FORM 10-Q. QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q /A
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the period ended SEPTEMBER 30, 1997
------------------
Commission File Number: 0-19409
SYNERGY BRANDS, INC.
(Formely KRANTOR CORPORATION)
(Exact name of registrant as it appears in its charter)
Delaware 22-2993066
(State of incorporation) (I.R.S. Employer
identification no.)
10850 Perry Highway, Suite 203 Wexford, PA
15090 (Address of principal executive offices)
(zip code)
412-980-6380
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[x] YES [ ] NO
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. On November 3, 1997
there were 2,436,115 shares outstanding of the registrant's common stock.
<PAGE>
KRANTOR CORPORATION
FORM 10-Q
SEPTEMBER 30, 1997
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION Page
Consolidated Balance sheets as of September 30, 1997
(Unaudited) and December 31, 1996 2 -3
Consolidated Statements of Operations for the nine
months ended September 30, 1997 and 1996 (Unaudited) 4-5
Consolidated Statements of Operations for the Three
months ended September 30, 1997 and 1996 (Unaudited) 6-7
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1997 and 1996 (Unaudited) 8-9
Notes to Consolidated Financial Statements 10-14
Management's Discussion and Analysis of 15-16
Financial Condition and Results of Operations
Forward Looking Information and Cautionary 17-18
Statements
PART II: OTHER INFORMATION
Item VI: Exhibits and Reports on Form 8-K 19
<PAGE>
KRANTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ ------------------
(Unaudited)
ASSETS
------
Current Assets:
- ---------------
<S> <C> <C>
Cash $ 5,302 $ 2,897
Accounts Receivable - Net of allowance for doubtful
accounts of $ 551,000 and $ 551,000 respectively 385,788 491,427
Inventory - -
Promotional Rebates (Note 5) 704,777 483,529
Other Current Assets 100,184 51,368
---------------- ----------------
Total Current Assets 1,196,051 1,029,221
Collateral and Security Deposit (note 7) 2,308,995 2,052,995
Property and Equipment - Net 27,374 30,611
Other Assets 209,040 253,264
---------------- ----------------
Total Assets $ 3,741,460 $ 3,366,091
=============== ===============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
-2-
<PAGE>
KRANTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ ----------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
<S> <C> <C>
Notes Payable (Note 2) $ 647,082 $ 803,050
Accounts Payable & Accrued Expenses (Note8) 1,369,188 2,054,565
Arbitration award payable (Notes 7) 467,453 467,453
Income taxes payable 48,817 71,158
---------------- ----------------
Total Current Liabilites 2,532,540 3,396,226
Subordinated Debentures 100,000 377,000
Commitments and Contingencies
Stockholders' Equity: (Note 4)
Class A $2.20 Cumulative Preferred stock - $.001 par
value; 100,000 shares authorized, 100,000 Shares Issued
and Outstanding 100 100
Common stock - $.001 par value; 29,900,000 Shares
authorized- 1,912,385 and 847,035 shares were
outstanding at 9/30/97 and 12/31/96 respectively: 1,912 847
Additional Paid-in Capital 13,486,530 12,426,869
Accumulated Deficit (12,212,122) (12,667,451)
---------------- ----------------
1,276,420 (239,635)
Less treasury stock at cost, 1,400 shares (167,500) (167,500)
---------------- ----------------
Total stockholders' equity 1,108,920 (407,135)
Total Liabilities & Stockholder's Equity $ 3,741,460 $ 3,366,091
=============== ===============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
-3-
<PAGE>
KRANTOR
CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
<S> <C> <C>
Commission Income (Note 7) 370,450 -
Net Sales $ 3,512,810 $ 7,061,456
---------- -----------
3,883,260 7,061,456
Cost of Sales 3,007,407 6,723,211
---------------- ---------------
Gross Profit 875,853 338,245
Selling General and Administrative Expense 661,671 457,340
Depreciation and Amortization 15,938 96,830
---------------- ----------------
Operating Income (Expense): 198,244 (215,925)
