SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997.
Commission file number 333-45777
KRANTOR CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 22-2993066
(State of incorporation) (I.R.S. Employer
Identification No.)
10850 Perry Way, Ste 203
Wexford, Penna. 15090
(Address of principal executive offices)
Registrant's telephone number, including area code: 412-980-6380
Securities registered pursuant to Section 12(b) of
the Act:
Title of Each Class Name of Exchange
Common Stock, $.001 par value NASDAQ/Small-Cap System
and Boston Stock Exchange
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. Yes_X_ NO__
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
On April 6, 1998, the aggregate market value of the voting stock of Krantor
Corporation, held by non-affiliates of the Registrant (based on the closing
price as reported on the NASDAQ for April 6, 1998) approximately $7,302,919.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes. The number of outstanding shares of the
Registrant's Common Stock as of April 6, 1998 was 4,583,604.
<PAGE>
PART I
Other than historical and factual statements, the matters and items
discussed in this report on Form 10-K are forward-looking information that
involves risks and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking statements. Factors
that could contribute to such differences are discussed in the forward-looking
statements and are summarized in "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Forward-Looking Information and
Cautionary Statements."
ITEM 1. BUSINESS
A. OVERVIEW
Krantor Corporation ("Krantor") and its subsidiaries (collectively the
"Company") participate mainly in the food and grocery and health and beauty
aids, frozen squid distribution and premium handmade cigar and other related
tobacco product distribution industries. Trade sources estimate that this
industry generates annual nationwide revenues of over $400 billion and $1.3
billion respectively. The Company, estimates that 80% of its business is
generated in the Northeastern region of the United States.
The Company entered the premium handmade cigar market at the end of 1997
through a Distributorship Agreement with a Dominican Republic Company. The
Company believes that distributing premium handmade cigars to its existing
customer base through regional sales offices, a national broker network and
cable television marketing should develop for the Company a unique franchise in
the premium handmade cigar business.
Presently the Company is conducting its basic grocery business through and
as an agent for ALT, which business has been reinforced and the Company believes
strengthened by their 10 year exclusive U.S. distribution agreement with ALT.
The agreement presently calls for the Company to distribute frozen squid, also
known as calamari, exclusively in the United States. The agreement provides the
Company with the opportunity to earn royalties on both squid and grocery sales
distributed in the United States. It also allows the Company to utilize the
purchasing power and financing capabilities of its trading partner to support
the distribution of its products in the United States. In addition, the Chinese
trading company is developing products to be marketed by the Company in the
United States. Sales of calamari by the Company on behalf of its Chinese trading
partner provide for above average profit margins due to the Company's resultant
direct buying presence in China.
The Company plans on expanding its core grocery and frozen seafood market
through its subsidiaries. The Company 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. The Company prefers to use debt financing to expand its business but must
currently rely on equity financing until the Company may be able to establish
trade financing alternatively for its business. (See Management Discussion, Item
6).
Affiliated Island Grocers d/b/a Island Frozen and Dairy ("IFD") has ceased
functioning as an active subsidiary of the Company. The Company has terminated
its Kosher Foods and Specialty Foods business as previously operated by IFD, has
significantly curtailed its wholesaler operations in general, and
-2-
<PAGE>
is attempting to re-focus its business to its traditional business as a
Promotional Grocery Product distributor, together with its expansion into
distribution, presently on an agency basis, of frozen squid through agreements
with the Company's established Chinese distribution agreement with Asia Legend
Trading Ltd. ("ALT")(see "Chinese Distribution Agreement" and "Management
Discussion and Financial Analysis" infra) and its acquisition and resale and/or
distribution of premium hand made cigars and other related tobacco products
derived from contacts of the Company in the Dominican Republic. Such businesses
of Krantor are conducted through corporate subsidiaries whose stock is wholly or
majority owned by Krantor, and the results of whose businesses are consolidated
for reporting purposes with the financial statements of Krantor.
THE COMPANY'S EXECUTIVE OFFICES ARE LOCATED AT 10850 PERRY WAY, STE. 203,
WEXFORD , PENNSYLVANIA 15090, AND ITS TELEPHONE NUMBER IS (412) 980-6380.
B. CIGAR PRODUCTION AND SALE
1. DISTRIBUTION RIGHTS
The Company, through one of its wholly owned subsidiaries (the
"Affiliate"), entered into an exclusive distributorship agreement dated December
31, 1997 (the "Distribution Agreement") with Fabrica De Tobacco Valle Dorado,
SA, a Dominican Republic corporation (the "DR Company") for the sale and
distribution of premium hand made cigars manufactured in and from tobacco grown
in the Dominican Republic. The Affiliate will retain 50% of the profits from the
sale of the premium handmade cigars and will have discretion as to marketing
strategies. The DR Company owns and/or exclusively leases, for at least the
period of the Distribution Agreement, sufficient land and factory facilities in
the Dominican Republic capable of producing premium hand-made cigars at a
capacity of at least 500,000 cigars per month. The Affiliate will have the right
to sell the premium handmade cigars under the several brand names developed to
date by the DR Company, as well as the right to sell brands developed by the
Affiliate to fit market niches which it may locate. The Distribution Agreement
is for a term of 25 years with an option for a second 25 years, for worldwide
distribution to locations directed by the Affiliate. The DR Company, which has
shipped over 1,000,000 cigars to the United States since January 1, 1997, has
present tobacco inventory on hand to produce approximately 3,500,000 cigars. The
cigars presently marketed by the DR Company range from hand made short fillers
that retail around $2.00 each to premium hand-made long filler cigars that
retail as high as $6.00 each. Under the terms of the Distribution Agreement the
Affiliate is to pay the DR Company for the cigars at cost and to split the
profit derived from their resale. In addition, the Affiliate is to advance the
costs needed for the sale, promotion, marketing, advertising, shipping to
customers and all applicable taxes, and would be responsible for exhibition of
the goods at trade shows and other advertising shows and publicity vehicles, all
of which expenses would be deducted as costs, together with other costs of
goods, including but not limited to delivery expense, distribution, selling,
marketing, tobacco taxes and excise taxes, before arriving at the "profit" to be
split. Management of the Company believes that the Company's historical inroads
into the consumer goods distribution network will provide advantageous
opportunity for establishment and enhancement of distribution channels for the
cigars. There can be, of course, no assurance that the Affiliate will be
successful in marketing cigars, especially in view of the various risk factors
discussed herein.
-3-
<PAGE>
2. CIGAR PRODUCTION
According to statistics compiled by The Cigar Insider, a recognized written
source of authority, the Dominican Republic produces and exports more premium
handmade cigars into the United States than any other country in the world. It
has a strong lead over all other cigar exporting nations, with nearly 50% of the
market. Industry experts rate cigars manufactured in the Dominican Republic
third in the world in quality, trailing only those from Cuba and Jamaica.
Cuban cigars cannot be exported into the United States as a result of the
1962 trade embargo. Neither the Company nor any of its wholly-owned subsidiaries
currently distribute or engage in any transactions involving Cuban cigars or any
other products of Cuban origin. Removal of the trade embargo and the resultant
distribution of Cuban cigars into the United States could have a material
adverse effect on the prospective business for the Affiliate and thereby the
Company.
3. COMPETITION
The cigar distribution industry is dominated by a small number of large
companies which are well known to the public. Management believes that, as a
distributor of premium handmade cigars, the Affiliate will compete with a small
number of primarily regional distributors, including Southern Wine and Spirits,
Specialty Cigars, Inc., Cohabico and Old Scottsdale Cigar Company, Inc. and many
other small tobacco distributors and jobbers. A number of larger, well-known
cigar manufacturing and wholesale companies, along with major cigarette
manufacturers, have not yet entered the retail distribution market to any
appreciable degree, but may do so in the future. Such potential competitors
include JR Cigar Company, Inc., Consolidated Cigar Corporation, Culbro
Corporation, General Cigar Company, Swisher International Inc., Caribbean Cigar
Company and US Tobacco. Many existing and potential competitors have larger
resources than the Company and would, if they enter the premium handmade cigars
distribution market, constitute formidable competition for the Company's
business. There can be no assurance that the Company will compete successfully
in any market.
4. GOVERNMENTAL REGULATION AND TOBACCO INDUSTRY LITIGATION
GENERAL. The tobacco industry in general has been subject to regulation by
federal, state and local governments, and recent trends have been toward
increased regulation. Regulations include labeling requirements, limitations on
advertising and prohibition of sales to minors, laws restricting smoking from
public places including offices, office buildings, restaurants and other eating
establishments. In addition, cigars have been subject to excise taxation at the
federal, state and local level, and those taxes may increase in the future.
Tobacco products are especially likely to be subject to increases in excise
taxation. Future regulations and tax policies may have a material adverse affect
upon the ability of cigar companies, including the Company, to generate revenue
and profits.
HEALTH REGULATIONS. Cigars, like other tobacco products, are subject to
regulation in the United States at the federal, state and local levels. Together
with changing public attitudes toward smoking, a constant expansion of smoking
regulations since the early 1970s has been a major cause for a substantial
decline in consumption. Moreover, the trend is toward increasing regulation of
the tobacco industry.
-4-
<PAGE>
FEDERAL REGULATION. In recent years, a variety of bills relating to tobacco
issues have been introduced in the Congress of the United States, including
bills that have prohibited the advertising and promotion of all tobacco products
and/or restricted or eliminated the deductibility of advertising expenses; have
set a federal minimum age of 18 years for use of tobacco products; have
increased labelling requirements on tobacco products to include, among other
things, addiction warnings and lists of additives and toxins; have modified
federal preemption of state laws to allow state courts to hold tobacco
manufacturers liable under common law or state statutes; and have shifted
regulatory control of tobacco products and advertisements from the FTC to the
FDA.
