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 June 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 July 21, 1997
there were 1,346,411 shares outstanding of the registrant's common stock.
KRANTOR CORPORATION
FORM 10-Q
JUNE 30, 1997
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION Page
Consolidated Balance sheets as of June 30, 1997
(Unaudited) and December 31, 1996 2 -3
Consolidated Statements of Operations for the six
months ended June 30, 1997 and 1996 (Unaudited) 4-5
Consolidated Statements of Operations for the Three
months ended June 30, 1997 and 1996 (Unaudited) 6-7
Consolidated Statements of Cash Flows for the Six months
ended June 30, 1997 and 1996 (Unaudited) 8-9
Notes to Consolidated Financial Statements 10-14
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
KRANTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1997 AND DECEMBER 31, 1996
June 30, December 31,
1997 1996
------------ ------------
(Unaudited)
ASSETS
------
Current Assets:
- ---------------
Cash ....................................................... $ 95,998 $ 2,897
Accounts Receivable - Net of allowance for doubtful accounts
of $ 551,000 and $ 551,000 respectively .................. 337,788 491,427
Inventory .................................................. -- --
Promotional Rebates (Note 5) ............................... 678,117 483,529
Other Current Assets ....................................... 165,148 51,368
------------ ------------
Total Current Assets .............................. 1,277,051 1,029,221
Collateral and Security Deposit (Note 7) ................. 2,177,995 2,052,995
Property and Equipment - Net ............................... 27,550 30,611
Other Assets ............................................... 221,343 253,264
------------ ------------
Total Assets ...................................... $3,703,939 $3,366,091
========== ==========
See Accompanying Notes to Consolidated Financial Statements
-2-
KRANTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1997 AND DECEMBER 31, 1996
June 30, December 31,
1997 1996
------------ --------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
- --------------------
Notes Payable (Note 2) $ 684,520 $ 803,050
Accounts Payable & Accrued Expenses (Note 8) 1,666,292 2,054,565
Arbitration award payable (Notes 7) 467,453 467,453
Income taxes payable 57,798 71,158
------------ --------------
Total Current Liabilities 2,876,063 3,396,226
Subordinated Debentures 350,000 377,000
Commitments and Contingencies - -
Stockholders' Equity: (Note 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- 1,202,708 and 847,035 shares were outstanding
at 6/30/97 and 12/31/96 respectively: 1,203 847
Additional Paid-in Capital 12,950,654 12,426,869
Accumulated Deficit (12,306,581) (12,667,451)
------------ --------------
645,376 (239,635)
Less treasury stock at cost, 1,400 shares (167,500) (167,500)
------------ --------------
Total stockholders' equity 477,876 (407,135)
Total Liabilities & Stockholder's Equity $ 3,703,939 $ 3,366,091
============ =============
See Accompanying Notes to Consolidated Financial Statements
-3-
KRANTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
1997 1996
------------ -----------
Commission Income (Note 7) $ 370,450 $ --
Net Sales 1,548,896 5,836,991
----------- -----------
1,919,346 5,836,991
Cost of Sales 1,345,852 5,356,548
----------- -----------
Gross Profit 573,494 480,443
Selling General and Administrative Expenses .. 442,006 220,728
Depreciation and Amortization 15,761 96,830
----------- -----------
Operating Income (Loss) 115,727 162,885
----------- -----------
Other Income (Expense):
Miscellaneous Income (Expense) 91,437 (10,848)
Interest Expense -- (197,177)
Financing Costs (12,476) (125,500)
----------- -----------
Total Other (Income) 78,961 (333,525)
=========== ===========
Income (Loss) From Continuing Operations
Before Income Taxes 194,688 (170,640)
Income Taxes -- --
----------- -----------
Income (Loss) From Continuing Operation $ 194,688 $ (170,640)
=========== ===========
DISCONTINUED OPERATIONS (Note 6)
Gain (Loss) from Discontinued Operations 166,182 (4,386,903)
Income Taxes -- --
----------- -----------
Net Income (Loss) from Discontinued Operations 166,182 (4,386,903)
See Accompanying Notes to Consolidated Financial Statements
-4-
KRANTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (cont.)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
Income (Loss) Before Extraordinary Item 360,870 (4,557,543)
----------- -----------
Net Income (Loss) 360,870 (4,557,543)
Less Preferred Dividend 110,000 110,000
----------- -----------
Income (Loss) Applicable to Common Stock (Note 1) $ 250,870 $(4,667,543)
=========== ===========
Earnings (Loss) Per Common Share From
Continuing Operations $ .08 $ (1.39)
Earnings (Loss) Per Common Share From
Discontinued Operations .16 (21.67)
----------- -----------
Earnings (Loss) Per Common Share $ .24 $ (23.06)
=========== ===========
Weighted Average Number of Shares Outstanding 1,057,614 202,369
See Accompanying Notes To Consolidated Financial Statements
-5-
KRANTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
1997 996
---------- -----------
Commission Income (Note 7) $ 122,050 $ --
Net Sales 1,548,896 1,057,319
----------- -----------
1,670,946 1,057,319
Cost of Sales 1,376,950 952,932
----------- -----------
Gross Profit 293,996 104,387
Selling General and Administrative Expenses 217,697 38,671
Depreciation and Amortization 7,346 48,415
----------- -----------
Operating Income (Loss) 68,953 17,301
----------- -----------
Other Income (Expense):
Miscellaneous Income (Expense) 39,353 (9,839)
Interest Expense -- (94,142)
Financing Costs (5,963) (25,500)
----------- -----------
Total Other (Income) 33,390 (129,481)
=========== ===========
Income (Loss) From Continuing Operations
Before Income Taxes 102,343 (112,180)
Income Taxes -- --
----------- -----------
Income (Loss) From Continuing Operation $ 102,343 $ (112,180)
=========== ===========
DISCONTINUED OPERATIONS (Note 6)
Gain (Loss) from Discontinued Operations (336) (4,136,393)
Income Taxes -- --
----------- -----------
Net Income (Loss) from Discontinued Operations (336) (4,136,393)
See Accompanying Notes To Consolidated Financial Statements
-6-
KRANTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (cont.)
FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
Income (Loss) Before Extraordinary Item 102,007 (4,248,573)
----------- -----------
Net Income (Loss) 102,007 (4,248,573)
Less Preferred Dividend 55,000 55,000
Income (Loss) Applicable to Common Stock (Note 1) $ 47,007 $(4,303,573)
=========== ===========
Earnings (Loss) Per Common Share From
Continuing Operations $ .04 $ (.82)
Earnings (Loss) Per Common Share From
Discontinued Operations -- (20.13)
----------- -----------
Earnings (Loss) Per Common Share $ .04 $ (20.95)
=========== ===========
Weighted Average Number of Shares Outstanding 1,134,415 205,441
See Accompanying Notes To Consolidated Financial Statements
-7-
KRANTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
1997 1996
------------ ------------
Cash Flows From Operating Activities:
Income (Loss) From Continuing Operations $ 194,688 $ (170,640)
Income (Loss) From Discontinued Operations 166,182 (4,387,088)
Adjustments to Reconcile Net Income (Loss)
From Continuing Operations to Net Cash
Flows From Continuing Operating Activities:
Depreciation and Amortization 15,761 96,830
Amortization of Financing Costs -- --
Non-Cash Expenses 274,141 --
Reserve for Bad Debts -- (176,000)
Changes in Operating Assets and Liabilities:
Sale of Markable Securities -- 11,000
Accounts Receivable 153,639 5,794,920
Inventory -- 4,346,958
Promotional Rebates (194,588) (976,023)
Deferred Taxes -- 268,323
Other Current Assets (113,780) (946,686)
Other Assets 31,921 88,151
Accounts Payable & Accrued Expenses (388,273) (4,356,793)
Income Taxes Payable (13,360) (307,854)
------------ ------------
Net Cash Flows Provided (Used)
by Operating Activities 126,331 (714,902)
Cash Flows From Investing Activities:
Purchase of Furniture and Equipment (12,700) (165,436)
Due From Officers and Shareholders -- 77,712
Payment of Collateral Security Deposit (125,000) --
Advances to Related Parties -- 228,718
------------ ------------
Net Cash Flows (Used)
in Investing Activities (137,700) 140,994
Cash Flows From Financing Activities:
Net Borrowing (Payments) on Notes Payable (118,530) (695,147)
Proceeds from Issuance of Common Stock 250,000 1,073,673
Cash Dividends on Preferred Stock -- (110,000)
Long Term Debt (27,000) --
Deferred Cost -- (62,479)
------------ ------------
Net Cash Flows Provided (used) by
Financing Activities 104,470 206,047