---------------- ----------------
Other Income (Expense):
Miscellaneous Income (Expense) 119,676 2,352
Interest Expense - (72,000)
Financing Costs (19,863) (125,500)
---------------- ----------------
Total Other (Income) 99,813 (195,148)
=============== ===============
Income (Loss) From Continuing Operations
Before Income Taxes 298,057 (411,073)
Income Taxes - -
---------------- ----------------
Income (Loss) From Continuing Operations $ 298,057 $ (411,073)
=============== ===============
DISCONTINUED OPERATIONS (Note 6)
Gain (loss) from Discontinued Operations 157,272 (7,387,998)
Income Taxes - -
---------------- ----------------
Net Income (Loss) from Discontinued Operations 157,272 (7,387,998)
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
-4-
<PAGE>
KRANTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (cont.)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
Income (Loss) Before Extraordinary Item 455,329 (7,799,071)
Extraordinary Item - Reduction of Income Taxes
Arising from Utilization of Loss Carryovers - -
---------------- ----------------
Net Income (Loss) 455,329 (7,799,071)
Less Preferred Dividend 165,000 165,000
---------------- ----------------
Income (Loss) Applicable to Common Stock (Note 1) $ 290,329 $ (7,964,071)
=============== ===============
Earnings (Loss) Per Common Share From
Continuing Operations $ .11 $ (2.38)
Earnings (Loss) Per Common Share From
Discontinued Operations .13 (30.46)
---------------- ----------------
Earnings (Loss) Per Common Share $ .24 $ (32.84)
=============== ===============
Weighted Average Number of Shares Outstanding 1,248,104 242,540
</TABLE>
See Accompanying Notes To Consolidated Financial Statements
-5-
<PAGE>
KRANTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
<S> <C> <C>
Net Sales $ 1,963,914 $ 1,224,465
Cost of Sales 1,661,555 1,366,663
---------------- ----------------
Gross Profit 302,359 (142,198)
Selling General and Administrative Expenses 219,665 236,612
Depreciation and Amortization 177 -
---------------- ----------------
Operating Income (Loss) 82,517 (378,810)
---------------- ----------------
Other Income (Expense):
Miscellaneous Income (Expense) 28,239 13,200
Interest Expense - 125,177
Financing Costs (7,387) -
---------------- ----------------
Total Other (Income) 20,852 138,377
=============== ===============
Income (Loss) From Continuing Operations
Before Income Taxes 103,369 (240,433)
Income Taxes - -
---------------- ----------------
Income (Loss) From Continuing Operation $ 103,369 $ (240,433)
=============== ===============
DISCONTINUED OPERATIONS (Note 6)
Gain (Loss) from Discontinued Operations (8,910) (3,001,095)
Income Taxes - -
---------------- ----------------
Net Income (Loss) from Discontinued Operations (8,910) (3,001,095)
</TABLE>
See Accompanying Notes To Consolidated Financial Statements
-6-
<PAGE>
KRANTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (cont.)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
Income (Loss) Before Extraordinary Item 94,459 (3,241,528)
Extraordinary Item - Reduction of Income Taxes
Arising from Utilization of Loss Carryovers - -
---------------- ----------------
Net Income (Loss) 94,459 (3,241,528)
Less Preferred Dividend 55,000 55,000
---------------- ----------------
Income (Loss) Applicable to Common Stock (Note 1) $ 39,459 $ (3,296,528)
=============== ===============
Earnings (Loss) Per Common Share From
Continuing Operations $ .01 $ (.98)
Earnings (Loss) Per Common Share From
Discontinued Operations - (9.96)
---------------- ----------------
Earnings (Loss) Per Common Share $ .01 $ (10.94)
=============== ===============
Weighted Average Number of Shares Outstanding 1,595,973 301,200
</TABLE>
See Accompanying Notes To Consolidated Financial Statements
-7-
<PAGE>
KRANTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
Cash Flows From Operating Activites:
<S> <C> <C>
Income (Loss) From Continuing Operations $ 298,057 $ (411,073)
Income (Loss) From Discontinued Operations 157,272 (7,387,998)
