<PAGE>
FORM 10-Q. QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the period ended September 30, 1996
------------------
Commission File Number: 0-19409
---------
KRANTOR CORPORATION
(Exact name of registrant as it appears in its charter)
Delaware 22-2993066
------------------------ ------------------------------------
(State of incorporation) (I.R.S. Employer identification no.)
120 East Industry Ct. Deer Park, N.Y. 11729
- - ---------------------------------------- ------------
(Address of principal executive offices) (zip code)
516-586-7500
--------------
(Registrant's telephone number, including area code)
- - -------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (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 90 days.
[x] YES [ ] NO
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. On November 11, 1996
there were 13,908,531, shares outstanding of the registrant's common stock.
<PAGE>
KRANTOR CORPORATION
FORM 10-Q
SEPTEMBER 30, 1996
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION Page
Consolidated Balance sheets as of September 30, 1996
(Unaudited) and December 31, 1995 2 - 3
Consolidated Statements of Operations for the nine
months ended September 30, 1996 and 1995 (Unaudited) 4
Consolidated Statements of Operations for the three
months ended September 30, 1996 and 1995 (Unaudited) 5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1996 and 1995 (Unaudited) 6 - 7
Notes to Consolidated Financial Statements 8 - 10
Management's Discussion and Analysis of
Financial Condition and Results of Operations 11 - 13
Forward Looking Information and Cautionary
Statements 14 - 16
PART II: OTHER INFORMATION
Item VI: Exhibits and Reports on Form 8-K 17
<PAGE>
KRANTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 68,039 $ 370,000
Marketable Securities 223 13,871
Accounts Receivable - Net of allowance for doubtful accounts
of $ 565,000 and $ 313,000 respectively 1,620,256 9,465,511
Inventory (Net of Reserve of 350,000 and 0 respectively) 620,064 6,432,981
Due From officers, employees & shareholders 31,270 111,305
Other Current Assets (Note 9) 2,373,443 552,816
----------- -----------
Total Current Assets 4,713,295 16,946,484
----------- -----------
Property and Equipment - Net 76,804 834,118
----------- -----------
Advances to related parties -- 228,718
Deferred Taxes 1,452,115 166,103
Deferred Costs 62,479 --
Other Assets 672,900 143,051
----------- -----------
Total Other Assets 2,187,494 537,872
----------- -----------
Total Assets $ 6,977,593 $18,318,474
=========== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
2
<PAGE>
KRANTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
----------- -----------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes Payable (Note 4) $ 1,148,269 $ 4,621,248
Accounts Payable & Accrued Expenses 1,086,296 6,390,375
Income taxes payable -- 307,854
----------- -----------
Total Current Liabilities 2,234,565 11,319,477
Notes Payable after one year -- 50,000
Long Term Debt (Note 5) 500,000 --
----------- -----------
Total Liabilities 2,734,565 11,369,477
Commitments and Contingencies
Stockholders' Equity (Note 5) -- --
Class A $2.20 Cumulative Preferred stock - $.001 par value; 1,000,000 shares
authorized, 100,000 Shares Issued and
Outstanding (Note 3) 100 100
Common stock - $.001 par value; 29,900,000 Shares authorized- 9,680,784 and
4,950,000 shares were outstanding
at 9/30/96 and 12/31/95 respectively: 9,681 4,950
Additional Paid-in Capital 12,176,31 8,591,758
Accumulated Deficit (7,775,567) (1,480,311)
----------- -----------
4,410,528 7,116,497
Less treasury stock at cost, 35,000 share (167,500) (167,500)
----------- -----------
Total stockholders' equity 4,243,028 6,948,997
Total Liabilities & Stockholder's Equity $ 6,977,593 $18,318,474
=========== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
KRANTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Sales (Note 7) $ 7,061,456 $ 31,585,096
Cost of Sales 6,723,211 27,683,986
------------ ------------
Gross Profit 338,245 3,901,110
Selling General and Administrative Expenses 534,425 2,319,401
Depreciation and Amortization 145,245 103,546
------------ ------------
Operating Income (Loss) (341,425) 1,478,163
------------ ------------
Other Income (Expense):
