-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I1O/UZv3xAFBCdFtgfjQ0rsJ44oXxEygEQri8O+1iiT5CGB6UBO9o7VY1nYCg9DL J9/og7yFFRTLWcPxw6dV3g== 0001026018-98-000035.txt : 19981113 0001026018-98-000035.hdr.sgml : 19981113 ACCESSION NUMBER: 0001026018-98-000035 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYNERGY BRANDS INC CENTRAL INDEX KEY: 0000870228 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-GROCERIES & GENERAL LINE [5141] IRS NUMBER: 222993066 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-19409 FILM NUMBER: 98744305 BUSINESS ADDRESS: STREET 1: 10850 PERRY WAY STREET 2: SUITE 203 CITY: WEXFORD STATE: PA ZIP: 15090 BUSINESS PHONE: 5166821980 MAIL ADDRESS: STREET 1: 10850 PERRY WAY STREET 2: SUITE 203 CITY: WEXFORD STATE: PA ZIP: 15090 FORMER COMPANY: FORMER CONFORMED NAME: KRANTOR CORP DATE OF NAME CHANGE: 19930328 FORMER COMPANY: FORMER CONFORMED NAME: DELTA VENTURES INC DATE OF NAME CHANGE: 19600201 10QSB 1 FORM 10QSB FORM 10-Q. QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the period ended SEPTEMBER 30, 1998 ------------------ Commission File Number: 0-19409 SYNERGY BRANDS INC. (Exact name of registrant as it appears in its charter) Delaware 22-2993066 (State of incorporation) (I.R.S. Employer identification no.) 10850 Perry Way, Suite 203 Wexford PA 15090 (Address of principal executive offices) (zip code) 412-980-6380 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [x] YES [ ] NO APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. On November 2, 1998 there were 5,545,033 shares outstanding of the registrant's common stock. SYNERGY BRANDS INC. FORM 10-QSB SEPTEMBER 30, 1998 TABLE OF CONTENTS PART I: FINANCIAL INFORMATION Page Consolidated Balance sheets as of September 30, 1998 (Unaudited) and December 31, 1997 2-3 Consolidated Statements of Operations for the nine months ended September 30 1998 and 1997 (Unaudited) 4-5 Consolidated Statements of Operations for the three months ended September 30, 1998 and 1997 (Unaudited) 6-7 Consolidated Statements of Cash Flows for the nine months ended September 30, 1998 and 1997 (Unaudited) 8-9 Notes to Consolidated Financial Statements 10-13 Management's Discussion and Analysis of Financial Condition and Results of Operations 14-16 Forward Looking Information and Cautionary 17-22 Statements PART II: OTHER INFORMATION Item VI: Exhibits and Reports on Form 8-K 23 SYNERGY BRANDS INC. CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
SEPTEMBER 30, 1998 DECEMBER 31, 1997 ------------------ ----------------- (Unaudited) ASSETS Current Assets: - --------------- Cash $ 123,273 $ 189,626 Accounts Receivable-Net of allowance for doubtful accounts of $ 0 and $ 96,000 respectively 2,568,209 1,128,000 Promotional Rebates 328,494 270,496 Inventory 1,121,000 - Other Current Assets 85,099 136,189 ------------------ ----------------- Total Current Assets 4,226,075 1,724,311 Collateral and Security Deposit (note 6) 1,258,597 2,252,995 Property and Equipment-Net 174,120 117,402 Other Assets - - ------------------ ----------------- Total Assets $5,658,792 $4,094,708 ================== =================
See Accompanying Notes to Consolidated Financial Statements -2- SYNERGY BRANDS INC. CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
SEPTEMBER 30, 1998 DECEMBER 31, 1997 ------------------ ----------------- (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: - -------------------- Notes Payable (Note 2) $1,409,134 $ 535,810 Accounts Payable & Accrued Expenses (Note 3) 653,378 1,092,716 Income taxes payable 488 10,529 ------------------ ----------------- Total Current Liabilites 2,063,000 1,639,055 Vendor Debt due after one year (note 3) 195,050 395,048 Commitments and Contingencies (note 6) - - Preferred Stock of Subsidiary (note 4) 129,500 111,125 Stockholders' Equity: (Note 5) Class A $2.20 Cumulative Preferred stock - $.001 par value; 100,000 shares authorized, 100,000 Shares Issued and Outstanding 100 100 Common stock - $.001 par value; 29,900,000 Shares authorized 5,543,015 and 4,140,515 shares were outstanding at 6/30/98 and 12/31/97 respectively 5,543 4,140 Additional Paid-in Capital 15,414,595 14,611,141 Accumulated Deficit (11,981,496) 12,498,401) ------------------ ----------------- 3,438,742 2,116,980 Less treasury stock at cost, 1,400 shares (167,500) (167,500) ------------------ ----------------- Total stockholders' equity 3,271,242 1,949,480 Total Liabilities & Stockholder's Equity $5,658,792 $4,094,708 ================== =================
See Accompanying Notes to Consolidated Financial Statements -3- SYNERGY BRANDS INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