Adjustments to Reconcile Net Income (Loss)
From Continuing Operations to Net Cash
Flows From Continuing Operating Activities:
Depreciation and Amortization 15,938 96,830
Non-Cash Expenses 810,726 979,287
Reserve for Bad Debts - 602,000
Changes in Operating Assets and Liabilities:
Sale of Markable Securities - 13,648
Accounts Receivable 105,639 8,569,278
Inventory - 5,462,917
Promotional Rebates (221,248) (976,023)
Deferred Taxes - 217,803
Other Current Assets (48,816) (1,820,627)
Other Assets 44,224 (529,849)
Accounts Payable & Accrued Expenses (685,377) (5,304,079)
Income Taxes Payable (22,341) (307,854)
---------------- ----------------
Net Cash Flows (Used)
in Operating Activities 454,074 (795,740)
Cash Flows From Investing Activities:
Purchase of Furniture and Equipment (12,701) 660,484
Due From Officers and Shareholders - 80,035
Payment of Collateral Security Deposit (256,000) -
Advances to Related Parties - 228,718
---------------- ----------------
Net Cash Flows provided (used)
in Investing Activities (268,701) 969,237
Cash Flows From Financing Activities:
Net Borrowing (Payments) on Notes Payable (155,968) (3,522,979)
Proceeds from Issuance of Common Stock 250,000 2,775,000
Cash Dividends on Preferred Stock - (165,000)
Long Term Debt (277,000) 500,000
Deferred Cost - (62,479)
---------------- ----------------
Net Cash Flows Provided (used) by (182,968) (475,458)
Financing Activities
---------------- ----------------
Net Increase (Decrease) in Cash 2,405 (301,961)
Cash - Beginning of Period 2,897 370,000
---------------- ----------------
Cash - End of Period $ 5,302 $ 68,039
=============== ===============
</TABLE>
See Accompanying Notes To Consolidated Financial Statements
-8-
<PAGE>
KRANTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for:
Interest
<S> <C> <C>
Continuing Operations $ -- $ 72,000
Discontinued Operation 37,100 352,875
================ ===============
Income Taxes
Continuing Operations $ -- $ --
Discontinued Operations -- --
================ ===============
Supplemental Disclosure of Non-Cash Operating,
Investing and Financing Activities:
Expenses paid via the distribution of registered
shares of the Company's Common Stock
through it's Compensation and Services Plan -- --
Prepaid Expenses paid via the distribution of
registered shares of the Company's Common
Stock through it's Compensation and Services Plan -- --
---------------- ---------------
Total Non-Cash Operating, Investing and
Financing Activities -- --
================ ===============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
-9-
<PAGE>
KRANTOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Krantor Corporation is a food brokerage Company specializing in
groceries, frozen squid, general household merchandise and health and
beauty aids in the promotional wholesale food industry throughout the
United States.
In April 1994, Krantor formed a wholly-owned subsidiary which is a
full-service wholesale delivery company capable of providing direct
store deliveries of inventory within hours of receiving an order,
principally in the northeastern United States.
In December 1995, Krantor formed a wholly-owned subsidiary, Affiliated
Island Grocers, Inc., which does business under the name Island Frozen
and Dairy (IFD). IFD distributes specialty food, poultry and dairy
products throughout the northeastern United States. In June 1996, the
Company discontinued all operations of IFD and presented them as such
in the consolidated financial statements. (see Note 6).
In September 1996, Krantor formed a wholly-owned subsidiary New Era
Foods Inc., which is a brokerage company representing manufacturers,
retailers and wholesalers in connection with distribution of grocery
and general merchandise products (see Note 7).
PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements include the accounts of Krantor
Corporation and its subsidiaries (Company). All significant
intercompany accounts and transactions have been eliminated in
consolidation.
