-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H/ZcMxK/69PnOpmG+jJ+oIrAAMbw12fPuFdLCsm1PYQ7kNZjKQ/9Nh/WYqYd+olk EcxP2gRhuaUYAH/yT8la4Q== 0001026018-98-000016.txt : 19980512 0001026018-98-000016.hdr.sgml : 19980512 ACCESSION NUMBER: 0001026018-98-000016 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980511 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: KRANTOR CORP CENTRAL INDEX KEY: 0000870228 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-GROCERIES & GENERAL LINE [5141] IRS NUMBER: 222993066 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-19409 FILM NUMBER: 98614913 BUSINESS ADDRESS: STREET 1: 10850 PERRY WAY STREET 2: SUITE 203 CITY: WEXFORD STATE: PA ZIP: 15090 BUSINESS PHONE: 5166821980 MAIL ADDRESS: STREET 1: 10850 PERRY WAY STREET 2: SUITE 203 CITY: WEXFORD STATE: PA ZIP: 15090 FORMER COMPANY: FORMER CONFORMED NAME: DELTA VENTURES INC DATE OF NAME CHANGE: 19600201 10QSB 1 FORM 10QSB FORM 10-QSB. 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-QSB [x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the period ended MARCH 31, 1998 -------------- Commission File Number: 0-19409 KRANTOR CORPORATION (Exact name of registrant as it appears in its charter) Delaware 22-2993066 - -------- ---------- (State of incorporation) (I.R.S. Employer identification no.) 10850 Perry Way, 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 May 1, 1998 there were 4,994,015 shares outstanding of the registrant's common stock. KRANTOR CORPORATION FORM 10-QSB MARCH 31, 1998 TABLE OF CONTENTS PART I: FINANCIAL INFORMATION Page Consolidated Balance sheets as of March 31, 1998 (Unaudited) and December 31, 1997 2-3 Consolidated Statements of Operations for the three months ended March 31, 1998 and 1997 (Unaudited) 4-5 Consolidated Statements of Cash Flows for the three months ended March 31, 1998 and 1997 (Unaudited) 6-7 Notes to Consolidated Financial Statements 8-11 Management's Discussion and Analysis of 12-13 Financial Condition and Results of Operations Forward Looking Information and Cautionary 14-19 Statements PART II: OTHER INFORMATION Item VI: Exhibits and Reports on Form 8-K 20 -2- KRANTOR CORPORATION CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1998 AND DECEMBER 31, 1997
March 31, 1998 December 31, 1997 ---------------- ---------------- (Unaudited) ASSETS ------ Current Assets: - --------------- Cash 15,199 $ 189,626 Accounts Receivable - Net of allowance for doubtful accounts of $0 and $95,826 respectively 1,397,001 1,128,000 Promotional Rebates (Note 6) 228,503 270,496 Other Current Assets 139,051 136,189 ---------------- ---------------- Total Current Assets 1,779,754 1,724,311 Collateral and Security Deposit (note 6) 2,252,995 2,252,995 Property and Equipment - Net 141,801 117,402 Other Assets - - ---------------- ---------------- Total Assets $ 4,174,550 $ 4,094,708 =============== =============== See Accompanying Notes to Consolidated Financial Statements
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KRANTOR CORPORATION CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1998 AND DECEMBER 31, 1997 March 31, 1998 December 31, 1997 ---------------- ---------------- (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Notes Payable (Note 2) $ 484,134 $ 535,810 Accounts Payable & Accrued Expenses (Note 3) 499,952 1,092,716 Income taxes payable 4,938 10,529 ---------------- ---------------- Total Current Liabilites 989,024 1,639,055 Vendor Debt due after one year (note 3) 328,382 395,048 Commitments and Contingencies (note 6) - - Preferred Stock of Subsidiary (note 4) 105,000 105,000 Stockholders' Equity: (Note 5) 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 4,919,515 and 4,140,515 shares were outstanding at 3/31/98 and 12/31/97 respectively: 4,920 4,140 Additional Paid-in Capital 15,091,537 14,467,141 Accumulated Deficit (12,176,913) (12,348,276) ---------------- ---------------- 2,919,644 2,123,105 Less treasury stock at cost, 1,400 shares (167,500) (167,500) ---------------- ---------------- Total stockholders' equity 2,752,144 1,955,605 Total Liabilities & Stockholder's Equity 4,174,550 $ 4,094,708 =============== ===============
See Accompanying Notes to Consolidated Financial Statements -4- KRANTOR CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
1998 1997 ---------------- ---------------- Net Sales 1,949,133 - Commission Income (note 6) - 279,498 ---------------- ---------------- 1,949,133 279,498 Cost of Sales 1,609,329 - ---------------- ------------ Gross Profit 339,804 279,498 Selling General and Administrative Expense 196,529 224,309 Depreciation and Amortization 399 8,415 ---------------- -------------- Operating Income (Loss): 142,876 46,774 ---------------- ---------------- Other Income (Expense): Miscellaneous Income (Expense) 325 52,084 Interest Income 28,162 - Financing Costs - (6,513) ---------------- ---------------- Total Other (Income) 28,487 45,571 =============== =============== Income (Loss) From Continuing Operations Before Income Taxes 171,363 92,345 Income Taxes - (30,474) ---------------- ---------------- Income (Loss) From Continuing Operations 171,363 $ 61,871 =============== =============== DISCONTINUED OPERATIONS (Note 7) Gain (loss) from Discontinued Operations - 166,518 Income Taxes - (54,951) ---------------- ---------------- Net Income (Loss) from Discontinued Operations - 111,567
See Accompanying Notes to Consolidated Financial Statements -5-
KRANTOR CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (cont.) FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED) Income (Loss) Before Extraordinary Item 171,363 173,438 Extraordinary Item - Reduction of Income Taxes Arising from Utilization of Loss Carryovers - 85,425 ---------------- ---------------- Net Income (Loss) 171,363 258,863 Less Preferred Dividend - - ---------------- ---------------- Income (Loss) Applicable to Common Stock (Note 1) 171,363 $ 258,863 =============== =============== Earnings (Loss) Per Common Share From Continuing Operations $ .05 $ .09 Earnings (Loss) Per Common Share From Discontinued Operations - .17 ---------------- ---------------- Earnings (Loss) Per Common Share $ .05 $ .26 =============== =============== Weighted Average Number of Shares Outstanding 3,722,958 982,315
See Accompanying Notes To Consolidated Financial Statements -6- KRANTOR CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
1998 1997 ---------------- ---------------- Cash Flows From Operating Activites: Income (Loss) From Continuing Operations $ 171,363 $ 92,345 Income (Loss) From Discontinued Operations - 166,518 Adjustments to Reconcile Net Income (Loss) From Continuing Operations to Net Cash Flows From Continuing Operating Activities: Depreciation and Amortization 399 8,415 Non-Cash Expenses 625,176 1,406,390 Changes in Operating Assets and Liabilities: Accounts Receivable (269,001) 72,621 Promotional Rebates 41,993 (984,209) Other Current Assets (2,862) (176,379) Other Assets - 18,984 Accounts Payable & Accrued Expenses (659,430) (279,924) Income Taxes Payable (5,591) (18,611) ---------------- ---------------- Net Cash Flows (Used) (97,953) 306,150 in Operating Activities Cash Flows From Investing Activities: Purchase of Furniture and Equipment (24,798) - Payment of Collateral Security Deposit - (125,000) ---------------- ---------------- Net Cash Flows (Used) (24,798) (125,000) in Investing Activities Cash Flows From Financing Activities: Net Borrowing (Payments) on Notes Payable (51,676) (81,577) Proceeds from Issuance of Common Stock - 75,000 Long Term Debt - (177,000) ---------------- ---------------- Net Cash Flows Provided by Financing Activities (51,676) (183,577) ---------------- ---------------- Net Increase (Decrease) in Cash (174,427) (2,427) Cash - Beginning of Period 189,626 2897 ---------------- ---------------- Cash - End of Period $ 15,199 $ 470 =============== ===============
See Accompanying Notes To Consolidated Financial Statements -7- KRANTOR CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
1998 1997 ---------------- ---------------- Supplemental Disclosure of Cash Flow Information: Cash Paid During the Period for: Interest Continuing Operations $ -- $ -- Discontinued Operation -- -- ================ ================ Income Taxes Continuing Operations $ -- $ (18,611) 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 -- -- ================ ================
