<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 0-18438
VITAFORT INTERNATIONAL CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 68-0110509
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1800 Avenue of the Stars, Suite 480, Los Angeles, CA 90067
(Address of principal executive offices)
(Zip Code)
(310) 552-6393
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act of 1934 of during the preceding
twelve months ended December 31, 1998 (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past ninety days.
Yes: X No:
The number of shares of the Registrant's Common Stock, par value $.0001 per
share outstanding on August 20, 1999 is 15,058,383.
1
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VITAFORT INTERNATIONAL CORPORATION
CONTENTS
PART 1 - FINANCIAL INFORMATION
_____________________________________________________________________________
<TABLE>
<C> <S>
ITEM 1. Consolidated Financial Statements:
Balance Sheets - June 30, 1999 and December 31, 1998 3-4
Statements of Operations -
Three Month Periods Ended June 30, 1999 and 1998 5
Six Month Periods Ended June 30, 1999 and 1998 6
Statement of Stockholders' Equity (Deficit) -
Six Month Period Ended June 30, 1999 7
Statements of Cash Flows -
Six-Month Periods Ended June 30, 1999 and 1998 8
Notes to the Financial Statements 9-12
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-15
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 16-17
ITEM 5. Other Information 17
Signature 18
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
VITAFORT INTERNATIONAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 1999 and December 31, 1998
<TABLE>
<CAPTION>
ASSETS
June 30,
1999 December 31,
(Unaudited) 1998
----------- ------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 224,296 $ 903,649
Marketable securities 142,486 250,000
Accounts receivable, less allowance for
doubtful accounts of $41,775 293,965 929,006
Litigation settlement receivable (Note 6) 1,200,000 -
Inventories 356,215 196,603
Prepaid expenses and other current assets 285,199 132,509
--------- ---------
Total Current Assets 2,502,161 2,411,767
Equipment
Manufacturing equipment 22,856 19,881
Furniture and equipment 105,160 105,160
Computer equipment 209,574 209,574
-------- --------
337,590 334,615
Less accumulated depreciation (304,872) (271,411)
--------- ---------
32,718 63,204
Other Assets
Intangible assets, net of accumulated
amortization of $111,159 and $66,236 845,277 911,684
Other assets 875 875
------- -------
Total Other Assets 846,152 912,559
$ 3,381,031 $ 3,387,530
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
3
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VITAFORT INTERNATIONAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 1999 and December 31, 1998
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
June 30,
1999 December 31,
(Unaudited) 1998
------------ ------------
<S> <C> <C>
Current liabilities
Notes payable - bank $ - $ 283,689
Notes payable - others 1,132,063 958,724
Convertible notes payable 600,000 600,000
Accounts payable 684,315 1,054,079
Accrued expenses 314,120 130,303
--------- ---------
Total Current Liabilities 2,730,498 3,026,795
Long-term debt 2,065,000 2,065,000
Stockholders' deficit
Series B, 10% Cumulative Convertible
Preferred Stock, $.01 par value;
authorized 110,000 shares; issued and
outstanding 1,000 shares, aggregate
liquidation preference of $50,000 10 10
Series C, Convertible Preferred Stock,
$.01 par value; authorized 450 shares;
issued and outstanding aggregate
liquidation preference of $50,000 1 1
Common stock, $.0001 par value;
authorized 30,000,000 shares; issued
and outstanding 14,101,428 and
12,056,428 shares 1,410 1,206
Additional paid-in-capital 24,299,994 24,064,868
Accumulated deficit (25,715,882) (25,770,350)
------------ -----------
Total Stockholders' deficit (1,414,467) (1,704,265)
------------ ------------
$3,381,031 $3,387,530
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1999 1998
--------------------
<S> <C> <C>
Net revenues $ 273,550 $ 403,158
Cost of sales 226,466 279,743
Gross profit 47,084 123,415
Operating expenses
Research and development 11,728 78,225
Sales and marketing 353,009 488,247
General and administrative 481,365 750,183
------- ---------
Total operating expenses 846,102 1,316,655
------- ---------
Loss from operations (799,018) (1,193,240)
Other income (expense)
Other income (expense) 3,271 (60,000)
Interest income 476 5,192
Litigation recovery receivable, net of costs 1,200,000 -
Interest expense (102,943) (50,337)