REVENUE RECOGNITION
The Company recognizes revenue at the time merchandise is shipped to
the customer. Merchandise which is damaged or has the wrong
specifications is returned by the Company to the supplier. The cost is
recovered from the trucking company or the supplier, depending upon the
nature of the return.
CASH EQUIVALENTS
The Company considers time deposits with original maturities of three
months or less to be components of cash.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of accounts
receivable. The concentration of credit risk with respect to
receivables is mitigated by the number of customers in the Company's
customer base and their dispersion across a diverse geographic area as
well as the credit worthiness of their major customers. The Company
maintains an allowance for losses based upon the expected collection of
all receivables. Fair value approximates carrying value for all
financial instruments. 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.
-10-
<PAGE>
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. Betterment and major renewals which substantially extend
the useful life of an existing asset are capitalized and depreciated
over the estimated useful life. Upon retirement or sale of an asset,
the cost of the asset and the related accumulated depreciation or
amortization are removed from the accounts and any resulting gain or
loss is credited or charged to income.
ADVERTISING
The Company expenses advertising costs as incurred. Advertising expense
totaled approximately $40,000 and $3,000 for the nine months ended
September 30, 1997 and 1996 respectively.
INCOME TAXES
The Company uses the asset and liability method of computing deferred
income taxes. In the event differences between the financial reporting
bases and the tax bases of an enterprise's assets and liabilities
result in deferred tax assets, an evaluation of the probability of
being able to realize the future benefits indicated by such assets is
required. A valuation allowance is provided for a portion or all of the
deferred tax assets when it is more likely than not that such portion
or all of such deferred tax assets will not be realized.
NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is based on the weighted average
number of common shares outstanding. Outstanding stock options and
warrants have not been included since the effect would be
anti-dilutive.
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.
STOCK-BASED COMPENSATIONS 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" (APB 25) 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.
-11-
<PAGE>
2. NOTES PAYABLE
Notes payable at September 30, 1997 consisted of the following:
<TABLE>
<CAPTION>
1997
<S> <C>
Revolving line-of-credit $ 265,799
Note Payable to investment company; non-interest bearing;
principal due May 8, 1996, previously collateralized by
inventory of IFD 306,283
Note payable to bank due July 5, 1996; non-interest bearing;
previously collateralized by inventory of IFD 75,000
---------
$ 647,082
</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.
3. SUBORDINATED DEBENTURES
The Company issued $480,000 of 3.75% subordinated debentures in
September 1996. The debentures were unsecured and convertible to common
stock at the lower of $1 per share or 70% of the average bid price, as
defined. The 30% beneficial conversion feature was calculated at the
date of issuance and amortized as interest expense through the first
conversion date. The Company recognized $144,000 of interest expense in
1996 as a result of the 30% beneficial conversion feature.
4. STOCKHOLDERS' EQUITY
The holders of Class A preferred shares are entitled to receive, as and
when declared by the Board of Directors, cumulative dividends at the
rate of $2.20 per share per annum before any dividends on the common
stock shall be paid. In the event of the dissolution of the Company and
the distribution of its net assets, the holders of the Class A
preferred shares shall be paid in full at $10.50 per share plus all
accumulated and unpaid dividends, before any amounts are distributed
among the holders of the common shares. Unpaid cumulative dividends on
the Class A preferred shares shall not bear interest. At September 30,
1997, there were no cumulative or outstanding dividends on the Class A
preferred stock.
The Company has the option of redeeming and/or retiring, upon thirty
days notice, the Class A preferred stock, in whole or in part, at the
cash price of $10.50 per share, in addition to dividends accumulated
and accrued up to the date fixed for the redemption or retirement of
the stock. Such redemption or retirement shall be effected only out of
the earned capital of the Company and with the majority consent of
stockholders.