See Accompanying Notes to Consolidated Financial Statements -8- KRANTOR CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 1998 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization ------------ Krantor Corporation (Company) is a distributor of groceries, general household merchandise and health and beauty aids in the promotional wholesale industry. In addition, the Company also distributes squid and premium handmade cigars throughout the United States. In April 1994, Krantor formed a wholly-owned subsidiary, Island Wholesale Grocers, which is a full-service wholesale delivery company capable of providing direct store deliveries of inventory within hours of receiving an order, principally in the northeastern United States. In December 1995, Krantor formed a wholly-owned subsidiary, Affiliated Island Grocers, Inc., which does business under the name Island Frozen and Dairy (IFD). IFD distributed specialty food, poultry and dairy products throughout the northeastern United States. In June 1996, the Company discontinued all operations of IFD (see Note 7). In September 1996, Krantor formed a wholly-owned subsidiary, New Era, Inc., which is a brokerage company representing manufacturers, retailers and wholesalers in connection with distribution of grocery and general merchandise products (see note 6). In October 1997, New Era, Inc. formed a subsidiary, Premium Cigar Wrappers, Inc. (PCW), for the purpose of producing premium cigar wrappers in the Dominican Republic. New Era, Inc. owns 66% of the common stock and approximately 22% of the preferred stock of PCW (see Note 4). Principles of consolidation --------------------------- The consolidated financial statements include the accounts of Krantor Corporation, and all of the other above Corporations metioned (collectively, the Company). All significant intercompany accounts and transactions have been eliminated in consolidation. Revenue recognition ------------------- The Company recognizes revenue at the time merchandise is shipped to the customer. The Company returns merchandise that is damaged or has the wrong specifications to the supplier. The cost is recovered from the trucking company or the supplier, depending upon the nature of the return. Cash equivalents ---------------- The Company considers time deposits with original maturities of three months or less to be components of cash. Concentrations of credit risk ----------------------------- Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of accounts receivable. The concentration of credit risk with respect to receivables is mitigated by the credit worthiness of the Company's major customers. The Company maintains an allowance for losses based upon the expected collectibility of all receivables. Fair value approximates carrying value for all financial instruments. -9- 1. Income Taxes (CONTINUED) ------------ The Company uses the asset and liability method of computing deferred income taxes. In the event differences between the financial reporting basis and the tax basis of an enterprise's assets and liabilities result in deferred tax assets, an evaluation of the probability of being able to realize the future benefits indicated by such assets is required. A valuation allowance is provided for a portion or all of the deferred tax assets when it is more likely than not that such portion or all of such deferred tax assets will not be realized. Property and equipment ---------------------- Property and equipment are stated at cost. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the assets, ranging from three to five years. Maintenance and repairs of a routine nature are charged to operations as incurred. Betterments and major renewals which substantially extend the useful life of an existing asset are capitalized and depreciated over the asset's estimated useful life. Upon retirement or sale of an asset, the cost of the asset and the related accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is credited or charged to income. Advertising ----------- The Company expenses advertising and promotional costs as incurred. Earnings Per Share ------------------ Net income (loss) per common shared is based on the weighted average number of common shares outstanding for the period. Management Estimates -------------------- In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses during the reporting period. Actual results could differ from management's estimates. 2. Notes Payable ------------- Notes payable at March 31, 1998 consisted of the following:
Revolving line-of-credit $ 301,633 Note payable to investment company: non-interest bearing: principal due May 8, 1996, previously collateralized by inventory of IFD 107,501 Note payable to bank due July 5, 1996; non-interest bearing: previously collateralized by inventory of IFD 75,000 ---------- 484,134
3. Vendor Debt ----------- In 1997, the Company entered into an agreement with a vendor to repay the December 31, 1996 accounts payable balance of $1,465,976. The Company was required to pay $50,000 and offset 50% of earned promotional rebates against the payable due to the vendor. In March 1998, the Company renegotiated with the vendor and modified the terms of the agreement to pay off the remaining balance. The Company renegotiated the settlement of amounts owing to a vendor on March 31, 1998. According to the terms of the agreement, the Company is required to issue $500,000 of common stock to the vendor during 1998, and repay the remaining balance in monthly payments of $22,222 from May 1998 through April 2000. No interest is being charged by the vendor. -10- Vendor Debt ( CONTINUED) ----------- The following are the scheduled maturities of vendor debt at March 31, 1998: Year ending December 31, ------------------ 1998 227,776 1999 266,664 2000 128,384 -------- 622,824 4. Preferred Stock Of Subsidiary ----------------------------- PCW was incorporated in October 1997. The Company owns 66% of the Common Stock and approximately 22% of the preferred stock of PCW. The holders of PCW preferred stock are entitled to receive cumulative dividends at the rate of $14 per share before any dividends on the common stock are paid. In the event of dissolution of PCW, the holders of the preferred shares are entitled to receive $60 per share together with all accumulated dividends, before any amounts can be distributed to the common stockholders. The shares are convertible only at the option of PCW at $120 per share. 5. Stockholders' Equity -------------------- During 1997, the Company redeemed 100% of the Class A preferred stock in exchange for $350,000, 400,000 shares of common stock and options to purchase 500,000 shares of restricted common stock exercisable at $1 per share. The options will vest if the Company achieves $1,000,000 in pretax income within five years. The preferred stock was thereafter reissued, at par value, to an officer of the Company in recognition of services rendered, however, all dividend privileges and stock redemption rights were stripped from the stock. The stock retains the 13 to 1 voting privilege. AT March 31, 1998, the company had outstanding warrants to purchase 578,000 shares of the Company's common stock, at $1.10 per share. In 1994, the Company registered with the Securities and Exchange Commission on Form S-8, 900,000 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 registed and reserved since that date. Through March 31, 1998 the Company has issued 1,627,450 and has 3,172,550 available in reserve under the plan. 6. Commitments and Contingencies ----------------------------- Lease Commitments ----------------- The Company leases office space in Wexford, Pennsylvania under an operation lease which expires in August 2000. The Company also leases office space in Syosset, New York, under an operating lease which expires in December 1998. Distribution Agreement ---------------------- In 1996, the Company entered into a ten-year agreement with a Chinese trading company to distribute frozen seafood in the United States under a licensing arrangement. The Chinese trading company finances the purchase and sale of products marketed on its behalf, and pays a commission to the Company, based on sales generated by the distribution agreement. In consideration for the Chinese trading company providing products to the Company for sale and distribution, and as security for doing so, the Company was required to provide $2,052,995 in 1996 and an additional $200,000 in 1997, as collateral security for performance by the Company under the terms of the agreement. The collateral security deposit bears interest at 5% and is received quarterly. -11- Commitments and Contingences ( CONTINUED) ---------------------------- Litigation ---------- The Company is a named defendant in various lawsuits arising from the liquidation of IFD. While it is not reasonably possible to estimate the amount of losses in excess of amounts accrued at March 31, 1998, if any that may arise out of such litigation, management believes the outcome will not have a material effect on the operations of the Company. The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial position, results of operations or cash flows of the Company. 