--------- ---------
Total other income (expense) 1,100,804 (105,145)
Income (loss) before income tax expense 301,786 (1,298,385)
State income tax expense - -
-------- ----------
Net income (loss) 301,786 (1,298,385)
Deemed dividend to preferred shareholders - (279,250)
-------- ----------
Net income (loss) allocable to common shareholders 301,786 (1,577,635)
========= ===========
Basic net income (loss) per common share $ 0.02 $ (0.22)
Basic weighted average shares of common stock 13,167,395 7,132,317
Diluted net income (loss) per common share $ 0.02 $ (0.22)
Diluted weighted average shares of common stock 15,312,523 7,132,317
=========== =========
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
------- ----------
<S> <C> <C>
Net revenues $1,113,248 $ 749,994
Cost of sales 636,976 548,315
Gross profit 476,272 201,679
Operating expenses
Research and development 22,156 139,584
Sales and marketing 783,077 746,334
General and administrative 873,768 1,473,731
---------- ---------
Total operating expenses 1,679,001 2,359,659
---------- ---------
Loss from operations (1,202,729)(2,157,980)
Other income (expense)
Other income (expense) 273,551 (60,385)
Interest income 498 36,017
Litigation recovery receivable, net of costs 1,200,000 -
Interest expense (216,852) (97,906)
-------- --------
Total other income (expense) 1,257,197 (122,274)
Income (loss) before income tax expense 54,468 (2,280,254)
State income tax expense - 3,143
----------- ----------
Net income (loss) 54,468 (2,283,397)
Deemed dividend to preferred shareholders - (422,978)
---------- ---------
Net income (loss) allocable to common
shareholders 54,468 (2,706,375)
============ =========
Basic net income (loss) per common share $ 0.004 $ (0.39)
Basic weighted average shares of common stock 12,586,620 6,994,639
Diluted net income (loss) per common share $ .004 $ (0.39)
Diluted weighted average shares of common stock 14,731,748 6,994,639
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
6
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VITAFORT INTERNATIONAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
Six Months Ended June 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Series B Series C
Convertible Convertible
Preferred Stock Preferred Stock Common Stock
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999 1,000 $ 10 50 $1 12,056,428 $ 1,206
Excercise of stock options 2,045,000 204
Net (Loss)
----- ----- ----- ----- ---------- -------
Balance, January 30, 1999 1,000 $ 10 50 $1 14,101,428 $ 1,410
===== ===== ===== ===== ========== =======
</TABLE>
<TABLE>
<CAPTION>
Additional
Paid-In Accumulated
Capital Deficit Total
---------- ------------ -------------
<S> <C> <C> <C>
Balance, January 1, 1999 $24,064,868 $ (25,770,350) $ (1,704,265)
Excercise of stock options 235,126 235,330
Net income (loss) 54,468 54,468
----------- ------------ -------------
Balance, June 30, 1999 $24,299,994 $ (25,715,882) $ (1,414,467)
=========== ============ =============
</TABLE>
See accompanying notes to consolidated financial statements
7
<PAGE>
VITAFORT INTERNATIONAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 1998
--------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities:
Net income (loss) $54,468 $(2,283,397)
Depreciation and amortization 99,868 111,094
Stock options exercised for services 161,955 -
Stock issued for services - 109,336
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable, net 635,042 308,274
Inventories (159,612) (265,245)
Litigation recovery receivable (1,200,000) -
Prepaid expenses and other current assets (143,691) 95,350
Other assets (2,975) (1,475)
Increase (decrease) in:
Accounts payable (305,599) (130,912)
Accrued expenses 188,817 (106,558)
---------- -----------
Cash and cash equivalents used in operating
activities (671,727) (2,163,533)
Cash flows from investing activities:
Purchase of equipment - (22,510)
Advances to related parties - (13,954)
Advances to Global International (4,789) (285,385)
Cash acquired through sale of
marketable securities 107,514 -
Cash acquired through acquisition of
Global International - 75,462
-------- --------
Cash and cash equivalents used in
investing activities 102,725 (246,387)
Cash flows from financing activities:
Proceeds from issuance of stock - 499,000
Proceeds from notes payable, short term 173,339 400,000
Repayments of line of credit - 25,825
Repayments of notes payable (283,690) (246,135)
--------- ---------
Cash and cash equivalents provided by
financing activities (110,351) 678,690
Increase (decrease) in cash and cash equivalents (679,353) (1,731,230)
