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 JUNE 30, 1998
Commission File Number: 0-19409
SYNERGY BRANDS INC.
(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 July 22, 1998
there were 5,215,444 shares outstanding of the registrant's common stock.
<PAGE>
SYNERGY BRANDS INC.
FORM 10-QSB
JUNE 30, 1998
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION Page
Consolidated Balance sheets as of June 30, 1998
(Unaudited) and December 31, 1997 2-3
Consolidated Statements of Operations for the six
months ended June 30 1998 and 1997 (Unaudited) 4-5
Consolidated Statements of Operations for the three
months ended June 30, 1998 and 1997 (Unaudited) 6-7
Consolidated Statements of Cash Flows for the six months
ended June 30, 1998 and 1997 (Unaudited) 8-9
Notes to Consolidated Financial Statements 10-13
Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-16
Forward Looking Information and Cautionary 17-23
Statements
PART II: OTHER INFORMATION
Item VI: Exhibits and Reports on Form 8-K 24
<PAGE>
<TABLE>
<CAPTION>
SYNERGY BRANDS INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1998 AND DECEMBER 31, 1997
JUNE 30, 1998 December 31, 1997
---------------- ----------------
(Unaudited)
ASSETS
------
Current Assets:
- ---------------
<S> <C> <C>
Cash $ 4,199 $ 189,626
Accounts Receivable - Net of allowance for doubtful
accounts of $ 0 and $ 95,826 respectively 1,591,915 1,128,000
Promotional Rebates 303,186 270,496
Inventory 672,852 -
Other Current Assets 86,384 136,189
---------------- ----------------
Total Current Assets 2,658,536 1,724,311
Collateral and Security Deposit (note 6) 1,802,995 2,252,995
Property and Equipment - Net 174,321 117,402
Other Assets - -
---------------- ----------------
Total Assets $ 4,635,852 $ 4,094,708
=============== ===============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
2
<PAGE>
<TABLE>
<CAPTION>
SYNERGY BRANDS INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1998 AND DECEMBER 31, 1997
JUNE 30, 1998 December 31, 1997
---------------- -----------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
- --------------------
<S> <C> <C>
Notes Payable (Note 2) $ 484,134 $ 535,810
Accounts Payable & Accrued Expenses (Note 3) 726,937 1,092,716
Income taxes payable 2,268 10,529
---------------- ----------------
Total Current Liabilites 1,213,339 1,639,055
Vendor Debt due after one year (note 3) 261,716 395,048
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 5,151,944 and 4,140,515 shares were outstanding
at 6/30/98 and 12/31/97 respectively: 5,152 4,140
Additional Paid-in Capital 15,215,325 14,467,141
Accumulated Deficit (11,997,280) (12,348,276)
---------------- ----------------
3,223,297 2,123,105
Less treasury stock at cost, 1,400 shares (167,500) (167,500)
---------------- ----------------
Total stockholders' equity 3,055,797 1,955,605
Total Liabilities & Stockholder's Equity $ 4,635,852 $ 4,094,708
================ ===============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
3
<PAGE>
<TABLE>
<CAPTION>
SYNERGY BRANDS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
1998 1997
---------------- ----------------
<S> <C> <C>
Net Sales 4,954,136 1,548,896
Commission Income (note 6) - 370,450
---------------- ----------------
4,954,136 1,919,346
Cost of Sales 4,183,227 1,345,852
---------------- ------------
Gross Profit 770,909 573,494
Selling General and Administrative Expense 471,512 442,006
Depreciation and Amortization 402 15,761
---------------- --------------
Operating Income (Loss): 298,995 115,727
---------------- ----------------
Other Income (Expense):
Miscellaneous Income (Expense) 1,301 12,887
Interest Income 50,700 78,550
Financing Costs - (12,476)
---------------- ----------------
Total Other (Income) 52,001 78,961
=============== ===============
Income (Loss) From Continuing Operations
Before Income Taxes 350,996 194,688
Income Taxes - (64,247)
---------------- ----------------
Income (Loss) From Continuing Operations $ 350,996 $ 130,441
=============== ===============
DISCONTINUED OPERATIONS (Note 8)
Gain (loss) from Discontinued Operations - 166,182
Income Taxes - (54,951)
---------------- ----------------
Net Income (Loss) from Discontinued Operations - 111,231
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
4
<PAGE>
<TABLE>
<CAPTION>
SYNERGY BRANDS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (cont.)
