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, 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 November 3, 1997 there
were 2,436,115 shares outstanding of the registrant's common stock.
<PAGE>
KRANTOR CORPORATION
FORM 10-Q
SEPTEMBER 30, 1997
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION Page
Consolidated Balance sheets as of September 30, 1997
(Unaudited) and December 31, 1996 2 -3
Consolidated Statements of Operations for the nine
months ended September 30, 1997 and 1996 (Unaudited) 4-5
Consolidated Statements of Operations for the Three
months ended September 30, 1997 and 1996 (Unaudited) 6-7
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1997 and 1996 (Unaudited) 8-9
Notes to Consolidated Financial Statements 10-12
Management's Discussion and Analysis of 13-14
Financial Condition and Results of Operations
Forward Looking Information and Cautionary 15-16
Statements
PART II: OTHER INFORMATION
Item VI: Exhibits and Reports on Form 8-K 17
-2-
<PAGE>
KRANTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
---------------- ---------------
(UNAUDITED)
ASSETS
------
Current Assets:
- ---------------
<S> <C> <C>
Cash $ 5,302 $ 2,897
Accounts Receivable - Net of allowance for doubtful
accounts of $ 551,000 and $ 551,000 respectively (note 6) 385,788 491,427
Inventory - -
Promotional Rebates (Note 3) 1,688,986 1,467,738
Other Current Assets 100,184 51,368
---------------- ----------------
Total Current Assets 2,180,260 2,013,430
Collateral and Security Deposit (note 5) 2,308,995 2,052,995
Property and Equipment - Net 27,374 30,611
Other Assets 209,040 253,264
---------------- ----------------
Total Assets $ 4,725,669 $ 4,350,300
=============== ===============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
-3-
<PAGE>
KRANTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
---------------- ----------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities:
- --------------------
Notes Payable (Note 6) $ 547,082 $ 803,050
Accounts Payable & Accrued Expenses (Note 6) 1,469,188 2,054,565
Arbitration award payable (Notes 3,5) 467,453 467,453
Income taxes payable 48,817 71,158
---------------- ----------------
Total Current Liabilites 2,532,540 3,396,226
Subordinated Debentures 100,000 377,000
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- 1,912,385 and 847,035 shares were outstanding
at 9/30/97 and 12/31/96 respectively: 1,912 847
Additional Paid-in Capital 13,342,530 12,282,869
Accumulated Deficit (11,083,913) (11,539,242)
---------------- ----------------
2,260,629 744,574
Less treasury stock at cost, 1,400 shares (167,500) (167,500)
---------------- ----------------
Total stockholders' equity 2,093,129 577,074
Total Liabilities & Stockholder's Equity $ 4,725,669 $ 4,350,300
=============== ===============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
-4-
<PAGE>
KRANTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
<S> <C> <C>
Net Sales $ 3,512,810 $ 7,061,456
Cost of Sales 3,007,407 6,723,211
---------------- ----------------
Gross Profit 505,403 338,245
Selling General and Administrative Expense 661,671 457,340
Depreciation and Amortization 15,938 96,830
---------------- ----------------
Operating Income (Expense): (172,206) (215,925)
---------------- ----------------
Other Income (Expense):
Miscellaneous Income (Expense) 119,676 2,352
Commission Income (Note 5) 370,450 -
Interest Expense - (72,000)
Financing Costs (19,863) (125,500)
---------------- ----------------
Total Other (Income) 470,263 (195,148)
=============== ===============
Income (Loss) From Continuing Operations
Before Income Taxes 298,057 (411,073)
Income Taxes (98,359) (56,000)
---------------- ----------------
Income (Loss) From Continuing Operations $ 199,698 $ (355,073)
=============== ===============
DISCONTINUED OPERATIONS (Note 4)
Gain (loss) from Discontinued Operations 157,272 (7,388,183)
Income Taxes (54,951) (1,448,000)
---------------- ----------------
Net Income (Loss) from Discontinued Operations 102,321 (5,940,183)
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
-5-
<PAGE>
KRANTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (cont.)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
Income (Loss) Before Extraordinary Item 302,019 (6,295,256)
Extraordinary Item - Reduction of Income Taxes
Arising from Utilization of Loss Carryovers 153,310 -
---------------- ----------------
Net Income (Loss) 455,329 (6,295,256)
Less Preferred Dividend - 165,000
---------------- ----------------
Income (Loss) Applicable to Common Stock (Note 1) $ 455,329 $ (6,460,256)