------------ ------------
Net Increase ( Decrease) in Cash 93,101 (367,861)
Cash - Beginning of Period 2,897 370,000
------------ ------------
Cash - End of Period $ 95,998 $ 2,139
============ ============
See Accompanying Notes To Consolidated Financial Statements
-8-
KRANTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
1997 1996
---- ----
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for:
Interest
Continuing Operations $ -- $197,177
Discontinued Operation 23,100 64,951
========= ========
Income Taxes
Continuing Operations $ -- $ --
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
-9-
KRANTOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
------------
Krantor Corporation is a food brokerage Company specializing in
groceries, frozen squid, general household merchandise and health and
beauty aids 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-
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 $20,000 and $3,000 for the six months ended June
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-
2. NOTES PAYABLE
Notes payable at June 30, 1997 consisted of the following:
1997
----
Revolving line-of-credit $ 267,799
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
---------
$ 684,520
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 June 30, 1997,
there were no cumulative or outstanding dividends on the Class A
preferred stock.
The Company has the option of redeeming and/or retiring, upon thirty
days notice, the Class A preferred stock, in whole or in part, at the
cash price of $10.50 per share, in addition to dividends accumulated
and accrued up to the date fixed for the redemption or retirement of
the stock. Such redemption or retirement shall be effected only out of
the earned capital of the Company and with the majority consent of
stockholders.
In 1994, the Company registered with the Securities and Exchange
Commission on Form S-8, 600,000 shares of the Company's common stock to
be distributed under the Company's 1994 Services and Consulting
Compensation Plan (Plan). An additional 3,900,000 shares have been
reserved since that date. Through June 30, 1997, the Company issued
209,450 shares for payment of services to employees and professional
service providers and has 4,290,550 shares available in reserve under
the plan.
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-
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 $150,000 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 six months ended
June 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 June 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 150,000
Notes payable 684,520
Arbitration award payable 238,000
------------
$ 1,072,520
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-
MANAGEMENT PARTNERSHIP AGREEMENT
--------------------------------
During 1995, Krantor and IFD entered into a management partnership
agreement with SCP Enterprises, a New York general partnership
(Partnership) whose partners were employees of IFD. Under the terms of
the agreement, 1% of IFD's sales in excess of $30 million and 20% of
IFD's gross profit in excess of 12% of sales were to be paid to the
Partnership annually through December 2000 or upon termination of said
employees, if earlier. No amounts were paid in 1996 or 1995. The
employees were terminated in 1996 and filed an arbitration claim for
amounts due under the agreement. The employees received a favorable
award in the amount of $237,453, which is included in arbitration award
payable at December 31, 1996. The company is vigorously contesting and
countersuing on this award.
EMPLOYMENT AGREEMENTS
---------------------
During 1995, IFD entered into employment agreements with three
employees whereby each employee was entitled to receive a base salary
of $108,000 with annual increases of 5% plus certain employee benefits
through December 2000 and stock options to purchase 2,667 shares of the
Company's common stock at $50 per share. The employees were terminated
in 1996 and filed an arbitration claim for the balance due under the
employment contracts. The employees received a favorable arbitration
award in the amount of $230,000. Such amounts are included in the
arbitration award payable at June 30, 1997. Krantor Corporation has
guaranteed such agreements. The company has countersued and is
contesting the awards.