7. Discontinued Operations ----------------------- On June 30, 1996, the Company adopted a formal plan to discontinue the operations of IFD through a liquidation that is expected to be completed during 1998. During 1997, the Company incurred additional expenses related to the liquidation of IFD and related litigation. The Company has approximately $484,000 in notes payable and $25,000 in accounts payable related to IFD at March 31, 1998. -12- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company primarily distributes and merchandises squid and promotional brand name grocery products through an agency agreement with a Chinese trading company ("ALT") to the food industry. The Company discontinued its Kosher Food business (IFD) on June 30, 1996. The Company's current assets consist primarily of accounts receivable, prepaid expenses and cash. The Company's liabilities consist of accounts payable, short and long term debt. The Company also recently entered the business of the sale and distribution of premium handrolled cigars. RESULTS OF OPERATION Revenues from continued operations increased for the three months ended March 31, 1998 to $ 1.95 million (597%) increase as compared to the prior period. The Company's grocery distribution business increased significantly as compared to the prior period. In the first quarter of 1997, the company did not realize direct sales, but only commissions on broker sales. Cost of sales for continued operations increased for the quarter ended March 31, 1998 to $1.6 million. In the first quarter of 1997 the company recognized no cost of sales and transacted as a broker for its sales. In this first quarter of 1998, the company resumed its direct grocery business. Selling General & Administrative (S,G&A) expenses from continuing operations decreased to $196,529 for the period a 13% decrease. The decrease in S,G&A is related to lower professional expenses, advertising costs, and general overhead costs. Income from continuing operations for the quarter totaled $171,363 for the period as compared to a $92,345 profit for the prior period. The higher profit represents a greater sales volume and lower operating expenses than the prior period. The following table sets forth selected operational data of the Company: FIRST QUARTER ENDED MARCH 31, 1998 1997 ---- ---- Revenues $ 1,949,133 $ 279,498 Income (Loss) from Continuing Operations $ 171,363 $ 92,345 Earings (Loss) Per Common Share From Continuing Operations $ .05 $ .09 Weighted Averge Number of Shares Outstanding 3,722,958 982,315 LIQUIDITY AND CAPITAL RESOURCES The company increased it's working capital to $791,000 at March 31, 1998. Liabilities were reduced from 2 million to 1.3 million, a 35% drop. Reaching a positive working capital position is a significant milestone for the Company. The Company raised enough capital and turned its operations to profitability which enhanced the liquidity of the Company. As a result the Company can begin to secure vendor credits and secured financing to grow its operating business. These changes reflect a positive working capital position of the Company after absorbing all costs related to discontinued operation (IFD). The Company believes that it has sufficient working capital to fund its continuing operations but requires additional financing to expand. Continuing operations will be conducted through Island Wholesale Grocers (IWG), and the distribution agreement entered into on October 1, 1996 with ALT. -13- In March 1998, the Company guaranteed a $1,000,000 line-of-credit facility to a Dominican cigar manufacturer, which is owned by a PCW stockholder. The purpose of the line-of-credit is to provide financing to the cigar manufacturer to which PCW will supply the wrappers. The line is secured by the inventory and accounts receivables of the Dominican factory and Gran Reserve Corp. Advances against the line are 75% rate and the interest paid is 12%. Advances as of May 7, 1998 totalled $750,000. The Company's receivables at March 31, 1998 increased by 24% to $ 1.4 million. The increase of receivables is due to several factors which include the Company's re-establishment, as a primary supplier, through IWG, of direct sales through its Distribution Agreement with ALT. The Company is financing a portion of its business through trade credits arranged through ALT and vendor credits established by IWG. The company hopes to continue this trend with the support of ALT. Management is not aware of negative trends in the Company's area of business or other economic factors which may cause a significant change in the Company's viability or financial stability, except as specified herein and in "Forward-Looking Information and Cautionary Statements.". Management has no plans to alter the nature of its business. Subject to available financing, the Company intends to further expand its continuing business through its distribution agreement by merchandising well accepted readily marketable promotional brand-name grocery products, frozen squid and handmade premium cigars. However, there can be no assurance that the Company's proposed expansion plans will be successful. The following table sets forth selected balance sheet data of the Company: 3/31/98 12/31/97 ------- -------- Total Assets $ 4,174,550 $ 4,094,708 Total Stockholders Equity $ 2,752,144 $ 1,955,605 Working Capital $ 790,730 $ 85,256 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 forth 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- 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 product liability; there can be no assurance, however, that such claims will not arise in the future. Currently, the company does not carry product liability insurance. In the event that any products liability claim is not fully funded by insurance, and if the Company is unable to recover damages from the manufacturer or supplier of the product that caused such injury, the Company may be required to pay some or all of such claim from its own funds. Any such payment could have a material adverse impact on the Company. 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 affect 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 intense competition in its promotional grocery, squid, and premium handmade cigars businesses. While these industries may be highly fragmented, with no one distributor dominating the industry, the Company is subject to competitive pressures from other distributors based on price and service and product quality and origin. -15- 6. TRADE RELATIONS WITH CHINA. The Company is dependent on trade with the People's Republic of China (PRC). The Company's financing arrangements and distribution contracts with ALT involve a Chinese trading company and squid, which is directly supplied through the PRC. Any government sanctions that cause an interruption of trade or prohibit trade with PRC through higher duties or quotas could have a material adverse effect on the Company's business. China currently maintains a Most Favored Nation status with the United States, which it has maintained continuously since 1980, renewal of which is done on an annual basis each May. Loss of such status could have a material adverse effect on Company business. 