Miscellaneous Income (Expense) 2,352 145,899
Interest Expense (72,000) (270,320)
Financing Costs -- (71,283)
------------ ------------
Total Other Expense (69,648) (195,704)
============ ============
Income (Loss) From Continuing Operations
Before Income Taxes (411,073) 1,282,459
Income Taxes (Benefit) (56,000) 435,000
------------ ------------
Income (Loss) from Continuing Operation $ (355,073) $ 847,459
============ ============
Discontinued Operations (Note 7)
Loss From Discontinued
Operation (less applicable income taxes of $ (1,448,000)) (5,940,183) --
------------ ------------
Net Income (Loss) (6,295,256) 847,459
Preferred stock dividend 165,000 (5,000)
============ ============
Income (Loss) Applicable to Common Stock $ (6,460,256) $ 842,459
============ ============
Earnings (Loss) Per Common Share From
Continuing Operations $ (.09) $ .18
Loss Per Common Share From
Discontinued Operations (.98) --
------------ ------------
Earnings (Loss) Per Common Share $ (1.07) $ .18
============ ============
Weighted Average Number of Shares Outstanding 6,063,505 4,788,002
</TABLE>
See Notes To Consolidated Financial Statements
4
<PAGE>
KRANTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Sales (Note 7) $ 1,224,465 $ 10,561,053
Cost of Sales 1,366,663 9,210,787
------------ ------------
Gross Profit(loss) (142,198) 1,350,266
Selling General and Administrative Expenses 236,612 859,211
Depreciation and Amortization -- 34,060
------------ ------------
Operating Income (Loss) (378,810) 456,995
------------ ------------
Other Income (Expense):
Miscellaneous Income (Expense) 13,200 56,791
Interest Expense 125,177 (111,023)
Financing Costs -- (23,760)
------------ ------------
Total Other Expense (Income) 138,377 (77,992)
============ ============
Income (Loss) From Continuing Operations
Before Income Taxes (240,433) 379,003
Income Taxes (benefit) -- 138,000
------------ ------------
Income (Loss) From Continuing Operation $ (240,433) $ 241,003
============ ============
Discontinued Operations (Note 7)
Loss from Discontinued
Operations (3,001,095) --
------------ ------------
Net Income (Loss) (3,241,528) 241,003
Preferred stock dividend 55,000 --
============ ============
Income (Loss) Applicable to Common Stock $ (3,296,528) $ 241,003
============ ============
Earnings (Loss) Per Common Share From
Continuing Operations $ (.04) $ .05
Earnings (Loss) Per Common Share From
Discontinued Operations (.40) --
------------ ------------
Earnings (Loss) Per Common Share $ (.44) $ .05
============ ============
Weighted Average Number of Shares Outstanding 7,530,023 4,831,001
</TABLE>
See Notes To Consolidated Financial Statements
5
<PAGE>
KRANTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Income (Loss) From Continuing Operations $ (355,073) $ 847,459
Income (Loss) From Discontinued Operations (5,940,183) --
Adjustments to Reconcile Net Income (Loss)
From Continuing Operations to Net Cash
Flows From Continuing Operating Activities:
Depreciation and Amortization 145,245 103,546
Amortization of Financing Costs -- 71,283
Non-Cash Expenses 979,287 47,703
Reserve for Bad Debts & inventory 602,000 20,000
Changes in Operating Assets and Liabilities:
Purchase of Marketable Securities -- (225,454)
Sales of Marketable Securities 13,648 --
Accounts Receivable 7,593,255 (2,924,214)
Inventory 5,462,917 (2,456,778)
Prepaid Expenses -- 11,746
Deferred Taxes (1,286,012) 232,887
Other Current Assets (1,820,627) 110,833
Other Assets (529,849) --
Accounts Payable (5,304,079) 1,812,035
Accrued Expenses -- (22,814)
Income Taxes Payable (307,854) 180,814
----------- -----------
Net Cash Flows (Used)
in Operating Activities (747,325) (2,190,954)
Cash Flows From Investing Activities:
Proceeds from sale of Furniture and Equipment 612,069 (24,286)
Advances To Related Parties 228,718 (98,333)
Due From Officers and Shareholders 80,035 (17,265)
Deferred Costs -- (80,338)
----------- -----------
Net Cash Flows (Used)
in Investing Activities 920,822 (220,222)
Cash Flows From Financing Activities:
Net Borrowing (Payments) on Notes Payable (3,522,979) 2,157,830
Proceeds from Issuance of Common Stock 2,775,000 --
Cash Dividends on Preferred Stock (165,000) (5,000)
Deferred Costs (62,479) --
Expenses Related to Sale of Stock -- (80,244)
