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 March 31, 1997
--------------
Commission File Number: 0-19409
SYNERGY BRANDS, INC.
(Formerly 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 April 30, 1997
there were 1,104,207 shares outstanding of the registrant's common stock.
<PAGE>
KRANTOR CORPORATION
FORM 10-Q
MARCH 31, 1997
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION Page
Consolidated Balance sheets as of March 31, 1997
(Unaudited) and December 31, 1996 2-3
Consolidated Statements of Operations for the three
months ended March 31, 1997 and 1996 (Unaudited) 4-5
Consolidated Statements of Cash Flows for the three months
ended March 31, 1997 and 1996 (Unaudited) 6-7
Notes to Consolidated Financial Statements 8-12
Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-14
Forward Looking Information and Cautionary
Statements 15-16
PART II: OTHER INFORMATION
Item VI: Exhibits and Reports on Form 8-K 17
<PAGE>
KRANTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
-------------- ------------
(Unaudited)
ASSETS
Current Assets:
<S> <C> <C>
Cash $ 470 $ 2,897
Accounts Receivable - Net of allowance for doubtful accounts
of $ 551,000 and $ 551,000 respectively 418,806 491,427
Inventory - -
Promotional Rebates (Note 5) 483,529 483,529
Other Current Assets 227,747 51,368
-------------- ------------
Total Current Assets 1,130,552 1,029,221
Collateral Security Deposit (Note 7) 2,177,995 2,052,995
Property and Equipment - Net 22,196 30,611
Other Assets 234,280 253,264
-------------- ------------
Total Assets $ 3,565,023 $ 3,366,091
============== ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
-2-
<PAGE>
KRANTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------- ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
<S> <C> <C>
Notes Payable (Note 2) $ 721,473 $ 803,050
Accounts Payable & Accrued Expenses (Note 8) 1,774,641 2,054,565
Arbitration award payable (Notes 7) 467,453 467,453
Income taxes payable 52,547 71,158
------------- ------------
Total Current Liabilities 3,016,114 3,396,226
Subordinated Debentures 200,000 377,000
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- 10,952,071 and 847,035 shares were outstanding
at 3/31/97 and 12/31/96 respectively: 1,095 847
Additional Paid-in Capital 12,923,802 12,426,869
Accumulated Deficit (12,408,588) (12,667,451)
------------- ------------
516,409 (239,635)
Less treasury stock at cost, 1,400 share (167,500) (167,500)
------------- ------------
Total stockholders' equity 348,909 (407,135)
Total Liabilities & Stockholder's Equity $ 3,565,023 $ 3,366,091
============= ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
-3-
<PAGE>
KRANTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
1997 1996
----------- -----------
Commission Income (Note 7) $ 248,400 $ --
Promotional Income 31,098 --
Net Sales -- 4,779,672
----------- -----------
279,498 4,779,672
Cost of Sales -- 4,403,616
----------- -----------
Gross Profit 279,498 376,056
Selling, General and Administrative Expenses 224,309 182,057
Depreciation and Amortization 8,415 48,415
----------- -----------
Operating Income (Loss) 46,774 145,584
----------- -----------
Other Income (Expense):
Miscellaneous Income (Expense) 52,084 (1,009)
Interest Expense -- (103,035)
Financing Costs (6,513) (100,000)
----------- -----------
Total Other (Income) 45,571 (204,044)
=========== ===========
Income (Loss) From Continuing Operations
Before Income Taxes 92,345 (58,460)
Income Taxes -- --
----------- -----------
Income (Loss) From Continuing Operation $ 92,345 $ (58,460)
=========== ===========
DISCONTINUED OPERATIONS (Note 6)
Gain (Loss) from Discontinued Operations 166,518 (250,510)
Income Taxes -- --
----------- -----------
Net Income (Loss) from Discontinued Operations 166,518 (250,510)
See Accompanying Notes to Consolidated Financial Statements
-4-
<PAGE>
KRANTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (Cont.)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
Net Income (Loss) 258,863 (308,970)
Less Preferred Dividend 55,000 55,000
Income (Loss) Applicable to Common Stock (Note 1) $ 203,863 $ (363,970)
========== ===========
Earnings (Loss) Per Common Share From
Continuing Operations $ .03 $ (.02)
Earnings (Loss) Per Common Share From
Discontinued Operations .17 (.05)
Earnings (Loss) Per Common Share $ .20 $ (.07)
========== ===========
Weighted Average Number of Shares Outstanding 982,315 5,059,228
See Accompanying Notes To Consolidated Financial Statements
-5-
<PAGE>
KRANTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- ------------
Cash Flows From Operating Activities:
<S> <C> <C>
Income (Loss) From Continuing Operations $ 92,345 $ (58,460)
Income (Loss) From Discontinued Operations 166,518 (250,510)
Adjustments to Reconcile Net Income (Loss)
From Continuing Operations to Net Cash
Flows From Continuing Operating Activities:
Depreciation and Amortization 8,415 48,415
Amortization of Financing Costs -- --
Operating Expenses paid with common stock 422,181 --
Reserve for Bad Debts -- (98,380)