Cash and cash equivalents, beginning of period 903,649 2,199,036
-------- -----------
Cash and cash equivalents, end of period $ 224,296 $ 467,806
======== ==========
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 216,852 $ 97,906
Income taxes $ - $ 3,143
Supplemental disclosure of non-cash operating,
Investing and financing activities
Stock issued for accounts payable $ 64,375 $ 683,870
Stock issued for prepaid consulting services $ 9,000 $ -
Stock issued for acquisition of marketing
contract $ - $ 43,124
Acquisition of Global International Sourcing:
Assets acquired, net of cash $ - $ 535,786
Liabilities assumed, including $522,328
due to Vitafort $ - $ 829,461
</TABLE>
See accompanying notes to consolidated financial statements
8
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VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(Unaudited)
NOTE 1 - GENERAL
The unaudited consolidated financial statements have been prepared on the
same basis as the audited consolidated financial statements and, in the
opinion of management, reflect all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation for each of the periods
presented. The results of operations for interim periods are not necessarily
indicative of results to be achieved for full fiscal years.
As contemplated by the Securities and Exchange Commission (SEC) under item
310(b) of Regulation S-B, the accompanying consolidated financial statements
and related footnotes do not contain certain information that will be
included in the Company's annual consolidated financial statements and
footnotes thereto. For further information, refer to the consolidated
financial statements and related footnotes included in the fiscal 1998 form
10-KSB/A filing.
The Company is presently engaged in formulating, marketing and
distributing fat-free, low fat and reduced fat foods.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All material intercompany accounts and
transactions have been eliminated.
(b) Inventories are stated at the lower of cost (first-in, first-out basis) or
market.
(c) Prepaid assets include product introduction expenses (which are recorded at
cost and amortized over the economic life thereof), but not in excess of twelve
months, consulting and other prepaids.
(d) Fixed assets are composed of manufacturing equipment, furniture, office
equipment, and computer equipment and are recorded at cost. Depreciation is
computed on a straight-line basis over the estimated useful life, generally
five years or less.
(e) Intangible assets, which are recorded at cost, are composed of debt
issuance costs, acquisition costs of Auburn Farms and Natures Warehouse
trademarks, and goodwill associated with the acquisition of Global
International Sourcing, Inc. The acquisition costs associated with trademarks
and goodwill are being amortized on a straight-line basis over twenty years.
All other intangible assets are being amortized on a straight-line basis over
periods not exceeding five years. These costs are reviewed by management
periodically and written down to the value of the future benefit expected to
be derived.
(f) For the purpose of cash flow, the Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
(g) For the three and six months ended June 30, 1999, basic and diluted income
per share has been computed using the weighted average number of common
shares outstanding during the period since all the potentially dilutive
securities are anti-dilutive. Dividends on cumulative preferred
stock are not material.
9
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NOTE 3 INVENTORIES
Inventories are stated at the lower of cost (first in, first out) or market.
Inventory consists of the following:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
<S> <C> <C>
Finished goods $ 176,432 $ 118,524
Packaging and raw materials 179,783 78,079
--------- ---------
$ 356,215 $ 196,603
</TABLE>
NOTE 4 - STOCKHOLDERS' EQUITY
During the six month period ended June 30, 1999, the holders of stock options
to purchase 1,045,000 shares of stock exercised these options as follows:
(a) 620,000 shares at prices ranging from $0.085 to $.50 in settlement of
debts previously recorded as a liability.
(b) 335,000 shares at prices ranging from $0.10 to $0.40 in exchange for
services rendered.
(c) 90,000 shares at a price of $0.10 as prepayment for future services to be
rendered to the Company.
Also, the Company issued 1,000,000 shares at prices ranging from $0.085 to
$0.50 as added compensation to various employees.