EPA LITIGATION. The U.S. Environmental Protection Agency (the "EPA") has
recently published a report with respect to the respiratory effects of passive
smoking, which report concluded that widespread exposure to environmental
tobacco smoke presents a serious and substantial public health impact.
FDA REGULATION. The FDA has proposed rules to regulate cigarettes and
smokeless tobacco in order to protect minors. Although the FDA has defined
cigarettes in such a way as to include little cigars, the ruling does not
directly impact large cigars. However, once the FDA has successfully exerted
authority over any tobacco product, the practical impact may be felt by
distributors and manufacturers of any tobacco product. If the FDA is successful,
this may have long-term repercussions on the larger cigar industry.
STATE REGULATION. In addition, the majority of states restrict or prohibit
smoking in certain public places and restrict the sale of tobacco products to
minors. Places where the majority of states have prohibited smoking include: any
public building designated as non-smoking; elevators; public transportation;
educational facilities; health care facilities; restaurants and workplaces.
Local legislative and regulatory bodies have also increasingly moved to curtail
areas. In a few states, legislation has been introduced which would require all
little cigars sold in those states to be "fire-safe" little cigars, i.e., cigars
which extinguish themselves if not continuously smoked. Passage of this type of
legislation and any other related legislation could have a materially adverse
effect on the Company's cigar business.
TOBACCO INDUSTRY LITIGATION. Historically, the cigar industry has not
experienced material health-related litigation. However, litigation against
leading United States cigarette manufacturers seeking compensatory and, in some
cases, punitive damages for cancer and other health effects alleged to have
resulted from cigarette smoking is pending and being processed.
PROPOSED SETTLEMENT WITH STATES. Several states have sued tobacco companies
seeking to recover the monetary benefits paid under Medicaid to treat residents
allegedly suffering from tobacco-related illnesses. On June 20, 1997, the
Attorneys General of 40 states and the major United States tobacco companies
announced a proposed settlement of the litigation, which, if approved by the
United States Congress, would require significant changes in the way United
States cigarette and tobacco companies do business. The potential impact, if
any, on the cigar industry is uncertain, especially in view of the fact that it
is not certain as to what the final terms of the settlement will be even as to
cigarettes. However, the potential limitations on advertising, the distribution
of anti-nicotine literature and the limitations on smoking areas are just
examples
-5-
<PAGE>
of provisions which could, if adopted, adversely impact the cigar industry and
thus the operations of the Company in this industry.
CLASS ACTIONS. There have been various class actions instituted against the
tobacco companies relating to cigarette smoking, certain of which are still
pending. Although management does not believe that any of the deciding or
pending actions will have a material adverse effect on the Company's cigar
business, there can be no assurance that management's evaluation will be correct
as this litigation evolves. Although there are numerous differences between the
cigar and cigarette industries, the outcome of pending and future cigarette
litigation may encourage various parties to bring suits on various grounds
against cigar industry participants. While it is impossible to quantify what
effect, if any, any such litigation may have on the Company's operations, there
can be no assurance that such litigation would not have a material adverse
effect on its operations.
OSHA REGULATION. The Occupational Safety and Health Administration ("OSHA")
has proposed an indoor air quality regulation covering the workplace that seeks
to eliminate nonsmoker exposure to environmental tobacco smoke. Under the
proposed regulation, smoking must be banned entirely from the workplace or
restricted to designated areas of the workplace that meet certain criteria. The
proposed regulation covers all indoor workplaces under OSHA jurisdiction,
including, for example, private residences used as workplaces, hotels and
motels, private offices, restaurants, bars and vehicles used as workplaces. The
tobacco industry is challenging the proposed OSHA regulation on legal,
scientific and practical grounds. It also contends that the proposed regulation
ignores reasonable alternatives . There is no guaranty, however, that this
challenge will be successful. Although management does not believe that the
proposed OSHA regulation would have a material adverse effect on the cigar
industry or the Affiliate, there can be no assurance that such regulation would
not adversely impact the Company's business.
C. CHINESE DISTRIBUTION AGREEMENT
The Company in the last quarter of 1996 entered into a 10 year exclusive
agreement with a major Chinese trading company (Asia Legend Trading Ltd. ("ALT")
to distribute frozen squid (also known as calamari) in the United States (also
being non-exclusive elsewhere). In such agreement and under such arrangement as
provided therein, the Company acts as a distribution agent (on a
licensing/royalty independent contractor basis) for the Chinese trading company
and seeks to expand the demand for products offered by such Chinese company in
the United States, including primarily squid, but also for other seafood and
grocery items marketed by such Chinese company. In return for such services the
Company is given a royalty and, further, such Chinese trading partner has agreed
to significantly finance the operations of the Company, through subsidiaries
where provided, in acting as their marketing and distribution agent for brand
name grocery and health & beauty aid products, including financing the
purchase/sale of products marketed for the Chinese trade partner. Currently the
Company distributes squid in the Northeastern United States, which is presently
the largest U.S. market area for such product. Gross Revenues related to the
Chinese Distribution Agreement will not be reported by Krantor. Krantor's
revenues will be the royalties derived through the sales generated by the
distribution agreement.
-6-
<PAGE>
D. PROMOTIONAL DISTRIBUTION BUSINESS
1. BACKGROUND
Since 1989, the Company has been a distributor of Promotional Grocery
Products. Industry sources estimate that the sale of Promotional Grocery
Products generates annual revenues of approximately $40 billion. In 1995, the
Company generated approximately 77% of its gross revenues from the distribution
of Promotional Grocery Products. This business is a part of the approximately
$40 billion promotional grocery distribution industry, which is a subset of the
approximately $400 billion food distribution industry. The Promotional Grocery
Products business involves the purchase of Promotional Grocery Products at
deeply discounted prices. The companies operating in this business are able to
purchase Promotional Grocery Products only when manufacturers provide
promotional allowances as an inducement to promote particular products.
2. PROMOTIONAL DISTRIBUTION BUSINESS MERCHANDISING AND SALES
Promotions offered by manufacturers of Grocery Products play a critical
role in the success of the Company's promotion distribution business. Such
promotions are offered by manufacturers who wish to increase consumer awareness
of their products in certain markets. Promotions offered on favorable terms are
keyed into the Company's information system network and members of the Company's
sales staff then offer the discounted brand-name products to their various
customer accounts. All purchases of Promotional Products will be handled by
representatives of ALT.
3. PROMOTIONAL DISTRIBUTION BUSINESS - TRUCKING, WAREHOUSE, AND
INSURANCE
The Company does not own its trucks and is dependent on common carriers in
the trucking industry. Although the Company can call upon any of several hundred
common carriers to distribute its products. From time to time the trucking
industry is subject to strikes or work stoppages, which could have a material
adverse effect on the Company's operations if alternative modes of shipping are
not then available. Additionally, the trucking industry is subject 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. All trucking and warehousing will be
handled by representatives of ALT.
The Company generally purchases Promotional Grocery Products for its
promotional business in truck-load quantities to take advantage of better
pricing from the supplier and lower freight costs. The Company's traffic
department then arranges for transportation of the product through a
computerized network of several hundred independent truckers coordinated through
its warehouse operation. The Company does not foresee difficulty in arranging
additional trucking if it increases its business volume. All purchases, shipping
and warehousing is transacted through the Chinese distribution agreement and is
handled by representatives of ALT. The Company has arranged for warehousing when
and where necessary, on a contract basis and has thereby eliminated the
existence of and need for centralized warehousing.
-7-
<PAGE>
4. PROMOTIONAL DISTRIBUTION BUSINESS - COMPETITION
The Promotional Products business is a highly competitive, fragmented
business which, as noted above, generates approximately $40 billion in gross
revenues. On a national level, the Company does not believe that any single
wholesaler or retailer has a significant percentage of market share. The Company
competes with a large number of wholesalers and retailers in the industry, many
of whom have substantially greater financial resources than the Company. These
competitors are able to make larger volume purchases and can finance larger
inventories than the Company. Moreover, some of these competitors will sometimes
receive preferential notice of product promotions prior to the Company.
The Company seeks to compete in the Promotional Grocery Products
distribution industry primarily on the basis of price and service. Because of
its experienced sales force and its information systems network, the Company is
generally able to carefully price its purchases, thereby offering products at
competitive prices. All sales of promotional grocery and Squid products flow
through the Distribution Agreement and are supervised by representatives of ALT.
E. SEASONALITY
Seasonality affects the demand for certain of the products sold by the
Company such as juice drinks in the summer months or hot cereals in the fall and
winter months; however, all these products are available to the Company
throughout the year. Manufacturers also tend to promote more heavily toward the
close of their fiscal quarters and during the spring and early summer months.
Accordingly, the Company is able to purchase more product 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 high
concentration of holidays in that quarter.
Seasonality also affects the squid market (and seafood in general) of
products originating in China. Because of time and locality differences, the
optimum timing for catching the seafood and the most popular times for re-sale
in the United States differ significantly and such requires that the seafood be
delivered and stored frozen, in many cases for a significant time. Purchases and
sales are likely to be affected thereby.
F. EXPANSION STRATEGY
Krantor plans to expand its core grocery and frozen squid market through
its ten year distribution agreement with its Chinese trading partner. Subject to
available financing, the Company plans to expand its continuing business by
merchandising readily marketable promotional brand grocery products and frozen
seafood and selling these goods to its customer base.
In the second half of 1996, Krantor enhanced its expansion into the frozen
squid business and has seen such segment of its business grow significantly
since. As a result of this expansion, the Company believes it can obtain better
margins on its sales of frozen seafood products.