In 1994, the Company registered with the Securities and Exchange
Commission on Form S-8, 600,000 shares of the Company's common stock to
be distributed under the Company's 1994 Services and Consulting
Compensation Plan (Plan). An additional 3,900,000 shares have been
reserved since that date. Through September 30, 1997, the Company
issued 719,450 shares for payment of services to employees and
professional service providers and has 3,780,550 shares available in
reserve under the plan.
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.
-12-
<PAGE>
5. LITIGATION
The Company is a named defendant in various lawsuits arising from the
liquidation of IFD. The Company has evaluated the potential exposure of
an unfavorable outcome on various lawsuits and has accrued $100,000 for
all losses which are considered probable.
The Company has negotiated a settlement agreement with Procter & Gamble
Distributor Company in connection with disputes relating to promotional
rebates that are due the Company. Failure to resolve the terms of the
agreement may have a material adverse effect on the Company's business.
Two former officer's of IFD were awarded through arbitration $467,000
under disputed employment contracts. The award has been converted to a
judgement against Krantor and Affiliated Island Grocers DBA Island
Frozen & Dairy. (Collectively AIG). The company settled all actions
relating to this case for $300,000 in common stock on November 6, 1997.
Failure to honor the terms of the settlement will have an adverse
effect on the company.
The Company is subject to legal proceedings and claims which arise in
the ordinary course of its business. In the opinion of management, the
amount of ultimate liability with respect to these actions will not
materially affect the financial position, results of operations or cash
flows of the Company.
6. 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. Accordingly, IFD is accounted for as a
discontinued operation in the accompanying consolidated financial
statements. IFD revenues were approximately $0 for the nine months
ended September 30, 1997 and $12,852,000 and $3,114,000 for the years
ended 1996 and 1995, respectively. During 1997, the Company incurred
additional expenses related to the liquidation of IFD and related
litigation. Subsequent to he adoption of the plan to discontinue
operations of IFD, an injunction was filed preventing the sale of IFD's
inventory. Due to the perishable nature of the inventory, the inventory
spoiled and $280,556 of inventory was written down to the lower of cost
or market in 1996, in accordance with the Accounting Research Bulletin
No. 43 and included in the consolidated statement of operations as a
component of "Loss on disposal of IFD." The assets and liabilities of
IFD included in the accompanying consolidated balance sheets as of
September 30, 1997 consisted of approximately the following:
Current Assets of discontinued operations -
Accounts receivable, net 197,000
Current liabilities of discontinued operations:
Accounts payable and accrued expenses 100,000
Notes payable 647,082
Arbitration award payable 238,000
-----------
$ 985,082
7. COMMITMENTS AND CONTINGENCIES
DISTRIBUTION AGREEMENT
In 1996, the Company entered into a ten-year agreement with a Chinese
trading company (ALT) to distribute frozen seafood in the United States
under a licensing arrangement. The Company acts as an agent for ALT.
The Company markets ALT's frozen seafood products and earns commission
based on sales generated by the distribution agreement. In
consideration for the Chinese trading company providing products to the
Company for sale and distribution and as security for doing so, the
Company provided $2,052,995 in 1996 and an additional $125,000 in 1997,
as collateral security for performance by the Company under the terms
of the agreement.
-13-
<PAGE>
MANAGEMENT PARTNERSHIP AGREEMENT
During 1995, Krantor and IFD entered into a management partnership
agreement with SCP Enterprises, a New York general partnership
(Partnership) whose partners were employees of IFD. Under the terms of
the agreement, 1% of IFD's sales in excess of $30 million and 20% of
IFD's gross profit in excess of 12% of sales were to be paid to the
Partnership annually through December 2000 or upon termination of said
employees, if earlier. No amounts were paid in 1996 or 1995. The
employees were terminated in 1996 and filed an arbitration claim for
amounts due under the agreement. The employees received a favorable
award in the amount of $237,453, which is included in arbitration award
payable at December 31, 1996. The company is vigorously contesting and
countersuing on this award.