=============== ===============
Earnings (Loss) Per Common Share From
Continuing Operations $ .24 $ (2.14)
Earnings (Loss) Per Common Share From
Discontinued Operations .12 (24.49)
---------------- ----------------
Earnings (Loss) Per Common Share $ .36 $ (26.63)
=============== ===============
Weighted Average Number of Shares Outstanding 1,248,104 242,540
</TABLE>
See Accompanying Notes To Consolidated Financial Statements
-6-
<PAGE>
KRANTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
--------------- ----------------
<S> <C> <C>
Net Sales $ 1,963,914 $ 1,224,465
Cost of Sales 1,661,555 1,366,663
---------------- ----------------
Gross Profit 302,359 (142,198)
Selling General and Administrative Expenses 219,665 236,612
Depreciation and Amortization 177 -
---------------- ----------------
Operating Income (Loss) 82,517 (378,810)
---------------- ----------------
Other Income (Expense):
Miscellaneous Income (Expense) 28,239 13,200
Interest Expense - 125,177
Financing Costs (7,387) -
---------------- ----------------
Total Other (Income) 20,852 138,377
=============== ===============
Income (Loss) From Continuing Operations
Before Income Taxes 103,369 (240,433)
Income Taxes (34,112) -
---------------- ----------------
Income (Loss) From Continuing Operation $ 69,257 $ (240,433)
=============== ===============
DISCONTINUED OPERATIONS (Note 4)
Gain (Loss) from Discontinued Operations (8,910) (3,001,095)
Income Taxes - -
---------------- ----------------
Net Income (Loss) from Discontinued Operations (8,910) (3,001,095)
</TABLE>
See Accompanying Notes To Consolidated Financial Statements
-7-
<PAGE>
KRANTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (cont.)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
Income (Loss) Before Extraordinary Item 60,347 (3,241,528)
Extraordinary Item - Reduction of Income Taxes
Arising from Utilization of Loss Carryovers 34,112 -
---------------- ----------------
Net Income (Loss) 94,459 (3,241,528)
Less Preferred Dividend - 55,000
---------------- ----------------
Income (Loss) Applicable to Common Stock (Note 1) $ 94,459 $ (3,296,528)
=============== ===============
Earnings (Loss) Per Common Share From
Continuing Operations $ .06 $ (.98)
Earnings (Loss) Per Common Share From
Discontinued Operations - (9.96)
---------------- ----------------
Earnings (Loss) Per Common Share $ .06 $ (10.94)
=============== ===============
Weighted Average Number of Shares Outstanding 1,595,973 301,200
</TABLE>
See Accompanying Notes To Consolidated Financial Statements
-8-
<PAGE>
KRANTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
Cash Flows From Operating Activites:
<S> <C> <C>
Income (Loss) From Continuing Operations $ 298,057 $ (355,073)
Income (Loss) From Discontinued Operations 157,272 (5,940,183)
Adjustments to Reconcile Net Income (Loss)
From Continuing Operations to Net Cash
Flows From Continuing Operating Activities:
Depreciation and Amortization 15,938 96,830
Non-Cash Expenses 810,726 979,287
Reserve for Bad Debts - 602,000
Changes in Operating Assets and Liabilities:
Sale of Markable Securities - 13,648
Accounts Receivable 105,639 8,569,278
Inventory - 5,462,917
Promotional Rebates (221,248) (976,023)
Deferred Taxes - (1,286,012)
Other Current Assets (48,816) (1,820,627)
Other Assets 44,224 (529,849)
Accounts Payable & Accrued Expenses (585,377) (5,304,079)
Income Taxes Payable (22,341) (307,854)
---------------- ----------------
Net Cash Flows (Used)
in Operating Activities 554,074 (795,740)
Cash Flows From Investing Activities:
Purchase of Furniture and Equipment (12,701) 660,484
Due From Officers and Shareholders - 80,035
Payment of Collateral Security Deposit (256,000) -
Advances to Related Parties - 228,718
---------------- ----------------
Net Cash Flows (Used)
in Investing Activities (268,701) 969,237
Cash Flows From Financing Activities:
Net Borrowing (Payments) on Notes Payable (255,968) (3,522,979)
Proceeds from Issuance of Common Stock 250,000 2,775,000
Cash Dividends on Preferred Stock - (165,000)
Long Term Debt (277,000) 500,000
Deferred Cost - (62,479)
---------------- ----------------
Net Cash Flows Provided by Financing Activities (282,968) (475,458)
---------------- ----------------
Net Increase (Decrease) in Cash 2,405 (301,961)
Cash - Beginning of Period 2,897 370,000
---------------- ----------------
Cash - End of Period $ 5,302 $ 68,039
=============== ===============
See Accompanying Notes To Consolidated Financial Statements
</TABLE>
-9-
<PAGE>
KRANTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
-------------------- -----------