Changes in Operating Assets and Liabilities:
Accounts Receivable 72,621 4,077,101
Inventory -- 2,220,510
Promotional Rebates -- (976,023)
Other Current Assets (176,379) (357,898)
Other Assets 18,984 (25,079)
Accounts Payable & Accrued Expenses (279,924) (4,883,320)
Income Taxes Payable (18,611) (65,639)
----------- ------------
Net Cash Flows provided (used) by
Operating Activities 306,150 (369,283)
Cash Flows From Investing Activities:
Purchase of Furniture and Equipment -- (166,541)
Due From Officers and Shareholders -- (29,142)
Payment of Collateral Security Deposit (125,000) --
----------- ------------
Net Cash Flows (Used)
in Investing Activities (125,000) (195,683)
Cash Flows From Financing Activities:
Net Borrowing (Payments) on Notes Payable (81,577) 195,453
Proceeds from Issuance of Common Stock 75,000 55,184
Cash Dividends on Preferred Stock -- (55,000)
Long Term Debt (177,000) --
----------- ------------
Net Cash Flows Provided (used) by
Financing Activities (183,577) 195,637
----------- ------------
Net Increase ( Decrease) in Cash (2,427) (369,329)
Cash - Beginning of Period 2,897 370,000
Cash - End of Period $ 470 $ 671
=========== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
-6-
<PAGE>
KRANTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
1997 1996
-------- --------
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for:
Interest
Continuing Operations $ -- $103,035
Discontinued Operation -- 30,000
======== ========
Income Taxes
Continuing Operations $ -- $ --
Discontinued Operation -- --
======== ========
Supplemental Disclosure of Non-Cash Operating,
Investing and Financing Activities:
Expenses paid via the distribution of registered
shares of the Company's Common Stock
through it's Compensation and Services Plan -- --
Prepaid Expenses paid via the distribution of
registered shares of the Company's Common
Stock through it's Compensation and Services Plan -- --
-------- --------
Total Non-Cash Operating, Investing and
Financing Activities -- --
======== ========
See Accompanying Notes to Consolidated Financial Statements
-7-
<PAGE>
KRANTOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 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.
-8-
<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 $9,900 and $3,000 for the quarters ended March
31, 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.
-9-
<PAGE>
2. NOTES PAYABLE
Notes payable at March 31, 1997 consisted of the following:
<TABLE>
<CAPTION>
1997
----
<S> <C>
Revolving line-of-credit $ 304,752
Note Payable to investment company; non-interest bearing;
principal due May 8, 1996, previously collateralized by
inventory of IFD 341,721
Note payable to bank due July 5, 1996; non-interest bearing;
previously collateralized by inventory of IFD 75,000
-----------
$ 721,473
</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 March 31,
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 March 31, 1997, the Company issued
3,516,258 shares for payment of services to employees and professional
service providers and has 983,742 shares available in reserve under the
plan.
-10-
<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 $166,000 for
all losses which are considered probable.
The Company is negotiating a settlement agreement with a major grocery
manufacturer in connection with disputes relating to promotional
rebates that are due the Company. Failure to resolve these disputes may
have a material adverse effect on the Company's business.
The Company is subject to legal proceedings and claims which arise in
the ordinary course of its business. In the opinion of management, the
amount of ultimate liability with respect to these actions will not
materially affect the financial position, results of operations or cash
flows of the Company.
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 quarter ended
March 31, 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 March 31, 1997
consisted of approximately the following:
Current Assets of discontinued operations -
Accounts receivable, net $ 230,000
Current liabilities of discontinued operations:
Accounts payable and accrued expenses 166,000
Notes payable 721,000
Arbitration award payable 238,000
-----------
$ 1,125,000
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.
-11-
<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 March 31, 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 March 31, 1997, current
liabilities exceeded current assets by $1,855,562. 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.
-12-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company primarily brokers and merchandises the sale of frozen squid
and promotional brand name grocery products through an agency agreement with a
Chinese trading company, Asia Legend Trading Ltd. ("ALT") to the food industry.
The Company discontinued its kosher food business (IFD) on June 30, 1996. (See
Note 6 to Consolidated Statements). 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.