Management's plans are to focus on growth through internal operations. The
Company believes that internal sales growth of at least 20 percent can be
achieved over the next five years. The existing sales force can continue to add
new customers to its base, in addition to increasing sales volume to existing
customers. The
-8-
<PAGE>
Company plans to expand its sales territory by recruiting additional qualified
sales personnel and establishing a broker network for its premium handmade
cigars business.
G. TRADEMARKS, LICENSES AND PATENTS
The Company does not utilize any copyrights, trademarks, licenses or
patents in its business. The Company has obtained a wholesale pharmaceutical
license through the New York State Department of Education, but to date has not
utilized it. Through its distribution agreements, the Company has US rights to
the "Tenda" "Picolo" name in the marketing of seafood products and "Suarez Gran
Reserva", "Breton Legend", "Anduleros", "Don Otilio","Alminante" "Nativo" and
various other trade names in marketing of premium handmade cigars. The seafood
trademarks are owned by ALT. The cigar tradenames are owed by Gran Reserve Corp.
H. EMPLOYEES
The Company as of the date of this report employs 7 full time persons all
of which work in executive, administrative or clerical activities. The
purchasing, transportation, sales and operations of the promotional grocery and
seafood business employs approximately 20 full time persons all who are under
the supervision and control of ALT. In the cigar distribution area there are 100
employees that work in the Dominican Republic for Fabrica De Tabaco Valle
Dorado, SA. The Company also utilizes numerous independent brokers.
I. ENVIRONMENTAL MATTERS
The Company is subject to various federal, state and local environmental
laws and regulations. The Company believes that it is currently conducting its
operations in material compliance with all such laws and regulations.
J. COMPETITION
The Company is small in both physical and financial attributes in
comparison to many of its competitors in the grocery industry and other business
areas in which it participates, and, although it plans an expansion to increase
its position, the Company also competes with other more substantial companies in
the sale and distribution of frozen seafood, including squid, although in this
latter area of business the Company believes it may be among the largest
distributors of squid from China. The Company's knowledge and experience in and
devotion to its business, receptiveness to general customers, service, and its
exclusivity arrangement with a major Chinese trading entity should continue to
benefit its operations and continue to allow it to compete with its more
financially endowed competitors.
K. YEAR 2000 ISSUE
The Company does not consider that there will be any material effect on its
business operations of any Year 2000 issues relating to computer generated
information and maintenance. The Company is not reliant on time based computer
generated information which may be affected by such issues. The Company does not
maintain inventory of any significance, the records of which might under other
circumstances be adversely affected. Therefor the Company has not made any
general plans to address any Year 2000 issues. However, the Company has
purchased the necessary accounting software for its system that are Year 2000
compliant.
-9-
<PAGE>
ITEM 2: PROPERTIES
The Company's central headquarters consists of approximately 1000 square
feet of office space. Two of the Company employees work at this facility. The
Company may expand its warehousing activities to other facilities if and when
same may be deemed advisable for easy access to goods at various locations in
the United States and/or abroad or for other reasons associated with the nature
of goods sold. Currently squid from China is stored in freezers at warehousing
facilities in New Jersey. The Company utilizes regional sales offices under the
distribution agreement located in New York, New Jersey, Florida, Pennsylvania
and the Dominican Republic.
The Company has relocated its principal offices to 10850 Perry Way, Suite
203, Wexford, Pennsylvania near Pittsburgh, Pennsylvania and has arranged for
warehousing, where necessary, on a contract basis. Such facility change was
accomplished because of the lesser need for larger facilities in the wake of the
Company's entering into its distributorship arrangement with its Chinese trading
partner, the latter company being responsible for purchasing, financing,
shipping and handling of all goods distributed for them by the Company. The new
principal offices for the Company were established in Pennsylvania, closer to
the domicile of Krantor's president, Henry Platek, which offices continue to be
used principally as a contact point and are fully accessible by modern
telecommunications. The Company maintains satellite offices in New York, New
Jersey, Florida and the Dominican Republic.
ITEM 3: LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims which arise in the
ordinary course of business. Except for the items below, in the opinion of
management, the amount of ultimate liability with respect to these proceedings
and claims will not materially affect the financial position of the Company.
The Company is named as a defendant in various lawsuits arising from the
liquidation of Island Frozen and Dairy ("IFD"), a previous wholly-owned
subsidiary of the Company. The Company has reserved and accrued on its books
minimal funds to cover these possible claims. In June 1996, a complaint was
filed in Superior Court Law Division, Essex County, New Jersey, Docket No.
ESX-L- 6491-96 by New Jersey National Bank against the Company, Affiliated
Island Grocers, the then affiliate of the Company, and certain other defendants,
seeking payment on secured business financing, to which claim the Company
believes it has and has asserted significant claims to monetary offsets. The
principal amount claimed owed by the Company in such lawsuit is $350,000.00. The
Company does not believe that the extent of the balance of above mentioned
lawsuits exceeds $100,000. While it is not reasonably possible to estimate the
amount of losses in excess of amounts accrued and reserved for such losses, if
any, that may arise out of such litigation, management believes that the outcome
will not have a material effect on the operations of the Company.
Action was brought by Krantor Corporation, and Island Wholesale Grocers
Inc., an affiliated company of Krantor Corporation against The Proctor & Gamble
Distributing Company, in which case The Proctor & Gamble Distributing Company
counterclaimed, which action was brought in United States District Court,
Eastern District of New York under docket no. CIV. 96- 1503(FB), the nature of
the claims relating to promotional rebates which the Company claims from Proctor
& Gamble and accounts payable from the Company to Proctor & Gamble which are
claimed as due and outstanding. The Company has negotiated a settlement
agreement with Proctor and Gamble in connection with this matter entered in
-10-
<PAGE>
May 1997. The settlement involves recognition of debt due to Proctor & Gamble in
the amount of $1,465,976 which the Company shall pay in cash and stock, as
reduced by promotional rebates expected to offset at least one third of such
settled amount. Full payment is due by April 30, 2000. Failure to abide by the
terms of such settlement may have a material adverse effect on the Company's
business.
Two former officers of IFD were awarded through arbitration $467,000 under
disputed employment contracts. The award was converted to a judgment against
Krantor and Affiliated Island Grocers d/b/a Island Frozen & Dairy. An
involuntary Bankruptcy petition was attempted and the Company settled all
actions relating to this case for $300,000 in shares of the Common Stock by
stipulation entered in the Eastern District of New York, Case No. 897-87458-478
dated November 6, 1997.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In 1997 no matters were submitted for shareholder approval during the
fourth quarter.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock are traded on NASDAQ Small-Cap under the symbol
"KRAN", and on the Boston Stock Exchange under the symbol "KRN". The NASDAQ
Stock Market, which began operation in 1971, is the world's first electronic
securities market and the fastest growing stock market in the U.S. NASDAQ
utilizes today's information technologies -computer and telecommunications- to
unite its participants in a screen-based, floorless market. It enables market
participants to compete with each other for investor orders in each NASDAQ
security and surveillance of thousands of securities. This competitive
marketplace, along with the many products and services available to issuers and
their shareholders, attracts today's largest and fastest growing companies to
NASDAQ. These include industry leaders in computers, pharmaceutical,
telecommunications, biotechnology, and financial services. More domestic and
foreign companies list on NASDAQ than on all other U.S. stock markets combined.
The high and low sales prices in the NASDAQ Small Cap Market for the Company's
Common Stock, as reported by the NASDAQ for each of the quarters of the
Company's two most recent fiscal years are as follows:
-11-
<PAGE>
COMMON STOCK
Quarter Ended High Low
- ------------- ------- -------
March 31, 1996 38.28 34.38
June 30, 1996 35.93 33.59
September 30, 1996 9.38 7.81
December 31, 1996 9.38 1.56
March 31, 1997 4.68 1.50
June 30, 1997 3.13 .75
September 30, 1997 1.44 .97
December 31, 1997 3.19 1.03
March 31, 1998 2.50 1.59
On April 6, 1998, the Company had approximately 5000 shareholders of
record, with much of the stock being held in street name. The Company is
currently listed on NASDAQ Small Cap. In May 1997 the Company reserve split its
common stock 1 for 25. The figures shown through December 31, 1996 are adjusted
to show pro-forma post-split; all figures thereafter are also split adjusted.
The Company has never paid any dividends on its Common Stock and does not
presently intend to pay any dividends on the Common Stock in the foreseeable
future. The Company also has authorized and outstanding Class A Preferred Stock
but dividends thereon have been waived (see below).
REDEMPTION OF PREFERRED STOCK AND SETTLEMENT ON DIVIDENDS
In December 1997, the Company, by agreement with the holder thereof,
redeemed all of its outstanding Preferred Stock and reached agreement regarding
settlement on outstanding accrued dividends thereon, issuing to such holder
400,000 shares of unlegended common stock (as and for redemption), and an option
(the "Option") to purchase 500,000 additional shares of legended common stock
exercisable at $1.00 per share, together with payment of $350,000 from the
Company to the holder (as settlement on any claims for accrued dividends and in
lieu of future dividends). The Option does not vest until the Company has
reached a pre-tax profit of $1,000,000 and if and when vested shall be for a
five year term. The Preferred Stock was thereafter re-issued to Mair Faibish,
the Company's Executive Vice President in recognition of and in consideration
for his efforts in locating new product lines for marketing by the Company and
his assistance in locating financing therefor, but dividends associated with
such Stock have been waived and there will be no acceptance of redemption
thereof unless same is done with the written consent of the Company's full Board
of Directors, such alteration in the terms of the Preferred Stock being
agreeable to the new holder evidenced by written agreement reached with the
Company.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATIONS
OVERVIEW
The Company primarily distributes and merchandises squid and promotional
brand name grocery products through an agency agreement with a Chinese trading
company ("ALT") to the food industry. The Company discontinued its Kosher Food
business (IFD) on June 30, 1996. The Company's current assets consist primarily
of accounts receivable, prepaid expenses and cash. The Company's liabilities
consist of accounts payable, short term and long term debt. The Company also
recently entered the business of the sale and distribution of premium handrolled
cigars.
