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 MARCH 31, 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 May 6, 1999 there were
9,053,567 shares outstanding of the registrant's common stock.
<PAGE>
SYNERGY BRANDS, INC.
FORM 10-Q SB
MARCH 31, 1999
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION Page
Consolidated Balance sheets as of March 31, 1999
(Unaudited) and December 31, 1998 2 -3
Consolidated Statements of Operations for the three
months ended March 31, 1999 and 1998 (Unaudited) 4-5
Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and 1998 (Unaudited) 6-7
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 17-22
Statements
PART II: OTHER INFORMATION
Item VI: Exhibits and Reports on Form 8-K 23
<PAGE>
SYNERGY BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, 1999 December 31, 1998
---------------- -----------------
(Unaudited)
ASSETS
Current Assets:
Cash $ 699,859 $ 325,699
Accounts Receivable (note 4) 3,684,283 3,020,010
Inventory (note 3 and 4) 1,600,303 1,374,808
Other Current Assets 553,836 53,650
---------------- ------------------
Total Current Assets 6,538,281 4,774,167
Collateral and Security Deposit (note 7) 1,802,995 1,802,995
Property and Equipment - Net (note 2) 115,872 120,059
Other Assets 43,379 56,891
---------------- ------------------
Total Assets $ 8,500,527 $ 6,754,112
================ ==================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
-2-
<PAGE>
SYNERGY BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, 1999 December 31, 1998
----------------- -----------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current Portion of long term debt. (Note 4) $ 1,275,000 $ 1,475,000
Accounts Payable & Accrued Expenses 940,575 1,240,079
Income taxes payable 12,738 12,794
---------------- ----------------
Total Current Liabilities 2,228,313 2,727,873
Vendor Debt due after one year 128,384 128,384
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 100 100
authorized
Common stock - $.001 par value; 29,900,000 Shares
authorized 8,699,178 and 6,327,086 shares were outstanding at 8,702 6,327
3/31/98 and 12/31/98 respectively: 17,649,613 15,724,196
Additional Paid-in Capital (11,882,710) (12,200,893)
Accumulated Deficit ________________ ________________
5,775,705 3,529,730
(167,500) (167,500)
Less treasury stock at cost, 1,400 shares ________________ ________________
5,608,205 3,362,230
Total stockholders' equity
$ 8,500,527 $ 6,754,112
Total Liabilities & Stockholder's Equity =============== ===============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
-3-
<PAGE>
SYNERGY BRANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
---------------- ----------------
Net Sales (note 8) 3,260,319 1,949,133
- -
---------------- ----------------
3,260,319 1,949,133
Cost of Sales 2,741,306 1,609,329
---------------- ----------------
Gross Profit 519,013 339,804
Selling General and Administrative Expense 171,522 196,529
Depreciation and Amortization 5,869 399
---------------- ----------------
Operating Income (Loss): 341,622 142,876
---------------- ----------------
Other Income (Expense):
Miscellaneous Income (Expense) 1,776 325
Interest Income 22,537 28,162
Interest Expense (47,752) -
---------------- ----------------
Total Other Income (Expense) (23,439) 28,487
================ ================
Income (Loss) From Continuing Operations
Before Income Taxes 318,183 171,363
Income Taxes - -
---------------- ----------------
Income (Loss) From Continuing Operations 318,183 171,363
================= ================
DISCONTINUED OPERATIONS (Note 9)
Gain (loss) of disposal of IFD, net of applicable - -
income tax benefit of $0 - .02
----------------- ----------------
Net Income 318,183 171,363
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
-4-
<PAGE>
SYNERGY BRANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (cont.)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
Income (Loss) Applicable to Common Stock (Note 1) $ 318,183 $ 171,363
=============== ===============
Earnings (Loss) Per Common Share From
Continuing Operations $ .04 $ .05
Earnings (Loss) Per Common Share From
Discontinued Operations - -
---------------- ----------------
Earnings (Loss) Per Common Share $ .04 $ .05
=============== ===============
Weighted Average Number of Shares Outstanding 7,577,421 3,722,958
</TABLE>
See Accompanying Notes To Consolidated Financial Statements
-5-
<PAGE>
SYNERGY BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
---------------- ----------------
Cash Flows From Operating Activities:
Income (Loss) From Continuing Operations $ 318,183 $ 171,363
Income (Loss) From Discontinued Operations - -
Adjustments to Reconcile Net Income (Loss)
From Continuing Operations to Net Cash
Flows From Continuing Operating Activities:
Depreciation and Amortization 5,869 399
Non-Cash Expenses 1,927,792 625,176
Changes in Operating Assets and Liabilities:
Accounts Receivable (664,273) (269,001)
Inventory (225,495) -
Promotional Rebates - 41,993
Other Current Assets (500,186) (2,862)
Other Assets 13,512 -
Accounts Payable & Accrued Expenses (299,504) (659,430)
Income Taxes Payable (56) (5,591)
---------------- ----------------
Net Cash Flows provided by (used in) in
Operating Activities of continued operations 575,842 (97,953)
Cash Flows From Investing Activities:
Purchase of Furniture and Equipment (1,682) (24,798)
Payment of Collateral Security Deposit - -
---------------- ----------------
Net Cash Flows provided by (used in)
in Investing activities of continued operations (1,682) (24,798)
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 374,160 (174,427)
Cash - Beginning of Period 325,699 189,626
---------------- ----------------
Cash - End of Period $ 699,859 $ 15,199
</TABLE>
See Accompanying Notes To Consolidated Financial Statements
-6-
<PAGE>
SYNERGY BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 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 - -
=============== ===============
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
March 31, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
------------
Synergy Brands, Inc. (Company) is a distributor of groceries, general
household merchandise and health and beauty aids in the promotional
wholesale industry. In addition, Synergy also distributes squid and
premium handmade cigars throughout the United States.
In April 1994, Synergy formed a wholly-owned subsidiary, Island
Wholesale Grocers, which is a full-service wholesale delivery company
capable of providing direct store deliveries of inventory within hours
of receiving an order, principally in the northeastern United States.
In December 1995, Synergy formed a wholly-owned subsidiary, Affiliated
Island Grocers, Inc., which does business under the name Island Frozen
and Dairy (IFD). IFD distributed specialty food, poultry and dairy
products throughout the northeastern United States. In June 1996,
Synergy discontinued all operations of IFD and presented them as such
in the consolidated financial statements (see Note 9).
In September 1996, Synergy formed a wholly-owned subsidiary, New Era,
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, 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. In
(PHS), which is a wholesale distributor of premium beauty salon
products.
In October 1998, Synergy formed a wholly-owned subsidiary, Netcigar.com
as a web site for sale of cigar products.
In March 1999, Synergy formed a wholly-owned subsidiary, Sybr.com Inc.,
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.
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.
-8-
<PAGE>
1. 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 March 31, 1999.
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 March 31, 1999 consisted of the following:
Office equipment $ 36,908
Machinery and equipment 48,825
Leasehold improvements 62,675
----------
148,408
Less accumulated depreciation and amortization 26,667
----------
$ 115,872
==========
3. INVENTORY
Inventory as of March 31, 1999 consisted of the following:
Salon finished goods $ 1,055,905
Tobacco raw materials 544,398
----------
$1,600,303
==========
4. LONG-TERM DEBT
Long-term debt at March 31, 1999 consisted of the following:
Note payable to financial company due August 1999,
bearing interest at 12%; collateralized by inventory
of NEF 1,000,000
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
-10-
<PAGE>
Note payable to bank due July 5, 1996; non-interest
bearing; previously collateralized by inventory of IFD 75,000
----------
1,675,000
Less current portion 1,275,000
----------
$ 400,000
==========
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.
-11-
<PAGE>
In 1994, the Company adopted the 1994 Services and Consulting
Compensation Plan (the Plan). Under this Plan, 4,500,000 shares of
common stock have been reserved for issuance. Since the inception of
the Plan, the Company has issued 4,030,582 shares for payment of
services to employees and professional service providers such as legal,
marketing, promotional and investment consultants. The Company has
469,418 available in reserve under the plan at March 31, 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.
7. COMMITMENTS AND CONTINGENCIES
Lease commitments
-----------------
The Company leases office space in Wexford, Pennsylvania and Syosset,
New York, under operating leases expiring in August 2000 and April
2001, 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 March 31, 1999 were as follows:
Year ending
December 31,
------------
1999 $ 35,475
2000 42,255
2001 18,400
2002 9,600
2003 9,600
--------
$115,330
========
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
March 31, 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.
-12-
<PAGE>
Guarantee
---------
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.