7. LITIGATION The Company is named as a defendant in various lawsuits arising from the liquidation of Island Frozen and Dairy ("IFD"), a previous wholly-owned subsidiary of the Company. The Company has reserved and accrued on its books minimal funds to cover these possible claims. In June 1996, a complaint was filed in Superior Court Law Division, Essex County, New Jersey, Docket No. ESX-L-6491-96 by New Jersey National Bank against the Company, Affiliated Island Grocers, the then affiliate of the Company, and certain other defendants, seeking payment on secured business financing, to which claim the Company believes it has and has asserted significant claims to monetary offsets. The principal amount claimed owed by the Company in such lawsuit is $350,000.00. The Company does not believe that the extent of the balance of above mentioned lawsuits exceeds $100,000. While it is not reasonably possible to estimate the amount of losses in excess of amounts accrued and reserved for such losses, if any, that may arise out of such litigation, management believes that the outcome will not have a material effect on the operations of the Company. Action was brought by Krantor Corporation and Island Wholesale Grocers Inc., an affiliated company of Krantor Corporation against The Procter & Gamble Distributing Company, in which case The Procter & Gamble Distributing Company counterclaimed, which action was brought in United States District Court, Eastern District of New York under docket no. CIV. 96-1503 (FB), the nature of the claims relating to promotional rebates which the Company claims from Procter & Gamble and accounts payable from the Company to Procter & Gamble which are claimed as due and outstanding. The Company has negotiated a settlement agreement with Procter and Gamble in connection with this matter entered in May 1997. The settlement involves recognition of debt due to Procter & Gamble in the amount of $1,465,976 which the Company shall pay in cash and stock, as reduced by promotional rebates expected to offset at least one third of such settled amount. Full payment is due by April 30, 2000. Failure to abide by the terms of such settlement may have a material adverse effect on the Company's business. Two former officer's of IFD were awarded through arbitration $467,000 under disputed employment contracts. The award was converted to a judgment against Krantor and Affiliated Island Grocers d/b/a Island Frozen & Dairy. An involuntary Bankruptcy petition was attempted and the company settled all actions relating to this case for $300,000 in shares of the Common Stock by stipulation entered in the Eastern District of New York, Case No. 897-87458-478 dated November 6, 1997. The Company is subject to other legal proceedings and claims which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial position, results of operations or cash flows of the Company, but there can be no assurance as to this. -16- 8. POSSIBLE LOSS OF NASDAQ SMALL-CAP LISTINGS. Krantor currently qualifies for trading on the Nasdaq Small Cap system. Nasdaq has adopted, and the Commission has approved, certain changes to its maintenance requirements which became effective as of February 20, 1998, including the requirement that a stock listed in such market have a bid price greater than or equal to $1.00. The bid price per share for the Common Stock of Krantor has been below $1.00 in the past and the Common Stock has remained on the Nasdaq Small Cap system because Krantor has complied with the alternative criteria which are now eliminated under the new rules. If the bid price continues below $1.00 per share, the Common Stock could be delisted from the Nasdaq Small Cap System and thereafter trading would be reported in the NASD's OTC Bulletin Board or in the "pink sheets." In the event of delisting from the Nasdaq Small Cap System, the Common Stock would become subject to rules adopted by the Commission regulating broker-dealer practices in connection with transactions in "penny stocks." The disclosure rules applicable to penny stocks require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized list disclosure document prepared by the Commission that provides information about penny stocks and the nature and level of risks in the penny stock market. In addition, the broker-dealer must identify its role, if any, as a market maker in the particular stock, provide information with respect to market prices of the Common Stock and the amount of compensation that the broker-dealer will earn in the proposed transaction. The broker- dealer must also provide the customer with certain other information and must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. Further, the rules require that following the proposed transaction the broker-dealer provide the customer with monthly account statements containing market information about the prices of the securities. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to the penny stock rules. If the Common Stock became subject to the penny stock rules, many broker-dealers may be unwilling to engage in transactions in the Company's securities because of the added disclosure requirements, thereby making it more difficult for purchasers of the Common Stock in this offering to dispose of their shares of the Common Stock. 9. RISK OF BUSINESS DEVELOPMENT. The Company has ventured into new lines of product distribution and such product lines are expected to constitute a material part of the Company's revenue stream. The Company has not restored its level of product sales to that of previous years but with the addition of these new product lines the Company is hopeful of reaching and hopefully exceeding those prior levels. Because of the newness of these lines of products to the Company, the Company's operations in these areas should be considered subject to all of the risks inherent in a new business enterprise, including the absence of a profitable operating history and the expense of new product development. Various problems, expenses, complications and delays may be encountered in connection with the development of the Company's new products. These expenses must either be paid out of the proceeds of future offerings or out of generated revenues and Company profits. There can be no assurance as to the availability of funds from either of these sources. 10. RAPIDLY CHANGING MARKET MAY IMPACT OPERATIONS. The market for the Company's products is rapidly changing with evolving industry standards and frequent new product introductions. The Company's future success will depend in part upon its continued ability to enhance its existing products and to introduce new products and features to meet changing customer requirements and emerging industry standards. The Company will have to develop and implement an appropriate marketing strategy for each of its products. There can be no assurance that the Company will successfully complete the development of future products or that the Company's current or future products will achieve market acceptance levels conducive to the Company's fiscal needs. Any delay or failure of these products to achieve market acceptance would adversely affect the Company's business. In addition, there can be no assurance that the products or technologies developed by others will not render the Company's products or technologies non-competitive or obsolete. -17- The Company's revenue base has been slowly recovering from losses of 1996 generating from the discontinuation of its Kosher Food business. In order for the Company to increase grocery sales, it must reestablish it's relationships with the major grocery manufactures. The Company is vigorously attempting to reestablish these ties to prior customers as well as develop new ones. Failure to re-establish these ties would have an adverse effect on the Company. Furthermore, the Company has entered new markets which include squid, and premium handmade cigars for sale to its existing customers and newly found sources. These product lines have lower sales volume than the Company's traditional business, but higher margins and greater advertising and promotional expenses. The Company believes that developing propriety products is in the best interest of the Company's expansion. The existence of and relationship with the Company's Chinese Trading Partner has also significantly decreased the Company's cost of goods sold. Failure to secure market penetration in the new product lines would however have an adverse effect on the Company's profitability. Management believes actions presently being taken to revise the Company's operating and financial requirements should provide the opportunity for the Company to continue as a going concern. However, Management cannot predict the outcome of future operations and no adjustments have been made to offset the outcome of this uncertainty. 