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for:
Interest
<S> <C> <C>
Continuing Operations $ -- $ 72,000
Discontinued Operation 37,100 352,875
==================== ===========
Income Taxes
Continuing Operations $ -- $ (56,000)
Discontinued Operations -- (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 -- --
==================== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
-10-
<PAGE>
KRANTOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 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 1997, the company entered the premium Cigar and Pre-paid Telephone
card businesses. All businesses operate through subsidiaries.
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 or when services are rendered. 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.
Maintenance and repairs of a routine nature are charged to operations
as incurred. Capital improvements and major renovations 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 earnings.
-11-
<PAGE>
1. (CONTINUED)
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
basis and the tax basis 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 for the period.
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 September 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 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 September 30, 1997, the Company
issued 719,450 shares for payment of services to employees and
professional service providers and has 3,780,550 shares available in
reserve under the plan.
3. LITIGATION
The Company is named as 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 September 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 Proctor & Gamble
Distributor Company 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.
-12-
<PAGE>
LITIGATION (CONTINUED)
Two former officer's of IFD were awarded through arbitration $467,000
under disputed employment contracts. The award has been converted to a
judgment against Krantor and Affiliated Island Grocers DBA Island
Frozen & Dairy. (Collectively (AIG.) The company settled all actions
relating to this case for $300,000 in common stock on November 6, 1997.
Failure to honor the terms of the settlement will have an adverse
effect on the company.
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 September 30,
1997. Net Gains related to IFD totaled $157,272 for the nine months
ended September 30, 1997. The operations of IFD are included in the
accompanying statement of operations as discontinued operations. The
board of the Company is evaluating certain claims against parties that
may have contributed to the losses incurred in the operation of IFD.
There can be no assurance if the company decides to pursue there claims
that any benefit would be resulted to the Company.
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 $2.3 million as collateral security for
performance by the Company under the terms of the agreement.
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 September 30, 1997, current
liabilities exceeded current assets by $352,280. 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
and relies on the Chinese distributor agreement for its working capital
(see Note 5)
Management has discontinued the operations of IFD, intends to liquidate
IFD's remaining assets and settle its outstanding liabilities.(see Note
4)
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
should 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.
-13-
<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 a distribution agreement with a
Chinese trading company, Asia Legend Trading Ltd,. ("ALT"). In 1997 the company
entered the premium cigar market and pre-paid telephone card businesses. 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 and long term debt.
RESULTS OF OPERATION
Revenues decreased for the nine months ended September 30, 1997 to $3,512,810 a
(50%) decrease as compared to the prior period. Cost of sales decreased for the
nine months ended September 30, 1997 to $3,007,407 or (56 %) decrease as
compared to the prior period. Gross profit for direct sales increased from 4.8%
to 14.4% for the same period. The company is realizing better margins on its
sale of groceries and health beauty aids as compared to the prior period.
Selling General & Administrative (S,G&A) expenses increased to $661,671 for the
period a 31% increase. In 1996 most of the S.G&A expenses were absorbed by IFD,
which has been discontinued. Currently all expenses are absorbed by the company.
As a result S.G&A is proportionally higher in nine months.