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<S> <C> <C>
Income (Loss) Before Extraordinary Item 350,996 241,672
Extraordinary Item - Reduction of Income Taxes
Arising from Utilization of Loss Carryovers - 119,198
---------------- ----------------
Net Income (Loss) 350,996 360,870
Less Preferred Dividend - -
---------------- ----------------
Income (Loss) Applicable to Common Stock (Note 1) $ 350,996 $ 360,870
=============== ===============
Earnings (Loss) Per Common Share From
Continuing Operations $ .09 $ .18
Earnings (Loss) Per Common Share From
Discontinued Operations - .16
---------------- ----------------
Earnings (Loss) Per Common Share $ .09 $ .34
=============== ===============
Weighted Average Number of Shares Outstanding 4,030,889 1,057,614
</TABLE>
See Accompanying Notes To Consolidated Financial Statements
5
<PAGE>
<TABLE>
<CAPTION>
SYNERGY BRANDS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
1998 1997
---------------- ----------------
<S> <C> <C>
Net Sales 3,005,003 1,548,896
Commission Income (note 6) - 122,050
---------------- ----------------
3,005,003 1,670,946
Cost of Sales 2,573,898 1,376,950
---------------- ------------
Gross Profit 431,105 293,996
Selling General and Administrative Expense 274,983 217,697
Depreciation and Amortization 3 7,346
---------------- --------------
Operating Income (Loss): 156,119 68,953
---------------- ----------------
Other Income (Expense):
Miscellaneous Income (Expense) 976 12,128
Interest Income 22,538 27,225
Financing Costs - (5,963)
---------------- ----------------
Total Other (Income) 23,514 33,390
=============== ===============
Income (Loss) From Continuing Operations
Before Income Taxes 179,633 102,343
Income Taxes - (33,773)
---------------- ----------------
Income (Loss) From Continuing Operations 179,633 $ 68,570
=============== ===============
DISCONTINUED OPERATIONS (Note 8)
Gain (loss) from Discontinued Operations - (336)
Income Taxes - -
---------------- ----------------
Net Income (Loss) from Discontinued Operations - (336)
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
6
<PAGE>
<TABLE>
<CAPTION>
SYNERGY BRANDS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (cont.)
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<S> <C> <C>
Income (Loss) Before Extraordinary Item 179,633 68,234
Extraordinary Item - Reduction of Income Taxes
Arising from Utilization of Loss Carryovers - 33,773
---------------- ----------------
Net Income (Loss) 102,007
Less Preferred Dividend - -
---------------- ----------------
Income (Loss) Applicable to Common Stock (Note 1) 179,633 $ 102,007
=============== ===============
Earnings (Loss) Per Common Share From
Continuing Operations $ .04 $ .09
Earnings (Loss) Per Common Share From
Discontinued Operations - -
---------------- ----------------
Earnings (Loss) Per Common Share $ .04 $ .09
=============== ===============
Weighted Average Number of Shares Outstanding 4,321,135 1,134,415
</TABLE>
See Accompanying Notes To Consolidated Financial Statements
7
<PAGE>
<TABLE>
<CAPTION>
SYNERGY BRANDS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
1998 1997
---------------- ----------------
<S> <C> <C>
Cash Flows From Operating Activites:
Income (Loss) From Continuing Operations $ 350,996 $ 194,688
Income (Loss) From Discontinued Operations - 166,182
Adjustments to Reconcile Net Income (Loss)
From Continuing Operations to Net Cash
Flows From Continuing Operating Activities:
Depreciation and Amortization 402 15,761
Non-Cash Expenses 749,196 274,141
Changes in Operating Assets and Liabilities:
Accounts Receivable (463,915) 153,639
Promotional Rebates (32,690) (194,588)
Inventory (672,852) -
Other Current Assets 49,805 (113,780)
Other Assets - 31,921
Accounts Payable & Accrued Expenses (499,111) (388,273)
Income Taxes Payable (8,261) (13,360)
---------------- ----------------
Net Cash Flows (Used) (526,430) 126,331
in Operating Activities
Cash Flows From Investing Activities:
Purchase of Furniture and Equipment (57,321) (12,700)
Payment of Collateral Security Deposit 450,000 (125,000)
---------------- ----------------
Net Cash Flows (Used) 392,679 (137,700)
in Investing Activities
Cash Flows From Financing Activities:
Net Borrowing (Payments) on Notes Payable (51,676) (118,530)
Proceeds from Issuance of Common Stock - 250,000
Long Term Debt - (27,000)
---------------- ----------------
Net Cash Flows Provided by Financing Activities (51,676) 104,470
---------------- ----------------
Net Increase (Decrease) in Cash (185,427) 93,101
Cash - Beginning of Period 189,626 2,897
---------------- ----------------
Cash - End of Period $ 4,199 $ 95,998
=============== ===============
</TABLE>
See Accompanying Notes To Consolidated Financial Statements
8
<PAGE>
<TABLE>
<CAPTION>
SYNERGY BRANDS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
1998 1997
---------------- ----------------
<S> <C> <C>
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for:
Interest
Continuing Operations $ - $ -
Discontinued Operation - 23,100
=============== ===============
Income Taxes
Continuing Operations $ - $ -
Discontinued Operations - -
=============== ===============
Supplemental Disclosure of Non-Cash Operating,
Investing and Financing Activities:
Expenses paid via the distribution of registered
shares of the Company's Common Stock
through it's Compensation and Services Plan - -
Prepaid Expenses paid via the distribution of
registered shares of the Company's Common
Stock through it's Compensation and Services Plan _ _
---------------- ---------------
Total Non-Cash Operating, Investing and
Financing Activities - -
================ ===============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
9
<PAGE>
SYNERGY BRANDS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
------------
Synergy Brands Inc. (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, Synergy 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, Synergy 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, Synergy 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 Synergy
Brands Inc., 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.
During 1998, the Company distributed its products through an agency
agreement and hence, all revenues were derived from this arrangement.
As a result, the Company has an inherent business risk in concentrating
its sales through this arrangement.
10
<PAGE>
1. Inventory (CONTINUED)
---------
Inventory consists of finished goods and is stated at the lower of cost
of market (first-in, first-out method)
Income Taxes
------------
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
------------------
The Company calculates earnings per share pursuant to statement of
Financial Accounting Standards No. 128, "Earnings per Share" (FAS 128).
FAS 128 requires dual presentation of basic and diluted earnings per
share (EPS) on the face of the statement of income for all entities
with complex capital structures and requires a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. Basic EPS calculations
are based on the weighted-average number of common shares outstanding
during the period, while diluted EPS calculations are based on the
weighted-average common shares and diluted common share equivalents
outstanding during each 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.
Stock-Based Compensation Plans
------------------------------
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-based employee 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" 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. Disclosures required by SFAS 123 are not
material to the Company's financial statements.
11
<PAGE>
2. Notes Payable
-------------
<TABLE>
<CAPTION>
Notes payable at June 30, 1998 consisted of the following:
<S> <C>
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
</TABLE>
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.
The following are the scheduled maturities of vendor debt at June 30,
1998:
Year ending
June 30,
-----------
1999 244,442
2000 261,716
-------
506,158
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 June 30, 1998, the company had outstanding warrants to purchase
578,000 shares of the Company's common stock, at $1.10 per share. The
warrants become exercisible when the shares are registered and expire
at various dates through 2002. At June 30, 1998, 578,000 shares of
common stock were reserved for that purpose.
