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 June 30, 1997.
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 July 21, 1997 there were
1,346,411 shares outstanding of the registrant's common stock.
<PAGE>
KRANTOR CORPORATION
FORM 10-Q
JUNE 30, 1997
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION Page
Consolidated Balance sheets as of June 30, 1997
(Unaudited) and December 31, 1996 2 -3
Consolidated Statements of Operations for the six
months ended June 30, 1997 and 1996 (Unaudited) 4-5
Consolidated Statements of Operations for the Three
months ended June 30, 1997 and 1996 (Unaudited) 6-7
Consolidated Statements of Cash Flows for the Six months
ended June 30, 1997 and 1996 (Unaudited) 8-9
Notes to Consolidated Financial Statements 10-13
Management's Discussion and Analysis of 14-15
Financial Condition and Results of Operations
Forward Looking Information and Cautionary 16-17
Statements
PART II: OTHER INFORMATION
Item VI: Exhibits and Reports on Form 8-K 18
2
<PAGE>
KRANTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
---- ----
(UNAUDITED)
ASSETS
------
Current Assets:
- ---------------
<S> <C> <C>
Cash ....................................................... $ 95,998 $ 2,897
Accounts Receivable - Net of allowance for doubtful accounts
of $ 551,000 and $ 551,000 respectively (Note 6) ........ 337,788 491,427
Inventory .................................................. -- --
Promotional Rebates (Note 3) ............................... 1,662,32 1,467,738
Other Current Assets ....................................... 165,148 51,368
Total Current Assets .............................. 2,261,260 2,013,430
Collateral and Security Deposit (Note 5) ................. 2,177,995 2,052,995
Property and Equipment - Net ............................... 27,550 30,611
Other Assets ............................................... 221,343 253,264
Total Assets ...................................... $ 4,688,148 $ 4,350,300
========== ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
3
<PAGE>
KRANTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
---- ----
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
- --------------------
<S> <C> <C>
Notes Payable (Note 6) .......................................... $ 684,520 $ 803,050
Accounts Payable & Accrued Expenses (Note 6) .................... 1,666,292 2,054,565
Arbitration award payable (Notes 3,5) ........................... 467,453 467,453
Income taxes payable ............................................ 57,798 71,158
Total Current Liabilities .............................. 2,876,063 3,396,226
------------ ------------
Subordinated Debentures ......................................... 350,000 377,000
Commitments and Contingencies ................................... -- --
Stockholders' Equity: (Note 2)
Class A $2.20 Cumulative Preferred stock - $.001 par
value; 100,000 shares authorized, 100,000 Shares Issued and
Outstanding ................................................. 100 100
Common stock - $.001 par value; 29,900,000 Shares
authorized- 1,202,708 and 847,035 shares were outstanding
at 6/30/97 and 12/31/96 respectively: ....................... 1,203 847
Additional Paid-in Capital ...................................... 12,806 12,282,869
Accumulated Deficit ........................................... (11,178,372) (11,539,242)
----------- -----------
1,629,585 744,574
Less treasury stock at cost, 1,400 shares........................ (167,500) (167,500)
Total stockholders' equity ............................. 1,462,085 577,074
Total Liabilities & Stockholder's Equity ............... $ 4,688,148 $ 4,350,300
============ ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
4
<PAGE>
KRANTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
1997 1996
---- ----
Commission Income (Note 5) ................... $ 370,450 $ --
Net Sales .................................... 1,548,896 5,836,991
--------- ---------
1,919,346 5,836,991
Cost of Sales ................................ 1,345,852 5,356,548
--------- ---------
Gross Profit ................................. 573,494 480,443
Selling General and Administrative Expenses .. 442,006 220,728
Depreciation and Amortization ................ 15,761 96,830
------ ------
Operating Income (Loss) ...................... 115,727 162,885
------- -------
Other Income (Expense):
Miscellaneous Income (Expense) ............ 91,437 (10,848)
Interest Expense .......................... -- (197,177)
Financing Costs ........................... (12,476) (125,500)
------- --------
Total Other (Income) ................ 78,961 (333,525)
====== ========
Income (Loss) From Continuing Operations
Before Income Taxes .......................... 194,688 (170,640)
Income Taxes ................................. (64,247) (56,000)
------- -------