Long Term Debt 500,000 --
----------- -----------
Net Cash Flows Provided by
Financing Activities (475,458) 2,072,586
----------- -----------
Net Increase ( Decrease) in Cash (301,961) (338,590)
Cash - Beginning of Period 370,000 502,797
----------- -----------
Cash - End of Period $ 68,039 $ 164,207
=========== ===========
</TABLE>
6
<PAGE>
KRANTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for:
Interest
Continuing Operations $ 72,000 $ 270,320
Discontinued Operation 352,875 --
=========== ===========
Income Taxes
Continuing Operations $ (56,000 $ 435,000
Discontinued Operation (1,448,000) --
=========== ===========
Supplemental Disclosure of Non-Cash Operating,
Investing and Financing Activities:
Expenses paid via the distribution of registered
shares of the Company's Common Stock
through it's Compensation and Services Plan -- 47,703
Prepaid Expenses paid via the distribution of
registered shares of the Company's Common
Stock through it's Compensation and Services Plan -- 57,713
----------- -----------
Total Non-Cash Operating, Investing and
Financing Activities -- $ 105,416
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
7
<PAGE>
KRANTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1996
(UNAUDITED)
Note 1 - Basis of Presentation:
The December 31, 1995 balance sheet represents the prior year's audited
balance sheet and is presented for comparative purposes. In the opinion of
management, all adjustments that include only normal recurring adjustments
necessary to present fairly the financial position, results of operations and
cash flows for all periods presented have been made to the unaudited interim
financial statements. The results of operations for interim periods are not
necessarily indicative of the operating results for the full year. Footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting practices have been omitted in accordance
with the published rules and regulations of the Securities and Exchange
Commission. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto for the
most recent year end.
Note 2 - Summary of Significant Accounting Policies:
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company, Island Wholesale Grocers, Inc. (IWG), its
wholly owned subsidiary, formed in April, 1994 and Island Frozen & Dairy (IFD)
formed in May, 1995 and discontinued at June 30, 1996(See Note 7). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Earnings (loss) Per Common Share - Earnings (loss) per common share is
based on the weighted average number of common shares outstanding during the
periods. When losses are incurred, warrants and options are not included since
the effect would dilute loss per share. When net income is reported, warrants
and options are included using the treasury stock method, when exercise prices
are less than the average market price.
Inventory - Inventory, consisting entirely of finished goods is stated
at the lower of cost or market determined by the first in, first-out method.
Note 3 - Preferred Dividends:
Dividends on the preferred stock in the amount of $165,000 for the nine
months ending September 30, 1996 were declared and caused to be paid in common
stock.
Note 4 - Revolving Line of Credit:
The Company finances its receivables through a loan and security
agreement with a lender. Under the terms of the agreement, the Company receives
cash advances of up to eighty percent of its eligible accounts receivable, as
defined. The proceeds from collections of the eligible accounts receivable are
used to reduce the loan balance. On May 14th the Company amended the loan
agreement with the Lender to include financing Island Frozen & Dairy, increased
its line from $5,000,000 to $8,000,000 and extended the maturity to November 14,
1997. The Company is currently not borrowing under its revolving loan due to its
ongoing litigation with a major kosher poultry manufacturer. The company intends
to pay off its loan with fidelity through the liquidation of IFD's assets. As of
September 30, 1996 the Company and IWG have paid off their loans with fidelity
under the loan and security agreement dated November 4, 1994. The only loan
obligation that remains with Fidelity is due from IFD in the amount of $723,269
under its loan and security agreement dated May 13, 1996.