11. DEPENDENCE UPON ATTRACTING AND HOLDING. The Company's future success depends in large part on the continued service of its key technical, marketing, sales and management personnel and on its ability to continue to attract, motivate and retain highly qualified employees. Although the Company's key employees have stock options, its key employees may voluntarily terminate their employment with the Company at any time. Competition for such employees is intense and the process of locating technical and management personnel with the combination of skills and attributes required to execute the Company's strategy is often lengthy. Accordingly, the loss of the services of key personnel could have a material adverse effect upon the Company's operating efforts and on its research and development efforts. The Company does not have key person life insurance covering its management personnel or other key employees. 12. EXTENSIVE AND INCREASING REGULATION OF TOBACCO PRODUCTS AND LITIGATION MAY IMPACT CIGAR INDUSTRY. The tobacco industry in general has been subject to extensive regulation at the federal, state and local levels. Recent trends have increased regulation of the tobacco industry. Although regulation initially focused on cigarette manufacturers, it has begun to have a broader impact on the industry as a whole and may focus more directly on cigars in the future. The recent increase in popularity of cigars could lead to an increase in regulation of cigars. A variety of bills relating to tobacco issues have been introduced in the U.S. Congress, including bills that would have (1) prohibited the advertising and promotion of all tobacco products or restricted or eliminated the deductibility of such advertising expense, (ii) increased labeling requirements on tobacco products to include, among others things, addiction warnings and lists of additives and toxins. (iii) shifted control of tobacco products and advertisements from the Federal Trade Commission (the "FTC") to the Food and Drug Administration (the "FDA"), (iv) increased tobacco excise taxes and (v) required tobacco companies to pay for health care costs incurred by the federal government in connection with tobacco related diseases. Future enactment of such proposals or similar bills may have an adverse effect on the results of operations or financial condition of the Company. -18- In addition, a majority of states restrict or prohibit smoking in certain public places and restrict the sale of tobacco products to minors. Local legislative and regulatory bodies also have increasingly moved to curtail smoking by prohibiting smoking in certain buildings or areas or by designated "smoking" areas. Further restrictions of a similar nature could have an adverse effect on the Company's sales or operations, such as banning counter access to or display of premium handmade cigars, or decisions by retailers because of public pressure to stop selling all tobacco products. Numerous proposals also have been considered at the state and local level restricting smoking in certain public areas, regulating point of sale placement and promotions and requiring warning labels. Although federal law has required health warnings on cigarettes since 1965 and on smokeless tobacco since 1986, there is no federal law requiring that cigars carry such warnings. California, however, requires "clear and reasonable" warning to consumers who are exposed to chemicals determined by the state to cause cancer on reproductive toxicity, including tobacco smoke and several of its constituent chemicals. Similar legislation has been introduced in other states, but did not pass. There can be no assurance that other states will not enact similar legislation. Consideration at both the federal and state level also has been given to consequences of tobacco smoke on others who are not currently smoking (so called "second-hand" smoke). There can be no assurance that regulations relating to second hand smoke will not be adopted or that such regulations or related litigation would not have a material adverse effect on the Company's results of operations or financial condition. Increased cigar consumption and the publicity such increase has received may increase the risk of additional regulation. The Company cannot predict the ultimate content, timing or effect or any additional regulation of tobacco products by any federal, state, local or regulatory body, and there can be no assurance that any such legislation or regulation would not have a material adverse effect on the Company's business. See "Recent Developments" On June 20, 1997 the Attorneys General of 40 states and the major United States cigarette manufacturers announced a proposed settlement of a lawsuit filed by the states. The proposed settlement, which will require that the United States Congress take certain action, is complex and may change significantly or be rejected. However, the proposal would require significant changes in the way United States cigarette and tobacco companies do business. Among other things: the tobacco companies will pay hundreds of billions of dollars; the EDA could regulate nicotine as a drug; class action lawsuits and punitive damages would be banned; and tobacco billboards and sporting event sponsorships would be prohibited. The potential impact, if any, of the settlement and related legislation on the cigar industry is uncertain. In addition to the 40-state litigation referred to in the preceding paragraph, the tobacco industry has experienced and is experiencing significant health-related litigation involving tobacco and health issues. Plaintiffs in such litigation have sought and are seeking compensatory, and in some cases punitive, damages for various injuries claimed to result from the use of tobacco products or exposure to tobacco smoke. The proposed settlement of the 40-state litigation may have a material impact to limit litigation, but there can be no assurance that there would not be an increase in health-related litigation against the cigarette and smokeless tobacco industries or similar litigation in the future against the cigar industry. Costs of defending prolonged litigation and any settlement or successful prosecution of any material health-related litigation against manufacturers of cigars, cigarettes or smokeless tobacco or suppliers to the tobacco industry could have a material adverse effect on the Company's results of operations and /or financial condition. The recent increase in the sales of cigars and the publicity such increase has received may have the effect of increasing the probability of legal claims. Also, a recent study published in the journal Science reported that a chemical found in tobacco smoke has been found to cause genetic damage in lung cells that is identical to damage observed in many malignant tumors of the lung and thereby directly links lung cancer to smoking. This study and other reports could affect pending and future tobacco regulation or litigation relating to cigar smoking. -19- 13. RISKS RELATING TO MARKETING OF CIGARS. The Company primarily will distribute premium handmade cigars which are hand-rolled and use tobacco aged over one year. The Company believes that there is an abundant supply of tobacco available through its supplier in the Dominican Republic for the types of premium handmade cigars the Company primarily will sell. However, there can be no assurance that increases in demand would not adversely affect the Company's ability to acquire higher priced premium handmade cigars. While the cigar industry has experienced increasing demand for cigars during the last several years, there can be no assurance that the trend will continue. If the industry does not continue as the Company anticipates or if the Company experiences a reduction in demand for whatever reason, the Company's supplier may temporarily accumulate excess inventory which could have an adverse effect on the Company's business or results of operations. 