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 JUNE 30, 1999
-------------
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.)
40 Underhill Blvd. Syosset, NY 11791
(Address of principal executive offices) (zip code)
516-682-1980
(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 August 3, 1999
there were 9,476,692 shares outstanding of the registrant's common stock.
<PAGE>
SYNERGY BRANDS INC.
FORM 10-QSB
JUNE 30, 1999
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION Page
Consolidated Balance sheets as of June 30, 1999 2-3
(Unaudited) and December 31, 1998
Consolidated Statements of Operations for the six 4
months ended June 30 1999 and 1998 (Unaudited)
Consolidated Statements of Operations for the three 5
months ended June 30, 1999 and 1998 (Unaudited)
Consolidated Statements of Cash Flows for the six months 6-7
ended June 30, 1999 and 1998 (Unaudited)
Notes to Consolidated Financial Statements 8-13
Management's Discussion and Analysis of 14-16
Financial Condition and Results of Operations
Forward Looking Information and Cautionary 17-21
Statements
PART II: OTHER INFORMATION
Item VI: Exhibits and Reports on Form 8-K 22
<PAGE>
SYNERGY BRANDS INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1999 AND DECEMBER 31, 1998
JUNE 30, 1999 December 31, 1998
---------------- -----------------
(Unaudited)
ASSETS
------
Current Assets:
- ---------------
Cash $ 586,350 $ 325,699
Accounts Receivable (note 4) 4,298,166 3,020,010
Inventory (note 3 and 4) 1,355,538 1,374,808
Other Current Assets 482,305 53,650
__________ ____________
Total Current Assets 6,722,359 4,774,167
Collateral and Security Deposit (note 7) 1,802,995 1,802,995
Property and Equipment-net (note 2) 118,469 120,059
Other Assets 682,130 56,891
___________ ____________
Total Assets $ 9,325,953 $ 6,754,112
See Accompanying Notes to Consolidated Financial Statements
-2-
<PAGE>
SYNERGY BRANDS INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
JUNE 30, 1999 December 31, 1998
---------------- ----------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
- --------------------
Current Portion of long term debt (note 4) $ 1,775,000 $ 1,475,000
Accounts Payable & Accrued Expenses 962,284 1,240,079
Income taxes payable 12,738 12,794
---------------- ----------------
Total Current Liabilities 2,750,022 2,727,873
Vendor Debt due after one year 4,384 128,384
Long term debt (note 4) 400,000 400,000
Commitments and Contingencies (note 7) - -
Preferred Stock of Subsidiary (note 5) 135,625 135,625
Stockholders' Equity: (Note 6)
Class A $2.20 Cumulative Preferred stock - $.001 par
value; 100,000 shares authorized 100 100
Common stock - $.001 par value; 29,900,000 Shares
authorized 9,310,928 and 6,327,086 shares were
outstanding at 6/30/99 and 12/31/98 respectively: 9,311 6,327
Additional Paid-in Capital 7,852,713 15,724,196
Accumulated Deficit (11,658,702) (12,200,893)
---------------- ----------------
6,203,422 3,529,730
Less treasury stock at cost, 1,400 shares (167,500) (167,500)
---------------- ----------------
Total stockholders' equity 6,035,922 3,362,230
Total Liabilities & Stockholder's Equity $9,325,953 $6,754,112
================ ================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
-3-
<PAGE>
SYNERGY BRANDS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
---------------- ----------------
Net Sales (note 8) 6,660,045 4,954,136
---------------- ----------------
6,660,045 4,954,136
Cost of Sales 5,518,853 4,183,227
---------------- ------------
Gross Profit 1,141,192 770,909
Selling General and Administrative Expense 535,620 471,512
Depreciation and Amortization 11,738 402
---------------- --------------
Operating Income (Loss) 593,834 298,995
---------------- ----------------
Other Income (Expense)
Miscellaneous Income (Expense) 1,860 1,301
Interest Income 45,075 50,700
Interest Expense (98,578) -
---------------- ----------------
Total Other Income (Expense) 542,191 52,001
=============== ===============
Income (Loss) Before Income Taxes 542,191 350,996
Income Taxes - -
---------------- ----------------