Income (Loss) From Continuing Operation ..... $ 130,441 $ (114,640)
=========== ===========
DISCONTINUED OPERATIONS (Note 4)
Gain (Loss) from Discontinued Operations .... 166,182 (4,387,088)
Income Taxes ................................. (54,951) (1,448,000)
------- ----------
Net Income (Loss) from Discontinued Operations 111,231 (2,939,088)
See Accompanying Notes to Consolidated Financial Statements
5
<PAGE>
KRANTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (cont.)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
Income (Loss) Before Extraordinary Item .......... 241,672 (3,053,728)
Extraordinary Item - Reduction of Income Taxes
Arising from Utilization of Loss Carryovers ...... 119,198 --
Net Income (Loss) ................................ 360,870 (3,053,728)
Less Preferred Dividend .......................... -- 110,000
Income (Loss) Applicable to Common Stock (Note 1) $ 360,870 $(3,163,728)
=========== ===========
Earnings (Loss) Per Common Share From
Continuing Operations ......................... $ .18 $ (1.11)
Earnings (Loss) Per Common Share From
Discontinued Operations ....................... .16 (14.52)
Earnings (Loss) Per Common Share ................. $ .34 $ (15.63)
=========== ===========
Weighted Average Number of Shares Outstanding .... 1,057,614 202,369
See Accompanying Notes To Consolidated Financial Statements
6
<PAGE>
KRANTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
1997 1996
---- ----
Commission Income (Note 5) ................... $ 122,050 $ --
Net Sales .................................... 1,548,896 1,057,319
1,670,946 1,057,319
Cost of Sales ................................ 1,376,950 952,932
Gross Profit ................................. 293,996 104,387
Selling General and Administrative Expenses .. 217,697 38,671
Depreciation and Amortization ................ 7,346 48,415
Operating Income (Loss) ...................... 68,953 17,301
Other Income (Expense):
Miscellaneous Income (Expense) ............ 39,353 (9,839)
Interest Expense .......................... -- (94,142)
Financing Costs ........................... (5,963) (25,500)
Total Other (Income) ................ 33,390 (129,481)
Income (Loss) From Continuing Operations
Before Income Taxes .......................... 102,343 (112,180)
Income Taxes ................................. (33,773) (37,000)
Income (Loss) From Continuing Operation ..... $ 68,570 $ (75,180)
DISCONTINUED OPERATIONS (Note 4)
Gain (Loss) from Discontinued Operations .... (336) (4,136,393)
Income Taxes ................................. -- (1,367,945)
Net Income (Loss) from Discontinued Operations (336) (2,768,448)
See Accompanying Notes To Consolidated Financial Statements
7
<PAGE>
KRANTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (cont.)
FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
Income (Loss) Before Extraordinary Item .......... 68,234 (2,843,628)
Extraordinary Item - Reduction of Income Taxes
Arising from Utilization of Loss Carryovers .... 33,773 --
Net Income (Loss) ................................ 102,007 (2,843,628)
Less Preferred Dividend .......................... -- 55,000
Income (Loss) Applicable to Common Stock (Note 1) $ 102,007 $(2,898,628)
=========== ============
Earnings (Loss) Per Common Share From
Continuing Operations ......................... $ .09 $ (.63)
Earnings (Loss) Per Common Share From
Discontinued Operations ....................... -- (13.48)
Earnings (Loss) Per Common Share ................. $ .09 $ (14. 11)
=========== ============
Weighted Average Number of Shares Outstanding .... 1,134,415 205,441
See Accompanying Notes To Consolidated Financial Statements
8
<PAGE>
KRANTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
1997 1996
---- ----
<TABLE>
<CAPTION>
Cash Flows From Operating Activities:
<S> <C> <C>
Income (Loss) From Continuing Operations ............ $ 194,688 $ (114,640)
Income (Loss) From Discontinued Operations .......... 166,182 (2,939,088)
Adjustments to Reconcile Net Income (Loss)
From Continuing Operations to Net Cash
Flows From Continuing Operating Activities:
Depreciation and Amortization .............. 15,761 96,830
Amortization of Financing Costs ............ -- --
Non-Cash Expenses .......................... 274,141 --
Reserve for Bad Debts ...................... -- (176,000)
Changes in Operating Assets and Liabilities:
Sale of Markable Securities ............... -- 11,000
Accounts Receivable ........................ 153,639 5,794,920
Inventory .................................. -- 4,346,958
Promotional Rebates ........................ (194,588) (976,023)
Deferred Taxes ............................. -- (1,235,677)
Other Current Assets ....................... (113,780) (946,686)
Other Assets ............................... 31,921 88,151
Accounts Payable & Accrued Expenses ........ (388,273) (4,356,793)