RESULTS OF OPERATION
Revenues from continued operations decreased for the three months ended
March 31, 1997 to $279,498 a (94%) decrease as compared to the prior period. As
a result of the Company's change of its business from a distributor to a food
broker, the Company will only be recognizing commissions and promotional
revenues in connection with its distribution and not direct product revenues.
This revenue classification change causes the Company's revenue base to decrease
as compared to prior years, but should not affect profitability.
Cost of sales for continued operations decreased for the quarter ended
March 31, 1997 to $0 or (100 %) decrease as compared to the prior period. Since
the Company no longer recognizes product sales, it no longer has any cost
associated with product purchases.
Selling, General & Administrative (S,G&A) expenses from continuing
operations increased to $224,309 for the period a 19% increase. The increase in
S,G&A is related to higher professional expenses, advertising costs and a lower
revenue base.
Income from continuing operations for the quarter totaled $92,345 for
the period as compared to a $(58,460) loss for the same period. This profit
represents the Company's food brokerage business and promotional rebates the
Company earns by representing food manufacturers. Income from discontinued
operations totaled $166,518 for the quarter. 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.
LIQUIDITY AND CAPITAL RESOURCES
The company reduced its working capital deficit by 20% to $1,885,562
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, this bringing inventory
value to $0.00 at March 31, 1997. Liabilities were reduced from $3.8 million to
$3.2 million a 16% drop. (See Note 8 to Consolidated Statements). The Company
believes that it has sufficient working capital to fund its continuing
operations but requires additional financing to expand and satisfy its
liabilities related to discontinued operations. Continuing operations will be
conducted through Island Wholesale Grocers (IWG), the promotional grocery and
seafood subsidiary of Krantor and the distribution agreement entered into on
October 1, 1996 with ALT. (See Note 1 to Consolidated Statements). There was no
material change in the Company's accounts receivable since December 31, 1996.
-13-
<PAGE>
The Company plans on expanding its core grocery and frozen seafood
market through its distribution agreement. Krantor believes that by
discontinuing IFD's operation it should enable it to support the capital
requirements of its continuing operations. However, the Company believes it will
need additional financing in the form of subordinated debt or equity to finance
its expansion plans. See "Forward-Looking Information and Cautionary
Statements." The company has a deposit with ALT of $2.2 million for the purpose
of securing the performance underlying the distribution agreement entered into
in October 1996. The Company earns a 5% interest rate on the pledged deposit.
The Company has an $8 Million credit facility with Fidelity Funding of
California which expires on November 14, 1997. The Company is in technical
default on the credit facility and currently not borrowing under the facility.
The Company's business is exclusively being conducted through its food brokerage
distribution agreement. The Company intends to pay the facility off through the
liquidation of IFD's assets. The facility, which expired in November 1996, was
extended on May 11, 1996 through November 14, 1997 by Fidelity. The Company's
loan balance is $304,752 as of March 31, 1997.
Management is not aware of negative trends in the Company's area of
business or other economic factors which may cause a significant change in the
Company's viability or financial stability, except as specified herein and in
"Forward-Looking Information and Cautionary Statements." Management has no plans
to alter the nature of its business, other than by discontinuing its kosher
frozen food business (IFD).
Subject to available financing, the Company intends to further expand
its continuing business through its distribution agreement by merchandising well
accepted readily marketable promotional brand-name grocery products and frozen
squid and other seafood products. However, there can be no assurance that the
Company's proposed expansion plans will be successful. Additional working
capital is required beyond the current available financing in order for the
Company to expand from its current levels.
SEASONALITY
- -----------
Seasonality affects the demand for certain products sold by the
Company, such as juice drinks in the summer months or hot cereals in fall and
winter months. However, all these products are available to the Company
throughout the year. Manufacturers also tend to promote more heavily towards the
close of the fiscal quarters and during the spring and early summer months.
Accordingly, the Company is able to purchase more products, increase sales
during these periods and reduce its product cost due to these promotions. The
Company generally experiences lower sales volume in the fourth quarter due to
the reduced number of selling days resulting from the concentration of holidays
in the quarter. Sale of frozen squid is more significant in the third and fourth
quarters due to the seasonal catch which occurs in the second quarter.
INFLATION
- ---------
The Company believes that inflation, under certain circumstances, could
be beneficial to the Company's business. When inflationary pressures drive
product costs up, the Company's customers sometimes purchase greater quantities
of product to expand their inventories to protect against further pricing
increases. This enables the Company to sell greater quantities of products that
are sensitive to inflationary pressures.
However, inflationary pressures frequently increase interest rates.
Since the Company is dependent on financing, any increase in interest rates will
increase the Company's credit costs, thereby reducing its profits.