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 June 30, 1997, current
liabilities exceeded current assets by $1,599,012. 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-
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, promotional rebates, prepaid expenses and
cash. The Company's liabilities consist of accounts payable, short term and long
term debt.
RESULTS OF OPERATION
Revenues decreased for the six months ended June 30, 1997 to $1,919,346 a
(67%) decrease as compared to the prior period. As a result of the Company's
change of its business from a distributor to a food broker, the Company is
recognizing only commissions on many of its sales in connection with its
distribution agreement with ALT. This revenue classification change causes the
Company's revenue base to decrease as compared to prior years, but should not
affect profitability.
Cost of sales for decreased for the six months ended June 30, 1997 to
$1,345,852 or (75 %) decrease as compared to the prior period. Gross profit for
direct sales increased from 8.2% to 13% for the same period. The company is
realizing better margins on its sale of groceries as compared to the prior
period.
Selling General & Administrative (S,G&A) expenses increased to $442,006 for
the period a 100% increase. In 1996 most of the S.G&A expenses were absorbed by
IFD, which has been discontinued. Currently all expenses are absorbed by
Krantor. As a result S.G&A is proportionally higher in the first six months.
Income from continuing operations for the six months ended June 30, 1997
totaled $194,688 for the period as compared to a $170,640 loss for the same
period. This profit represents the Company's food brokerage and direct sales
business. Income from discontinued operations totaled $166,182 for the six
months ended June 30, 1997. The Company believes that the total costs incurred
from discontinuing operations have been fully charged to earnings and should not
negatively affect future operating results. Earnings per share for continuing
operations were $.08 per share compared to a $1.39 per share loss for the prior
six months period.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1997 the company reduced its working capital deficit by 33%
to $1,599,012 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 June 30, 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.
-15-
The Company plans on expanding its core grocery and frozen seafood market
through its distribution agreement. Krantor believes that by discontinuing IFD's
operation it should enable it to support the capital requirements of its
continuing operations. However, the Company believes it will need additional
financing in the form of subordinated debt or equity to finance its expansion
plans. See "Forward-Looking Information and Cautionary Statements." The company
has collateral with ALT of $2.2 million for the purpose of securing the
performance underlying the distribution agreement entered into in October 1996.
The Company earns a 5% interest rate on the collateral security pledge.
The Company has an $8 Million credit facility with Fidelity Funding of
California which expires on November 14, 1997. IFD is in technical default on
the credit facility and currently not borrowing under the facility. The
Company's business is exclusively being conducted though its food brokerage
distribution agreement. The Company intends to pay the facility off through the
liquidation of IFD's assets. The facility, which expired in November 1996, was
extended on May 11, 1996 through November 14, 1997 by Fidelity. IFD's loan
balance is $267,799 as of June 30, 1997. Krantor and IWG do not owe any money to
Fidelity, but Krantor has guaranteed IFD's loan.
Management is not aware of negative trends in the Company's area of
business or other economic factors which may cause a significant change in the
Company's viability or financial stability, except as specified herein and in
"Forward-Looking Information and Cautionary Statements."
Subject to available financing, the Company intends to further expand its
continuing business through its distribution agreement by merchandising well
accepted readily marketable promotional brand-name grocery products and frozen
squid and other seafood products. However, there can be no assurance that the
Company's proposed expansion plans will be successful. Additional working
capital is required beyond the current available financing in order for the
Company to expand from its current levels. The company is expanding it's product
base especially as related to general merchandise that is carried by it's
customers. The company entered the prepaid phone card business and is looking
for other similar opportunities that complement its customer base.
SEASONALITY
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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
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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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FORWARD LOOKING INFORMATION AND CAUTIONARY STATEMENTS
Other than the factual matters set forth herein, the matters and items set
forth in this report are forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, the following:
1. CASH FLOW.
The Company has experienced cash shortages which continue to
adversely affect its business. See "Liquidity and Capital
Resources". The Company requires additional working capital in
order to maintain and expand its business.