Income Taxes Payable ....................... (13,360) (307,854)
Net Cash Flows (Used)
in Operating Activities .......... 126,331 (714,902)
Cash Flows From Investing Activities:
Purchase of Furniture and Equipment ................. (12,700) (165,436)
Due From Officers and Shareholders .................. -- 77,712
Payment of Collateral Security Deposit .............. (125,000) --
Advances to Related Parties ......................... -- 228,718
Net Cash Flows (Used)
in Investing Activities .......... (137,700) 140,994
Cash Flows From Financing Activities:
Net Borrowing (Payments) on Notes Payable .......... (118,530) (695,147)
Proceeds from Issuance of Common Stock .............. 250,000 1,073,673
Cash Dividends on Preferred Stock ................... -- (110,000)
Long Term Debt ...................................... (27,000) --
Deferred Cost ....................................... -- (62,479)
Net Cash Flows Provided by
Financing Activities .................. 104,470 206,047
Net Increase ( Decrease) in Cash .................. 93,101 (367,861)
Cash - Beginning of Period .......................... 2,897 370,000
Cash - End of Period ................................ $ 95,998 $ 2,139
=========== ===========
</TABLE>
See Accompanying Notes To Consolidated Financial Statements
9
<PAGE>
KRANTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
1997 1996
---- ----
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for:
Interest
Continuing Operations ........... $ -- $ 197,177
Discontinued Operation .......... 23,100 64,951
========== ===========
Income Taxes
Continuing Operations .................... $ -- $ (56,000)
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 ..... -- --
Prepaid Expenses paid via the distribution of
registered shares of the Company's Common
Stock through it's Compensation and Services Plan --
Total Non-Cash Operating, Investing and
Financing Activities ....... -- --
========== ===========
See Accompanying Notes to Consolidated Financial Statements
10
<PAGE>
KRANTOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
------------
Krantor Corporation is a food brokerage Company specializing in groceries,
frozen squid, general household merchandise and health and beauty aids(HBA)
in the promotional wholesale food industry throughout the United States.
In April 1994, Krantor formed a wholly-owned subsidiary which is a
full-service wholesale delivery company capable of providing direct store
deliveries of inventory within hours of receiving an order, principally in
the northeastern United States.
In December 1995, Krantor formed a wholly-owned subsidiary, Affiliated
Island Grocers, Inc., which does business under the name Island Frozen and
Dairy (IFD). IFD distributed specialty food, poultry and dairy products
throughout the northeastern United States. In June 1996, the Company
discontinued all operations of IFD (see Note 4).
In September 1996, Krantor formed a wholly-owned subsidiary which is a food
brokerage company that represents manufacturers, retailers and wholesalers
in connection with distribution of grocery, HBA and general merchandise
products (see Note 5).
PRINCIPLES OF CONSOLIDATION
---------------------------
The consolidated financial statements include the accounts of Krantor
Corporation and its subsidiaries (Company). All significant intercompany
accounts and transactions have been eliminated in consolidation.
REVENUE RECOGNITION
-------------------
The Company recognizes revenue at the time merchandise is shipped to the
customer. Merchandise which is damaged or has the wrong specifications is
returned by the Company to the supplier. The cost is recovered from the
trucking company or the supplier, depending upon the nature of the return.
CASH EQUIVALENTS
----------------
The Company considers time deposits with original maturities of three
months or less to be components of cash.
CONCENTRATIONS OF CREDIT RISK
-----------------------------
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of accounts receivable.
The concentration of credit risk with respect to receivables is mitigated
by the number of customers in the Company's customer base and their
dispersion across a diverse geographic area as well as the credit
worthiness of their major customers. The Company maintains an allowance for
losses based upon the expected collection of all receivables. Fair value
approximates carrying value for all financial instruments.
INVENTORY
---------
Inventory consists of finished goods and is stated at the lower of cost or
market (first-in, first-out method).
PROPERTY AND EQUIPMENT
----------------------
Property and equipment are stated at cost. Depreciation of property and
equipment is computed using the straight-line method over the estimated
useful lives of the assets, ranging from three to five years.