-12-
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth selected operational data of the Company,
expressed as a percentage of revenues for the periods indicated below:
Years Ended December 31,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Revenues 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Sales (90.8) (89.3) (87.9) (106.2) (77.8)
Operating Expenses (7.7) (10.6) (8.1) (11.0) (17.1)
Other Income (expense) (1.0) (3.7) (1.6) (0.8) 0.6
---- ---- ---- ---- ----
Income(loss)from
Operations Before
Income Tax 0.5 (3.6) 2.4 (18.0) 5.7
Income Tax
(Expense)Benefit (0.2) 1.2 (0.8) (0.3) --
Discontinued Operations -- -- (0.3) (131.5) (2.4)
Extraordinary Item 0.0 0.6 -- -- --
---- ---- ---- ---- ----
Net Income(Loss) 0.3% (1.8)% 1.3% (149.8)% 3.3%
-13-
<PAGE>
Year Ended December 31, 1997
Compared to Year Ended December 31, 1996
Revenues from continued operations decreased for the year ended December
31, 1997 to $5.4 million, a (27%) decrease as compared to the prior period. The
decrease in revenues is related to discontinuing IFD's business and operations
and the recognition of commission income as opposed to direct sales. The
Company's sales increased materially in the second half of 1997. The Company was
able to re-establish direct vendor contacts, especially with its largest vendor,
Proctor & Gamble thereby reducing overall product cost. The Company believes
that in 1998 sales growth should substantially exceed 1996 and 1997 levels.
Cost of sales decreased for the year ended December 31, 1997 to $4.2
million or (46%) decrease as compared to the prior year. The Company's cost of
goods decreased as a percentage of sales. The Company attributes this change to
increased commission income, increased squid sales and a more favorable
marketing promotional program. The Gross Profit in 1997 was 23% as compared to a
Gross Profit loss in 1996 due to the liquidation of IFD.
Selling General & Administrative expenses from continuing operations
increased to $907,386 for the period, a 16% increase. The increase in operating
expenses is attributable to the total absorption by the Company of expenses in
connection with closing down IFD. Costs incurred include legal expenses,
financing costs and stock issuances in connection with satisfying IFD creditor
claims.
Net income from continuing operations increased to $305,807 ($.19 per
share) compared to a loss of $1.5 million ($5 per share). The Company attributes
its profitability to:
a) Closing its kosher business (IFD).
b) signing a Distributorship Agreement with its Chinese trading
partner to re-enter the promotional grocery business. This
Agreement allowed the Company to reestablish vendor contacts
and obtain financing for product purchases for re-sale to its
customers in the promotional grocery and health & beauty aid
(HBA) business.
c) increasing commission sales of squid manufactured by ALT at
higher margins.
d) streamlining its corporate overhead by establishing profit
centers in each business segment with separate operating
budgets.
e) outsourcing all primary services relating sales, freight,
warehousing and management information systems.
f) significant utilization of the internet for sales, marketing
and corporate exposure.
One time charges from discontinued operations totalled $130,632 ($.08 per
share) as compared to $9.7 million ($29 per share). As a result net income
totalled $175,175 ($.11 per share) as compared to a loss of $11.3 million ($34
per share). The Company does not expect its future expenses from discontinued
operations to be material to its future business.
In 1998 the Company hopes to benefit from its entry to the premium handmade
cigars business, as well as increasing its sales by purchasing from its primary
vendors in the promotional grocery and HBA business.
-14-
<PAGE>
Year Ended December 31, 1996
Compared to Year ended December 31, 1995
Revenues from continued operations decreased for the year ended December
31, 1996 to $7.4 million an (83%) decrease as compared to the prior period.
Revenues from discontinued operations (IFD) for the period totaled $12.8
million. Total revenues for the combined business would have been $20.2 million
a 54% decrease from the prior period. 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 and prevented
the utilization of its credit facilities. 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. The redirection of capital to
continuing operations should allow the promotional grocery and seafood business
to expand to Fiscal 1995 profit levels starting in Fiscal year 1997; although
additional capital may be required (See "Liquidity and Capital Resources" and
"Forward looking and Cautionary Statement"). However, the Company will only be
recognizing royalty revenues in connection with its distribution and not direct
product revenue. This would cause the Company's revenue base to decrease as
compared to prior years, but should not affect profitability.
Cost of sales for continued operations decreased to $7.8 million or (80 %)
decrease as compared to the prior year. This decrease was primarily attributable
to the decrease in the Company's revenues due to discontinued operations and $1
million adjustment to a trade payable due Proctor & Gamble resulting from the
Company's settlement with this primary vendor. The Company's gross profit from
continuing operations decreased from 12.1% to (6.2)% in the same period. In
order to support IFD's business and maintain its liquidity the Company needed to
quickly sell inventory at margins that were lower than customarily realized. At
the closing date of IFD's business the Company's cost of goods totaled $15.6
million on $12.8 million in revenues. In order to raise cash to satisfy creditor
obligations the Company was forced to sell below its product cost. Furthermore,
IFD reserved $425,000 against its $671,587 accounts receivable at December 31,
1996. The Company felt that in closing down IFD, it would have a difficult time
to fully collect on its accounts and would need significant legal support in
this effort.
Selling General & Administrative (S,G&A) expenses from continuing
operations decreased to $782,367 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 7.7% to 11.0% for the same period.
The increase in operating expenses as a percentage of sales is due to the
drastic reduction of sales. Major components of SG&A include freight expense,
sales commissions and general service fees that are direct percentage of sales.
As sales decline, these components of sale decline as well.
Loss from continuing operations totaled $1.3 million for the period as
compared to a $703,632 profit for the same period. This decrease is related to
an (83%) drop in revenues from continuing operations and $1 million adjustment
to a trade payable due Proctor & Gamble resulting from the Company's settlement
with this primary vendor. Loss from discontinued operations totaled $9,690,148.
The Company believes that the total costs incurred from discontinuing operations
have been fully charged to earnings and should not materially affect future
operating results.
The Company fully reserved its IFD inventory at December 31, 1996. Due to
Empire's injunction on the IFD inventory, the goods lost value due to their
perishable nature. At December 31, 1997 the Company realized no sales from its
inventory and in fact the public warehouses liquidated the IFD inventory to
cover warehousing costs.
-15-
<PAGE>
Year Ended December 31, 1995
Compared to Year Ended December 31, 1994
Revenues increased for the year ended December 31, 1995 to $43,917,040, a
$11,900,189 (27.0%) increase as compared to the prior year. This increase was
primarily due to two factors: (i) the increase in the Company's line of credit
in November 1994 from $2.0 million to $5.0 million; and (ii) the completion of a
secondary public offering in November 1994 resulting in net proceeds to the
company of approximately $3.7 million. These two factors enabled the Company to
purchase larger quantities of products and maintain greater inventory levels
thus leading to higher sales volume in 1995. All activity related to
discontinued operations has been eliminated.
Cost of sales increased for the year ended December 31, 1995 to
$38,588,738, a $10,001,045 (or 26.0%) increase as compared to the prior year.
This increase was primarily attributable to the increase in the Company's
revenues. The gross profit increased from 10.7% in 1994 to 12.1% in 1995 as a
result of the increased percentage of sales derived from the Company's wholesale
business. All activity related to IFD has been eliminated.
Selling, general and administrative expenses increased for the year ended
December 31, 1995 to $3,386,874, a $364,449 (or 10.8%) increase as compared to
the prior year. This increase is primarily attributable to the increase in the
Company's revenues by 27.0% in 1995 as compared to 1994.
The Company had net income of $552,883 in 1995 as compared with a net loss
of $571,743 in 1994. The gain is attributable to the increase in sales volume
during 1995 increasing gross profit from 10.7% to 12.1% and decreasing selling
general and administration costs from 9.4% of sales in 1994 to 7.7% in 1995.
-16-
<PAGE>
Liquidity and Capital Resources
The company had a positive working capital of $85,000 at December 31, 1997.
Excluding IFD's current liabilities, working capital for continuing operations
equals $746,000. Liabilities were reduced from $3.4 million to $2 million a 41%
drop. (See Notes 4 & 5 to Consolidated Statements). Reaching a positive working
capital position is a significant milestone for the Company. The Company finally
raised enough capital and turned its operations to profitability which
significantly enhanced the liquidity of the Company. As a result the Company can
begin to secure vendor credits and secured financing to grow its operating
business. These changes reflect a positive 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), and the distribution
agreement entered into on October 1, 1996 with ALT. (See Note 9 to Consolidated
Statements).
The Company's receivables for the fiscal year increased by 130% to
$1,128,000. The increase of receivables is due to several factors which include
the Company's re-establishment, as a primary supplier, through IWG, of direct
sales through its Distribution Agreement with ALT. The Company is financing a
portion of its business through trade credits arranged through ALT and vendor
credits established by IWG. The Company hopes to continue this trend with the
support of ALT. The Company currently buys directly from one of the major food &
consumer product companies in the United States.
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 had a $8 Million credit facility with Fidelity Funding of
California which expires on November 14, 1997. The Company is currently not
borrowing under the facility. The Company's business is being conducted though
its distribution agreement. 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 expired 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.
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 handmade premium cigars. However, there can be no assurance that the
Company's proposed expansion plans will be successful.
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
-17-
<PAGE>
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.
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.