-14-
<PAGE>
FORWARD LOOKING INFORMATION AND CAUTIONARY STATEMENTS
Other than the factual matters set forth herein, the matters and items
set forth in this report are forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, the following:
1. CASH FLOW.
The Company has experienced cash shortages which continue to
adversely affect its business. See "Liquidity and Capital
Resources". The Company requires additional working capital in
order to maintain and expand its business.
2. DEPENDENCE ON PUBLIC TRENDS.
The Company's business is subject to the effects of changing
customer preferences and the economy, both of which are
difficult to predict and over which the Company has no
control. A change in either consumer preferences or a
down-turn in the economy may affect the Company's business
prospects.
3. POTENTIAL PRODUCT LIABILITY.
As a participant in the distribution chain between the
manufacturer and consumer, the Company would likely be named
as a defendant in any product liability action brought by a
consumer. To date, no claims have been asserted against the
Company for products liability; there can be no assurance,
however, that such claims will not arise in the future.
Accordingly, ALT maintains a product liability insurance
policy of $10,000,000 per occurrence. In the event that any
products liability claim is not fully funded by insurance, and
if the Company is unable to recover damages from the
manufacturer or supplier of the product that caused such
injury, the Company may be required to pay some or all of such
claim from its own funds. Any such payment could have a
material adverse impact on the Company.
4. RELIANCE ON COMMON CARRIERS.
The Company does not utilize its own trucks in its business
and is dependent, for shipping of product purchases, on common
carriers in the trucking industry. Although the Company uses
several hundred common carriers, the trucking industry is
subject to strikes from time to time, which could have
material adverse effects 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.
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<PAGE>
5. COMPETITION.
The Company is subject to competition in both its promotional
grocery and squid businesses. While both industries are highly
fragmented, with no one distributor dominating the industry,
the Company is subject to competitive pressures from other
distributors based on price and service.
6. DISCONTINUED OPERATION.
The Company has experienced a significant loss in
discontinuing its kosher food business (IFD). This loss
materially reduced the Company's working capital position.
(See Liquidity & Capital Resources).
7. TRADE RELATIONS WITH CHINA.
The Company is dependent on trade with the People's Republic
of China (PRC). The Company's financing arrangements and
distribution contracts with ALT involve a Chinese trading
company and squid, which is directly supplied through the PRC.
Any government sanctions that cause an interruption of trade
or prohibit trade with PRC through higher duties or quotas
could have a material adverse effect on the Company's
business.
8. LITIGATION.
The Company is liquidating IFD's business. In connection with
IFD's liquidation, the Company may be subject to litigation.
The Company believes that potential litigation in connection
with the liquidation of IFD's business is not material to
continuing operations. However, there can be no assurance that
potential litigation may not have a material adverse effect on
the Company.
The Company is negotiating a settlement agreement with a major
grocery manufacturer in connection with disputes relating to
bill backs and rebates that are due the Company. Failure to
resolve theses disputes may have a material adverse effect on
the Company's business.
Two former officers of IFD's business are claiming that the
Company is required to pay their employment contracts. The
Company believes that their claim for employment benefits is
without merit. These former officers have been awarded
$460,000 through arbitration. The Company has counter-sued
against these officers claiming that they caused material
damage to IFD's business which resulted in the closure of the
operation. The company is attempting to negotiate a settlement
with these former officers. If the arbitration award is
converted to a judgement against the Company, it will have an
adverse effect on the Company's business.
9. NASDAQ SMALL-CAP Qualifications.
The Company currently does not qualify for NASDAQ small-cap
listing. There are several proposals by the NASD that could
have an effect on the Company's NASDAQ small-cap listing. In
particular it may become mandatory for a stock listed on
NASDAQ small-cap to have a price greater than or equal to $
1.00. The Company's current stock price is materially under a
$1.00. The Company expects to qualify under alternative
requirements. In the event that the NASD makes it mandatory
for a stock listed on NASDAQ small cap to be equal or greater
than a $1.00, the Company may not qualify for listing. If the
Company is de-listed from NASDAQ small-cap it may have a
material adverse effect on the Company.
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<PAGE>
PART II- OTHER INFORMATION
Item 6- Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) There were two reports filed on Form 8-K for the first quarter ended
March 31, 1997.
1. 2/10/97 Behai Tenda stock subscription.
2. 3/20/97 Cygni stock subscription and Empire Settlement.
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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: 4/29/97 By: /s/ Mair Faibish
-------------------------------
By: Mair Faibish
Chief Financial Officer
Date: 4/29/97 By: /s/ Mitchell Gerstein
-------------------------------
By: Mitchell Gerstein
Treasurer
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