NOTE 5 - GOING CONCERN
The Company has prepared the financial statements included herewith assuming
that the Company will continue as a going concern. Although the Company raised
additional capital in 1998, it has not generated sufficient revenue-producing
activity to sustain its operations. Accordingly, the Company must realize a
satisfactory level of profitability from its current and future operations in
order to remain a viable entity. The Company's auditors have included an
explanatory paragraph in their report for the year ended December 31, 1998
indicating there is substantial doubt regarding the Company's ability to
continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome
of any uncertainty.
NOTE 6 - LITIGATION
The Company is subject to pending claims and litigation, the most significant
of which are discussed below.
In December 1994, Lloyd Gauntt, who invested an aggregate of $75,000 in
certain of the Company's private placements, initiated an action in Superior
Court, Orange County, California against his stockbroker, two national
brokerage firms, several companies in which he had invested; and, certain of
those company's officers. Included among the defendants were the Company and
its then Chief Executive Officer, Steve Westlund. The complaint seeks damages
in an unspecified amount in excess of $500,000 and punitive damages in an
10
<PAGE>
unspecified amount in excess of $5,000,000. The Court dismissed the class
action claims as to the Company and granted a motion that the claims against
the brokerage firms and associated persons must be submitted to arbitration.
The Plaintiff appealed that ruling and the appellate court affirmed the lower
court ruling. The Company denies any liability to the plaintiff and intends
to vigorously defend this action in the event the plaintiff seeks to pursue
the arbitration. The Company notes that the plaintiff sold a portion of the
securities he purchased from the Company, realizing a profit; that the
balance of the securities became salable under Rule 144; and that, if sold,
the Plaintiff 's losses might be as little as $15,000.
In April, 1997, the Company agreed in principle with ATCOLP INVESTMENT
PARTNERS, a California Limited Partnership (the "Lender), in which Donald
Wohl, a Director of the Company at the time, is the general partner, for a
loan in the amount of $300,000 (the "Loan"), to fund the payment of legal fees
in connection with the Company's arbitration against The Keebler Company.
The loan was evidenced by a note which bears interest at the lesser of 15%
per annum or the highest rate allowed by law with recourse solely to the net
proceeds of the arbitration, if any. If the Company did not realize any net
proceeds from the arbitration, the Loan would be canceled and the Lender
would receive a warrant for the purchase of 400,000 shares of the Company's
Common Stock at $.01 per share. If the Loan was repaid through the
application of the net proceeds of the arbitration, the Lender would receive
warrants for the purchase of 200,000 shares of Common Stock at $.01 per
share and a percentage of net proceeds of the arbitration equal to 15% of the
first $1,000,000 of net proceeds, but not less than $100,000; 20% of
the net proceeds greater than $1,000,000 and less than $3,000,000; and, 25% of
net proceeds above $3,000,000. The Loan was approved by the disinterested
members of the Company's Board of Directors, and was on terms no less favorable
to the Company than were available from non-affiliated lenders. A second
proposal, from another source, contained terms which would have required the
Company to pay $2,050,000 in fees based on the actual award, repay the $300,000
advance, and be granted a warrant for 1,000,000 shares of the Company's common
stock at an exercise price of $1.00. The loan amount of $300,000 was repaid
upon settlement of the litigation in June 1997 and receipt of funds in July
1997, plus $1,236,883 in conformity with the agreed upon formula, plus a
warrant for 200,000 shares of the Company's common stock at a $0.01 per share.
In connection with the acquisition of assets of Auburn Farms, Inc., ("AFI") in
1996, the Company acquired the intellectual property and certain claims of
AFI. In May 1996, the Company filed an action in federal court alleging
Lanham Act violations, misappropriation of trade secrets, unfair competition,
conspiracy and related claims arising out of misappropriation of Auburn
Farms' principal products by Auburn Farms co-packer, New Life Bakery ("New
Life") and a principal competitor, Barbara's Bakery ("Barbara's").
