FORM 10-Q. QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the period ended SEPTEMBER 30, 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 New
York 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 November 1 there
were 10,641,244 shares outstanding of the registrant's common stock.
<PAGE>
SYNERGY BRANDS INC.
FORM 10-QSB
SEPTEMBER 30, 1999
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION Page
Consolidated Balance sheets as of September 30, 1999
(Unaudited) and December 31, 1998 2-3
Consolidated Statements of Operations for the nine
months ended September 30 1999 and 1998 (Unaudited) 4
Consolidated Statements of Operations for the three
months ended September 30, 1999 and 1998 (Unaudited) 5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 1998 (Unaudited) 6-7
Notes to Consolidated Financial Statements 8-12
Management's Discussion and Analysis of Financial Condition
and Results of Operations 13-16
Forward Looking Information and Cautionary 17-20
Statements
PART II: OTHER INFORMATION
Item VI: Exhibits and Reports on Form 8-K 21
<PAGE>
SYNERGY BRANDS INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, 1999 December 31, 1998
---------------- ---------------
ASSETS (Unaudited)
Current Assets:
Cash $ 444,130 $ 325,699
Accounts Receivable (note 4 ) 3,573,715 3,020,010
Inventory (notes 3 & 4) 2,282,327 1,374,808
Other Current Assets 1,084,864 53,650
---------------- ----------------
Total Current Assets 7,385,036 4,774,167
Collateral and Security Deposit (note 7) 1,802,995 1,802,995
Property and Equipment - Net (note 2) 135,702 120,059
Other Assets 756,024 56,891
---------------- ----------------
Total Assets $ 10,079,757 $ 6,754,112
=============== ===============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
-2-
<PAGE>
SYNERGY BRANDS INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, 1999 December 31, 1998
---------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited)
Current Liabilities:
Current Portion of Long term debt (Note 4) $ 390,000 $ 1,475,000
Accounts Payable & Accrued Expenses 1,625,120 1,240,079
Income taxes payable 9,182 12,794
---------------- ----------------
Total Current Liabilities 2,024,302 2,727,873
Vendor Debt due after one year - 128,384
Long Term Debt (note 4) 1,775,000 400,000
Commitments and Contingencies (note 7) - -
Preferred Stock of Subsidiary (note 4) 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 10,558,744 and 6,327,086 shares were
outstanding at 9/30/99 and 12/31/98 respectively 10,559 6,327
Additional Paid-in Capital 18,467,991 15,724,196
Accumulated Deficit (12,166,320) (12,200,893)
---------------- ----------------
6,312,330 3,529,730
Less treasury stock at cost, 1,400 shares (167,500) (167,500)
---------------- ----------------
Total stockholders' equity 6,144,830 3,362,230
Total Liabilities & Stockholder's Equity $10,079,757 $ 6,754,112
================ ================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
-3-
<PAGE>
SYNERGY BRANDS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
---------------- ----------------
Net Sales (note 8) $10,619,556 $ 7,872,274
Cost of Sales 9,086,112 6,707,286
---------------- ------------
Gross Profit 1,533,444 1,164,988
Selling General and Administrative Expense 1,399,515 684,562
Depreciation and Amortization 17,607 603
---------------- --------------
Operating Income (Loss): 116,322 479,823
---------------- ----------------
Other Income (Expense):
Miscellaneous Income (Expense) 1,865 (16,924)
Interest Income 67,612 66,673
Interest Expense (151,226) (12,667)
---------------- ----------------
Total Other Income (Expense) (81,749) 37,082
=============== ===============
Income (Loss) Before Income Taxes $ 34,573 $ 516,905
Income Taxes - -
--------------- ----------------
Income (Loss) $ 34,573 $ 516,905
Income (Loss) Applicable to Common Stock (Note 1) $ 34,573 $ 516,905
=============== ===============
Earnings (Loss) Per Common Share - $.12
=============== ===============
Weighted Average Number of Shares Outstanding 8,746,437 4,271,480
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
-4-
<PAGE>
SYNERGY BRANDS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
---------------- ----------------
Net Sales (note 8) $ 3,959,511 $ 2,918,138
Cost of Sales 3,567,259 2,524,059
---------------- ----------------
Gross Profit 392,252 394,079
Selling General and Administrative Expense 863,895 213,050
Depreciation and Amortization 5,869 201
---------------- ----------------
Operating Income (Loss): (477,512) 180,828
---------------- ----------------
Other Income (Expense):
Miscellaneous Income (Expense) 5 (18,225)
Interest Income 22,537 15,973
Interest Expense (52,648) (12,667)
---------------- ----------------