Currently, the Company does not carry product liability
insurance. 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.
-18-
<PAGE>
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 its promotional
grocery, squid, and premium handmade cigars businesses. While
these industries may be highly fragmented, with no one
distributor dominating the industry, the Company is subject to
competitive pressures from other distributors based on price
and service and product quality and origin.
6. 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. China currently maintains a Most Favored Nation
status with the United States, which it has maintained
continuously since 1980, renewal of which is done on an annual
basis each May, Loss of such status could have a material
adverse affect on Company business.
7. Litigation
The Company is named as a defendant in various lawsuits
arising from the liquidation of Island Frozen and Dairy
("IFD"), a previous wholly-owned subsidiary of the Company.
The Company has reserved and accrued on its books minimal
funds to cover these possible claims. In June 1996, a
complaint was filed in Superior Court Law Division, Essex
County, New Jersey, Docket No. ESX-L-6491- 96 by New Jersey
National Bank against the Company, Affiliated Island Grocers,
the then affiliate of the Company, and certain other
defendants, seeking payment on secured business financing, to
which claim the Company believes it has and has asserted
significant claims to monetary offsets. The principal amount
claimed owed by the Company in such lawsuit is $350,000.00.
The Company does not believe that the extent of the balance of
above mentioned lawsuits exceeds $100,000. While it is not
reasonably possible to estimate the amount of losses in excess
of amounts accrued and reserved for such losses, if any, that
may arise out of such litigation, management believes that the
outcome will not have a material effect on the operations of
the Company.
Action was brought by Krantor Corporation, and Island
Wholesale Grocers Inc., an affiliated company of Krantor
Corporation against The Proctor & Gamble Distributing Company,
in which case The Proctor & Gamble Distributing Company
counterclaimed, which action was brought in United
-19-
<PAGE>
States District Court, Eastern District of New York under
docket no. CIV. 96-1503(FB), the nature of the claims relating
to promotional rebates which the Company claims from Proctor &
Gamble and accounts payable from the Company to Proctor &
Gamble which are claimed as due and outstanding. The Company
has negotiated a settlement agreement with Proctor and Gamble
in connection with this matter entered in May 1997. The
settlement involves recognition of debt due to Proctor &
Gamble in the amount of $1,465,976 which the Company shall pay
in cash and stock, as reduced by promotional rebates expected
to offset at least one third of such settled amount. Full
payment is due by April 30, 2000. Failure to abide by the
terms of such settlement may have a material adverse effect on
the Company's business.
Two former officers of IFD were awarded through arbitration
$467,000 under disputed employment contracts. The award was
converted to a judgment against Krantor and Affiliated Island
Grocers d/b/a Island Frozen & Dairy. An involuntary Bankruptcy
petition was attempted and the Company settled all actions
relating to this case for $300,000 in shares of the Common
Stock by stipulation entered in the Eastern District of New
York, Case No. 897- 87458-478 dated November 6, 1997.
The Company is subject to other 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, but there can be no assurance as to this.
8. Possible Loss of NASDAQ Small Cap Listing.
Krantor currently qualifies for trading on the Nasdaq Small
Cap system. Nasdaq has adopted, and the Commission has
approved, certain changes to its maintenance requirements
which became effective as of February 28, 1998, including the
requirement that a stock listed in such market have a bid
price greater than or equal to $1.00. The bid price per share
for the Common Stock of Krantor has been below $1.00 in the
past and the Common Stock has remained on the Nasdaq Small Cap
System because Krantor has complied with the alternative
criteria which are now eliminated under the new rules. If the
bid price continues below $1.00 per share, the Common Stock
could be delisted from the Nasdaq Small Cap System and
thereafter trading would be reported in the NASD's OTC
Bulletin Board or in the "pink sheets." In the event of
delisting from the Nasdaq Small Cap System, the Common Stock
would become subject to rules adopted by the Commission
regulating broker-dealer practices in connection with
transactions in "penny stocks." The disclosure rules
applicable to penny stocks require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the
rules, to deliver a standardized list disclosure document
prepared by the Commission that provides information about
penny stocks and the nature and level of risks in the penny
stock market. In addition, the broker-dealer must identify its
role, if any, as a market maker in the particular stock,
provide information with respect to market prices of the
Common Stock and the amount of compensation that the
broker-dealer will earn in the proposed transaction. The
broker-dealer must also provide the customer with certain
other information and must make a special written
determination that the penny stock is a suitable investment
for the purchaser and receive the purchaser's
-20-
<PAGE>
written agreement to the transaction. Further, the rules
require that following the proposed transaction the
broker-dealer provide the customer with monthly account
statements containing market information about the prices of
the securities. These disclosure requirements may have the
effect of reducing the level of trading activity in the
secondary market for a stock that becomes subject to the penny
stock rules. If the Common Stock became subject to the penny
stock rules, many broker-dealers may be unwilling to engage in
transactions in the Company's securities because of the added
disclosure requirements, thereby making it more difficult for
purchasers of the Common Stock in this offering to dispose of
their shares of the Common Stock.
9. Risks of Business Development.
The Company has ventured into new lines of product
distribution (see "Item I B (Cigars) (1997) and C (Squid)
(1996)") and such product lines are expected to constitute a
material part of the Company's revenue stream. The Company has
not restored its level of product sales to that of previous
years but with the addition of these new product lines the
Company is hopeful of reaching and hopefully exceeding those
prior levels. Because of the newness of these lines of
products to the Company, the Company's operations in these
areas should be considered subject to all of the risks
inherent in a new business enterprise, including the absence
of a profitable operating history and the expense of new
product development. Various problems, expenses, complications
and delays may be encountered in connection with the
development of the Company's new products. These expenses must
either be paid out of the proceeds of future offerings or out
of generated revenues and Company profits. There can be no
assurance as to the availability of funds from either of these
sources.
10. Rapidly Changing Market May Impact Operations.
The market for the Company's products is rapidly changing with
evolving industry standards and frequent new product
introductions. The Company's future success will depend in
part upon its continued ability to enhance its existing
products and to introduce new products and features to meet
changing customer requirements and emerging industry
standards. The Company will have to develop and implement an
appropriate marketing strategy for each of its products. There
can be no assurance that the Company will successfully
complete the development of future products or that the
Company's current or future products will achieve market
acceptance levels conducive to the Company's fiscal needs. Any
delay or failure of these products to achieve market
acceptance would adversely affect the Company's business. In
addition, there can be no assurance that the products or
technologies developed by others will not render the Company's
products or technologies non-competitive or obsolete.
The Company's revenue base has been slowly recovering from
losses of 1996 generating from the discontinuation of its
Kosher Food business. In order for the Company to increase
grocery sales, it must reestablish it's relationships with the
major grocery manufactures. The Company is vigorously
attempting to reestablish these
-21-
<PAGE>
ties to prior customers as well as develop new ones. Failure
to re-establish these ties would have an adverse effect on the
Company. Furthermore, the Company has entered new markets
which include squid, and premium handmade cigars for sale to
its existing customers and newly found sources. These product
lines have lower sales volume than the Company's traditional
business, 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. The existence of and relationship with the
Company's Chinese Trading Partner has also significantly
decreased the Company's cost of goods sold. Failure to secure
market penetration in the new product lines would however have
an adverse effect on the Company's profitability. 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 and no adjustments have been made to offset the
outcome of this uncertainty.
11. Dependence Upon Attracting and Holding.
The Company's future success depends in large part on the
continued service of its key technical, marketing, sales and
management personnel and on its ability to continue to
attract, motivate and retain highly qualified employees.
Although the Company's key employees have stock options, its
key employees may voluntarily terminate their employment with
the Company at any time. Competition for such employees is
intense and the process of locating technical and management
personnel with the combination of skills and attributes
required to execute the Company's strategy is often lengthy.
Accordingly, the loss of the services of key personnel could
have a material adverse effect upon the Company's operating
efforts and on its research and development efforts. The
Company does not have key person life insurance covering its
management personnel or other key employees.
12. Extensive and Increasing Regulation of Tobacco Products
and Litigation May Impact Cigar Industry.
The tobacco industry in general has been subject to extensive
regulation at the federal, state and local levels. Recent
trends have increased regulation of the tobacco industry.
Although regulation initially focused on cigarette
manufacturers, it has begun to have a broader impact on the
industry as a whole and may focus more directly on cigars in
the future. The recent increase in popularity of cigars could
lead to an increase in regulation of cigars. A variety of
bills relating to tobacco issues have been introduced in the
U.S. Congress, including bills that would have (i) prohibited
the advertising and promotion of all tobacco products or
restricted or eliminated the deductibility of such advertising
expense, (ii) increased labeling requirements on tobacco
products to include, among others things, addiction warnings
and lists of additives and toxins, (iii) shifted control of
tobacco products and advertisements from the Federal Trade
Commission (the "FTC") to the Food and Drug Administration
(the "FDA"), (iv) increased tobacco excise taxes and (v)
required tobacco companies to pay for health care costs
-22-
<PAGE>
incurred by the federal government in connection with tobacco
related diseases. Future enactment of such proposals or
similar bills may have an adverse effect on the results of
operations or financial condition of the Company.
In addition, a majority of states restrict or prohibit smoking
in certain public places and restrict the sale of tobacco
products to minors. Local legislative and regulatory bodies
also have increasingly moved to curtail smoking by prohibiting
smoking in certain buildings or areas or by designated
"smoking" areas. Further restrictions of a similar nature
could have an adverse effect on the Company's sales or
operations, such as banning counter access to or display of
premium handmade cigars, or decisions by retailers because of
public pressure to stop selling all tobacco products. Numerous
proposals also have been considered at the state and local
level restricting smoking in certain public areas, regulating
point of sale placement and promotions and requiring warning
labels.