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
registed and reserved since that date. Through June 30, 1998 the
Company has issued 1,819,450 and has 2,680,550 available in reserve
under the plan.
12
<PAGE>
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 April 2002. Rent expense for the six months ended June 30,
1998 & 1997 were $12,010 and 18,950. Future minimum lease commitments
are $17,010, $34,020, $31,480, and $8800 for the years ending December
31, 1998, 1999, 2000 and 2001.
Distribution Agreement
----------------------
In 1996, the Company entered into a ten-year agreement with a Chinese
trading company to distribute grocery and 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,
based on sales generated by the distribution agreement. In
consideration for the Chinese trading company providing products and
financing to the Company, 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 and security deposit balance at June 30, 1998
is $ 1,802,995. The collateral and security deposit bears interest at
5% and is received quarterly.
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 June 30, 1998, if any
that may arise out of such litigation, management believes the outcome
will not have a material effect on the financial statements taken as a
whole 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. Major Customers
---------------
The Company has one customer, the U.S. agent of the Chinese Trading
Company that provides financing to the Company, which accounted for
100% of total sales for 1997. Accounts receivable from this customer
accounted for approximately $1,500,000 (94.2%) of total trade accounts
receivable at June 30, 1998.
8. 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 June 30, 1998.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company primarily distributes and merchandises promotional brand name
grocery products and frozen squid through an agency agreement with Asia Legend
Trading Ltd (ALT), a Chinese trading company. The Company's current assets
consist primarily of accounts receivable, inventory, 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 six months ended June 30,
1998 to $ 4.95 million a (158%) increase as compared to the prior period. The
Company's grocery distribution business increased significantly as compared to
the prior period. The company attributes the increase in sales due to increase
business with its primary suppliers and especially the renewed relationship with
Procter and Gamble (P&G) and additional revenue from its cigar business.
Cost of sales from continued operations increased for the six months ended June
30, 1998 to $4.2 million a (210%) increase compared to the prior period. The
company attributes the increase in costs due to increase business with its
primary suppliers and especially the renewed relationship with Procter and
Gamble (P&G)and its cigar business.
Selling General & Administrative (S,G&A) expenses from continuing operations
increased to $471,512 for the period a 6.7% increase. The company is attempting
to maintain a static S,G&A while increasing sales in order to increase
profitability.
Income from continuing operations for the six months ended June 30, 1998 totaled
$ 350,996 as compared to a $194,688 profit for the prior period. The company
recognized a greater profit from continuing operations due to increase grocery
and cigar sales contribution.
The following table sets forth selected operational data of the Company:
Six Months Ended June 30,
1998 1997
---- ----
Revenues $ 4,954,136 $ 1,919,346
Income (Loss) from Continuing Operations $ 350,996 $ 194,688
Earings (Loss) Per Common Share
From Continuing Operations $ .09 $ .18
Weighted Averge Number of Shares Outstanding 4,030,889 1,057,614
LIQUIDITY AND CAPITAL RESOURCES
The company increased it's working capital to $1,445,000 at June 30,
1998. Liabilities were reduced from 2 million to 1.4 million, a 30% drop.
Reaching a positive working capital position is a significant milestone for the
Company. The Company raised sufficient capital and turned its operations to
profitability which enhanced the liquidity of the Company. As a result the
Company has secured vendor credits and secured financing to grow its operating
businesses. These changes reflect a positive working capital
14
<PAGE>
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.
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 cigar wrappers. The line is secured by
the inventory and accounts receivables of the Dominican factory and Gran Reserve
Corp. Advances against the line are at a 75% rate and the interest paid is 12%.
Advances as of June 30, 1998 totalled $950,000.
The Company's receivables at June 30, 1998 increased by 41% to $ 1.6
million. The increase in receivables is attributable to increased sales and
manufactures rebates due to the company.