Total Other Income (Expense) (30,106) (14,919)
================ ================
Income (Loss) Before Income Taxes $ (507,618) $ 165,909
Income Taxes - -
---------------- ----------------
Income (Loss) $ (507,618) $165,909
Income (Loss) Applicable to Common Stock (Note 1) $ (507,618) $ 165,909
================ ================
Earnings (Loss) Per Common Share $ (.05) $.04
================ ================
Weighted Average Number of Shares Outstanding 9,692,062 4,721,093
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
-5-
<PAGE>
SYNERGY BRANDS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
---------------- ----------------
Cash Flows From Operating Activities:
Income (Loss) From Continuing Operations $ 34,573 $ 516,905
Adjustments to Reconcile Net Income (Loss)
From Continuing Operations to Net Cash
Flows From Continuing Operating Activities:
Depreciation and Amortization 17,607 603
Non-Cash Expenses 745,965 804,857
Dividends on Preferred Stock of Subsidiary 18,375
Changes in Operating Assets and Liabilities:
Accounts Receivable (553,705) (1,440,209)
Promotional Rebates - ( 57,998)
Inventory (907,519) (1,121,000)
Other Current Assets (1,031,214) 51,090
Other Assets (699,133) -
Accounts Payable & Accrued Expenses (828,343) (639,336)
Income Taxes Payable (3,612) (10,041)
---------------- ----------------
Net Cash Flows Provided by (Used in)
Operating Activities (3,225,381) (1,876,754)
Cash Flows From Investing Activities:
Purchase of Furniture and Equipment (33,250) (57,321)
Payment of Collateral Security Deposit - 994,398
---------------- ----------------
Net Cash Flows provided by (Used in)
Investing Activities (33,250) 937,077
Cash Flows From Financing Activities:
Net Borrowing (Payments) on Notes Payable 873,324
Proceeds from Issuance of Common Stock 2,002,062 -
Long Term Debt 1,375,000 -
---------------- ----------------
Net Cash Flows Provided by Financing Activities 3,377,062 873,324
---------------- ----------------
Net Increase (Decrease) in Cash 118,431 (66,353)
Cash - Beginning of Period 325,699 189,626
---------------- ----------------
Cash - End of Period $ 444,130 $ 123,273
================ ================
</TABLE>
See Accompanying Notes To Consolidated Financial Statements
-6-
<PAGE>
SYNERGY BRANDS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
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 - -
=========== ==========
See Accompanying Notes to Consolidated Financial Statements
-7-
<PAGE>
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 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 U.S. retailers and wholesalers as well as developing and
selling proprietary brand consumer products to and through on line
channels, including Health & Beauty Aids (HBA), Fragrances, Salon hair
products, Groceries and Hand made premium Cigars.
Synergy operates through three wholly owned subsidies, New Era Foods,
Sybr.com and Island Wholesale Grocers.
New Era Foods operates the Salon hair care business though PHS, Inc.
and it's Premium Cigar business through PCW, Inc. (which is 66% owned).
(See notes 5 & 7)
Sybr.com operates through recently formed two subsidiaries,
BeautyBuys.com and netcigar.com. BeautyBuys sells on a business to
consumers and business to business model fragrances, hair care, beauty,
health, wellness, personal care and gift products. netcigar sells
through the Internet on a business to consumer model hand made premium
cigars, cigar accessories, gifts, fragrances and leather goods.
Island Wholesale Grocers integrates its purchasing of Grocery and HBA
products through New Era Foods.
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, warehouse 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 September 30, 1999.
-8-
<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 September 30, 1999 consisted of the
following:
Office equipment $ 65,286
Machinery and equipment 50,698
Leasehold improvements 63,992
----------
179,976
Less accumulated depreciation and amortization (44,274)
---------
$ 135,702
==========
3. INVENTORY
Inventory as of September 30, 1999 consisted of the following:
Finished goods $ 1,737,929
Tobacco raw materials 544,398
----------
$ 2,282,327
==========
4. LONG-TERM DEBT
Long-term debt at September 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. 65,000
----------
2,165,000
-10-
<PAGE>
Less current portion 390,000
------------
$ 1,775,000
=============
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.
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 5,944,312 shares for payment of
services to employees and professional service providers such as legal,
marketing, promotional and investment consultants. The Company has
155,688 available in reserve under the plan at September 30, 1999.