Income from continuing operations for the nine months ended September 30, 1997
totaled $298,057 for the period as compared to a $411,073 loss to the prior
period. Income from discontinued operations totaled $157,272 for the nine months
ended September 30, 1997 compared to a 7.4 million loss to the prior period. 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 $.24 per
share compared to a $2.14 per share loss for the prior nine months period.
The company's revenue base has been slowly recovering from losses of 1996. In
order for the company to increase sales, it must reestablish it's relationships
with the major grocery manufactures. The company is vigorously attempting to
reestablish these ties as well as develop new one. Failure to re-establish these
ties worked would have an adverse effect on the company. Furthermore, the
Company is entering two new markets which include premium cigars and pre-paid
telephone cards for sale to its existing customers. These product lines have
lower sales volume than the companies traditional businesses, but higher margins
and greater advertising and promotional expenses. The company believes that
developing propriety products is in the best interest of the company's
expansion. Failure to secure market penetration in the new lines would have an
adverse effect on the company.
-14-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of Sept 30, 1997 the company reduced its working capital deficit by 75% to
$352,280 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. IFD's inventory has been fully reserved at Sept 30, 1997.
Liabilities were reduced from $3.4 million to $2.6 million a 24% drop. (See Note
5 to Consolidated Statements). The Company does not have sufficient working
capital to fund its continuing operations. It requires additional financing to
expand and satisfy its liabilities related to discontinued operations due to
it's contingencies in IFD. 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 $2.3 million for the purpose
of securing the performance underlying the distribution agreement entered into
in October 1996.
The Company has an $8 Million credit facility with Fidelity Funding of
California which expires on November 14, 1997. IFD is in 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. IFD's loan balance is $265,799 as of September 30, 1997. Krantor does
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, frozen squid and other seafood
products, premium cigars and pre-paid telephone cards. However, there can be no
assurance that the Company's 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.
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 fourth quarter due to the
holidays.
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.
-15-
<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. Failure to raise additional cash will have an adverse effect
on the company.
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,( Asia Legend Trading Ltd.) 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. COMPETITION.
The Company is subject to intense competition in its promotional
grocery, prepaid phone cards, premium cigar market and squid
businesses. While all industries are highly fragmented, with no one
distributor dominating the industry, the Company is subject to
competitive pressures from other distributors based on price, product
recognition, and service. However, in all of the industries the company
compete's there exists manufactures and distributors that have a
stronger capital base and better product recognitions that further
impair's the company's competitive edge.
5. 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). Many IFD
creditors have claimed that Krantor has guaranteed this debt. The
company disputes these allegation and is vigorously opposing there
claims. Failure to resolve these claims may have an adverse effect on
Krantor's working capital.
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6. TRADE RELATIONS WITH CHINA.
The Company is dependent on trade with the People's Republic of China
(PRC). The Company's financing arrangements, distribution contracts and
its supply of frozen squid with ALT a PRC company. Any government
sanctions that cause an interruption of trade or prohibit trade with
PRC through higher duties or quotas would have a material adverse
effect on the Company's business.
7. LITIGATION
The Company is named as 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 September 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 Proctor & Gamble
Distributor Company 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.
Two former officer's of IFD were awarded through arbitration $467,000
under disputed employment contracts. The award has been converted to a
judgment against Krantor and Affiliated Island Grocers DBA Island
Frozen & Dairy. (Collectively (AIG.) The company settled all actions
relating to this case for $300,000 in common stock on November 6, 1997.
Failure to honor the terms of the settlement will have an adverse
effect on the company.
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.
8. NASDAQ SMALL-CAP QUALIFICATIONS.
NASDAQ has increased it's maintenance requirements for small-cap
companies. Under it's new guidelines a NASDAQ small-cap stock must
trade over $1\per share and have a net tangible value in excess of $2
million. If the company fails to meet these requirements, it may be
delisted from NASDAQ small cap. Such event would reduce the liquidity
of the company's stock and will have an adverse effect on the company's
business.
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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 third quarter ended
September 30, 1997.
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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: 10/31/97 /S/ Mair Faibish
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By: Mair Faibish
Chief Financial Officer
Date: 10/31/97 /S/ Mitchell Gerstein
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By: Mitchell Gerstein
Treasurer
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