Although federal law has required health warnings on
cigarettes since 1965 and on smokeless tobacco since 1986,
there is no federal law requiring that cigars carry such
warnings. California, however, requires "clear and reasonable"
warning to consumers who are exposed to chemicals determined
by the State to cause cancer on reproductive toxicity,
including tobacco smoke and several of its constituent
chemicals. Similar legislation has been introduced in other
states, but did not pass. There can be no assurance that other
states will not enact similar legislation. Consideration at
both the federal and state level also has been given to
consequences of tobacco smoke on others who are not currently
smoking (so called "second-hand" smoke). There can be no
assurance that regulations relating to second hand smoke will
not be adopted or that such regulation or related litigation
would not have a material adverse effect on the Company's
results of operations or financial condition.
Increased cigar consumption and the publicity such increase
has received may increase the risk of additional regulation.
The Company cannot predict the ultimate content, timing or
effect of any additional regulation of tobacco products by any
federal, state, local or regulatory body, and there can be no
assurance that any such legislation or regulation would not
have a material adverse effect on the Company's business. See
"Recent Developments"
On June 20, 1997 the Attorneys General of 40 states and the
major United States cigarette manufacturers announced a
proposed settlement of a lawsuit filed by the States. The
proposed settlement, which will require that the United States
Congress take certain action, is complex and may change
significantly or be rejected. However, the proposal would
require significant changes in the way United States cigarette
and tobacco companies do business. Among other things: the
tobacco companies will pay hundreds of billions of dollars;
the FDA could regulate nicotine as a drug; class action
lawsuits and punitive damages would be banned; and tobacco
billboards and sporting event sponsorships would be
prohibited. The potential impact, if any, of the settlement
and related legislation on the cigar industry is uncertain.
-23-
<PAGE>
In addition to the 40-state litigation referred to in the
preceding paragraph, the tobacco industry has experienced and
is experiencing significant health-related litigation
involving tobacco and health issues. Plaintiffs in such
litigation have sought and are seeking compensatory, and in
some cases punitive, damages for various injuries claimed to
result from the use of tobacco products or exposure to tobacco
smoke. The proposed settlement of the 40-state litigation may
have a material impact to limit litigation, but there can be
no assurance that there would not be an increase in
health-related litigation against the cigarette and smokeless
tobacco industries or similar litigation in the future against
the cigar industry. Costs of defending prolonged litigation
and any settlement or successful prosecution of any material
health-related litigation against manufacturers of cigars,
cigarettes or smokeless tobacco or suppliers to the tobacco
industry could have a material adverse effect on the Company's
results of operations and/or financial condition. The recent
increase in the sales of cigars and the publicity such
increase has received may have the effect of increasing the
probability of legal claims. Also, a recent study published in
the journal Science reported that a chemical found in tobacco
smoke has been found to cause genetic damage in lung cells
that is identical to damage observed in many malignant tumors
of the lung and thereby directly links lung cancer to smoking.
This study and other reports could affect pending and future
tobacco regulation or litigation relating to cigar smoking.
13. Risks Relating to Marketing of Cigars.
The Company primarily will distribute premium handmade cigars
which are hand-rolled and use tobacco aged over one year. The
Company believes that there is an abundant supply of tobacco
available through its supplier in the Dominican Republic for
the types of premium handmade cigars the Company primarily
will sell. However, there can be no assurance that increases
in demand would not adversely affect the Company's ability to
acquire higher priced premium handmade cigars.
While the cigar industry has experienced increasing demand for
cigars during the last several years, there can be no
assurance that the trend will continue. If the industry does
not continue as the Company anticipates or if the Company
experiences a reduction in demand for whatever reason, the
Company's supplier may temporarily accumulate excess inventory
which could have an adverse effect on the Company's business
or results of operations.
14. Social, Political, And Economic Risks Associated With
Foreign Trade May Adversely Impact Business.
The Company purchases all of its premium handmade cigars from
manufacturers located in countries outside the United States.
In addition, the Company acquires squid through the People's
Republic of China ("PRC"). Social and economic conditions
inherent in foreign operations and international trade may
change, including changes in the laws and policies that govern
foreign investment and international trade. To a lesser extent
social, political and economic conditions may cause changes in
United States laws and regulations relating to foreign
-24-
<PAGE>
investment and trade. Social, political or economic changes
could, among other things, interrupt cigar supply or cause
significant increases in cigar prices. In particular,
political or labor unrest in the Dominican Republic could
interrupt the production of premium handmade cigars, which
would inhibit the Company from buying inventory. Any
government sanctions that cause an interruption of trade or
prohibit trade with the PRC through higher duties or quotas
could have a material adverse effect on the Company's
business. Accordingly, there can be no assurance that changes
in social, political or economic conditions will not have a
material adverse affect on the Company's business.
15. 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 during these
periods 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.
16. No Dividends Likely.
No dividends have been paid on the Common Stock since
inception, nor, by reason of its current financial status and
its contemplated financial requirements, does Krantor
contemplate or anticipate paying any dividends upon its Common
Stock in the foreseeable future.
-25-
<PAGE>
PART III
The information required by items 10-13 are omitted pursuant to general
instruction G(3) to form 10K. The Company intends to include this information in
its proxy statement which is expected to be mailed and filed with the Commission
on or before April 30, 1998. The annual meeting expected to be scheduled in May
1998.
-26-
<PAGE>
PART IV
ITEM 8. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) Documents filed as part of this Report:
1. Financial Statements
The following financial statements of the Company are contained in Item 8 of
this Report on the pages indicated:
Page
----
Independent Auditors Reports F1
Balance Sheets -
December 31, 1997 F2
Statements of Operations -
Years ended December 31, 1997 and
1996 F3 - F4
Statements of Changes in Stockholders'
Equity - Years ended December 31, 1997 and
1996 F5 - F6
Statements of Cash Flows - Years
ended December 31, 1997, and 1996 F7 - F8
Notes to Financial Statements as of
December 31, 1997, and 1996 F9 - F15
2. Financial Statement Schedules
I. Independent Auditors Report on
Financial Statement Schedule F-17
II. Valuation Accounts F-18
3. (a) Exhibits:
See Index to Exhibits
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the fourth quarter of
1997.
-27-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
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
by /s/ Mair Faibish
--------------------------------
Mair Faibish
Executive Vice President
Dated: April 14, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
by /s/ Mair Faibish
----------------------------------
Mair Faibish
Executive Vice President
Principal Financial Officer
and Director
Signed: April 14, 1998
by /s/ Mitchell Gerstein
----------------------------------
Mitchell Gerstein, Director
Signed: April 14, 1998
-28-
<PAGE>
INDEPENDENT AUDITOR'S REPORT
----------------------------
The Board of Directors
Krantor Corporation
We have audited the accompanying consolidated balance sheet of Krantor
Corporation and subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the years ended December 31, 1997 and 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our report dated April 4, 1997, we were unable to confirm promotional rebates
totaling $1,467,738 at December 31, 1996 or satisfy ourselves about the
recoverability of promotional rebates through alternative procedures. As
described in Note 14 to the financial statements, the Company has restated its
December 31, 1996 financial statements to correctly record promotional rebates.
Accordingly, our present opinion on the December 31, 1996 financial statements,
as presented herein, is different from that expressed in our previous report.
In our opinion, the consolidated financial statements referred to in the first
paragraph present fairly, in all material respects, the financial position of
Krantor Corporation and subsidiaries as of December 31, 1997 and the results of
their operations and their cash flows for the years ended December 31, 1997 and
1996, in conformity with generally accepted accounting principles.
BELEW AVERITT LLP
Dallas, Texas
March 18, 1998, except for
Note 15, as to which the
date is March 31, 1998
F-1
-29-
<PAGE>
KRANTOR CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 1997
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $ 189,626
Accounts receivable, net of allowance for doubtful accounts
of $95,826 1,128,000
Promotional rebates (Note 14) 270,496
Other current assets 136,189
------------
Total current assets 1,724,311
COLLATERAL SECURITY DEPOSIT (Note 9) 2,252,995
PROPERTY AND EQUIPMENT, net (Note 3) 117,402
------------
$ 4,094,708
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable (Note 4) $ 535,810
Accounts payable and accrued expenses (Note 5) 1,092,716
Income taxes payable 10,529
------------
Total current liabilities 1,639,055
VENDOR DEBT DUE AFTER ONE YEAR (Note 5) 395,048
COMMITMENTS AND CONTINGENCIES (Note 9) --
PREFERRED STOCK OF SUBSIDIARY (Note 6) 105,000
STOCKHOLDERS' EQUITY (Note 7)
Class A preferred stock - $.001 par value; 100,000 shares
authorized 100
Common stock - $.001 par value; 29,900,000 shares authorized 4,140
Additional paid-in capital 14,467,141
Deficit (12,348,276)
------------
2,123,105
Less treasury stock, at cost, 1,400 shares (167,500)
------------
Total stockholders' equity 1,955,605
$ 4,094,708
============
See accompanying notes to consolidated financial statements.