11
<PAGE>
Maintenance and repairs of a routine nature are charged to operations as
incurred. Betterment and major renewals which substantially extend the
useful life of an existing asset are capitalized and depreciated over the
estimated useful life. Upon retirement or sale of an asset, the cost of the
asset and the related accumulated depreciation or amortization are removed
from the accounts and any resulting gain or loss is credited or charged to
income.
ADVERTISING
-----------
The Company expenses advertising costs as incurred.
INCOME TAXES
------------
The Company uses the asset and liability method of computing deferred
income taxes. In the event differences between the financial reporting
bases and the tax bases of an enterprise's assets and liabilities result in
deferred tax assets, an evaluation of the probability of being able to
realize the future benefits indicated by such assets is required. A
valuation allowance is provided for a portion or all of the deferred tax
assets when it is more likely than not that such portion or all of such
deferred tax assets will not be realized.
NET INCOME (LOSS) PER COMMON SHARE
----------------------------------
Net income (loss) per common share is based on the weighted average number
of common shares outstanding. Outstanding stock options and warrants have
not been included since the effect would be anti-dilative.
MANAGEMENT ESTIMATES
--------------------
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses during the reporting period. Actual results could
differ from management's estimates.
2. STOCKHOLDERS' EQUITY
The holders of Class A preferred shares are entitled to receive, as and
when declared by the Board of Directors, cumulative dividends at the rate
of $2.20 per share per annum before any dividends on the common stock shall
be paid. In the event of the dissolution of the Company and the
distribution of its net assets, the holders of the Class A preferred shares
shall be paid in full at $10.50 per share plus all accumulated and unpaid
dividends, before any amounts are distributed among the holders of the
common shares. Unpaid cumulative dividends on the Class A preferred shares
shall not bear interest. At June 30, 1997, there were no cumulative or
outstanding dividends on the Class A preferred stock.
The Company has the option of redeeming and/or retiring, upon thirty days
notice, the Class A preferred stock, in whole or in part, at the cash price
of $10.50 per share, in addition to dividends accumulated and accrued up to
the date fixed for the redemption or retirement of the stock. Such
redemption or retirement shall be effected only out of the earned capital
of the Company and with the majority consent of stockholders.
In 1994, the Company registered with the Securities and Exchange Commission
on Form S-8, 600,000 shares of the Company's common stock to be distributed
under the Company's 1994 Services and Consulting Compensation Plan (Plan).
An additional 3,900,000 shares have been reserved since that date. Through
June 30, 1997, the Company issued 209,450 shares for payment of services to
employees and professional service providers and has 4,290,550 shares
available in reserve under the plan.
12
<PAGE>
3. LITIGATION
The Company is a named defendant in various lawsuits arising from the
liquidation of IFD. While it is not reasonably possible to estimate the
amount of losses in excess of amounts accrued at June 30, 1997, if any,
that may arise out of such litigation, management believes the outcome may
have a material effect on the operations of the Company.
The Company has negotiated a settlement agreement with a major grocery
manufacturer in connection with disputes relating to promotional rebates
that are due the Company. Failure to honor the terms of the settlement
agreement may have a material adverse effect on the company's business.
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount
of ultimate liability with respect to these actions will not materially
affect the financial position, results of operations or cash flows of the
Company.
4. DISCONTINUED OPERATIONS
On June 30, 1996, the Company adopted a formal plan to discontinue the
operations of IFD through a liquidation that is expected to be completed
during 1997. Assets to be disposed of consisted primarily of accounts
receivable and totaled approximately $197,000 at June 30, 1997. Net Gains
related to IFD totaled $166,182 for the six months ended June 30, 1997. The
operations of IFD are included in the accompanying statement of operations
as discontinued operations.
5. COMMITMENTS AND CONTINGENCIES
DISTRIBUTION AGREEMENT
----------------------
In 1996, the Company entered into a ten-year agreement with a Chinese
trading company to distribute frozen seafood in the United States under a
licensing arrangement. The Chinese trading company finances the purchase
and sale of products marketed on its behalf and pays a commission to the
Company based on sales generated by the distribution agreement. In
consideration for the Chinese trading company providing products to the
Company for sale and distribution and as security for doing so, the Company
provided $2.2 million as collateral security for performance by the Company
under the terms of the agreement.