14. SOCIAL, POLITICAL AND ECONOMIC RISKS ASSOCIATED WITH FOREIGN TRADE MAY ADVERSELY IMPACT BUSINESS. The Company purchases all of its premium handmade cigars from manufactures located in countries outside the United States. In addition, the Company acquires squid through the People's Republic of China ("PRC"). Social and economic conditions inherent in foreign operations and international trade may change, including changes in the laws and policies that govern foreign investment and international trade. To a lesser extent social, political and economic conditions may cause changes in United States laws and regulations relating to foreign investment and trade. Social, political or economic changes could among other things, interrupt cigar supply or cause significant increases in cigar prices. In particular, political or labor unrest in the Dominican Republic could interrupt the production of premium handmade cigars, which would inhibit the Company from buying inventory. Any government sanctions that cause an interruption of trade or prohibit trade with the PRC through higher duties or quotas could have a material adverse effect on the Company's business. Accordingly, there can be no assurance that changes in social, political or economic conditions will not have a material adverse affect on the Company's business. 15. SEASONALITY. Seasonality affects the demand for certain products sold by the Company, such as juice drinks in the summer months or hot cereals in fall and winter months. However, all these products are available to the Company throughout the year. Manufacturers also tend to promote more heavily towards the close of the fiscal quarters and during the spring and early summer months. Accordingly, the Company is able during these periods to purchase more products, increase sales during these periods and reduce its product cost due to these promotions. The Company generally experiences lower soles volume in the fourth quarter due to the reduced number of selling days resulting from the concentration of holidays in the quarter. Sale of frozen squid is more significant in the third and fourth quarters due to the seasonal catch which occurs in the second quarter. 16. NO DIVIDENDS LIKELY. No dividends have been paid on the Common Stock since inception, nor, by reason of its current financial status and its contemplated financial requirements, does Krantor contemplate or anticipate paying any dividends upon its Common Stock in the foreseeable future. -20- Part II- Other Information Item 4-Submission of matters to vote of security holders. (a) No matters were submitted to vote of shareholders for the first quarter ended March 31, 1998 Item 6- Exhibits and Reports on Form 8-K Exhibits - Item 16 (a) Exhibits No. Description of Exhibit ------------ ---------------------- 10. Distributorship Agreement dated December 31, 1997 between Gran Reserve Corporation and Fabrica De Tobaco Valle Donado SA and letter agreement between Gran Reserve Corporation and New Era Foods Inc. (affiliate of Krantor Corporation) dated April 1, 1998 assigning benefits from such distributorship agreement. (No Schedules included as in Agreement) (b) There was one report filed on Form 8-K for the first quarter ended March 31, 1998. 1. 1/28/98 Regulation D placement, Redemption of preferred stock and distribution agreement. -21- 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 By: /S/ Mair Faibish ------------------------------ Date: 05/08/98 - ----------------------------- By: Mair Faibish Chief Financial Officer By: /S/ Mitchell Gerstein ------------------------------ Date: 05/08/98 - ----------------------------- By: Mitchell Gerstein Treasurer -22- EX-10 2 EXHIBIT 10 EXHIBIT 10 To: NEW ERA FOODS INC. Please be advised that the undersigned, Gran Reserve Corporation ( formerly GR Cigars, Inc.) a Nevada Corporation (hereinafter referred to as "GR"), does hereby agree that any and all benefits to GR derived from any agreements entered by GR for the distribution and/or marketing and/or sale of tobacco products and associated labels shall be treated as the property of NEW ERA FOODS INC. (hereinafter "NEF"). Agreements covered by this Agreement include, but are not limited to, that certain Distributorship Agreement between GR and Fabrica De Tabaco Valle Dorado, SA ("FTVD") dated December 31, 1997 and Memorandum of Understanding dated August 13, 1997. In furtherance thereof GR hereby assigns its interest in such agreements for the sole benefit of NEF and agrees to continue to assist where reasonably requested in the marketing of tobacco products produced by FTVD. This Agreement shall be governed by the laws of the State of New Jersey (USA) and all parties shall submit to the jurisdiction of the courts of the said State of New Jersey to determine the outcome of any disputes which the parties may not be able to settle between themselves without such intervention. If NEF and/or its assets be subject to any material liens, judgments or other third party interests, and/or if NEF shall be in default under any material agreement, such that GR shall consider, in its discretion, that the financial status of NEF shall be materially affected and/or the benefits herein assigned from GR to NEF may be transferred voluntarily or involuntarily to any third party and/or the controlling ownership of NEF may change, then and in any such event this Agreement may be canceled unilaterally by GR on written notice to NEF. Gran Reserve Corporation by ---------------------- New Era Foods, Inc. by ---------------------- Accepted and Agreed Fabrica De Tabaco Valle Dorado by ---------------------------- Dated: EX-1 DISTRIBUTORSHIP AGREEMENT This Agreement (hereinafter the "Agreement") is made and executed in New York, New York this day of , 1997 between Fabrica De Tabaco Valle Dorado, SA ("hereinafter "DR"), a Dominican Republic corporation with principal offices at Zona Franca Licey Km 5 Carretera Stgo, Moca, Santiago, D.R. and Gran Reserve Corporation Inc., a Nevada corporation (hereinafter "GR"), with principal offices at 40 Underhill Blvd., Syosset, NY 11791 WITNESSETH WHEREAS DR is a manufacturer of cigars in the Dominican Republic; and WHEREAS DR is willing to grant exclusive distributorship and marketing rights in the United States and elsewhere worldwide where requested; and WHEREAS GR is a consumer product sales distributor based in the United States; desires to sell and distribute tobacco products developed to their specifications (hereinafter the "Product"); and represents that it possesses the ability to promote the sale and use of the Product manufactured by DR and is desirous of developing demand for and selling such Product on an exclusive basis; and WHEREAS in order for DR to grant any distribution and marketing rights to GR, GR must be willing to accept full responsibility for obtaining all necessary governmental approvals and compliance with all further applicable governmental regulations, except where the responsibility otherwise of DR therefor would not be allowed by law to be assigned or otherwise transferred to GR as the designated distributor and GR must further be willing to indemnify DR against any liability arising from failure to meet those responsibilities; and WHEREAS GR has expressed a willingness to accept the conditions as above outlined and purchase, sell and otherwise distribute the Product on the terms and conditions set forth herein, and DR has agreed to negotiate a distributorship contract with GR based upon such understandings. NOW THEREFORE, the parties hereto acknowledge the above stated understandings and in furtherance of mutual compliance therewith and in consideration of the mutual covenants hereinafter contained, the parties agree as follows: EX-2 I. REPRESENTATIONS AND WARRANTIES A) GR represents and warrants: (i) that it has full right, power and authority to market and distribute consumer products in the United States and other jurisdictions outside the United States where distribution of the Product under the terms of this Agreement is contemplated by GR and GR will maintain such authority in