On August 3, 1999, the Company entered into litigation settlement agreements
with Barbara's Bakery, Inc. ("Barbara's Bakery"), New Life Bakery, Inc. ("New
Life"), Gil Pritchard, David Marson, James Marson, and Kim Walters
(collectively the "Defendants") and resolved the Company's disputes with its
insurers over coverage for Defendants' counterclaims against the Company and
Mark Beychok. The lawsuit alleged that Barbara's Bakery had violated the
Federal Lanham Act, and the California Unfair Competition Act, by improperly
marketing toaster pastries, fruit juice sweetened cookies, and fig bars, and
that New Life had breached an agreement with Auburn Farms, Inc., whose claims
Vitafort purchased in 1996. Pursuant to the agreement with Defendants,
Vitafort will receive gross proceeds of $2 million. Barbara's Bakery further
agreed to withdraw from the toaster pastry business by discontinuing its
Nature's Choice Toaster Pastry line by no later than November 30, 1999.
Vitafort had secured up to $800,000 in off balance sheet financing for the
litigation against New Life and Barbara's Bakery, including $600,000 from
an investment partnership, Auburn Farms Vindication Partners, LLC, for the
purpose of paying the legal fees and expenses of the pending litigation. The
fee arrangement included a limited, partial attorney's fees and making
payments to outside investors who funded the litigation, the Company will
receive approximately $1,200,000. Each party to the litigation denies all
libility and wrong doing in connection with the claims asserted in the pending
litigation. The Company intends to use the proceeds of the settlement, when
and if received, towards its working capital requirements.
In addition to the items discussed in this note, the Company is a party
to legal proceedings (which generally relate to disputes between the Company
and its suppliers or customers regarding payment for products sold or
supplied) typical for a company of its size and scope and financial
condition, and that none of these proceedings are believed to be material to
its financial condition or results of operations.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AS RESULTS OF OPERATIONS
(Unaudited)
Cautionary Statement for Purposes of "Safe Harbor Provisions" of the
Private Securities Litigation Reform Act of 1995:
Except for historical facts, all matters discussed in this report which are
forward looking involve a high degree of risks and uncertainties. Potential
risks and uncertainties include, but are not limited to, competitive pressures
from other food companies and within the grocery industry, economic conditions
in the Company's primary markets and other uncertainties detailed from time to
time in the Company's Securities and Exchange Commission filings.
Three Months and Six Months Ended June 30, 1999 and 1998
Results of Operations:
In the second quarter, management targeted four critical areas to focus the
Company's resources. The first initiative was to further develop the food
broker infrastructure that would maintain the Company's current distribution
and provide support and momentum for the new product introductions that
were forthcoming. At the beginning of the quarter, the broker coverage for
Vitafort products was less than 35%. With the appointment of
Crossmark Sales and Marketing in 12 Midwest markets, the Company increased
its broker representation to over 85% of U.S. markets. Crossmark is one of
the leading brokerage companies in the food industry and will provide the
support needed to execute the upcoming distribution initiatives of the new
product introductions.
Product development during the second quarter included the introduction of
the first squeezable peanutty snack at the Food Marketing Institute (FMI)
trade show in May 1999. Subsequent to the second quarter, initial orders of
"Peanut Squeeze" have been shipped to large retailers and wholesalers. In
addition, the Company has received purchase orders from other leading retail
chains such as Wal-Mart Supercenters and Bi-Lo.
Management has been presenting "Peanut Squeeze" to supermarket chain buyers
and to date has received positive response. However, no assurance
is given that these positive responses will result in purchase orders.
The Company's product development initiative also included the redesign of the
packaging of "The Wizard of Oz" line of marshmallow snacks. The product line
that generated significant percentage of the Company's sales over the previous
two quarters lost momentum this quarter due to delays in the change of
packaging and delays in the introduction of a new white marshmallow. This
strategic redesign was implemented to create uniqueness among each of the
five flavors (featuring a different character on each package) and to conform
with Warner Bros. style guide, which was not available when the Company first
introduced this product line. The initial response to both the new package
design and the white marshmallow has been very positive as the Company
recently shipped (in August) its initial orders to Albertsons and Save-
12
<PAGE>
Mart. Management feels that the Company has an opportunity in this
category due to certain competitive advantages and market conditions,
superior tasting white marshmallow, unique shapes and flavors, and "The Wizard
of Oz" branded strategy. Management notes that the category leader recently
filed for bankruptcy protection under chapter 11. Management believes that
with the combined rollout of "Peanut Squeeze" and "The Wizard of Oz," the
Company will enjoy additional leverage and attention from its brokers and
retailers.