EMPLOYMENT AGREEMENTS
During 1995, IFD entered into employment agreements with three
employees whereby each employee was entitled to receive a base salary
of $108,000 with annual increases of 5% plus certain employee benefits
through December 2000 and stock options to purchase 2,667 shares of the
Company's common stock at $50 per share. The employees were terminated
in 1996 and filed an arbitration claim for the balance due under the
employment contracts. The employees received a favorable arbitration
award in the amount of $230,000. Such amounts are included in the
arbitration award payable at Sept 30, 1997. Krantor Corporation has
guaranteed such agreements. The company has countersued and is
contesting the awards.
8. MANAGEMENT'S PLANS
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplates the
Company continuing as a going concern. However, the Company sustained a
substantial operating loss in 1996 and at September 30, 1997, current
liabilities exceeded current assets by $1,336,489. During 1996 and
1997, the Company became unable to use its line-of-credit due to lack
of collateral and the default of certain provisions of the loan
agreement.
Management has discontinued the operations of IFD, intends to liquidate
IFD's remaining assets and settle its outstanding liabilities.
In view of these matters, realization of the Company's assets in the
accompanying balance sheet is dependent upon continued operations of
the Company, which, in turn, is dependent upon the Company's ability to
realize its assets in the ordinary course of business while meeting its
financing requirements. Management believes actions presently being
taken to revise the Company's operating and financial requirements will
provide the opportunity for the Company to continue as a going concern.
However, Management cannot predict the outcome of future operations.
The financial statements do not include any adjustments that might
result form the outcome of this uncertainty.
-14-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company primarily brokers and merchandises the sale of frozen squid and
promotional brand name grocery products through a distribution agreement with a
Chinese trading company, Asia Legend Trading Ltd,. ("ALT"). In 1997 the company
entered the premium cigar market and pre-paid telephone card businesses. The
Company discontinued its Kosher Food business (IFD) on June 30, 1996. (See Note
6 to Consolidated Statements). The Company's current assets consist primarily of
accounts receivable, promotional rebates, prepaid expenses and cash. The
Company's liabilities consist of accounts payable, short and long term debt.
RESULTS OF OPERATION
Revenues decreased for the nine months ended September 30, 1997 to $3,883,260 a
(45%) decrease as compared to the prior period. Cost of sales decreased for the
nine months ended September 30, 1997 to $3,007,407 or (56 %) decrease as
compared to the prior period. Gross profit for direct sales increased from 4.8%
to 14.4% for the same period. The company is realizing better margins on its
sale of groceries and health beauty aids as compared to the prior period.
Selling General & Administrative (S,G&A) expenses increased to $661,671 for the
period a 31% increase. In 1996 most of the S.G&A expenses were absorbed by IFD,
which has been discontinued. Currently all expenses are absorbed by the company.
As a result S.G&A is proportionally higher in nine months.
Income from continuing operations for the nine months ended September 30, 1997
totaled $298,057 for the period as compared to a $411,073 loss to the prior
period. Income from discontinued operations totaled $157,272 for the nine months
ended September 30, 1997 compared to a 7.4 million loss to the prior period. The
Company believes that the total costs incurred from discontinuing operations
have been fully charged to earnings and should not negatively affect future
operating results. Earnings per share for continuing operations were $.11 per
share compared to a $2.38 per share loss for the prior nine months period.
The company's revenue base has been slowly recovering from losses of 1996. In
order for the company to increase sales, it must reestablish it's relationships
with the major grocery manufactures. The company is vigorously attempting to
reestablish these ties as well as develop new one. Failure to re-establish these
ties worked would have an adverse effect on the company. Furthermore, the
Company is entering two new markets which include premium cigars and pre-paid
telephone cards for sale to its existing customers. These product lines have
lower sales volume than the companies traditional businesses, but higher margins
and greater advertising and promotional expenses. The company believes that
developing propriety products is in the best interest of the company's
expansion. Failure to secure market penetration in the new lines would have an
adverse effect on the company.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of Sept 30, 1997 the company reduced its working capital deficit by 44%
to $1,336,489 from December 31, 1996. The deficit is directly related to current
liabilities that are fully accrued for IFD's business that have not been settled
or reconciled. IFD's inventory has been fully reserved at Sept 30, 1997.