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.
-11-
<PAGE>
7. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases office space in Wilmerding 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 September 30, 1999 were as
follows:
Year ending
December 31,
------------
1999 $ 13,755
2000 49,729
2001 31,193
2002 15,973
2003 3,196
--------
$113,846
========
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 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.
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. The
guarantee was reduced to $500,000 in April, 1999.
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.
-12-
<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 through off line distribution channels including
Salon, Vitamins, HB&A and Groceries as well as developing and selling
proprietary brand consumer products to and through online channels, including
Health & Beauty Aids, Fragrances, Salon hair products, Vitamins, Groceries and
Hand made premium Cigars.
SYBR.COM
The Internet has presented an outstanding opportunity for low 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.
Sybr.com further formed BeautyBuys.com, netcigar.com and BeautyBuys.com
wholesale for the purpose of segmenting its merchandising. 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 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, cosmetics, vitamins, nutritional
supplements and gift related products. The launch, which included approximately
2,000 individual items, has encouraged the Company to follow through with its
marketing objective of increasing the variety to more than 5,000 items before
the end of 1999. 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 according to Jupiter Communication. Advertising through on-line
and off line channels will be a part of the overall image building model for
BeautyBuys.com.
NETCIGAR.COM
In May 1999, the Company expanded its premium cigar business by
establishing netcigar.com as 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 proprietary labels and other popular brands are expected to be added
to build a unique community for netcigar. The Market size for all of the
combined categories offer on netcigar.com is in excess of ten billion dollars
according to Jupiter Communication. 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.
NEW ERA FOODS
The Company markets, grocery, health and beauty aid products and salon
hair care goods to major resellers and wholesalers through land channels in the
northeastern part of the U.S. through (NEF).
RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 1999
Nine Month Ended September 30, 1999
Revenues for the nine months increased by 35% to $10,619,556. Gross
profit increased by 32% to $1,533,444 and generated a gross margin of 14.44%.
Net profit decreased by 93% to $34,573 or $0.00 per share for the period.
The increase in revenues is attributable to increase in sales of the
two recently formed business segments which include Internet e-commerce sales
and Salon Hair care sales. Gross profit increased as a result of additional
operating margins realized from the Company's newly formed e-commerce subsidiary
and hair business.
-13-
<PAGE>
Net profit before Internet sales increased by 13% to $586,711 or .07
per share for the period. Internet marketing, advertising and technology costs
were funded by the Company's cash flow from non-Internet businesses and general
working capital, which reduced the Company's profit by $ 552,198.
The table below compares the Company's Non-Internet business for the most recent
nine month period against the Company's Non-Internet business for the similar
period in 1998.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Consolidated Nine months Sept 30, 1999 Nine months Sept 30, 1998 Nine month
(excluding Internet) comparison 1998
vs 1999
- ------------------- --------------------------- -------------------------- ----------------
Gross Sales 9,374,692 100.00% 7,872,274 100.00% 19.08%
Cost of Goods 8,037,440 85.74% 6,707,286 85.20% 19.83%
Gross Profit 1,337,252 14.26% 1,164,988 14.80% 14.79%
SG&A 750,481 8.01% 648,083 8.23% 15.80%
Net Profit (loss) 586,771 6.26% 516,905 6.57% 13.52%
- ------------------
Weighted Shares 8,746,437 4,271,480
Per Share 0.07 0.12
</TABLE>
The table below outlines the operating performance of each of the Company's
three business segments for the most recent Nine months:
NINE MONTHS SEPT. 30, 1999
Internet HB&A Grocery Salon Hair Care Total
--------- ------------ --------------- --------
Gross Sales 1,244,864 7,186,473 2,188,219 10,619,556
Cost of Goods 1,048,672 5,975,446 2,061,994 9,086,112
Gross Profit 196,192 1,211,027 126,225 1,533,444
SG&A 748,390 694,825 55,656 1,498,871
Net Profit (552,198) 516,202 70,569 34,573
- ----------
Weighted Shares 8,746,437
Per Share (.06) .06 0.00
The Internet business for the nine months represented 12% of the
Company's revenues. The company plans on converting as many of its off line
sales to Internet sales on a business to consumer (BtoC) and business to
business model (BtoB) through its online e-commerce sale channels.
Three Month Ended September 30, 1999
Revenues for the three months ended September 30, 1999 increased to
3,959,511 a 36% increase from the prior period. Gross Profit decreased to
392,252 and generated a gross margin of 9.9%. Net loss for the period was
507,618 or (.05) per share.