Income (Loss) $ 542,191 $ 350,996
=============== ===============
Income (Loss) Applicable to Common Stock (Note 1) $ 542,191 $350,996
---------------- ----------------
Earnings (Loss) Per Common Share $ .07 $.09
=============== ===============
Weighted Average Number of Shares Outstanding 8,266,859 4,030,889
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
-4-
<PAGE>
SYNERGY BRANDS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
---------------- ----------------
Net Sales (note 8) 3,399,726 3,005,003
Cost of Sales 2,777,547 2,573,898
---------------- ------------
Gross Profit 622,179 431,105
Selling General and Administrative Expense 364,098 274,983
Depreciation and Amortization 5,869 3
---------------- --------------
Operating Income (Loss): 252,212 156,119
---------------- ----------------
Other Income (Expense):
Miscellaneous Income (Expense) 84 976
Interest Income 22,538 22,538
Interest Expense (50,826) -
---------------- ----------------
Total Other Income (Expense) 224,008 23,514
=============== ===============
Income (Loss) Before Income Taxes 224,008 179,633
Income Taxes - -
---------------- ----------------
Income (Loss) $ 224,008 $ 179,633
Income (Loss) Applicable to Common Stock (Note 1) $ 224,008 $179,633
=============== ===============
Earnings (Loss) Per Common Share $ .03 $.04
=============== ===============
Weighted Average Number of Shares Outstanding 8,956,296 4,321,135
</TABLE>
-5-
<PAGE>
SYNERGY BRANDS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
---------------- ----------------
Cash Flows From Operating Activities:
Income (Loss) From Continuing Operations $ 542,191 $ 350,996
Adjustments to Reconcile Net Income (Loss)
From Continuing Operations to Net Cash
Flows From Continuing Operating Activities:
Depreciation and Amortization 11,738 402
Non-Cash Expenses 2,631,501 749,196
Changes in Operating Assets and Liabilities:
Accounts Receivable (1,278,156) (463,915)
Promotional Rebates - ( 32,690)
Inventory 19,270 (672,852)
Other Current Assets (428,655) 49,805
Other Assets (625,239) -
Accounts Payable & Accrued Expenses (401,795) (499,111)
Income Taxes Payable (56) ( 8,261)
---------------- ----------------
Net Cash Flows provided by (used in) in
Operating Activities of continued 470,799 (526,430)
operations
Cash Flows From Investing Activities:
Purchase of Furniture and Equipment (10,148) (57,321)
Payment of Collateral Security Deposit - 450,000
________________ ________________
Net Cash Flows provided by (used in) in
Investing Activities of continued
operations (10,148) 392,679
Cash Flows From Financing Activities:
Net Borrowing (Payments) on Notes Payable (200,000) (51,676)
Proceeds from Issuance of Common Stock - -
Long Term Debt - -
________________ ________________
Net Cash Flows Provided by Financing Activities of
Continued Operations (200,000) (51,676)
________________ ________________
Net Increase (Decrease) in Cash 260,651 (185,427)
Cash - Beginning of Period 325,699 189,626
________________ ________________
Cash - End of Period $586,350 $ 4,199
=============== ===============
</TABLE>
See Accompanying Notes To Consolidated Financial Statements
-6-
<PAGE>
SYNERGY BRANDS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
---------------- ----------------
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for:
Interest
Continuing Operations $ - $ -
Discontinued Operation in - 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
-7-
<PAGE>
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Synergy Brands, Inc. ("Synergy") through its subsidiaries (collectively
the "Company") markets national brand name consumer products to
numerous US retailers and wholesalers as well as developing and selling
proprietary brand consumer products to and through on line channels.
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 September 1996, Synergy formed a wholly-owned subsidiary, New Era,
Foods Inc., (NEF) which is a brokerage company representing
manufacturers, retailers and wholesalers in connection with
distribution of grocery and general merchandise products (see note 7).
