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-QSB
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the period ended SEPTEMBER 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 November 2, 1998
there were 5,545,033 shares outstanding of the registrant's common stock.
<PAGE>
SYNERGY BRANDS INC.
FORM 10-QSB
SEPTEMBER 30, 1998
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION Page
Consolidated Balance sheets as of September 30, 1998
(Unaudited) and December 31, 1997 2-3
Consolidated Statements of Operations for the nine
months ended September 30 1998 and 1997 (Unaudited) 4-5
Consolidated Statements of Operations for the three
months ended September 30, 1998 and 1997 (Unaudited) 6-7
Consolidated Statements of Cash Flows for the nine months
ended September 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 17-22
Statements
PART II: OTHER INFORMATION
Item VI: Exhibits and Reports on Form 8-K 23
<PAGE>
SYNERGY BRANDS INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
(Unaudited)
ASSETS
Current Assets:
- ---------------
<S> <C> <C>
Cash $ 123,273 $ 189,626
Accounts Receivable-Net of allowance for doubtful
accounts of $ 0 and $ 96,000 respectively 2,568,209 1,128,000
Promotional Rebates 328,494 270,496
Inventory 1,121,000 -
Other Current Assets 85,099 136,189
------------------ -----------------
Total Current Assets 4,226,075 1,724,311
Collateral and Security Deposit (note 6) 1,258,597 2,252,995
Property and Equipment-Net 174,120 117,402
Other Assets - -
------------------ -----------------
Total Assets $5,658,792 $4,094,708
================== =================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
-2-
<PAGE>
SYNERGY BRANDS INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
- --------------------
<S> <C> <C>
Notes Payable (Note 2) $1,409,134 $ 535,810
Accounts Payable & Accrued Expenses (Note 3) 653,378 1,092,716
Income taxes payable 488 10,529
------------------ -----------------
Total Current Liabilites 2,063,000 1,639,055
Vendor Debt due after one year (note 3) 195,050 395,048
Commitments and Contingencies (note 6) - -
Preferred Stock of Subsidiary (note 4) 129,500 111,125
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 5,543,015 and 4,140,515 shares were outstanding
at 6/30/98 and 12/31/97 respectively 5,543 4,140
Additional Paid-in Capital 15,414,595 14,611,141
Accumulated Deficit (11,981,496) 12,498,401)
------------------ -----------------
3,438,742 2,116,980
Less treasury stock at cost, 1,400 shares (167,500) (167,500)
------------------ -----------------
Total stockholders' equity 3,271,242 1,949,480
Total Liabilities & Stockholder's Equity $5,658,792 $4,094,708
================== =================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
-3-
<PAGE>
SYNERGY BRANDS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------------ -----------------
<S> <C> <C>
Net Sales $ 7,872,274 $ 3,512,810
Commission Income (note 6) - 370,450
------------------ -----------------
7,872,274 3,883,260
Cost of Sales 6,707,286 3,007,407
------------------ -----------------
Gross Profit 1,164,988 875,853
Selling General and Administrative Expense 684,562 661,671
Depreciation and Amortization 603 15,938
------------------ -----------------
Operating Income (Loss): 479,823 198,244
------------------ -----------------
Other Income (Expense):
Miscellaneous Income (Expense) 1,451 119,676
Interest Income 66,673 -
Financing Costs - (19,863)
Interest Expense (12,667)
Dividends on Preferred Stock of Subsidiary (18,375)
------------------ -----------------
Total Other (Income) 37,082 99,813
================== =================
Income (Loss) From Continuing Operations
Before Income Taxes 516,905 298,057
Income Taxes - -
------------------ -----------------
Income (Loss) From Continuing Operations $ 516,905 $ 298,057
================== =================
DISCONTINUED OPERATIONS (Note 8)
Gain (loss) from Discontinued Operations - 157,272
Income Taxes - -
------------------ -----------------
Net Income (Loss) from Discontinued Operations - 157,272
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
-4-
<PAGE>
SYNERGY BRANDS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (cont.)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
Income (Loss) Before Extraordinary Item 516,905 455,329
Extraordinary Item - Reduction of Income Taxes
Arising from Utilization of Loss Carryovers - -
---------------- ----------------
Net Income (Loss) 516,905 455,329
Less Preferred Dividend - 165,000
---------------- ----------------
Income (Loss) Applicable to Common Stock (Note 1) $ 516,905 $ 290,329
=============== ===============
Earnings (Loss) Per Common Share From
Continuing Operations $ .12 $ .11
Earnings (Loss) Per Common Share From
Discontinued Operations - .13
---------------- ----------------
Earnings (Loss) Per Common Share $ .12 $ .24
=============== ===============
Weighted Average Number of Shares Outstanding 4,271,480 1,248,104
</TABLE>
See Accompanying Notes To Consolidated Financial Statements
-5-
<PAGE>
SYNERGY BRANDS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------------ -----------------
<S> <C> <C>
Net Sales $2,918,138 $ 1,963,914