Liabilities were reduced from $3.4 million to $2.6 million a 24% drop. (See Note
8 to Consolidated Statements). The Company does not have sufficient working
capital to fund its continuing operations. It requires additional financing to
expand and satisfy its liabilities related to discontinued operations due to
it's contingencies in IFD. The Company plans on expanding its core grocery and
frozen seafood market through its distribution agreement. Krantor believes that
by discontinuing IFD's operation it should enable it to support the capital
requirements of its continuing operations. However, the Company believes it will
need additional financing in the form of subordinated debt or equity to finance
its expansion plans. See "Forward-Looking Information and Cautionary
Statements." The company has collateral with ALT of $2.3 million for the purpose
of securing the performance underlying the distribution agreement entered into
in October 1996.
The Company has an $8 Million credit facility with Fidelity Funding of
California which expires on November 14, 1997. IFD is in default on the credit
facility and currently not borrowing under the facility. The Company's business
is exclusively being conducted though its food brokerage distribution agreement.
The Company intends to pay the facility off through the liquidation of IFD's
assets. IFD's loan balance is $265,799 as of September 30, 1997. Krantor does
not owe any money to Fidelity, but Krantor has guaranteed IFD's loan.
Management is not aware of negative trends in the Company's area of
business or other economic factors which may cause a significant change in the
Company's viability or financial stability, except as specified herein and in
"Forward-Looking Information and Cautionary Statements." Subject to available
financing, the Company intends to further expand its continuing business through
its distribution agreement by merchandising well accepted readily marketable
promotional brand-name grocery products, frozen squid and other seafood
products, premium cigars and pre-paid telephone cards. However, there can be no
assurance that the Company's plans will be successful. Additional working
capital is required beyond the current available financing in order for the
Company to expand from its current levels. The company is expanding it's product
base especially as related to general merchandise that is carried by it's
customers.
SEASONALITY
Seasonality affects the demand for certain products sold by the Company,
such as juice drinks in the summer months or hot cereals in fall and winter
months. However, all these products are available to the Company throughout the
year. Manufacturers also tend to promote more heavily towards the close of the
fiscal quarters and during the spring and early summer months. Accordingly, the
Company is able to purchase more products, increase sales during these periods
and reduce its product cost due to these promotions. The Company generally
experiences lower sales volume in the fourth quarter due to the reduced number
of selling days resulting from the concentration of holidays in the quarter.
Sale of frozen squid is more significant in the fourth quarter due to the
holidays.
INFLATION
The Company believes that inflation, under certain circumstances, could be
beneficial to the Company's business. When inflationary pressures drive product
costs up, the Company's customers sometimes purchase greater quantities of
product to expand their inventories to protect against further pricing
increases. This enables the Company to sell greater quantities of products that
are sensitive to inflationary pressures.
However, inflationary pressures frequently increase interest rates. Since
the Company is dependent on financing, any increase in interest rates will
increase the Company's credit costs, thereby reducing its profits.
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<PAGE>
FORWARD LOOKING INFORMATION AND CAUTIONARY STATEMENTS
Other than the factual matters set forth herein, the matters and items set forth
in this report are forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, the following:
1. CASH FLOW.
The Company has experienced cash shortages which continue to
adversely affect its business. See "Liquidity and Capital
Resources". The Company requires additional working capital in
order to maintain and expand its business. Failure to raise
additional cash will have an adverse effect on the company.
2. DEPENDENCE ON PUBLIC TRENDS.
The Company's business is subject to the effects of changing
customer preferences and the economy, both of which are difficult
to predict and over which the Company has no control. A change in
either consumer preferences or a down-turn in the economy may
affect the Company's business prospects.