In October 1997, NEF formed a subsidiary, Premium Cigar Wrappers, Inc.
(PCW), for the purpose of producing premium cigar wrappers in the
Dominican Republic. New Era Foods, Inc. owns 66% of the common stock
and approximately 22% of the preferred stock of PCW (see Note 5).
In October 1998 NEF formed a wholly-owned subsidiary, PHS Group Inc. In
(PHS), which is a wholesale distributor of premium beauty salon
products.
In October 1998, Synergy formed a wholly-owned subsidiary, Netcigar.com
Inc. which has developed a web site for sale of premium cigar products,
fragrances, golf and cigar accessories.
In March 1999 Synergy formed a wholly-owned subsidiary, Sybr.com to
oversee the Internet activity.
In March 1999, Synergy formed a wholly-owned subsidiary, BeautyBuys.com
Inc. which has developed a web site to offer direct to the customer via
Internet sales on a non-exclusive basis a popular selection of
nationally branded health and beauty care products, design fragrance
and salon products.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Synergy,
its wholly-owned subsidiaries and its majority-owned subsidiary
(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.
MARKETABLE SECURITIES
Management determines the appropriate classification of its investments
in debt and equity securities at the time of purchase and re-evaluates
such determination at each balance sheet date. No securities were
outstanding at June 30, 1999.
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<PAGE>
1. INVENTORY
Inventory is stated at the lower of cost or market. The Company uses
the first-in, first-out (FIFO) cost method of valuing its inventory.
All tobacco inventory is included in current assets in conformity with
standard industry practice, not withstanding the fact that significant
quantities of inventory may be carried for several years for purposes
of the curing process.
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.
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.
PREFERRED STOCK OF SUBSIDIARY
Changes in preferred stock of the subsidiary are accounted for as
equity transactions and thus no gain or loss is recognized. Upon each
new issuance of the subsidiary's preferred stock, the Company will
evaluate whether or not its investment has been impaired and adjust
accordingly.
ADVERTISING
The Company expenses advertising and promotional costs as incurred.
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.
EARNINGS PER SHARE
The Company calculates earnings per share pursuant to Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS
128). SFAS 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 of common shares and dilutive common share equivalents
outstanding during each period.
-9-
<PAGE>
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 Compensation" (SFAS 123), encourages, but does not require,
companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has elected to continue
to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related
interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the fair market value of the
Company's stock at the date of the grant over the amount the employees
or non-employees must pay to acquire the stock.
2. PROPERTY AND EQUIPMENT
Property and equipment as of June 30, 1999 consisted of the following:
Office equipment $ 45,374
Machinery and equipment 48,825
Leasehold improvements 62,675
----------
156,874
Less accumulated depreciation and amortization (38,405)
----------
$ 118,469
==========
3. INVENTORY
Inventory as of June 30, 1999 consisted of the following:
Finished goods $ 811,140
Tobacco raw materials 544,398
----------
$ 1,355,538
===========
4. LONG-TERM DEBT
Long-term debt at June 30, 1999 consisted of the following:
Note payable to financial company due January 2001,
bearing interest at 9%; collateralized by inventory of NEF 1,500,000
Secured debentures; bearing interest at 12% payable
monthly; $200,000 principal due October 1999 and
remainder maturing October 2000; collateralized by
inventory and accounts receivable of PHS 600,000
Note payable to bank due July 5, 1996; non-interest
bearing; previously collateralized by inventory of IFD 75,000
----------
2,175,000
Less current portion 1,775,000
------------
$ 400,000
==========
-10-
<PAGE>
5. MINORITY INTEREST
PCW was incorporated in October 1997 with 7,750 shares of authorized
$.001 par value common stock. At December 31, 1998, PCW had 1,000
shares of common stock outstanding which were issued at par value. The
Company owns 66% of the common stock and an unrelated individual owns
the minority interest. For financial reporting purposes, the assets,
liabilities, results of operations and cash flows for PCW are included
in the Company's consolidated financial statements and the outside
investor's interest in PCW is reflected in the preferred stock of
subsidiary.