Net profit before Internet sales decreased by 59% to 67,770 or .01 per
share. Internet marketing, advertising and technology cost was funded by the
Company's cash flow from Non-Internet business and general working capital,
which reduced the Company's profit by $ 575,388.
The increase in revenues is attributable to the focus of the Company's
sales being generated and redirected to e-commerce activities in addition to
traditional wholesaling. The Company's business segments that have a direct
affect on sales as it relates to Internet activities increased materially from
the second quarter and did not exist in the comparable period in 1998. Please be
advised that the Company transacted no Internet business and no Salon Hair Care
business in the comparable period in 1998.
-14-
<PAGE>
The table below compares the Company's Non-Internet business for the most recent
three months against the Company's Non-Internet business for the same period in
1998.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Consolidated Three months Sept 30, 1999 Three months Sept 30,1998 Three month
(excluding Internet) comparison 1998
vs 1999
- -------------------- -------------------------- -------------------------- ---------------
Gross Sales 3,052,780 100.00% 2,918,138 100.00% 4.61%
Cost of Goods 2,752,349 90.16% 2,524,059 86.50% 9.04%
Gross Profit 300,431 9.84% 394,079 13.50% -23.76%
SG&A 232,661 7.62% 228,170 7.82% 1.97%
Net Profit (loss) 67,770 2.22% 165,909 5.69% -59.15%
- -------------------
Weighted Shares 9,692,062 4,721,093
Per Share 0.01 0.04
</TABLE>
The table below represents the segments of business for the three months ended
September 30,1999:
Internet HB&A` Grocery Salon Hair Care Total
--------- ------------- --------------- ----------
Gross Sales 906,731 2,232,139 820,641 3,959,511
Cost of Goods 814,910 1,972,740 779,609 3,567,259
Gross Profit 91,821 259,399 41,032 392,252
SG&A 667,209 213,738 18,923 899,870
Net Profit (575,388) 45,661 22,109 (507,618)
- ------------
Weighted Shares 9,692,002
Per Share (.06) .01 (.05)
The Internet business for the three months represented 23% of the
Company's revenues. The Company plans on converting as many of its off line
sales to Internet sales on a business to consumer (BtoC) business to business
model (BtoB) through its online e-commerce sale channels.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased to 5.4 million at September 30,
1999, a 162% increase from December 31, 1998. 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 an average 10% 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
$ 4 million for 1999, of which $2.1 million has been expended in the first nine
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.
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. Manufacturers 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.
-15-
<PAGE>
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.
-16-
<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 the 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.
-17-
<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.
-18-
<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.
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.
-19-
<PAGE>
In addition numerous tobacco litigations have 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. YEAR 2000 ISSUE.
The Company's management recognizes the need to ensure that its
operations and relationship with vendors, and other third parties will
not be adversely impacted by software processing errors arising from
calculations using the year 2000 and beyond. Many existing computer
programs and databases use only two digits to identify a year in the
date filed (i.e. 99 would represent 1999). If not corrected, many
computer systems could fail or create erroneous results in the year
2000. The Company believes all of its internal information systems
currently in use are year 2000 ready. The majority of the Company's
critical business applications have been developed internally, in the
past year with Year 2000 ready tools.
Should any or all of the applications fail to perform properly on
January 1, 2000, the Company will resort to temporary manual
processing, which is not expected to have a material adverse impact on
its short-term operations. Failure to achieve Year 2000 readiness by
any of the Company's vendors, while expected to cause some disruption
to operations in the short-term, is not expected to have a material
impact on the Company's operations.
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.
-20-
<PAGE>
Item 4-Submission of matters to vote of security holders.
(a) No matters were submitted to vote of shareholders for the third quarter
ended September 30, 1999.
Item 6- Exhibits and Reports on Form 8-K
(a) Exhibits - none
(b) There was no reports filed on Form 8-K for the relevant period.
-21-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SYNERGY BRANDS INC.
/s/ Mair Faibish
Date 11/8/99 -------------------
/s/ Mair Faibish
/s/ Mair Faibish
-----------------------------
By: /s/ Mair Faibish
Chief Financial Officer
Date: 11/8/99
/s/ Mitchell Gerstein
-----------------------
/s/ Mitchell Gerstein
/s/ Mitchell Gerstein
- ---------------------------
By: /s/ Mitchell Gerstein
Treasurer
