-----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, Ffh1yENgV3aCuWUBqhr2RrA1fMA01RcEh2RwCSthzNZ9mMkP//tYw2dhwpTijA4A MJfeJwqoYyeZMnhT0pPedw== 0001026018-98-000030.txt : 19980928 0001026018-98-000030.hdr.sgml : 19980928 ACCESSION NUMBER: 0001026018-98-000030 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19980925 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYNERGY BRANDS INC 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: 10-Q/A SEC ACT: SEC FILE NUMBER: 000-19409 FILM NUMBER: 98714705 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: KRANTOR CORP DATE OF NAME CHANGE: 19930328 FORMER COMPANY: FORMER CONFORMED NAME: DELTA VENTURES INC DATE OF NAME CHANGE: 19600201 10-Q/A 1 FORM 10-Q/A 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 - ----------- Seasonality affects the demand for certain products sold by the Company, such as juice drinks in the summer months or hot cereals in fall and winter months. However, all these products are available to the Company throughout the year. Manufacturers also tend to promote more heavily towards the close of the fiscal quarters and during the spring and early summer months. Accordingly, the Company is able to purchase more products, increase sales during these periods and reduce its product cost due to these promotions. The Company generally experiences lower sales volume in the fourth quarter due to the reduced number of selling days resulting from the concentration of holidays in the quarter. Sale of frozen squid is more significant in the third and fourth quarters due to the seasonal catch which occurs in the second quarter. Inflation - --------- The Company believes that inflation, under certain circumstances, could be beneficial to the Company's business. When inflationary pressures drive product costs up, the Company's customers sometimes purchase greater quantities of product to expand their inventories to protect against further pricing increases. This enables the Company to sell greater quantities of products that are sensitive to inflationary pressures. However, inflationary pressures frequently increase interest rates. Since the Company is dependent on financing, any increase in interest rates will increase the Company's credit costs, thereby reducing its profits. -16- 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). -17- 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. -18- 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 -19- 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 -20- -----END PRIVACY-ENHANCED MESSAGE-----