PCW had 2,250 shares of authorized $.001 par value preferred stock
issued and outstanding at December 31,1998. PCW issued 1,750 shares of
preferred stock at inception to two unrelated individuals at $60 per
share, and 500 shares to the Company for a 22% minority interest in the
preferred stock. 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. Included in preferred stock of
subsidiary is $30,625 of preferred stock dividends payable at December
31, 1998. The Company's portion of the dividend has been eliminated in
consolidation. 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.
6. STOCKHOLDERS' EQUITY
In May 1997, the majority of common stockholders voted to authorize a
1-for-25 reverse split of the Company's $.001 par value common stock.
Any stockholders entitled to fractional shares were paid with cash
based upon the current fair market value of the stock. All references
in the accompanying financial statements to the number of common shares
have been restated to reflect the stock split.
In November 1997, the Company redeemed 100% of the Class A preferred
stock in exchange for $350,000 cash, 400,000 shares of common stock and
options to purchase 500,000 shares of restricted common stock
exercisable at $1 per share. Part of the cash payment was used to
settle accrued dividends of $220,000. The options were to vest if the
Company achieved $1,000,000 in pretax income within five years. During
1998, this restriction was removed and the options were granted at $.50
per share. 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 December 31, 1998, the Company had outstanding warrants to purchase
112,500 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 December 31, 1998, 112,500 shares of
common stock were reserved for that purpose.
During 1997, the Company issued 1,612,200 shares in connection with a
Regulation S offering at an average price of $.82 per share, resulting
in $1,331,780 proceeds net of offering expenses, including the
conversion of $377,000 of subordinated debt, and $125,000 of non-cash
issuances as described in the consolidated statement of cash flows.
In 1994, the Company adopted the 1994 Services and Consulting
Compensation Plan (the Plan). Under this Plan, 6,100,000 shares of
common stock have been reserved for issuance. Since the inception of
the Plan, the Company has issued 4,818,312 shares for payment of
services to employees and professional service providers such as legal,
marketing, promotional and investment consultants. The Company has
1,281,688 available in reserve under the plan at June 30, 1999. An
additional 1,600,000 shares has been registered and reserved at
4/19/99. Common stock issued in connection with the Plan was valued at
the fair value of the common stock at the date of issuance at an amount
equal to the service provider's invoice amount. Under the Plan, the
Company granted options to selected employees and professional service
providers.
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<PAGE>
7. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases office space in Wexford, Pennsylvania and Syosset,
New York, under operating leases expiring in April 2001 and July 2002,
respectively. The Company is also leasing a vehicle under an operating
lease expiring in 2003. Future minimum lease payments under
non-calculable operating leases as of June 30, 1999 were as follows:
Year ending
December 31,
------------
1999 $ 27,600
2000 49,873
2001 31,805
2002 16,335
2003 4,000
--------
$129,613
========
DISTRIBUTION AGREEMENTS
In 1996, the Company entered into a ten-year agreement with a Chinese
trading company (ALT) to distribute frozen seafood in the United States
under a licensing arrangement. The Company acts as an agent for ALT.
During 1997, the Company marketed ALT's frozen seafood products and
earned commissions based on sales generated by the distribution
agreement. Additionally, the Company sells promotional grocery products
to an agent of ALT. ALT provides the funding for such purchases.
In consideration for ALT providing products and funding to the Company
for sale and distribution, and as security for doing so, the Company
was required to provide $2,052,995 in 1996 and an additional $200,000
in 1997, as collateral security for performance by the Company under
the terms of the agreement. The Company had $450,000 refunded to it in
1998. The collateral security deposit bears interest at 5% and is
received quarterly.
In December 1997, NEF entered into a 25-year exclusive worldwide
distribution agreement with a Dominican Republic corporation (DR) for
the sale and distribution of premium handmade cigars manufactured in
the Dominican Republic. There is an option to extend the term of the
distribution agreement up to an additional 25 years.