1998 1997 ------------------ ----------------- Net Sales $ 7,872,274 $ 3,512,810 Commission Income (note 6) - 370,450 ------------------ ----------------- 7,872,274 3,883,260 Cost of Sales 6,707,286 3,007,407 ------------------ ----------------- Gross Profit 1,164,988 875,853 Selling General and Administrative Expense 684,562 661,671 Depreciation and Amortization 603 15,938 ------------------ ----------------- Operating Income (Loss): 479,823 198,244 ------------------ ----------------- Other Income (Expense): Miscellaneous Income (Expense) 1,451 119,676 Interest Income 66,673 - Financing Costs - (19,863) Interest Expense (12,667) Dividends on Preferred Stock of Subsidiary (18,375) ------------------ ----------------- Total Other (Income) 37,082 99,813 ================== ================= Income (Loss) From Continuing Operations Before Income Taxes 516,905 298,057 Income Taxes - - ------------------ ----------------- Income (Loss) From Continuing Operations $ 516,905 $ 298,057 ================== ================= DISCONTINUED OPERATIONS (Note 8) Gain (loss) from Discontinued Operations - 157,272 Income Taxes - - ------------------ ----------------- Net Income (Loss) from Discontinued Operations - 157,272
See Accompanying Notes to Consolidated Financial Statements -4- SYNERGY BRANDS INC. CONSOLIDATED STATEMENTS OF OPERATIONS (cont.) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
Income (Loss) Before Extraordinary Item 516,905 455,329 Extraordinary Item - Reduction of Income Taxes Arising from Utilization of Loss Carryovers - - ---------------- ---------------- Net Income (Loss) 516,905 455,329 Less Preferred Dividend - 165,000 ---------------- ---------------- Income (Loss) Applicable to Common Stock (Note 1) $ 516,905 $ 290,329 =============== =============== Earnings (Loss) Per Common Share From Continuing Operations $ .12 $ .11 Earnings (Loss) Per Common Share From Discontinued Operations - .13 ---------------- ---------------- Earnings (Loss) Per Common Share $ .12 $ .24 =============== =============== Weighted Average Number of Shares Outstanding 4,271,480 1,248,104
See Accompanying Notes To Consolidated Financial Statements -5- SYNERGY BRANDS INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
1998 1997 ------------------ ----------------- Net Sales $2,918,138 $ 1,963,914 Commission Income (note 6) - - ------------------ ----------------- 2,918,138 1,963,918 Cost of Sales 2,524,059 1,661,555 ------------------ ----------------- Gross Profit 394,079 302,359 Selling General and Administrative Expense 213,050 219,665 Depreciation and Amortization 201 177 ------------------ ----------------- Operating Income (Loss): 180,828 82,517 ------------------ ----------------- Other Income (Expense): Miscellaneous Income (Expense) 150 28,239 Interest Income 15,973 - Financing Costs - (7,387) Interest Expense (12,667) - Dividends on Preferred Stock of Subsidiary (18,375) - ------------------ ----------------- Total Other (Income) (14,919) 20,852 ================== ================= Income (Loss) From Continuing Operations Before Income Taxes 165,909 103,369 Income Taxes - - ------------------ ----------------- Income (Loss) From Continuing Operations $ 165,909 $ 103,369 ================== ================= DISCONTINUED OPERATIONS (Note 8) Gain (loss) from Discontinued Operations - (8,910) Income Taxes - - ------------------ ----------------- Net Income (Loss) from Discontinued Operations - (8,910)
See Accompanying Notes to Consolidated Financial Statements -6- SYNERGY BRANDS INC. CONSOLIDATED STATEMENTS OF OPERATIONS (cont.) FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
Income (Loss) Before Extraordinary Item 165,909 94,459 Extraordinary Item - Reduction of Income Taxes Arising from Utilization of Loss Carryovers - - ---------------- ---------------- Net Income (Loss) 165,909 94,459 Less Preferred Dividend - 55,000 ---------------- ---------------- Income (Loss) Applicable to Common Stock (Note 1) $ 165,909 $ 39,459 =============== =============== Earnings (Loss) Per Common Share From Continuing Operations $ .04 $ .01 Earnings (Loss) Per Common Share From Discontinued Operations - - ---------------- ---------------- Earnings (Loss) Per Common Share $ .04 $ .01 =============== =============== Weighted Average Number of Shares Outstanding 4,721,093 1,595,973
See Accompanying Notes To Consolidated Financial Statements -7- SYNERGY BRANDS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