Logistical inefficiencies were also addressed in the second quarter as the
Company changed location of its principal public warehouse from Laredo, TX
to Quincy, IL. This location is centrally located to the Company's three
major manufacturing facilities and is also centrally located to is customers
throughout the country. Management believes that changing the location of
the Company's warehouse will enable it to give better service to its customers
and to achieve certain shipping efficiencies.
A final focal point was the subsequent settlement of the Barbara's Bakery, Inc.
and New Life Bakery, Inc. litigation. Vitafort will receive net proceeds of
approximately $1.2 million and Barbara's has agreed to withdraw from the
toaster pastry category (see, Litigation). With Barbara's withdrawl from the
category, Vitafort will diligently seek to position its brand "Toast N Jammers"
in natural foods stores and natural foods sections of grocery stores
throughout the country.
Management believes that with the settlement of the Barbara's litigation, the
increased logistic efficiencies, the improved broker representation and the
continued rollout of the Company's two key product lines (Peanut Squeeze and
The Wizard of Oz), that the Company will begin an increase in revenues in
the upcoming months. However, no assurances can be given that difficulties
will not be encountered and increases will in fact occur.
Net Revenues:
For the three months ended June 30, 1999, net sales were $273,550
compared to $ 403,158 for the same period in 1998, a decrease of $129,608, or
approximately 32%. This decrease in revenue was due to two significant
factors: The first was the delays in the packaging changes of "The Wizard of
Oz" marshmallows; and the second was the delay in the rollout of "Peanut
Squeeze" caused by both capital constraints and production start-up delays.
Subsequent to the second quarter, both of these problems have been resolved.
For the six months ended June 30, 1999, net sales were $1,113,248 compared to
$749,994 for the same period in 1998, an increase of $363,254 or 48%. This was
due primarily to sales of "The Wizard of Oz" line of products.
Gross Profit:
Gross profit decreased from $123,415 for the three months ended June 30, 1998
to $47,084 for the three months ended June 30, 1999, a decrease of $76,331 or
62%. Gross profit was 17% of net revenues for the quarter ended June 30, 1999,
compared to 31% for the same period of 1998. This is due to special promotions
run in the quarter to deplete the old packaging inventory of Wizard of Oz
products.
13
<PAGE>
Gross profit increased from $201,679 for the six months ended June 30,
1998 to $ 476,272 for the six months ended June 30, 1999, an increase of
$274,593 or 136%. The increase is due to the favorable mix of the "Wizard of
Oz" products sold at much higher profit margins.
Operating Expenses:
Research and Development - Total expenses for product development in the three
months ended June 30, 1999 were $11,728 compared to $78,225 for the same period
in 1998, a decrease of $66,497. This is in line with the Company's on-going
strategy to source from existing manufacturers and use their internal research
and technical staff to develop the new products.
Research and Development - Total expenses for product development in the six
months ended June 30, 1999 were $22,156 compared to $139,584 for the same
period in 1998, a decrease of $117,428.
Sales and Marketing:
Total sales and marketing expenses for the three months ended June 30, 1999
were $353,009 compared to $488,247 for the three months ended June 30, 1998, a
decrease of $135,238. This decrease in expenses was primarily due to staffing
reductions.
Total sales and marketing expenses for the six months ended June 30, 1999
were $783,077 compared to $746,344 for the six months ended June 30, 1998, an
increase of $36,733.
General and Administrative:
For the three months ended June 30, 1999, total general and administrative
expenses were $481,365 compared to $750,183 for the same quarter ended June 30,
1998, a decrease of $268,818. Significant cost reductions were primarily
achieved in the following areas: legal, $216,860, due to off balance sheet
financing of a litigation; consultants, $131,184, as part of the cost reduction
program, offset by increase in benefit expenses of $76,600 and investors
expenses of $63,359.
For the six months ended June 30, 1999, total general and administrative
expenses were $873,768 compared to $1,473,731 for the same quarter ended June
30, 1998, a decrease of $599,963. Significant cost reductions were primarily
achieved in the following areas: legal, $360,233, due to off balance sheet
financing of a litigation; consultants, $192,743, as part of the cost reduction
program.