LITIGATION
The Company is a named defendant in various lawsuits arising from the
liquidation of IFD. The Company has evaluated the potential exposure of
an unfavorable outcome on various lawsuits and has accrued $60,635 at
June 30, 1999 for obligations which are considered probable.
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.
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 cigar wrappers. The
guarantee was reduced to $500,000 in April, 1999.
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<PAGE>
8. MAJOR CUSTOMERS
The Company facilitates its sales to grocery and drug store chains
though the U.S. agent of Asia Legend Trading Company, which accounted
for 100% of total sales for 1998 and 1997. Accounts receivable from
this customer accounted for approximately $ 4,100.00 (95%) of total
trade accounts receivable at June 30, 1999.
9. DISCONTINUED OPERATIONS
On June 30, 1996, the Company adopted a formal plan to discontinue the
operations of IFD that was completed during 1998. Accordingly, IFD is
accounted for as a discontinued operation in the accompanying 1997
consolidated financial statements and had no revenues in 1998 or 1997.
During 1997, the Company incurred additional expenses related to the
discontinued operations of IFD and related litigation. The assets and
liabilities of IFD included in the accompanying consolidated balance
sheet as of June 30, 1999 consisted of approximately the following:
Current liabilities of discontinued operations -
Accounts payable and accrued expenses $ 60,635
Long-term debt 75,000
---------------
$ 135,635
===============
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Synergy Brands, Inc. ("Synergy") through its subsidiaries (collectively
the "Company") markets national brand name consumer products to numerous US
retailers and wholesalers as well as developing and selling proprietary brand
consumer products to and through on line channels.
SYBR.COM
The Internet has presented an outstanding opportunity for low cost mass
marketing and distribution of a wide variety of consumer products. As a result
the company formed Sybr.com Inc. in the 1st quarter of 1999 for the purpose of
developing and financing the expansion of the company's Internet operations. By
operating out of a warehouse configuration that requires less capital as well as
lower labor and rent factors than conventional retail stores, e-tailers can
experience substantial operating savings. These savings can be passed along to
the consumer in the form of lower prices. In addition to significant savings,
the convenience of shopping online at home instead of in line at a store makes
the Internet the preferred buying location for thousands of products.
BEAUTYBUYS.COM
In March 1999, the Company established BeautyBuys.com Inc. which has
developed a web-site which offers direct to the consumer via the Internet, a
popular selection of nationally branded health and beauty care products,
including professional salon hair and skin care items, designer fragrances and
cosmetics. The launch, which included approximately 2,000 individual items, has
encourage the Company to follow through with its marketing objective of
increasing the variety to more than 5,000 items before the end of 1999 with the
addition of a gift center, vitamins, nutritional supplements, and a convenience
drug store. Market size for all of the combined categories offered on this site
is in excess of fifty billion dollars, with online sales estimated at $1.2
billion by 2002. Contract advertising with major Internet sites such as
Lycos.com, women.com, Microsoft, NBC, Warner Brothers and Yahoo, as well as many
others, is part of the overall effort to establish a presence on the Internet
that will result in lasting consumer impressions. Additional advertising through
major off-line channels will also be part of the overall image building plan for
BeautyBuys.com.
NETCIGAR.COM
In May 1999, the Company expanded its premium cigar business by
establishing NetCigar.com Inc. which has developed a web site for the sale of
premium cigars and related products. Through the netcigar web site, the company
will offer information on a variety of cigars and cigar related products for
sale on the site. Additional content such as cigar news and events, editorials,
cigar reviews, cigar chat rooms, free e-mail, a member's area and products of
both the Company's pro-prietary labels and other popular brands will add to the
drawing power of the site. The Market size for all of the combined categories
offer on netcigar.com is in excess of ten billion dollars. The Company plans to
optimize the traffic for potential customers by sponsoring an affiliates
program, advertising on the Internet and traditional media channels, and
initiating a public relations program.