8. MAJOR CUSTOMERS
The Company has one customer, the U.S. agent of ALT, which accounted
for 100% of total sales for 1998 and 1997. Accounts receivable from
this customer accounted for approximately $3,600,000 (97%) of total
trade accounts receivable at March 31, 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 March 31, 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
==========
-13-
<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.
In late 1998 the Company expanded its product marketing efforts and
potential by establishing an array of internet sites linked to and available
through multiple search engines to afford access to purchase its products
directly by the consumer. With the addition of internet access many of the
Company products are now available for retail purchase as well as the
traditional wholesale distribution historically offered by the Company. Internet
sales presently include health and beauty aid salon products and cigar products
previously and traditionally offered by the Company through alternative
marketing channels as well as an array of more recently added consumer products
including fragrances, cosmetics and skin care products. These additional
products are offered or sale by the Company through its internet sales network
as well as the Company's historical wholesale distribution channels.
Such businesses of Synergy are segmented, managed and conducted through
corporate subsidiaries whose stock is wholly or majority owned by Synergy, and
the results of whose business are consolidated for reporting purposes with the
financial statements of Synergy. The Company operates its core grocery and HBA
product sale and distribution business though three subsidiaries New Era Foods
Inc., Synergy Brands Distribution Inc., and Island Wholesale Groceries Inc. The
Company's other current subsidiaries include NetCigar.Com Inc., (internet cigar
sales), PHS Group Inc. (salon quality hair and skin care products), SYBR.Com
Inc. (internet sales), and Premium Cigar Wrappers Inc. (Procurement and sale of
raw tobacco for cigar production).
RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1999
Revenues for the first quarter ended March 31, 1999 of $3,260,349, a
67% increase over revenues of $1,949,133 for the first quarter of 1998. Weighted
average shares outstanding were 7,577,421 and 3,722,958 for the 1999 and 1998
first quarters, respectively. The Company's earnings for the first quarter ended
March 31, 1999 were $318,183, an increase of 86%. Earnings per share for the
1999 first quarter were $0.04 per share vs $0.05 per share in the 1998 first
quarter result of operation March 31, 1999 as compared to March 31, 1998.
The Company's operating income increased 139% to $341,622. Operating
Expense declined to $177,391 from $196, 928 a 10% drop for the same period. The
Company is attempting to increase its revenue but without increasing its
operating expenses. The Company believes that account for its internet related
expense it can maintain its operating expense at a fixed level for its core
business as revenues increase in 1999.
"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
will launch May 7, 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."
Synergy Brands has established strategic marketing agreements with
Internet portals including, Lycos.com (Nasdaq:LCOS), The Microsoft Network,
NBC.com, The women.com Network, Warner Brothers. Online and Inktomi
(Nasdaq:INKT). The Company expects to expand onto a broader array of Internet
sites and is also developing an affiliate program to work in conjunction with
other Web sites. In addition, the company has scheduled television commercials
for BeautyBuys.com on the leading women's television network, Lifetime
Television, and on financial networks such as CNBC.
-14-
<PAGE>
The company plans to launch an advertising campaign through online
channels and traditional media to fuel the growth of netcigar.com.
The new e-commerce web site will offer a variety of popular brand name
hand made cigars as well as premium hand made cigars that are produced in the
company's Dominican Republic affiliate factory. The internet site will also
feature a gift shop that will include premium quality leather golf & luggage
items, golf related novelty items for the home, cigar accessories and a wide
selection of fragrances for both men and women. The company's product prices
will offer consumers substantial savings off conventional store prices.
With the goal of providing an environment for the various interests of
a cigar connoisseur and casual cigar enthusiast, netcigar.com will also offer
cigar-related content, including cigar editorials, articles, cigar reviews and
chat rooms. The company is also considering the inclusion of additional content
and services into its web site. Focus is being placed on topics such as
investments, travel, sports, and the offering of a free email service under the
netcigar.com domain.
First Quarter Ended March 31,
1999 1998
---- ----
Revenues $ 3,260,349 $ 1,949,133
Earnings (Loss) Per Common Share 318,183 171,363
Earnings Per Share $ .04 $ .05
Weighted Average Number of Shares Outstanding 7,577,421 3,722,958
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased to 4.3 million at March 31,
1999, a 110% 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 which significantly enhanced the
liquidity of the Company. 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 continuing operations but requires
additional financing to expand its internet e-commerce operations.