3. POTENTIAL PRODUCT LIABILITY.
As a participant in the distribution chain between the
manufacturer and consumer, the Company would likely be named as a
defendant in any product liability action brought by a consumer.
To date, no claims have been asserted against the Company for
products liability; there can be no assurance, however, that such
claims will not arise in the future. Accordingly,( Asia Legend
Trading Ltd.) maintains a product liability insurance policy of
$10,000,000 per occurrence. In the event that any products
liability claim is not fully funded by insurance, and if the
Company is unable to recover damages from the manufacturer or
supplier of the product that caused such injury, the Company may
be required to pay some or all of such claim from its own funds.
Any such payment could have a material adverse impact on the
Company.
4. COMPETITION.
The Company is subject to intense competition in its promotional
grocery, prepaid phone cards, premium cigar market and squid
businesses. While all industries are highly fragmented, with no
one distributor dominating the industry, the Company is subject to
competitive pressures from other distributors based on price,
product recognition, and service. However, in all of the
industries the company compete's there exists manufactures and
distributors that have a stronger capital base and better product
recognitions that further impair's the company's competitive edge.
5. DISCONTINUED OPERATION.
The Company has experienced a significant loss in discontinuing
its Kosher Food business (IFD). This loss materially reduced the
Company's working capital position. (See Liquidity & Capital
Resources). Many IFD creditors have claimed that Krantor has
guaranteed this debt. The company disputes these allegation and is
vigorously opposing there claims. Failure to resolve these claims
may have an adverse effect on Krantor's working capital.
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<PAGE>
6. TRADE RELATIONS WITH CHINA.
The Company is dependent on trade with the People's Republic of
China (PRC). The Company's financing arrangements, distribution
contracts and its supply of frozen squid with ALT a PRC company.
Any government sanctions that cause an interruption of trade or
prohibit trade with PRC through higher duties or quotas would have
a material adverse effect on the Company's business.
7. LITIGATION
The Company is named as defendant in various lawsuits arising from
the liquidation of IFD. While it is not reasonably possible to
estimate the amount of losses in excess of amounts accrued at
September 30, 1997, if any, that may arise out of such litigation,
management believes the outcome may have a material effect on the
operations of the Company.
The Company has negotiated a settlement agreement with Proctor &
Gamble Distributor Company in connection with disputes relating to
promotional rebates that are due the Company. Failure to honor the
terms of the settlement agreement may have a material adverse
effect on the company's business.
Two former officer's of IFD were awarded through arbitration
$467,000 under disputed employment contracts. The award has been
converted to a judgment against Krantor and Affiliated Island
Grocers DBA Island Frozen & Dairy. (Collectively (AIG.) The
company settled all actions relating to this case for $300,000 in
common stock on November 6, 1997. Failure to honor the terms of
the settlement will have an adverse effect on the company.
The Company is subject to legal proceedings and claims which arise
in the ordinary course of its business. In the opinion of
management, the amount of ultimate liability with respect to these
actions will not materially affect the financial position, results
of operations or cash flows of the Company.
8. NASDAQ SMALL-CAP QUALIFICATIONS.
NASDAQ has increased it's maintenance requirements for small-cap
companies. Under it's new guidelines a NASDAQ small-cap stock must
trade over $1\per share and have a net tangible value in excess of
$2 million. If the company fails to meet these requirements, it
may be delisted from NASDAQ small cap. Such event would reduce the
liquidity of the company's stock and will have an adverse effect
on the company's business.
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<PAGE>
Part II- Other Information
Item 6- Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) There were no reports filed on Form 8-K for the third quarter ended
September 30, 1997.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KRANTOR CORPORATION
Date: 10/31/97 By: /s/ Mair Faibish
-------------------------------
Mair Faibish
Chief Financial Officer
Date: 10/31/97 By: /s/ Mitchell Gerstein
-------------------------------
Mitchell Gerstein
Treasurer
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