GROCERY, HEALTH AND BEAUTY AID OPERATION
The company markets, grocery, health and beauty aid products to major
resellers and wholesalers in the northeastern part of the U.S.. At the present
time 90% of the company's sales are conducted through there outlets.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 1999
Six Month Ended June 30, 1999
Revenues for the six months ended June 30, 1999 increased to
$6,660,045, a 34 % increase over revenues from the prior period. The Company's
earnings for the six months ended June 30, 1999 were $542,191, an increase of
54% for the period. Earnings per share for the 1999 period were $0.07 per share
vs $0.09 per share in the 1998 period. The Company's gross profit increased 48%
to $1,141,192. The increase in Gross Profit and Net Income is attributable to
increase in revenue and increased selling margins.
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<PAGE>
Three Month Ended June 30, 1999
Revenues for the three months ended June 30, 1999 increased to
$3,399,726 a 13% increase over revenues from the prior period. The Company's
earning for the three months ended June 30, 1999 were $224,008 an increase of
24% for the period. Earnings per share for the 1999 period were $0.03 per share
vs $0.04 per share in the 1998 period. The Company's gross profit increased 44%
to 622,179. The increase in Gross Profit and Net Income is attributable to
increase in revenue and increased selling margins.
The company continues to invest a significant amount of capital and has
raised funds to insure the growth of its Internet subsidiaries, BeautyBuys.com,
which was launched on February 26, 1999, and NetCigar.com, which was launched
May 26, 1999. The company plans to explore several opportunities to maximize the
market value of its web sites through co-branding ventures and financial
partnerships that would enhance the overall value of the company.
The following tables set forth selected operation data of the Company:
Six Months Ended June 30, 1999
1999 1998
Revenues $ 6,660,045 $ 4,954,136
Income (Loss) from Continuing Operations $ 542,191 $ 350,996
Earnings (Loss) Per Common Share
From Continuing Operations $.07 $.09
Weighted Average Number of Shares Outstanding 8,266,859 4,030,889
Three Months Ended June 30, 1999
1999 1998
Revenues $ 3,399,726 $ 3,005,003
Income (Loss) from Continuing Operations $ 224,008 $ 179,633
Earnings (Loss) Per Common Share
From Continuing Operations $.03 $.04
Weighted Average Number of Shares Outstanding 8,956,296 4,321,135
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased to 4.0 million at June 30,
1999, a 94% increase from December 31, 1998. Reaching this level of working
capital is a significant milestone for the Company. The Company raised
additional capital and turned its operations to profitability. As a result the
Company has secured vendor credits and secured financing to grow its operation.
The Company believes that it has sufficient working capital to fund its
non-Internet operations but requires additional financing to expand its Internet
e-commerce operations.
The Company has streamlined its financing requirements by repaying its
revolving secured debt and established secured term financing. The Company
currently borrows $2.1 million at a 10% fixed rate. The current maturities of
the term loans extend from November 2000 to January 2001.
The Company's Internet budget is significant and currently estimated at
$ 3 million for 1999, of which $1.5 million has been expended in the first six
months of 1999. The Company plans to incur a significant amount of expense in
developing marketing and advertising its web sites on both the Internet and
traditional media outlets. As a result the Company plans on raising additional
capital to support its anticipated expenditures. Failure to raise additional
capital to support the Internet business may adversely effect the Company's
overall business.
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<PAGE>
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.
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.
Seasonality is a factor in the Internet business especially as it
relates to holiday promotions, therefore it is anticipated that sales would be
higher during the Christmas holiday, Mother's Day and other peak holidays.
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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<PAGE>
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. INTERNET
The internet environment is new to business and is subject to inherent
risks as in any new developing business including rapidly developing
technology with which to attempt to keep pace and level of acceptance
and level of consumer knowledge regarding its use.
2. 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.
3. 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.