MANAGEMENT PARTNERSHIP AGREEMENT
--------------------------------
During 1995, Krantor and IFD entered into a management partnership
agreement with SCP Enterprises, a New York general partnership
(Partnership) whose partners were employees of IFD. Under the terms of the
agreement, 1% of IFD's sales in excess of $30 million and 20% of IFD's
gross profit in excess of 12% of sales were to be paid to the Partnership
annually through December 2000 or upon termination of said employees, if
earlier. No amounts were paid in 1996 or 1995. The employees were
terminated in 1996 and filed an arbitration claim for amounts due under the
agreement. The employees received a favorable award in the amount of
$237,453, which is included in arbitration award payable at December 31,
1996. The company is vigorously contesting and countersuing on this award.
EMPLOYMENT AGREEMENTS
---------------------
During 1995, IFD entered into employment agreements with three employees
whereby each employee was entitled to receive a base salary of $108,000
with annual increases of 5% plus certain employee benefits through December
2000 and stock options to purchase 2,667 shares of the Company's common
stock at $50 per share. The employees were terminated in 1996 and filed an
arbitration claim for the balance due under the employment contracts. The
employees received a favorable arbitration award in the amount of $230,000.
Such amounts are included in the arbitration award payable at June 30,
1997. Krantor Corporation has guaranteed such agreements. The company has
countersued and is contesting the awards.
13
<PAGE>
6. MANAGEMENT'S PLANS
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates the Company
continuing as a going concern. However, the Company sustained a substantial
operating loss in 1996 and at June 30, 1997, current liabilities exceeded
current assets by $614,803. During 1996 and 1997, the Company became unable
to use its line-of-credit due to lack of collateral and the default of
certain provisions of the loan agreement.
Management has discontinued the operations of IFD, intends to liquidate
IFD's remaining assets and settle its outstanding liabilities.
In view of these matters, realization of the Company's assets in the
accompanying balance sheet is dependent upon continued operations of the
Company, which, in turn, is dependent upon the Company's ability to realize
its assets in the ordinary course of business while meeting its financing
requirements. Management believes actions presently being taken to revise
the Company's operating and financial requirements will provide the
opportunity for the Company to continue as a going concern. However,
Management cannot predict the outcome of future operations. The financial
statements do not include any adjustments that might result form the
outcome of this uncertainty.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company primarily brokers and merchandises the sale of frozen squid and
promotional brand name grocery products through an agency agreement with a
Chinese trading company, Asia Legend Trading Ltd. ("ALT") to the food industry.
The Company discontinued its Kosher Food business (IFD) on June 30, 1996. (See
Note 4 to Consolidated Statements). The Company's current assets consist
primarily of accounts receivable, promotional rebates, prepaid expenses and
cash. The Company's liabilities consist of accounts payable, short term and long
term debt.
RESULTS OF OPERATION
Revenues decreased for the six months ended June 30, 1997 to $1,919,346 a (67%)
decrease as compared to the prior period. As a result of the Company's change of
its business from a distributor to a food broker, the Company is recognizing
only commissions on many of its sales in connection with its distribution
agreement with ALT. This revenue classification change causes the Company's
revenue base to decrease as compared to prior years, but should not affect
profitability.
Cost of sales for decreased for the six months ended June 30, 1997 to $1,345,852
or (75 %) decrease as compared to the prior period. Gross profit for direct
sales increased from 8.2% to 13% for the same period. The company is realizing
better margins on its sale of groceries as compared to the prior period.
Selling General & Administrative (S,G&A) expenses increased to $442,006 for the
period a 100% increase. In 1996 most of the S.G&A expenses were absorbed by IFD,
which has been discontinued. Currently all expenses are absorbed by Krantor. As
a result S.G&A is proportionally higher in the first six months.
Income from continuing operations for the six months ended June 30, 1997 totaled
$130,441 for the period as compared to a $114,640 loss for the same period. This
profit represents the Company's food brokerage and direct sales business. Income
from discontinued operations totaled $111,231 for the six months ended June 30,
1997. The Company believes that the total costs incurred from discontinuing
operations have been fully charged to earnings and should not negatively affect
future operating results. Earnings per share for continuing operations were $.18
per share compared to a $1.11 per share loss for the prior six months period.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1997 the company reduced its working capital deficit by 56% to
$614,803 from December 31, 1996. The deficit is directly related to current
liabilities that are fully accrued for IFD's business that have not been settled
or reconciled. Excluding IFD's current liabilities, working capital for
continuing operations totaled 257,000 as of June 30, 1997. IFD's inventory has
been fully reserved at June 30, 1997. Liabilities were reduced from $3.8 million
to $3.2 million a 16% drop. (See Note 5 to Consolidated Statements). The Company
believes that it has sufficient working capital to fund its continuing
operations but requires additional financing to expand and satisfy its
liabilities related to discontinued operations. Continuing operations will be
conducted through Island Wholesale Grocers (IWG), the promotional grocery and
seafood subsidiary of Krantor, and the distribution agreement entered into on
October 1, 1996 with ALT. (See Note 1 to Consolidated Statements). There was no
material change in the Company's accounts receivable since December 31, 1996.