Note 5 - Shareholders Equity:
In the first nine months of 1996, the Company issued 1,071,446 shares
of the Company's common stock pursuant to the terms of the 1994 Services and
Consulting Compensation Plan. The Company issued 5,937,386 shares in connection
with several private placements totalling $ 2,775,000 (.47 per share). Long term
debt represents a convertible debenture maturing on August 15, 2002. The net
proceeds of the convertible debenture were used to finance the Company's
operating activities.
8
<PAGE>
KRANTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1996
(UNAUDITED)
Note 6 - Related Party Transactions:
There were no sales to related parties during the first nine months of
1996 and 1995. Purchases from related parties during the first nine months of
1996 and 1995 were approximately $307,000 and $1,487,816 respectively.
Note 7 - Discontinued Operations
On June 30, 1996 the Company discontinued its Kosher Food business
operated through IFD. All assets and applicable liabilities have been
consolidated into the Company's balance sheet. Applicable financing costs and
operating expenses were allocated to the loss from discontinued operations in
the consolidated statement of income. The Consolidated Balance Sheet from
discontinued operations (IFD) includes $1,216,761 of current assets.
The results of discontinued operations are summarized as follows:
September 30, 1996
------------------
Net Sales $ 12,826,040
============
Loss from discontinued operations before
income taxes $ ( 7,388,183)
Income taxes (credit) 1,448,000
-------------
Loss from discontinued operations $ (5,940,183)
=============
The above results for 1996 are through the end of the third quarter of
1996. Operating results for discontinued operations include allocations of
overhead and interest expense. Overhead expense of $ 4,647,304 was allocated
based upon determination of those costs which were not expected to be incurred
by continuing operations after closing. Financing costs of $1,044,360 were
allocated based on debt incurred to finance the discontinued operations since
formation in December, 1995.
Note 8 - Litigation
The Company has commenced a business interference lawsuit against a kosher
poultry vendor of IFD claiming damages that directly relate to the
discontinuation of IFD's business. This vendor has also commenced an action for
trade debt in the amount of $450,000 as well as file for an injunction against
Krantor and IFD. The injunctions have been lifted by federal court and are no
longer in effect. The $450,000 debt is being disputed. The Company believes that
the injunction against Krantor had a material affect on its third quarter
business. The Company also believes that the injunction against Krantor should
not have been issued as Krantor's business did not relate to the IFD case.
Furthermore, the Company believes that the lack of business activity in the
third quarter may have had a material adverse effect on the Company's stock due
to the injunction.
The Company is liquidating IFD's business. In connection with IFD's liquidation,
the Company may be subject to litigation. The Company believes that potential
litigation in connection with the liquidation of IFD's business is not material
to continuing operations. However, there can be no assurance that potential
litigation may not have a material adverse effect on the Company.
The Company is negotiating a settlement agreement with a major grocery
manufacturer in connection with disputes relating to bill backs and rebates that
are due the Company. Failure to resolve theses disputes may have a material
adverse effect on the Company's business.
9
<PAGE>
KRANTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1996
(UNAUDITED)
Note 8 - Continued
Two former principals of IFD's business are claiming that the Company is
required to pay their employment contracts. The Company believes that their
claim for employment benefits is without merit. However, if the Company is not
successful in defending this action, it would have a material effect on its
business.
Note 9 - Other Current Assets
The Company entered into a distribution agreement with a Chinese trading Company
in order to expand its squid and grocery business. As of September 30, 1996 the
Company pledged $2 million in connection with this distribution agreement.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company primarily distributes squid and promotional brand name
grocery products through an agency agreement with a Chinese trading company to
major wholesale and retailers in the food industry. The Company discontinued its
Kosher Food business (IFD) on June 30, 1996. (See Note 7 to Consolidated
Statements). The Company's current assets consist primarily of accounts
receivable, inventory, prepaid expenses and cash. The Company's liabilities
consist of accounts payable, short term and long term debt used to finance
accounts receivable.