F-2
-30-
<PAGE>
KRANTOR CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
REVENUE
<S> <C> <C>
Net sales (Note 10) $ 5,007,336 $ 7,086,521
Commission income (Note 9) 382,025 285,013
------------ ------------
5,389,361 7,371,534
COST OF SALES (Note 14) 4,195,519 7,829,881
------------ ------------
GROSS PROFIT (LOSS) 1,193,842 (458,347)
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 907,386 782,367
DEPRECIATION AND AMORTIZATION 16,915 33,660
------------ ------------
OPERATING INCOME (LOSS) 269,541 (1,274,374)
OTHER INCOME (EXPENSE)
Interest Income 134,875 --
Net gain (loss) on marketable securities (37,625) 13,673
Miscellaneous income (expense) (48,505) 3,027
Interest expense -- (72,169)
Financing costs (12,479) --
------------ ------------
36,266 (55,469)
------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 305,807 (1,329,843)
INCOME TAX EXPENSE (Note 8) -- 23,149
------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 305,807 (1,352,992)
DISCONTINUED OPERATIONS (Note 11)
Loss from operations of IFD, net of applicable
income tax benefit of $0 -- (4,386,904)
Loss on disposal of IFD, net of applicable income
tax benefit of $0 (130,632) (5,303,244)
------------ ------------
NET INCOME (LOSS) 175,175 (11,043,140)
LESS PREFERRED DIVIDENDS -- 220,000
------------ ------------
INCOME (LOSS) APPLICABLE TO COMMON
STOCK (Note 1) $ 175,175 $(11,263,140)
============ ============
</TABLE>
F-3
-31-
<PAGE>
KRANTOR CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations (Cont.)
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
BASIC EARNINGS (LOSS) PER COMMON SHARE (Note 13)
<S> <C> <C>
Income (loss) from continuing operations $ .19 $ (4.76)
Discontinued operations (.08) (29.36)
NET INCOME (LOSS) PER COMMON SHARE $ .11 $ (34.12)
============ ============
DILUTED EARNINGS (LOSS) PER COMMON SHARE $ .11 $ (34.12)
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
-32-
<PAGE>
[GRAPHIC OMITTED]KRANTOR CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Class A Additional Total
Preferred Stock Common Stock paid-in Treasury stockholders'
Shares Amount Shares Amount capital Deficit stock equity
------------------ ----------------- ------------ ------------ ----------- --------------
Balance at
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1995 100,000 $ 100 197,996 $ 198 $ 8,596,510 $ (1,480,311) $ (167,500) $ 6,948,997
Common stock issued
in connection with
Regulation S offering,
less related expenses -- -- 597,381 597 3,325,967 -- -- 3,326,564
Common stock issued
for dividend on preferred
stock -- -- 3,000 3 (3) -- -- --
Cash dividend on
preferred stock -- -- -- -- (75,500) -- -- (75,500)
Common stock issued
in connection with
compensation plan -- -- 48,658 49 435,895 -- -- 435,944
Net loss (Note 14) -- -- -- -- -- (11,043,140) -- (11,043,140)
-------- -------- -------- ------- ------------ ------------ ----------- --------------
Balance at
December 31, 1996 100,000 100 847,035 847 12,282,869 (12,523,451) (167,500) (407,135)
======= === ======= === ========== =========== ======== ========
</TABLE>
F-5
-33-
<PAGE>
[GRAPHIC OMITTED]KRANTOR CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity (Cont.)
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Class A Additional Total
Preferred Stock Common Stock paid-in Treasury stockholders'
Shares Amount Shares Amount capital Deficit stock equity
------------------ ----------------- ------------ ------------ ----------- --------------
Common stock issued
in connection with
Regulation S offering,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
less related expenses -- $ -- 1,612,200 $ 1,612 $ 1,330,168 $ -- $ -- $ 1,331,780
Redemption of
preferred stock (100,000) (100) 400,000 400 (350,300) -- -- (350,000)
Preferred stock issued
to officer 100,000 100 -- -- -- -- -- 100
Common stock
options exercised -- -- 275,000 275 442,225 -- -- 442,500
Common stock issued
in connection with
compensation plan -- -- 1,006,280 1,006 762,179 -- -- 763,185
Net income -- -- -- -- -- 175,175 -- 175,175
------- --------- ---------- ------- ------------ ------------ ----------- --------------
Balance at
December 31, 1997 100,000 $ 100 4,140,515 $ 4,140 $ 14,467,141 $ (12,348,276) $ (167,500) $ 1,955,605
======= ===== ========= ======= ============ ============= ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
-34-
<PAGE>
KRANTOR CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ --------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) $ 175,175 $(11,043,140)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Discontinued operations (167,717) 3,558,312
Depreciation and amortization 16,915 33,660
Loss on disposal of property and equipment 14,496 --
Net (gain) loss from marketable securities 37,625 (13,673)
Operating expenses paid with common stock 353,178 776,858
Provision for bad debts -- 318,346
Changes in operating assets and liabilities:
Purchases of marketable securities (73,687) (50,277)
Sales of marketable securities 36,062 77,821
(Increase) decrease in:
Accounts receivable (933,160) 6,149,894
Inventory -- 4,683,366
Promotional rebates (47,524) 8,186
Deferred taxes -- 166,103
Other current assets 22,789 94,448
Other assets 85,812 (215,213)
Increase (decrease) in:
Accounts payable and accrued expenses (58,680) (3,273,632)
Income taxes payable (60,629) (236,696)
------------ ------------
(599,345) 1,034,363
------------ ------------
Net cash flows provided (used) by operating activities:
Continuing operations (215,996) 7,166,199
Discontinued operations (383,349) (6,131,836)
------------ ------------
Net cash flows provided (used) by operating activities (599,345) 1,034,363
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (118,202) (3,486)
Payment of collateral security deposit (75,000) (739,400)
Payments from related party -- 228,718
------------ ------------
Net cash flows used by investing activities (193,202) (514,168)
CASH FLOWS FROM FINANCING ACTIVITIES
Net payments on debt (50,000) (3,868,198)
Issuance of subordinated debenture -- 377,000
Cash dividends on preferred stock (350,000) (75,500)
Proceeds from issuance of preferred stock of subsidiary 105,000 --
Proceeds from issuance of common stock 1,274,276 2,679,400
------------ ------------
Net cash flows provided (used) by financing activities 979,276 (887,298)
------------ ------------
NET INCREASE (DECREASE) IN CASH 186,729 (367,103)
CASH, beginning of year 2,897 370,000
------------ ------------
CASH, end of year $ 189,626 $ 2,897
============ ============
</TABLE>
F-7
-35-
<PAGE>
KRANTOR CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Cont.)
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
<S> <C> <C>
Interest paid $ 37,100 $ 967,778
============ ============
Income taxes paid $ 60,629 $ 65,443
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH
OPERATING, INVESTING AND FINANCING
ACTIVITIES
Inventory conveyed for collateral security deposit $ -- $ 1,007,345
Conversion of subordinated debentures 377,000 --
Non-cash issuance of common stock 532,610 306,250
------------ ------------
Total non-cash operating, investing and
financing activities $ 909,610 $ 1,313,595
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
-36-
<PAGE>
KRANTOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Krantor Corporation (Company) is a distributor of groceries, general
household merchandise and health and beauty aids in the promotional
wholesale industry. In addition, the Company also distributes squid and
premium handmade cigars 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 11).
In September 1996, Krantor formed a wholly-owned subsidiary, New Era,
Inc., which is a brokerage company representing manufacturers,
retailers and wholesalers in connection with distribution of grocery
and general merchandise products (see Note 9).
In October 1997, New Era, Inc. formed a subsidiary, Premium Cigar
Wrappers, Inc. (PCW), for the purpose of producing premium cigar
wrappers in the Dominican Republic. New Era, Inc. owns 66% of the
common stock and approximately 22% of the preferred stock of PCW (see
Note 6).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Krantor
Corporation, its wholly-owned subsidiaries and its majority-owned
subsidiary (collectively, the 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. The Company returns merchandise that is damaged or has
the wrong specifications 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.
F-9
-37-
<PAGE>
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 credit worthiness of the Company's
major customers. The Company maintains an allowance for losses based
upon the expected collectibility of all receivables. Fair value
approximates carrying value for all financial instruments.
During 1997, the Company distributed its products through an unrelated
intermediary and hence, all revenues were derived from this
organization. As a result, the Company has an inherent business risk in
concentrating its sales through this entity.
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. Betterments and major renewals which substantially extend
the useful life of an existing asset are capitalized and depreciated
over the asset's 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 and promotional costs as incurred.
Advertising expense totaled approximately $63,000 and $5,000 for the
years ended December 31, 1997 and 1996, respectively.
EARNINGS PER SHARE
The Company calculates earnings per share pursuant to Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (FAS 128).
FAS 128 requires dual presentation of basic and diluted earnings per
share (EPS) on the face of the statement of income for all entities
with complex capital structures and requires a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. Basic EPS calculations
are based on the weighted-average number of common shares outstanding
during the period, while diluted EPS calculations are based on the
weighted-average common shares and dilutive common share equivalents
outstanding during each 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.
F-10
-38-
<PAGE>
STOCK-BASED COMPENSATION PLANS
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), encourages, but does not require,
companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has elected to continue
to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations.
Accordingly, compensation cost for stock options is measured as the
excess, if any, of the fair market value of the Company's stock at the
date of the grant over the amount the employees or non-employees must
pay to acquire the stock. Disclosures required by SFAS 123 are not
material to the Company's financial statements.
RECLASSIFICATIONS
Certain 1996 amounts have been reclassified to conform to the 1997
presentation.
2. MARKETABLE SECURITIES
Realized gains or losses on marketable securities are determined on the
specific identification method. Net realized gains (losses) on sales of
securities included in the determination of consolidated net income
(loss) amounted to $(37,625) and $13,673 in 1997 and 1996,
respectively.
3. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1997 consisted of the
following:
<TABLE>
<CAPTION>
<S> <C>
Office equipment $ 193,355
Machinery and equipment 48,824
Leasehold improvements 61,378
----------------
303,557
Less accumulated depreciation and amortization (186,155)
$ 117,402
4. NOTES PAYABLE
Notes payable at December 31, 1997 consisted of the following:
Revolving line-of-credit $ 301,633
Note payable to investment company; non-interest bearing;
principal due May 8, 1996, previously collateralized by
inventory of IFD 159,177
Note payable to bank due July 5, 1996; non-interest bearing;
previously collateralized by inventory of IFD 75,000
----------------
$ 535,810
</TABLE>
The Company financed its receivables in the prior year through a
revolving line-of-credit and security agreement with a lender. Under
the terms of the agreement, the Company received cash advances of up to
80% of its eligible accounts receivable, as defined, with interest at
prime plus 2%. During 1997, the lender ceased corresponding with the
Company and reporting the activity related to collections of the
collateral and corresponding reductions of the loan.
F-11
-39-
<PAGE>
5. VENDOR DEBT
In 1997, the Company entered into an agreement with a vendor to repay
the December 31, 1996 accounts payable balance of $1,465,976. The
Company was required to pay $50,000 and offset 50% of earned
promotional rebates against the payable due to the vendor. In March
1998, the Company renegotiated with the vendor and modified the terms
of the agreement to pay off the remaining balance (see Note 15).
The following are the scheduled maturities of vendor debt at December
31, 1997:
Year ending
December 31,
------------
1998 $ 777,776
1999 266,664
2000 128,384
----------------
$ 1,172,824
6. PREFERRED STOCK OF SUBSIDIARY
PCW was incorporated in October 1997. The Company owns 66% of the
common stock and approximately 22% of the preferred stock of PCW. The
holders of PCW preferred stock are entitled to receive cumulative
dividends at the rate of $14 per share before any dividends on the
common stock are paid. In the event of dissolution of PCW, the holders
of the preferred shares are entitled to receive $60 per share together
with all accumulated dividends, before any amounts can be distributed
to the common stockholders. The shares are convertible only at the
option of PCW at $120 per share.
7. STOCKHOLDERS' EQUITY
In May 1997, the majority of common stockholders voted to authorize a 1
for 25 reverse split of the Company's $.001 par value common stock. Any
stockholders entitled to fractional shares were paid with cash based
upon the current fair market value of the stock. All references in the
accompanying financial statements to the number of common shares have
been restated to reflect the stock split.
During 1997, the Company redeemed 100% of the Class A preferred stock
in exchange for $350,000, 400,000 shares of common stock and options to
purchase 500,000 shares of restricted common stock exercisable at $1
per share. The options will vest if the Company achieves $1,000,000 in
pretax income within five years. The preferred stock was thereafter
reissued, at par value, to an officer of the Company in recognition of
services rendered, however, all dividend privileges and stock
redemption rights were stripped from the stock. The stock retains the
13 to 1 voting privilege.
At December 31, 1997, the Company had outstanding warrants to purchase
578,000 shares of the Company's common stock, at $1.10 per share. The
warrants become exercisable when the shares are registered and expire
at various dates through 2002. At December 31, 1997, 578,000 shares of
common stock were reserved for that purpose.
F-12
-40-
<PAGE>
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. Since the inception of the Plan, the Company
has issued 1,343,450 shares for payment of services to employees and
professional service providers. Under the Plan, the Company granted
options in 1994, 1995 and 1997 to selected employees and professional
service providers.
The following is a summary of such stock option transactions for the
years ended December 31, 1997 and 1996 in accordance with the Plan:
<TABLE>
<CAPTION>
Number of
Shares
---------------
<S> <C>
Outstanding at December 31, 1995 (37,200 exercisable): 43,200
Granted -
Terminated (14,000)
Exercised (2,400)
---------------
Outstanding at December 31, 1996 (26,800 exercisable): 26,800
Granted 275,000
Terminated (26,800)
Exercised (275,000)
---------------
Outstanding at December 31, 1997 -
===============
Option price $ .50 - $ 2.25
===============
Available for grant:
December 31, 1996 2,409,430
===============
December 31, 1997 3,156,550
===============
</TABLE>
The Company has also reserved 100,000 shares for a stock option plan
(Option Plan) for non-employee, independent directors, which entitles
each non-employee, independent director an option to purchase 10,000
shares of the Company's stock immediately upon election or re-election
to the Board of Directors. Options granted under the Option Plan will
be at the fair market value on the date of grant, are immediately
exercisable and have a term of ten years. The Company had 1,200 options
outstanding and exercisable and 98,800 available for grant at December
31, 1997, 1996 and 1995 at an option price of $.50 per share.
8. INCOME TAXES
At December 31, 1997, the Company had a net operating loss carryforward
of approximately $10,660,000 which will begin expiring in 2011 if not
utilized. No Federal tax provision was required for 1996 due to the
Company's net loss. The components of the deferred tax asset at
December 31, 1997 were approximately as follows:
Allowance for doubtful accounts $ 32,600
Net operating loss carryover 3,624,500
Deferred compensation 99,600
Capital losses 44,500
Valuation allowance (3,801,200)
----------------
$ -
================
F-13
-41-
<PAGE>
9. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases office space in Wexford, Pennsylvania under an
operating lease which expires in August 2000. The Company also leases
office space in Syosset, New York, under an operating lease which
expires in December 1998. Rent expense for the years ended December 31,
1997 and 1996 was approximately $30,000 and $95,000, respectively.
Future minimum lease commitments are $7,620, $7,620 and $5,080 for the
years ending December 31, 1998, 1999 and 2000, respectively.
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 was required to provide $2,052,995 in 1996 and an
additional $200,000 in 1997, as collateral security for performance by
the Company under the terms of the agreement. The collateral security
deposit bears interest at 5% and is received quarterly.
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 December 31, 1997, if
any, that may arise out of such litigation, management believes the
outcome will not have a material effect on the operations of 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.
10. MAJOR CUSTOMERS
The Company had one customer, the U.S. agent of the Chinese Trading
Company that provides financing to the Company, which accounted for
100% of total sales for 1997. Accounts receivable from this customer
accounted for approximately $1,013,000 (89.8%) of total trade accounts
receivable at December 31, 1997. No single customer accounted for more
than 10% of sales in 1996.
11. 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 1998. During 1997, the Company incurred additional
expenses related to the liquidation of IFD and related litigation. The
Company has approximately $536,000 in notes payable and $125,000 in
accounts payable related to IFD at December 31, 1997. The
aforementioned expenses related to IFD are included in the accompanying
statement of operations as discontinued operations.
F-14
-42-
<PAGE>
12. FOURTH QUARTER ADJUSTMENTS
The Company made a fourth quarter adjustment to correct an
overstatement of promotional rebates of $984,209 (see Note 14).
13. EARNINGS PER SHARE
The following data shows the amounts used in computing earnings per
share and the effect on the weighted average number of shares of
dilutive common stock.
<TABLE>
<CAPTION>
1997 1996
---------------- ---------------
<S> <C> <C>
Net income applicable to common stockholders $ 175,175 $ (11,263,140)
================ ===============
Weighted average number of shares in basic EPS 1,630,220 330,071
Effect of dilutive securities (stock warrants) 17,320 -
---------------- ----------------
Weighted average number of common shares
and dilutive potential common shares used
in diluted EPS 1,647,540 330,071
================ ================
</TABLE>
14. PRIOR PERIOD ADJUSTMENTS
The Company's financial statements as of December 31, 1996, have been
restated to reflect an error in the recording of promotional rebates
and preferred stock dividends. The effect of the restatement is as
follows:
<TABLE>
<CAPTION>
For Year Ended As Previously
December 31, 1996 Reported As Restated
----------------- -------- -----------
Balance sheet:
<S> <C> <C>
Promotional rebates $ 1,467,738 $ 483,529
Deficit $ (11,539,242) $ (12,523,451)
Statement of operations:
Cost of sales $ 6,845,672 $ 7,829,881
Net loss applicable to common stock $ (10,223,931) $ (11,263,140)
Net loss per common share $ (30.97) $ (34.12)
</TABLE>
15. SUBSEQUENT EVENTS
The Company renegotiated the settlement of amounts owing to a vendor on
March 31, 1998. According to the terms of the agreement, the Company is
required to issue $500,000 of common stock to the vendor during 1998,
and repay the remaining balance in monthly payments of $22,222 from May
1998 through April 2000. No interest is being charged by the vendor
(see Note 5).
In March 1998, the Company guaranteed a $1,000,000 line-of-credit
facility to a Dominican cigar manufacturer, which is owned by a PCW
stockholder. The purpose of the line-of-credit is to provide financing
to the cigar manufacturer to which PCW will supply the wrappers.
F-15
-43-
<PAGE>
SUPPLEMENTAL INFORMATION
F-16
-44-
<PAGE>
INDEPENDENT AUDITOR'S REPORT
----------------------------
The Board of Directors
Krantor Corporation
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of Krantor Corporation and subsidiaries
included in this Form 10-K and have issued our report thereon dated March 18,
1998. Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. Schedule II of this Form
10-K is the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic consolidated financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
consolidated financial statements and, in our opinion, fairly states in all
material respects, the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
BELEW AVERITT LLP
Dallas, Texas
March 18, 1998
F-17
-45-
<PAGE>
KRANTOR CORPORATION AND SUBSIDIARIES
Valuation Accounts
Schedule II
<TABLE>
<CAPTION>
Additions
Balance at charged to Balance at
beginning costs and end
Description of year expenses Deductions of year
- --------------------------------- ------------- ------------- ------------ --------------
Year ended December 31, 1997,
<S> <C> <C> <C> <C>
allowance for doubtful accounts $ 551,000 $ -- $ 455,174 $ 95,826
============= ============= ============ ==============
Reserve for deferred tax assets $ 3,819,443 $ -- $ 18,243 $ 3,801,200
============= ============= ============ ==============
</TABLE>
F-18
-46-