all such jurisdictions during the full term of this Agreement. (ii) that it has full right, power and authority to enter this Agreement and to perform the same in accordance with its terms, provisions and conditions and in the manner herein specified. B) DR represents and warrants: (i) that it owns and/or has exclusive rights to possess and operate for purposes of the growing of tobacco for and the manufacture of the cigars of kind and in the amounts as contemplated by this Agreement sufficient assets which assets include all of those stated in or covered by the certified financial statements of DR as of 8/31/97 (included as a part of this Agreement) which assets are and shall remain available for the full term of this Agreement. (attach such schedule) (ii) that it has authority to enter this Agreement and offer the participation in the sale of cigars as provided to GR herein. (iii) that the landlord facilities to which DR has exclusive possession as represented herein have the capacity to produce up to at least 180,000 cigars per month within any 12 month period. II. PRODUCT The Product shall be a line of cigars and other tobacco products, the specifications of which shall be determined by GR and presented to DR and DR shall confirm its ability to meet such specifications and manufacture such Product in sufficient quantities within the specified time periods requested by GR. If GR is satisfied that DR is able to continuously meet such qualifications, DR shall remain as the exclusive source for the acquisition for resale of the Product by GR. All of the labels produced by DR will be subject to this Agreement including but not limited to "Almirante," "Don Otilio," "Breton Legend," "Havana Blend Suarez," "Grand Reserve" and "Andulleros" and any other brands that may be developed in the future and GR shall have a continual interest in the tradename rights to such labels until it shall relinquish such by further agreement, regardless of whether the length of such ownership exceeds the Term of this Agreement, and no other person other than DR shall have any ownership interest or authority regarding use of such tradenames unless with the express written consent of GR, which consent shall not be unreasonably withheld, unless such right of GR is waived or otherwise terminated by agreement of GR in writing. EX-3 III. DISTRIBUTORSHIP 3.1 DR appoints GR as the exclusive distributor and sales organization, on an independent contractor basis, for the sale of its full product line (including the Product) worldwide except as shall be otherwise agreed and accepted by GR in writing. 3.2 During the continuance of this Agreement and the exclusive distributorship granted to GR hereunder, DR shall not appoint any other or different person, firm, corporation or other entity to sell the same products. 3.3 GR accepts the appointment to develop demand for and sell the Product and will make all sales hereunder in accordance with the terms and conditions of this Agreement. 3.4 As a distributor and sales organization as appointed under the terms of this Agreement GR shall act as an independent contractor and shall purchase the Product for distribution directly from DR and sell such Product as the title owner thereof under product labels as agreed by both GR and DR, including but not limited to the Suarez Gran Reserva label to which GR represents it has exclusive ownership. 3.5 In connection with sales and other distribution of the Product by GR shall obtain all necessary licenses and regulatory approvals and will otherwise comply with all governmental regulations applicable to sale and other distribution of the Product including all related to importing/exporting of the Product and GR shall advance such funds as are necessary therefor. 3.6 GR represents that it has conducted all research and has taken all other actions which it has thought necessary to familiarize itself with regulatory requirements for sale and distribution of the Product in the area and jurisdictions wherein GR contemplates distribution and in entering this Agreement accepts sole responsibility for all regulatory compliance and specifically accepts any and all risk associated with regulatory approvals not being in place at the execution hereof. EX-4 IV. TERM The term of this Agreement shall be twenty five years (the "Initial Term") from the date hereof with an exclusive option to GR to extend the term up to an additional 25 years (the "Extended Term"), which term may be extended by mutual consent between the parties. V. CONSIDERATION 5.1 In addition to GR's purchase of the Product from DR at DR cost of manufacture as specified in the Price Schedule and Cost Analysis Outline (the "Price Schedule") attached hereto, DR shall participate in the profits received by GR from its sales of DR products by GR equal to 50% of net profits by GR based on GR's net profits, determined after deduction from gross receipts on sale of the Product of cost of goods sold, returns and allowances, freight, distribution, selling, general and administrative expenses promotional expense, and all applicable taxes on importation and sale of the Product. 5.2 DR and GR shall continue to design and develop additional products encompassing the general concepts of the Product, and all further designs of DR or GR in which GR has principal input in this regard shall be property of GR and subject to the same distribution rights in GR as provided herein. 5.3 DR and the principals thereof shall not during the term of this Agreement and for one (1) year thereafter, as stockholder, director, officer, partner, principal, agent, employee or otherwise, directly or indirectly engage in any business of any nature or type presently conducted by DR as encompassed by this Agreement which shall in any manner compete with the business of GR or limit or preclude to GR the opportunity of increasing or expanding its business in the sale of tobacco products, without the prior written consent of GR. VI. PAYMENT AND DELIVERY 6.1 DR reserves a right of consultation and approval on all marketing strategies regarding the distribution of the Product, which approval shall not be unreasonably withheld and which approval shall be given if marketing methods and strategies by GR are in conformity with the usual business practices prevalent in the marketing area. In all events, shipment of the Product pursuant to the order given by GR shall be construed as approval. 6.2 DR will use its best efforts to fill the accepted orders as promptly as practicable, subject, however, to delays caused by transportation conditions, labor or material shortages, strikes or other labor difficulties, fire or other natural disaster, or other cause of whatever nature beyond the control of DR. In all cases DR will use its best efforts to advise GR in advance of any inability to make full and timely delivery of any of the Product which GR has previously ordered. EX-5 6.3 GR shall pay DR for its Product ordered by GR the price of the individual Product line items as stated in the schedule (hereinafter the "Price List") attached hereto and made a part hereof (hereinafter the "Price") which in all events shall not exceed the cost to DR to manufacture the Product, which cost, at the request of GR, shall be evidenced in writing, which Price List may be revised from time to time as costs change or new products are added, and same shall be binding if and when signed onto by DR and GR. Further items may be added from time to time to the Product line and the Price thereof added to the Price List. All payment shall be made in United States currency. 6.4 DR shall be paid the full Price owing from GR for each shipment by GR upon and at the time of delivery to, satisfactory inspection by, and acceptance by GR. 6.5 The costs of shipping and of insuring the Product during shipment shall be borne by GR but be an administrative cost deducted from the proceeds of further sale of the Product by GR before determining "profit" for distribution between DR and GR, as hereinafter provided. 6.6 GR will arrange for insurance and be named as beneficiary thereof covering insuring the shipment of the Product purchased by GR, such insurance to be carried for the maximum amount customarily carried and available for similar goods. 