The Company plans on expanding its core grocery, HBA and squid
businesses through its distribution agreement and on-line channels. However, the
Company believes it will need additional financing in the form of subordinated
debt or equity to finance its internet expansion plans.
The Company has streamlined its financing requirements by repaying its
revolving secured debt and established secured term financing. The Company
currently borrows $1.6 million at a 12% fixed rate. The current maturities of
the term loans extend from August 199 to October 2000. The Company plans to
increase its maturities to 2001 and reduce the interest rate on its term loans.
However, there can be no assurances that either can be achieved.
The Company's internet budget is significant current estimated at $2.5
million for 1999. The Company plans to incur a significant amount of expense in
developing marketing and advertising its web sites both on 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. 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.
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SEASONALITY
Seasonality affects the demand for certain products sold by the
Company, such as juice drinks in the summer months or hot cereals in fall and
winter months. However, all these products are available to the Company
throughout the year. Manufacturers also tend to promote more heavily towards the
close of the fiscal quarters and during the spring and early summer months.
Accordingly, the Company is able to purchase more products, increase sales
during these periods and reduce its product cost due to these promotions. The
Company generally experiences lower sales volume in the fourth quarter due to
the reduced number of selling days resulting from the concentration of holidays
in the quarter. Sale of frozen squid is more significant in the third and forth
quarters due to the seasonal catch which occurs in the second quarter.
INFLATION
The Company believes that inflation, under certain circumstances, could
be beneficial to the Company's business. When inflationary pressures drive
product costs up, the Company's customers sometimes purchase greater quantities
of product to expand their inventories to protect against further pricing
increases. This enables the Company to sell greater quantities of products that
are sensitive to inflationary pressures.
However, inflationary pressures frequently increase interest rates.
Since the Company is dependent on financing, any increase in interest rates will
increase the Company's credit costs, thereby reducing its profits.
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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. 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 ALiquidity 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.
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6. 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.
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
continues below $1.00 per share, the Common Stock could be delisted
from the Nasdaq Small Cap System and thereafter trading would be
reported in the NASD's OTC Bulletin Board or in the "pink sheets." In
the event of delisting from the Nasdaq Small Cap System, the Common
Stock would become subject to rules adopted by the Commission
regulating broker-dealer practices in connection with transactions in
"penny stocks." The disclosure rules applicable to penny stocks require
a broker-dealer, prior to a transaction in a penny stock not otherwise
exempt from the rules, to deliver a standardized list disclosure
document prepared by the Commission that provides information about
penny stocks and the nature and level of risks in the penny stock
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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.
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 propriety
products is in the best interest of the Company's expansion. The
existence of and relationship with the Company's Chinese Trading
Partner has also significantly decreased the Company's cost of goods
sold. Failure to secure market penetration in the new product lines
would however have an adverse effect on the Company's profitability.
Management believes actions presently being taken to revise the
Company's operating and financial requirements should provide the
opportunity for the Company to continue as a going concern. However,
Management cannot predict the outcome of future operations and no
adjustments have been made to offset the outcome of this uncertainty.
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<PAGE>
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.
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.
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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.
16. Seasonality.
Seasonality affects the demand for certain products sold by the
Company, such as juice drinks in the summer months or hot cereals in
fall and winter months. However, all these products are available to
the Company throughout the year. Manufacturers also tend to promote
more heavily towards the close of the fiscal quarters and during the
spring and early summer months. Accordingly, the Company is able during
these periods to purchase more products, increase sales during these
periods and reduce its product cost due to these promotions. The
Company generally experiences lower soles volume in the fourth quarter
due to the reduced number of selling days resulting from the
concentration of holidays in the quarter. Sale of frozen squid is more
significant in the third and fourth quarters due to the seasonal catch
which occurs in the second quarter.
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17. 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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Item 4-Submission of matters to vote of security holders.
(a)No matters were submitted to vote of shareholders for the first quarter ended
March 31, 1999
Item 6- Exhibits and Reports on Form 8-K
(a)Exhibits - none
(b)There were no reports filed on 8-k for the relevant 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
-----------------------------
By: Mair Faibish
Chief Financial Officer
Date: 05/11/99
/s/ Mitchell Gerstein
-----------------------------
By: Mitchell Gerstein
Treasurer