Other Income (Expense):
The interest expenses increased from $50,337 in 1998 to $102,943 in the
second quarter of fiscal 1999. Interest expenses also increased from $97,906
in 1998 to $216,852 for the six months ended June 30, 1999. This increase is
due to higher costs of lines of credit required to fund the Company's working
capital needs.
Other income of $273,551 for the six months ended June 30, 1999 reflects
primarily re-negotiation of consulting contract costs of $139,490 that had been
accrued, and reversal of old accounts payable of $130,790.
14
<PAGE>
Liquidity and Capital Resources:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
--------- ----------
<S> <C> <C>
Net Cash Used for Operations $(671,727) $(2,163,533)
Net Cash Provided by Investing Activities 102,725 (246,387)
Net Cash Provided by (Used in) Financing Activities (110,351) 678,690
Working Capital (Deficit) (228,337) 382,545
</TABLE>
The Company continues to expend resources in the product development area for
the scheduled introduction of new products. However, there is no guarantee
that these products, once introduced in the market, will achieve the
anticipated level of sales forecast by the Company nor reach the gross
profit margin targeted by the Company for each of the products. In addition,
while the Company's financial condition has improved over the past twelve
months, there is no guarantee that new co-packers will provide the Company
with credit terms. Nor is there any assurance that the Company will be able
to meet its future cash obligations without additional external funding and
improved sales. Neither additional financing nor improved sales can be
guaranteed to occur in the future. While the Company has made significant
improvement in rebuilding customer relationships, the process has been slow
and costly, and there is no guarantee that these customers will purchase
products from the Company with the same enthusiasm that they have in the past.
The Company continues to suffer recurring losses from operations as of June
30, 1999 and has not generated sufficient revenue-producing activity to sustain
its operations. The Company's independent certified public accountants have
included a modification to their opinion, which indicates there is substantial
doubt about the Company's ability to continue as a going concern. The
Company is attempting to raise additional capital to meet future working
capital requirements and launch new products, but may not be able to do so.
Should the Company not be able to raise additional capital, it may have to
curtail operations.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings
In December 1994, Lloyd Gauntt, who invested an aggregate of $75,000 in
certain of the Company's private placements, initiated an action in Superior
Court, Orange County, California against his stockbroker, two national
brokerage firms, several companies in which he had invested; and, certain of
those company's officers. Included among the defendants were the Company and
its then Chief Executive Officer, Steve Westlund. The complaint seeks damages
in an unspecified amount in excess of $500,000 and punitive damages in an
unspecified amount in excess of $5,000,000. The Court dismissed the class
action claims as to the Company and granted a motion that the claims against
the brokerage firms and associated persons must be submitted to arbitration.
The Plaintiff appealed that ruling and the appellate court affirmed the lower
court ruling. The Company denies any libility to the plaintiff and intends
to vigorously defend this action in the event the plaintiff seeks to pursue
the arbitration. The Company notes that the plaintiff sold a portion of the
securities he purchased from the Company, realizing a profit; that the
balance of the securities became salable under Rule 144; and that, if sold,
the Plaintiff's losses might be as little as $15,000.
In April, 1997, the Company agreed in principle with ATCOLP INVESTMENT
PARTNERS, a California Limited Partnership (the "Lender"), in which Donald
Wohl, a Director of the Company at the time, is the general partner, for a
loan in the amount of $300,000 (the "Loan"), to fund the payment of legal fees
in connection with the Company's arbitration against The Keebler Company.
The loan was evidenced by a note which bears interest at the lesser of 15%
per annum or the highest rate allowed by law with recourse solely to the net
proceeds of the arbitration, if any. If the Company did not realize any net
proceeds from the arbitration, the Loan would be canceled and the Lender
would receive a warrant for the purchase of 400,000 shares of the Company's
Common Stock at $0.01 per share. If the Loan was repaid through the
application of the net proceeds of the arbitration, the Lender would receive
warrants for the purchase of 200,000 shares of Common Stock at $0.01 per
share and a percentage of net proceeds of the arbitration equal to 15% of the
first $1,000,000 of net proceeds, but not less than $100,000; 20% of the
net proceeds greater than $1,000,000 and less than $3,000,000; and, 25% of
net proceeds above $3,000,000. The Loan was approved by the disinterested
members of the Company's Board of Directors, and was on terms no less favorable
to the Company than were available from non-affiliated lenders. A second
proposal, from another source, contained terms which would have required the
Company to pay $2,050,000 in fees based on the actual award, repay the $300,000
advance, and be granted a warrant for 1,000,000 shares of the Company's common
stock at an exercise price of $1.00. The loan amount of $300,000 was repaid
upon settlement of the litigation in June 1997 and receipt of funds in July
1997, plus $1,236,883 in conformity with the agreed upon formula, plus a
warrant for 200,000 shares of the Company's common stock at a $0.01 per share.