6.7 The carrier/shipper (the "Carrier") and insurer shall be as designated in the sole discretion of GR and DR notified in advance of the preparations made by GR regarding same. 6.8 In order to enable DR to have a complete record of all products sold, GR shall furnish DR at such intervals as DR and GR shall agree, but not less than monthly, a report of all sales of products produced by DR. VII. PROMOTION (i) GR shall promote the Product and shall advance all costs associated therewith (to be included in all calculations as a cost of distribution to be deducted from sale proceeds to determine "net profit" for purposes of distribution of the Consideration stated for this Agreement - see previous Section V Consideration). In this regard and in furtherance of such promotion GR will provide DR with a limited amount of free samples for each cigar size for which distribution is sought under this Agreement. GR may purchase larger amounts for sales promotion purposes at cost to DR. EX-6 (ii) GR would advance the costs needed for the sale, promotion, marketing, advertising, shipping to customers and all applicable taxes. GR would be responsible for setting up convention booths and shows and all other publicity vehicles. All such costs will be subject to review and approval by DR. VIII. TRADE SECRETS 8.1 GR agrees that any trade secrets or any other like information of value relating to the business and/or field of interest of DR or any of its affiliates, or of any corporation or other legal entity in which DR or any of its affiliates has an ownership interest of more than twenty-five per (25%), including but not limited to, information relating to inventions, disclosures, processes, systems, methods, formulae, patents, patent applications, machinery, materials, research activities and plans, costs of production, contract forms, prices, volume of sales, promotional methods, list of names or classes of customers, which GR has heretofore acquired during the engagement of GR by DR or any of its affiliates or which GR may hereafter acquire during the terms of this Agreement as the result of any disclosures to GR, or in any other way, shall be regarded as held by GR and its personnel in a fiduciary capacity solely for the benefit of DR, its successors or assigns, and shall not at any time, either during the term of this Agreement or thereafter, be disclosed, divulged, furnished, or made accessible by GR or its personnel to anyone, or be otherwise used by them, except in the regular course of business of DR or GR or their affiliates consistent with this Agreement. Information shall for the purposes of this Agreement be considered to be secret if not known by the trade generally, even though such information may have been disclosed to one or more third parties pursuant to distribution agreements, joint venture agreements and other agreements entered into by DR or any of its affiliates. 8.2 All information regarding marketing methods, contracts, customer lists, or other sales strategies and results generated by GR shall remain proprietary to GR and shall be considered Trade Secrets of GR and shall be handled by DR with same confidentiality standards and obligations as Trade Secrets of DR are to be handled by GR as provided herein. 8.3 All restrictions and prohibitions regarding Trade Secrets as provided here shall survive the expiration or other termination of this Agreement and be binding on all successors and assigns of the parties hereto. IX. MISCELLANEOUS 9.1 Distributor Not Made An Agent. It is agreed that this Agreement does not constitute GR the agent or legal representative of DR for any purpose whatsoever. GR is not granted any right or authority to assume or to create any obligation or responsibility, express or implied, in behalf of or in the name of DR or to bind DR in any manner or thing whatsoever and all parties hereto agree to submit themselves to the jurisdiction of the Courts in the State of New York competent to hear disputes arising from this Agreement in order to have such disputes resolved if not, done otherwise by agreement between the parties. EX-7 9.2 Governing Law. This contract shall be governed by and construed according to the laws of the State of New York and all parties hereto agree to submit themselves to the jurisdiction of the courts of the State of New York competent to hear disputes arising from this Agreement in order to have such disputes resolved if not done otherwise by agreement between the parties. 9.3 Further Assurances. At any time, and from time to time, after the date of this Agreement, each party will execute such additional instruments and take such action as may be reasonably requested by the other party to confirm or perfect title to any property transferred or to be transferred in accordance with the terms hereof or otherwise to carry out the intent and purposes of this Agreement. 9.4 Non Compete. This Agreement shall bind the parties hereto, their successors and assigns as to all covenants regarding consideration and trade secrets and the parties hereto and their executive officers shall not compete with any of the parties hereto through the sale and distribution of similar products while GR shall remain in the business of selling and/or distributing cigar products for DR under the terms of this Agreement. 9.5 Assignment. This Agreement is personal to the parties and shall inure only to their benefit or the benefit of any further entity into which said parties may merge under law. This Agreement cannot be assigned by any party except by or with the written consent of the other party. Nothing herein expressed or implied is intended or shall under any circumstances be construed to confer upon or give any person, firm or corporation other than the parties hereto and their respective legal representatives, any rights or benefits under or by reason of this Agreement. 9.6 Notices. All notices, demands and other communications hereunder shall be deemed to have been duly given if delivered or mailed, certified or registered mail, with postage prepaid, or served personally on a party at his respective address as hereinabove recited or at such other address as such party may, from time to time, provide in writing to the other party for such purpose. 9.7 Complete Agreement. This Agreement constitutes a complete statement of all of the arrangements, understandings and agreements between the parties with respect to the subject matter hereof. All prior memoranda and oral understandings with respect thereto are merged into this Agreement. Except as aforesaid, neither of the parties hereto shall rely on any statement by or in behalf of any other party which is not contained in this Agreement. EX-8 9.8 Interpretation. Whenever possible, each Article of this Agreement shall be interpreted in such a manner as to be effective and valid under applicable law, but if any Article is unenforceable or invalid under such law, such Article shall be ineffective only to the extent of such unenforceability or invalidity, and the remainder of such Article and the balance of this Agreement shall in such event continue to be binding and in full force and effect. 9.9 Inquiries. All inquiries regarding any Products or similar Products manufactured and/or sold by DR and/or GR shall be directed to GR for response. 9.10 Non-Waiver. The terms, provisions and covenants hereinbefore contained shall be specifically enforceable. The failure by either party hereto to enforce any provision of this Agreement shall not operate or be construed as a waiver of any right, power or privilege contained in that provision or any other provision of this Agreement. 9.11 Headings. The headings of all Articles or within any Articles herein specified are for the convenience of locating information only and shall have no substantive effect on or be construed as assisting in the interpretation of any of the terms, covenants or conditions of this Agreement. In Witness Whereof, the parties hereto have caused this Agreement to be executed the date and year first above written. WITNESS: Fabrica De Tabaco Valle Dorado, SA _______________________ by -------------------------------- WITNESS: Gran Reserve Corporation _______________________ by -------------------------------- EX-9 -----END PRIVACY-ENHANCED MESSAGE-----