Commission Income (note 6) - -
------------------ -----------------
2,918,138 1,963,918
Cost of Sales 2,524,059 1,661,555
------------------ -----------------
Gross Profit 394,079 302,359
Selling General and Administrative Expense 213,050 219,665
Depreciation and Amortization 201 177
------------------ -----------------
Operating Income (Loss): 180,828 82,517
------------------ -----------------
Other Income (Expense):
Miscellaneous Income (Expense) 150 28,239
Interest Income 15,973 -
Financing Costs - (7,387)
Interest Expense (12,667) -
Dividends on Preferred Stock of Subsidiary (18,375) -
------------------ -----------------
Total Other (Income) (14,919) 20,852
================== =================
Income (Loss) From Continuing Operations
Before Income Taxes 165,909 103,369
Income Taxes - -
------------------ -----------------
Income (Loss) From Continuing Operations $ 165,909 $ 103,369
================== =================
DISCONTINUED OPERATIONS (Note 8)
Gain (loss) from Discontinued Operations - (8,910)
Income Taxes - -
------------------ -----------------
Net Income (Loss) from Discontinued Operations - (8,910)
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
-6-
<PAGE>
SYNERGY BRANDS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (cont.)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
Income (Loss) Before Extraordinary Item 165,909 94,459
Extraordinary Item - Reduction of Income Taxes
Arising from Utilization of Loss Carryovers - -
---------------- ----------------
Net Income (Loss) 165,909 94,459
Less Preferred Dividend - 55,000
---------------- ----------------
Income (Loss) Applicable to Common Stock (Note 1) $ 165,909 $ 39,459
=============== ===============
Earnings (Loss) Per Common Share From
Continuing Operations $ .04 $ .01
Earnings (Loss) Per Common Share From
Discontinued Operations - -
---------------- ----------------
Earnings (Loss) Per Common Share $ .04 $ .01
=============== ===============
Weighted Average Number of Shares Outstanding 4,721,093 1,595,973
</TABLE>
See Accompanying Notes To Consolidated Financial Statements
-7-
<PAGE>
SYNERGY BRANDS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----------------- ----------------
<S> <C> <C>
Cash Flows From Operating Activities
Income (Loss) From Continuing Operations $ 516,905 $ 298,057
Income (Loss) From Discontinued Operations - 157,272
Adjustments to Reconcile Net Income (Loss)
From Continuing Operations to Net Cash
Flows From Continuing Operating Activities:
Depreciation and Amortization 603 15,938
Non-Cash Expenses 804,857 810,726
Dividends on Preferred Stock of Subsidiary 18,375 -
Changes in Operating Assets and Liabilities:
Accounts Receivable (1,440,209) 105,639
Promotional Rebates (57,998) (221,248)
Inventory (1,121,000) -
Other Current Assets 51,090 (48.816)
Other Assets - 44,224
Accounts Payable & Accrued Expenses (639,336) (685,377)
Income Taxes Payable (10,041) (22,341)
----------------- ----------------
Net Cash Flows Provided (Used) (1,876,754) 454,074
by Operating Activities:
Cash Flows From Investing Activities:
Purchase of Furniture and Equipment (57,321) (12,701)
Payment of Collateral Security Deposit 994,398 (256,000)
----------------- ----------------
Net Cash Flows (Used) 937,077 (268,701)
in Investing Activities
Cash Flows From Financing Activities:
Net Borrowing (Payments) on Notes Payable 873,324 (155,963)
Proceeds from Issuance of Common Stock - 250,000
Long Term Debt - (277,000)
Net Cash Flows Provided (Used) by Financing Activities 873,324 (182,968)
----------------- ----------------
Net Increase (Decrease) in Cash (66,353) 2,405
Cash - Beginning of Period 189,626 2,897
----------------- ----------------
Cash - End of Period $ 123,273 $ 5,302
================= ================
</TABLE>
See Accompanying Notes To Consolidated Financial Statements
-8-
<PAGE>
SYNERGY BRANDS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----------------- ----------------
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for:
Interest
<S> <C> <C>
Continuing Operations $ - $ -
Discontinued Operation - 37,100
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
September 30,1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Synergy Brands Inc. ("Company") is a distributor of groceries, frozen
squid, general household merchandise and health and beauty aids in the
promotional wholesale industry. In addition, the Company also
distributes premium handmade Dominican 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
financing 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
Notes payable at September 30, 1998 consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
Note payable to investment group. Principle due August, 1999 $ 1,000,000
Revolving line-of-credit 301,633
Note payable to investment company: non-interest bearing:
principal due May 8, 1996, previously collateralized by 32,501
inventory of IFD
Note payable to bank due July 5, 1996; non-interest bearing: 75,000
previously collateralized by inventory of IFD __________
$ 1,409,134
</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 September
30, 1998:
Year ending
September 30,