Revenues from continued operations decreased for the nine months ended
September 30, 1996 to $7,061,456 a (78%) decrease as compared to the prior
period. Revenues from discontinued operations (IFD) for the period totaled
$12,852,527. Total revenues for the combined business would have been
$19,913,983 a 37% decrease from the prior period (See Note 7 to Consolidated
Financial Statements). The decrease in revenues is related to discontinuing
IFD's business and the lack of sufficient working capital to maintain continuing
operations. In addition a major kosher poultry manufacturer filed and was
granted an injunction against the Company and IFD. The injunction limited the
company's ability to do business in the third quarter. In October, 1996 the
injunction against the company was lifted. The injunction was related to IFD's
business and not the Company's grocery and squid business (See "Litigation").
The redirection of capital to continuing operations should allow the promotional
grocery and seafood business to expand to Fiscal 1995 levels starting in Fiscal
year 1997; although additional capital may be required (See "Liquidity and
Capital Resources" and "Forward looking and Cautionary Statement").
Cost of sales for continued operations decreased for the quarter ended
September 30, 1996 to $6,723,211 or (76 %) decrease as compared to the prior
year. This decrease was primarily attributable to the decrease in the Company's
revenues (See Note 7 to Consolidated Financial Statements). The Company's gross
profit from continuing operations decreased from 12.4% to 4.8% in the same
period. In order to support IFD's business the Company needed to quickly sell
IWG inventory at margins that were lower than customarily realized. In the
fourth quarter the Company expects gross profits to be consistent with 1995
levels.
Selling General & Administrative (SG&A) expenses from continuing
operations decreased to $534,425 for the period a 77% decrease. This decrease is
related to lower revenues from continued operations. SG&A as a percentage of
sales for continued operation increased from 7.3% to 7.6% for the same period.
Loss from continuing operations totaled $355,073 for the period as
compared to a $847,459 profit for the same period. This decrease is related to a
78% drop in revenues from continuing operations. Loss from discontinued
operations totaled $5,940,183. The Company believes that the total costs
incurred from discontinuing operations have been fully charged to earnings and
should not affect future operating results (See Note 7 to Consolidated Financial
Statements).
11
<PAGE>
Liquidity and Capital Resources
As a result of the Company's recent expansion into the wholesale
segment of the food distribution industry and the high levels of inventory
needed to operate successfully in that segment, the Company has been
experiencing cash flow shortages. In particular, the Company has incurred
significant costs in connection with discontinuing Island Frozen & Dairy's (IFD)
operations. Another reason for the Company's cash flow shortages is the manner
in which its inventory was converted into sales. Although most of the Company's
customers are required to pay within thirty days of product delivery, IFD, for
competitive reasons, made advance purchases of inventory in order to quickly
meet retail demand and take advantage of promotional buying opportunities. In
addition IFD experienced significant collection problems from its customers and
delays in receiving trade credit, promotional rebates and allowances from its
vendors. These factors extended the time between the original purchase of goods
from manufacturers and the eventual cash collection from its retail customers to
a period which was well beyond acceptable terms. The Company is continuing to
collect its outstanding IFD receivables and sell its remaining inventory. (See
Note 7 to Consolidated Statements).
Working capital decreased by 56% to $2,478,000 while inventory and
payables both decreased by 90% and 83% respectively for the period. These
changes reflect the working capital position of the Company after absorbing all
costs related to discontinued operation (IFD). The Company believes that it has
sufficient working capital to fund its continuing operations but requires
additional financing to expand. Continuing operations will be conducted through
Island Wholesale Grocers (IWG), the promotional grocery and seafood subsidiary
of Krantor.
The Company's receivables for the first nine months decreased by 83 %
to $1,620,256. The reduction of receivables is due to several factors which
include (i) discontinuing IFD's business and (ii) entering into a distribution
agreement with a Chinese trading company in order to expand the Company's squid
and grocery business. As of September 30, 1996 the Company pledged $2 Million as
part of this distribution agreement.