16
<PAGE>
In connection with the acquisition of assets of Auburn Farms, Inc. ("AFI") in
1996, the Company acquired the intellectual property and certain claims of
AFI. In May 1996, the Company filed an action in Federal Court alleging
Lanham Act violations, misappropriation of trade secrets, unfair competition,
conspiracy and related claims arising out of misappropriation of Auburn
Farms' principal products by Auburn Farms co-packer, New Life Bakery ("New
Life") and a principal competitor, Barbara's Bakery ("Barbara's").
On August 3, 1999, the Company entered into litigation settlement agreements
with Barbara's, New Life, Gil Pritchard, David Marson, James Marson, and Kim
Walters (collectively the "Defendants") and resolved the Company's disputes
with its insurers over coverage for Defendats' counterclaims against the
Company and Mark Beychok. The lawsuit alleged that Barbara's Bakery had
violated the Federal Lanham Act, and the Calfornia Unfair Competition Act,
by improperly marketing toaster pastries, fruit juice sweetened cookies, and
fig bars, and that New Life had breached an agreement with AFI whose claims
Vitafort purchased in 1996. Pursuant to the agreement with Defendants,
Vitafort will receive gross proceeds of $2 million. Barbara's further agreed
to withdraw from the toaster pastry business by discontinuing its Nature's
Choice Toaster Pastry line by no later than November 30, 1999. Vitafort
had secured up to $800,000 in off balance sheet financing for the
litigation against New Life and Barbara's, including $600,000 from an
investment partnership, Auburn Farms Vindication Partners, LLC, for the
purpose of paying the legal fees and expenses of the pending litigation. The
fee arrangement inclued a limited, partial attorney's fees and making
payments to outside investors who funded the litigation, the Company will
receive approximately $1,200,000. Each party to the litigation denies all
liability and wrong doing in connection with the claims asserted in the pending
litigation. The Company intends to use the proceeds of the settlement, when
and if received, towards its working capital requirements.
In addition to the items discussed in this note, the Company is a party
to legal proceedings (which generally relate to disputes between the Company
and its suppliers or customers regarding payment for products sold or
supplied) are typical for a company of its size and scope and financial
condition, and that none of these proceedings are believed to be material to
its financial condition or results of operations.
ITEM 5 - Other Information
The Registrant hereby reports that Paul G. Cowen resigned from the Board of
Directors on June 30, 1999.
17
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
VITAFORT INTERNATIONAL CORPORATION
(Company)
/s/ Mark Beychok
Mark Beychok
Chief Executive Officer
/s/ Fred Rigaud
Fred Rigaud
Acting Chief Financial Officer
Date: August 23, 1999
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 224,296
<SECURITIES> 142,486
<RECEIVABLES> 335,740
<ALLOWANCES> 41,775
<INVENTORY> 356,215
<CURRENT-ASSETS> 2,502,161
<PP&E> 337,590
<DEPRECIATION> 304,872
<TOTAL-ASSETS> 3,381,031
<CURRENT-LIABILITIES> 2,730,498
<BONDS> 0
0
11
<COMMON> 1,410
<OTHER-SE> 1,414,467
<TOTAL-LIABILITY-AND-EQUITY> 3,381,031
<SALES> 1,113,248
<TOTAL-REVENUES> 1,113,248
<CGS> 636,976
<TOTAL-COSTS> 204,649
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 303
<INTEREST-EXPENSE> 216,852
<INCOME-PRETAX> 54,468
<INCOME-TAX> 0
<INCOME-CONTINUING> 54,468
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 54,468
<EPS-BASIC> (.004)
<EPS-DILUTED> (.004)
</TABLE>