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:
6/30/98 12/31/97
Total Assets $ 4,635,852 $ 4,094,708
Total Stockholders Equity $ 3,055,797 $ 1,955,605
Working Capital $ 1,445,197 $ 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.
15
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INFLATION
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The Company believes that inflation, under certain circumstances, could
be beneficial to the Company's business. When inflationary pressures drive
product costs up, the Company's customers sometimes purchase greater quantities
of product to expand their inventories to protect against further pricing
increases. This enables the Company to sell greater quantities of products that
are sensitive to inflationary pressures.
However, inflationary pressures frequently increase interest rates.
Since the Company is dependent on financing, any increase in interest rates will
increase the Company's credit costs, thereby reducing its profits.
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FORWARD LOOKING INFORMATION AND CAUTIONARY STATEMENTS
Other than the factual matters set forth herein, the matters and items
set forth in this report are forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, the following:
1. Cash Flow.
The Company has experienced cash shortages which
continue to adversely affect its business. See "Liquidity and
Capital Resources". The Company requires additional working
capital in order to maintain and expand its business.
2. Dependence on Public Trends.
The Company's business is subject to the effects of
changing customer preferences and the economy, both of which
are difficult to predict and over which the Company has no
control. A change in either consumer preferences or a
down-turn in the economy may affect the Company's business
prospects.
3. Potential Product Liability.
As a participant in the distribution chain between
the manufacturer and consumer, the Company would likely be
named as a defendant in any product liability action brought
by a consumer. To date, no claims have been asserted against
the Company for 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, but relies on its agency agreement for product
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, on its agent 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.
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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, 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.
Any disruption 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 Synergy Brands Inc. and Island
Wholesale Grocers Inc., an affiliated company of Synergy
Brands Inc. 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. The balance due on June 30,
1998 is $506,158. 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 Synergy and
Affiliated Island Grocers d/b/a Island Frozen & Dairy. An
involuntary Bankruptcy petition was attempted and was
immediatily dismissed by the court. 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
stipulation has been fully satisfied and is no longer in
effect.
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
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materially affect the financial position, results of
operations or cash flows of the Company, but there can be no
assurance as to this.
8. Possible Loss of NASDAQ SMALL-CAP Listings.
Synergy Brands Inc. 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 Synergy has been below $1.00
in the past and the Common Stock has remained on the Nasdaq
Small Cap system because Synergy 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 other wise 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.
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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.
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. 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
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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.
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; 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
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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 or
successful prosecution of any material health-related
litigation against manufacturers of cigars, cigarettes 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.
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.
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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 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.
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 Synergy
contemplate or anticipate paying any dividends upon its Common
Stock in the foreseeable future.
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Part II- Other Information
Item 4-Submission of matters to vote of security holders.
At the Company's annual meeting on June 19, 1998 the following purposes were
submitted:
(a) To approve an amendment to the Company's Certificate of Incorporation
to effect an abolishment of rights to further dividends on preferred
stock.
(b) To re-elect the Company's current board of directors or to nominate and
elect other persons to act in such capacity.
(c) To re-elect the Company's current auditors.
(d) To approve the private placement of additional securities of the
Company through an offering of units consisting of stock and
convertible debentures to raise up to $3,000,000 on terms, as more
particularly described in the Proxy Statement and the Term Sheet
included therein as an Exhibit with such change or addition in terms as
the President of this Company or his designee shall approve.
(e) To approve a change in corporate name to Synergy Brands Inc.
Item 6- Exhibits and Reports on Form 8-K
(a) Exhibits - none
(b) There was no reports filed on Form 8-K for the relevent period.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SYNERGY BRANDS INC.
/S/ Mair Faibish
----------------------
Date: 7/27/98
/s/ Mair Faibish
- ----------------------------
By: Mair Faibish
Chief Financial Officer
/S/ Mitchell Gerstein
----------------------
Date: 7/27/98
/s/ Mitchell Gerstein
- ----------------------------
By: Mitchell Gerstein
Treasurer