The Company plans on expanding its core grocery and frozen seafood
market through IWG. Krantor believes that by discontinuing IFD's operation it
should enable it to support the capital requirements of its continuing operation
through IWG. However, the Company believes it will need additional financing in
the form of subordinated debt or equity to finance its expansion plans. See
"Forward-Looking Information and Cautionary Statements."
The Company has $8 Million credit facility with Fidelity Funding of
California which expires on November 14, 1997. The Company is currently not
borrowing under the facility due to on going litigation with a kosher poultry
manufacturer. The Company's business is being financed by its Chinese Joint
Venture partner. The Company believes that it no longer requires Fidelity's
facility and intends to pay the facility off through the liquidation of IFD's
assets. The facility, which expires in November 1996, was extended on May 11,
1996 through November 14, 1997 by Fidelity.
Management is not aware of negative trends in the Company's area of business or
other economic factors which may cause a significant change in the Company's
viability or financial stability, except as specified herein and in
"Forward-Looking Information and Cautionary Statements." Management has no plans
to alter the nature of its business, other than by discontinuing its Kosher
frozen food business (IFD).
12
<PAGE>
Liquidity and Capital Resources (cont'd)
Subject to available financing, the Company intends to further expand its
continuing business by purchasing and maintaining short-term inventories of well
accepted readily marketable promotional brand-name grocery products and frozen
squid and other seafood products. The Company believes that by warehousing these
products it will be able to make larger purchases during manufacturers'
promotional periods, gain better access to some product promotions ordinarily
reserved for higher volume purchasers, increase sales by having more inventory
available for shipment on demand, and thereby expand its customers and supplier
base. The Company also plans to significantly expand its squid business in 1997.
However, there can be no assurance that the Company's proposed expansion plan
will be successful. Additional working capital is required beyond the current
available financing in order for the Company to expand from its current levels.
Seasonality
Seasonality affects the demand for certain products sold by the
Company, such as juice drinks in the summer months or hot cereals in fall and
winter months. However, all these products are available to the Company
throughout the year. Manufacturers also tend to promote more heavily towards the
close of the fiscal quarters and during the spring and early summer months.
Accordingly, the Company is able to purchase more products, increase sales
during these periods and reduce its product cost due to these promotions. The
Company generally experiences lower sales volume in the fourth quarter due to
the reduced number of selling days resulting from the concentration of holidays
in the quarter. Sale of frozen squid is more significant in the third and fourth
quarters due to the seasonal catch which occurs in the second quarter.
Inflation
The Company believes that inflation, under certain circumstances, could
be beneficial to the Company's business. When inflationary pressures drive
product costs up, the Company's customers sometimes purchase greater quantities
of product to expand their inventories to protect against further pricing
increases. This enables the Company to sell greater quantities of products that
are sensitive to inflationary pressures.
However, inflationary pressures frequently increase interest rates.
Since the Company is dependent on financing, any increase in interest rates will
increase the Company's credit costs, thereby reducing its profits.
13
<PAGE>
Forward Looking Information and Cautionary Statements
Other than the factual matters set forth herein, the matters and items
set forth in this report are forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, the following:
1. Cash Flow.
The Company has experienced cash shortages which continue to
adversely affect its business. See "Liquidity and Capital
Resources". The Company requires additional working capital in
order to expand.
2. Dependence on Public Trends.
The Company's business is subject to the effects of changing
customer preferences and the economy, both of which are
difficult to predict and over which the Company has no
control. A change in either consumer preferences or a
down-turn in the economy may affect the Company's business
prospects.
3. Potential Product Liability.
As a participant in the distribution chain between the
manufacturer and consumer, the Company would likely be named
as a defendant in any product liability action brought by a
consumer. To date, no claims have been asserted against the
Company for products liability; there can be no assurance,
however, that such claims will not arise in the future.
Accordingly, the Company maintains a product liability
insurance policy of $10,000,000 per occurrence. In the event
that any products liability claim is not fully funded by
insurance, and if the Company is unable to recover damages
from the manufacturer or supplier of the product that caused
such injury, the Company may be required to pay some or all of
such claim from its own funds. Any such payment could have a
material adverse impact on the Company.