4. POTENTIAL PRODUCT LIABILITY.
As a participant in the distribution chain between the manufacturer and
consumer, the Company would likely be named as a defendant in any
product liability action brought by a consumer. To date, no claims have
been asserted against the Company for product liability; there can be
no assurance, however, that such claims will not arise in the future.
Currently, the company does not carry product liability insurance. In
the event that any products liability claim is not fully funded by
insurance, and if the Company is unable to recover damages from the
manufacturer or supplier of the product that caused such injury, the
Company may be required to pay some or all of such claim from its own
funds. Any such payment could have a material adverse impact on the
Company.
5. RELIANCE ON COMMON CARRIERS.
The Company does not utilize its own trucks in its business and is
dependent, for shipping of product purchases, on common carriers in the
trucking industry. Although the Company uses several hundred common
carriers, the trucking industry is subject to strikes from time to
time, which could have material adverse affect on the Company's
operations if alternative modes of shipping are not then available.
Additionally the trucking industry is susceptible to various natural
disasters which can close transportation lanes in any given region of
the country. To the extent common carriers are prevented from or
delayed in utilizing local transportation lanes, the Company will
likely incur higher freight costs due to the limited availability of
trucks during any such period that transportation lanes are restricted.
6. COMPETITION.
The Company is subject to intense competition in its Internet business
, 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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<PAGE>
7. TRADE RELATIONS WITH CHINA.
The Company is dependent on trade financing with the People's Republic
of China (PRC). Any government sanctions that cause an interruption of
trade or prohibit trade with PRC through higher duties or quotas could
have a material adverse effect on the Company's business. China
currently maintains a Most Favored Nation status with the United
States, which it has maintained continuously since 1980, renewal of
which is done on an annual basis each May. Loss of such status could
have a material adverse effect on Company business.
8. LITIGATION
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, but there can be no assurance as to this.
9. POSSIBLE LOSS OF NASDAQ SMALL-CAP LISTINGS.
Synergy Brands 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 Brands has been below
$1.00 in the past and the Common Stock has remained on the Nasdaq Small
Cap system because Synergy Brands has complied with the alternative
criteria which are now eliminated under the new rules. If the bid price
falls below $1.00 per share, the Common Stock could be delisted from
the Nasdaq Small Cap System and thereafter trading would be reported in
the NASD's OTC Bulletin Board or in the "pink sheets." In the event of
delisting from the Nasdaq Small Cap System, the Common Stock would
become subject to rules adopted by the Commission regulating
broker-dealer practices in connection with transactions in "penny
stocks." The disclosure rules applicable to penny stocks require a
broker-dealer, prior to a transaction in a penny stock not otherwise
exempt from the rules, to deliver a standardized list disclosure
document prepared by the Commission that provides information about
penny stocks and the nature and level of risks in the penny stock
market. In addition, the broker-dealer must identify its role, if any,
as a market maker in the particular stock, provide information with
respect to market prices of the Common Stock and the amount of
compensation that the broker-dealer will earn in the proposed
transaction. The broker-dealer must also provide the customer with
certain other information and must make a special written determination
that the penny stock is a suitable investment for the purchaser and
receive the purchaser's written agreement to the transaction. Further,
the rules require that following the proposed transaction the
broker-dealer provide the customer with monthly account statements
containing market information about the prices of the securities. These
disclosure requirements may have the effect of reducing the level of
trading activity in the secondary market for a stock that becomes
subject to the penny stock rules. If the Common Stock became subject to
the penny stock rules, many broker-dealers may be unwilling to engage
in transactions in the Company's securities because of the added
disclosure requirements, thereby making it more difficult for
purchasers of the Common Stock in this offering to dispose of their
shares of the Common Stock.
10. RISK OF BUSINESS DEVELOPMENT.
The Company has ventured into new lines of product and Internet
distribution and such product and product distribution 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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<PAGE>
11. 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 proprietary products is in the best
interest of the Company's expansion. The existence of and relationship
with the Company's Chinese Trading Partner has also significantly
decreased the Company's cost of goods sold. Failure to secure market
penetration in the new product lines would however have an adverse
effect on the Company's profitability. Management believes actions
presently being taken to revise the Company's operating and financial
requirements should provide the opportunity for the Company to continue
as a going concern. However, Management cannot predict the outcome of
future operations and no adjustments have been made to offset the
outcome of this uncertainty.