15
<PAGE>
The Company plans on expanding its core grocery and frozen seafood market
through its distribution agreement. Krantor believes that by discontinuing IFD's
operation it should enable it to support the capital requirements of its
continuing operations. 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 collateral with ALT of $2.2 million for the purpose of securing the
performance underlying the distribution agreement entered into in October 1996.
The Company earns a 5% interest rate on the collateral security pledge.
The Company has an $8 Million credit facility with Fidelity Funding of
California which expires on November 14, 1997. IFD is in technical default on
the credit facility and currently not borrowing under the facility. The
Company's business is exclusively being conducted though its food brokerage
distribution agreement. The Company intends to pay the facility off through the
liquidation of IFD's assets. The facility, which expired in November 1996, was
extended on May 11, 1996 through November 14, 1997 by Fidelity. IFD's loan
balance is $267,799 as of June 30, 1997. Krantor and IWG do not owe any money to
Fidelity, but Krantor has guaranteed IFD's loan.
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."
Subject to available financing, the Company intends to further expand its
continuing business through its distribution agreement by merchandising well
accepted readily marketable promotional brand-name grocery products and frozen
squid and other seafood products. However, there can be no assurance that the
Company's proposed expansion plans will be successful. Additional working
capital is required beyond the current available financing in order for the
Company to expand from its current levels. The company is expanding it's product
base especially as related to general merchandise that is carried by it's
customers. The company entered the prepaid phone card business and is looking
for other similar opportunities that complement its customer base.
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.
16
<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 maintain and expand its
business.
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, ALT 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.
5. COMPETITION.
The Company is subject to competition in both its promotional grocery,
prepaid phone cards 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.
17
<PAGE>
6. DISCONTINUED OPERATION.
The Company has experienced a significant loss in discontinuing its Kosher
Food business (IFD). This loss materially reduced the Company's working
capital position. (See Liquidity & Capital Resources).
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 with
ALT involve a Chinese trading company and squid, which is directly supplied
through the PRC. Any government sanctions that cause an interruption of
trade or prohibit trade with PRC through higher duties or quotas could have
a material adverse effect on the Company's business.
8. LITIGATION
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.
Two former officers of IFD's business are claiming that the Company is
required to pay their employment and management contracts. The Company
believes that their claim for employment benefits is without merit. These
former officers have been awarded $460,000 through arbitration. The Company
has counter-sued against these officers claiming that they caused material
damage to IFD's business which resulted in the closure of the operation.
The company is attempting to negotiate a settlement with these former
officers. If the arbitration award is converted to a judgement against the
Company, it will have an adverse effect on the Company's business.
9. NASDAQ SMALL-CAP QUALIFICATIONS.
There are several proposals by the NASD that could have an effect on the
Company's NASDAQ small-cap listing. In particular it may become mandatory
for a stock listed on NASDAQ small-cap to have a price greater than or
equal to $ 1.00. The Company's current stock price is trading near a $1.00.
In the event that the NASD makes it mandatory for a stock listed on NASDAQ
Small Cap to be equal or greater than a $1.00, the Company may not qualify
for listing, if its stock drops below $1.00. If the Company is de-listed
from NASDAQ small-cap it may have a material adverse effect on the Company.
18
<PAGE>
PART II- OTHER INFORMATION
Item 6- Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) There were two reports filed on Form 8-K for the second quarter ended June
30, 1997.
1. 4/02/97 Empire settlement
2. 6/19/97 Arbitration award
19
<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
/S/ Mair Faibish
----------------
By: Mair Faibish
Chief Financial Officer
Date: 7/23/97
- ----- -------
/S/ Mitchell Gerstein
--- -----------------
By: Mitchell Gerstein
Treasurer
Date: 7/23/97
- ---- -------
20