4. Reliance on Common Carriers.
The Company does not utilize its own trucks in its business
and is dependent, for shipping of product purchases, on common
carriers in the trucking industry. Although the Company uses
several hundred common carriers, the trucking industry is
subject to strikes from time to time, which could have
material adverse effect on the Company's operations if
alternative modes of shipping are not then available.
Additionally the trucking industry is susceptible to various
natural disasters which can close transportation lanes in any
given region of the country. To the extent common carriers are
prevented from or delayed in utilizing local transportation
lanes, the Company will likely incur higher freight costs due
to the limited availability of trucks during any such period
that transportation lanes are restricted.
14
<PAGE>
Forward Looking Information and Cautionary Statements
5. Competition.
The Company is subject to competition in both its promotional
grocery and squid businesses. While both industries are highly
fragmented, with no one distributor dominating the industry,
the Company is subject to competitive pressures from other
distributors based on price and service.
6. Discontinued Operation.
The Company has experienced a significant one time loss in
discontinuing its Kosher Food business (IFD). This loss
materially reduced the Company's working capital position.
(See Liquidity & Capital Resources). The Company needs
additional capital to expand its core grocery and frozen
seafood business (IWG).
7. Trade Relations With China.
The Company is dependent on trade with the People's Republic
of China (PRC). The Company's financing arrangements and
distribution contracts involve a Chinese trading company and
squid is directly supplied through the PRC. Any government
sanctions that cause an interruption of trade or prohibit
trade through higher duties or quotas could have a material
adverse effect on the Company's business.
8. Litigation
The Company has commenced a business interference lawsuit
against a kosher poultry vendor of IFD claiming damages that
directly relate to the discontinuation of IFD's business. This
vendor has also commenced an action for trade debt in the
amount of $450,000 as well as file for an injunction against
Krantor and IFD. The injunctions have been lifted by federal
court and are no longer in effect. The $450,000 debt is being
disputed. The Company believes that the injunction against
Krantor had a material affect on its third quarter business.
The Company also believes that the injunction against Krantor
should not have been issued as Krantor's business did not
relate to the IFD case. Furthermore, the Company believes that
the lack of business activity in the third quarter may have
had a negative effect on the Company's stock.
The Company is liquidating IFD's business. In connection with
IFD's liquidation, the Company may be subject to litigation.
The Company believes that potential litigation in connection
with the liquidation of IFD's business is not material to
continuing operations. However, there can be no assurance that
potential litigation may not have an adverse effect on the
Company.
The Company is negotiating a settlement agreement with a major
grocery manufacturer in connection with disputes relating to
bill backs and rebates that are due the Company. Failure to
resolve theses disputes may have an adverse effect on the
Company's business.
15
<PAGE>
Forward Looking Information and Cautionary Statements
The former principals of IFD's business are claiming that the
Company continue to pay their employment contracts. The
Company believes that the claim for employment benefits is
without merit. However, if the Company is not successful in
defending this action, it would have a material effect on its
business.
9. NASDAQ Qualifications.
The Company currently qualifies for NASDAQ small cap listing.
There are several proposals by the NASD that could have an
effect on the Company's NASDAQ listing. In particular it may
become mandatory for a stock listed on NASDAQ to have a price
greater than or equal to $ 1.00. The Company's current stock
price is under a $1.00. The Company currently qualifies under
alternative requirements. In the event that the NASD makes it
mandatory for a stock listed on NASDAQ to be equal or greater
than a $1.00. The Company may not qualify for listing. If the
Company is delisted from NASDAQ it may have a material adverse
effect on the Company.
16
<PAGE>
Part II- Other Information
Item 6- Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) There were no reports filed on Form 8-K for the relevant period
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
KRANTOR CORPORATION
Date 11/15/96 /S/ Mair Faibish
-------------------- ------------------------------------
By Mair Faibish
Chief Financial Officer
Date 11/15/96 /S/ Mitchell Gerstein
--------------------- ------------------------------------
By Mitchell Gerstein
Treasurer
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