------------------
1999 266,664
2000 195,050
---------------
461,714
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 September 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 exercisable when the shares are registered and expire
at various dates through 2002. At September 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 September 30, 1998 the
Company has issued 2,210,950 and has 2,289,050 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 in New York, under an operating lease which expires in April
2002. Rent expense for the nine months ended September 30, 1998 & 1997
were $20,515 and 18,950. Future minimum lease commit-ments are $ 8,505,
$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 September 30,
1998 is $ 1,258,597. 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 September 30, 1998, if
any that may arise out of such litigation, management believes the
outcome could have a adverse 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 major customer, the U.S. agent of the Chinese
Trading Company that provides factored financing to the Company, which
accounted for 100% of total sales for 1997. Accounts receivable from
this customer accounted for approximately $2,400,000 (94.2%) of total
trade accounts receivable at September 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 $400,000 in notes payable and $30,000 in
accounts payable related to IFD at September 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
Dominican premium handrolled cigars.
RESULTS OF OPERATION
Revenues from continued operations increased for the nine months ended September
30, 1998 to $ 7.8 million a (102%) 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 nine months ended
September 30, 1998 to $6.7 million a (123%) 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 $684,562 for the period a 3.5% 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 nine months ended September 30, 1998
totaled $ 516,905 as compared to a $133,057 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:
Nine Months Ended September 30,
1998 1997
---- ----
Revenues $ 7,872,274 $ 3,883,260
Income (Loss) from Continuing Operations $ 516,905 $ 133,057
Earnings (Loss) Per Common Share
From Continuing Operations $ .12 $ .11
Weighted Average Number of Shares Outstanding 4,271,480 1,248,104
-14-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The company increased it's working capital to $2,163,075 at September
30, 1998. Liabilities increased to 2.2 million a 10% increase. 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 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.
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. Advances
against the line are at a 75% rate and the interest paid is 12%. Advances as of
September 30, 1998 totalled $1,000,000.
The Company's receivables at September 30, 1998 increased by 127% to $
2.6 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:
9/30/98 12/31/97
Total Assets $ 5,658,792 $ 4,094,708
Total Stockholders Equity $ 3,271,242 $ 1,949,480
Working Capital $ 2,163,075 $ 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 and cigars is more significant in the third
and fourth quarters due to the seasonal catch and holiday promotions.
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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.
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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 ALiquidity 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 may 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 September 30, 1998 is $461,714. 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 may materially affect the financial position, results of
operations or cash flows of the Company.
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8. POSSIBLE LOSS OF NASDAQ SMALL-CAP LISTINGS.
Synergy Brands Inc. currently does not qualify 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 and the Common Stock has remained on the Nasdaq Small Cap
system because Synergy has 90 days to comply under the new rules ending
January 4, 1999. The company is considering several options available
to cure the current NASDAQ deficiency. 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 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.
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<PAGE>
(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 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
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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 inks 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.
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.
(a) No matters were submitted to vote of shareholders for the third
quarter ended September 30, 1998.
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: 11/3/98 -----------------------------
Mair Faibish
/s/ Mair Faibish
- -----------------------------
By: Mair Faibish
Chief Financial Officer
/s/ Mitchell Gerstein
Date: 11/3/98 -----------------------------
Mitchell Gerstein
/s/ Mitchell Gerstein
- -----------------------------
By: Mitchell Gerstein
Treasurer