2. DEPENDENCE ON PUBLIC TRENDS.
The Company's business is subject to the effects of changing
customer preferences and the economy, both of which are difficult
to predict and over which the Company has no control. A change in
either consumer preferences or a down-turn in the economy may
affect the Company's business prospects.
3. POTENTIAL PRODUCT LIABILITY.
As a participant in the distribution chain between the
manufacturer and consumer, the Company would likely be named as a
defendant in any product liability action brought by a consumer.
To date, no claims have been asserted against the Company for
products liability; there can be no assurance, however, that such
claims will not arise in the future. Accordingly, ALT maintains a
product liability insurance policy of $10,000,000 per occurrence.
In the event that any products liability claim is not fully funded
by insurance, and if the Company is unable to recover damages from
the manufacturer or supplier of the product that caused such
injury, the Company may be required to pay some or all of such
claim from its own funds. Any such payment could have a material
adverse impact on the Company.
4. RELIANCE ON COMMON CARRIERS.
The Company does not utilize its own trucks in its business and is
dependent, for shipping of product purchases, on common carriers
in the trucking industry. Although the Company uses several
hundred common carriers, the trucking industry is subject to
strikes from time to time, which could have material adverse
effect on the Company's operations if alternative modes of
shipping are not then available. Additionally the trucking
industry is susceptible to various natural disasters which can
close transportation lanes in any given region of the country. To
the extent common carriers are prevented from or delayed in
utilizing local transportation lanes, the Company will likely
incur higher freight costs due to the limited availability of
trucks during any such period that transportation lanes are
restricted.
5. COMPETITION.
The Company is subject to competition in both its promotional
grocery, prepaid phone cards and squid businesses. While both
industries are highly fragmented, with no one distributor
dominating the industry, the Company is subject to competitive
pressures from other distributors based on price and service.
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).
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7. TRADE RELATIONS WITH CHINA.
The Company is dependent on trade with the People's Republic of
China (PRC). The Company's financing arrangements and distribution
contracts with ALT involve a Chinese trading company and squid,
which is directly supplied through the PRC. Any government
sanctions that cause an interruption of trade or prohibit trade
with PRC through higher duties or quotas could have a material
adverse effect on the Company's business.
8. LITIGATION
The Company is liquidating IFD's business. In connection with
IFD's liquidation, the Company may be subject to litigation. The
Company believes that potential litigation in connection with the
liquidation of IFD's business is not material to continuing
operations. However, there can be no assurance that potential
litigation may not have a material adverse effect on the Company.
Two former officers of IFD's business are claiming that the
Company is required to pay their employment and management
contracts. The Company believes that their claim for employment
benefits is without merit. These former officers have been awarded
$460,000 through arbitration. The Company has counter-sued against
these officers claiming that they caused material damage to IFD's
business which resulted in the closure of the operation. The
company is attempting to negotiate a settlement with these former
officers. If the arbitration award is converted to a judgement
against the Company, it will have an adverse effect on the
Company's business.
9. NASDAQ SMALL-CAP Qualifications.
There are several proposals by the NASD that could have an effect
on the Company's NASDAQ small-cap listing. In particular it may
become mandatory for a stock listed on NASDAQ small-cap to have a
price greater than or equal to $ 1.00. The Company's current stock
price is trading near a $1.00. In the event that the NASD makes it
mandatory for a stock listed on NASDAQ Small Cap to be equal or
greater than a $1.00, the Company may not qualify for listing, if
its stock drops below $1.00. If the Company is de-listed from
NASDAQ small-cap it may have a material adverse effect on the
Company.
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Part II- Other Information
Item 6- Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) There were two reports filed on Form 8-K for the second quarter ended June
30, 1997.
1. 4/02/97 Empire settlement
2. 6/19/97 Arbitration award
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KRANTOR CORPORATION
Date: 7/23/97 By: /s/ Mair Faibish
--------------------------------
By: Mair Faibish
Chief Financial Officer
Date: 7/23/97 By: /s/ Mitchell Gerstein
--------------------------------
By: Mitchell Gerstein
Chief Financial Officer
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