12. 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.
13. EXTENSIVE AND INCREASING REGULATION OF TOBACCO PRODUCTS AND LITIGATION
MAY IMPACT CIGAR INDUSTRY.
The tobacco industry in general has been subject to extensive
regulation at the federal, state and local levels. Recent trends have
increased regulation of the tobacco industry. Although regulation
initially focused on cigarette manufacturers, it has begun to have a
broader impact on the industry as a whole and may focus more directly
on cigars in the future. The recent increase in popularity of cigars
could lead to an increase in regulation of cigars. A variety of bills
relating to tobacco issues have been introduced in the U.S. Congress,
including bills that would have (1) prohibited the advertising and
promotion of all tobacco products or restricted or eliminated the
deductibility of such advertising expense, (ii) increased labeling
requirements on tobacco products to include, among others things,
addiction warnings and lists of additives and toxins. (iii) shifted
control of tobacco products and advertisements from the Federal Trade
Commission (the "FTC") to the Food and Drug Administration (the "FDA"),
(iv) increased tobacco excise taxes and (v) required tobacco companies
to pay for health care costs incurred by the federal government in
connection with tobacco related diseases. Future enactment of such
proposals or similar bills may have an adverse effect on the results of
operations or financial condition of the Company.
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<PAGE>
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.
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.
In addition numerous tobacco litigation has been commenced and may in
the future be instituted, all of which may adversely affect the cigar
consumption and sale and may pressure applicable government entities to
institute further and stricter legislation to restrict and possibly
prohibit cigar sale and consumption, any and all of which may have an
adverse affect on Company business (see "Government Regulation -
Tobacco Industry Regulation and Tobacco Industry Litigation" supra).
14. 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.
15. 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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<PAGE>
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 Brands 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 July 6, 1999 the following matters were
submitted:
(a) Election of the Company's board of directors, where in the following
persons were elected, such persons being all of the same persons than
acting as directors.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
The following persons: For Against Abstain
1. Henry Platek 3,526,612 11,912 17,528
2. Mair Faibish 3,526,604 12,000 17,528
3. Mitchell Gerstein 3,526,612 11,992 17,528
4. Dominic Marsicovetere 3,526,612 11,992 17,528
5. Michael Ferrone 3,526,532 12,072 17,528
</TABLE>
(b) To re-elect the Company's current auditors.
Where Belew Averitt LLP the current auditors was re-elected for
December 31, 1999.
For Against Abstain
3,507,078 12,894 11,730
Item 6- Exhibits and Reports on Form 8-K
(a) Exhibits no.
1. Promissory Note between The Venezuelan Recovery Fund NV as lender and
New Era Foods Inc. as borrower dated June 1, 1999
2. Extension Agreement between The Venezuelan Recovery Fund NV, New Era
Foods Inc., and Synergy Brands Inc. dated June 1, 1999.
3. 9% Subordinated Convertible Debenture between New Era Foods Inc., The
Venezuelan Recovery Fund NV, and Synergy Brands Inc. dated June 1,
1999.
The Exhibits were included within the Form 8-k referenced herein and
are incorporated herein by references thereto.
(b) There was one report filed on Form 8-K for the second quarter ended
June 30, 1999.
1. June 1, 1999 Restructure Debt with Venezuelan Recovery Fund NV.
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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
------------------
Mair Faibish
Dated 8/04/99
/s/ Mair Faibish
- -----------------------
By: Mair Faibish
Chief Financial Officer
/s/ Mitchell Gerstein
-----------------------
Mitchell Gerstein
Dated 8/04/99
/s/ Mitchell Gerstein
- -----------------------
By: Mitchell Gerstein
Treasurer