1998 1997 ----------------- ---------------- Cash Flows From Operating Activities Income (Loss) From Continuing Operations $ 516,905 $ 298,057 Income (Loss) From Discontinued Operations - 157,272 Adjustments to Reconcile Net Income (Loss) From Continuing Operations to Net Cash Flows From Continuing Operating Activities: Depreciation and Amortization 603 15,938 Non-Cash Expenses 804,857 810,726 Dividends on Preferred Stock of Subsidiary 18,375 - Changes in Operating Assets and Liabilities: Accounts Receivable (1,440,209) 105,639 Promotional Rebates (57,998) (221,248) Inventory (1,121,000) - Other Current Assets 51,090 (48.816) Other Assets - 44,224 Accounts Payable & Accrued Expenses (639,336) (685,377) Income Taxes Payable (10,041) (22,341) ----------------- ---------------- Net Cash Flows Provided (Used) (1,876,754) 454,074 by Operating Activities: Cash Flows From Investing Activities: Purchase of Furniture and Equipment (57,321) (12,701) Payment of Collateral Security Deposit 994,398 (256,000) ----------------- ---------------- Net Cash Flows (Used) 937,077 (268,701) in Investing Activities Cash Flows From Financing Activities: Net Borrowing (Payments) on Notes Payable 873,324 (155,963) Proceeds from Issuance of Common Stock - 250,000 Long Term Debt - (277,000) Net Cash Flows Provided (Used) by Financing Activities 873,324 (182,968) ----------------- ---------------- Net Increase (Decrease) in Cash (66,353) 2,405 Cash - Beginning of Period 189,626 2,897 ----------------- ---------------- Cash - End of Period $ 123,273 $ 5,302 ================= ================
See Accompanying Notes To Consolidated Financial Statements -8- SYNERGY BRANDS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
1998 1997 ----------------- ---------------- Supplemental Disclosure of Cash Flow Information: Cash Paid During the Period for: Interest Continuing Operations $ - $ - Discontinued Operation - 37,100 Income Taxes Continuing Operations $ - $ - Discontinued Operations - - ================= ================ Supplemental Disclosure of Non-Cash Operating, Investing and Financing Activities: Expenses paid via the distribution of registered shares of the Company's Common Stock through it's Compensation and Services Plan - - Prepaid Expenses paid via the distribution of registered shares of the Company's Common Stock through it's Compensation and Services Plan _ _ ----------------- ---------------- Total Non-Cash Operating, Investing and Financing Activities - - ================= ================
See Accompanying Notes to Consolidated Financial Statements -9- SYNERGY BRANDS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30,1998 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Synergy Brands Inc. ("Company") is a distributor of groceries, frozen squid, general household merchandise and health and beauty aids in the promotional wholesale industry. In addition, the Company also distributes premium handmade Dominican cigars throughout the United States. In April 1994, Synergy formed a wholly-owned subsidiary, Island Wholesale Grocers, which is a full-service wholesale delivery company capable of providing direct store deliveries of inventory within hours of receiving an order, principally in the northeastern United States. In December 1995, Synergy formed a wholly-owned subsidiary, Affiliated Island Grocers, Inc., which does business under the name Island Frozen and Dairy (IFD). IFD distributed specialty food, poultry and dairy products throughout the northeastern United States. In June 1996, the Company discontinued all operations of IFD (see Note 7). In September 1996, Synergy formed a wholly-owned subsidiary, New Era, Inc., which is a brokerage company representing manufacturers, retailers and wholesalers in connection with distribution of grocery and general merchandise products (see note 6). In October 1997, New Era, Inc. formed a subsidiary, Premium Cigar Wrappers, Inc. (PCW), for the purpose of producing premium cigar wrappers in the Dominican Republic. New Era, Inc. owns 66% of the common stock and approximately 22% of the preferred stock of PCW (see Note 4). PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Synergy Brands Inc., and all of the other above Corporations metioned (collectively, the Company). All significant intercompany accounts and transactions have been eliminated in consolidation. REVENUE RECOGNITION The Company recognizes revenue at the time merchandise is shipped to the customer. The Company returns merchandise that is damaged or has the wrong specifications to the supplier. The cost is recovered from the trucking company or the supplier, depending upon the nature of the return. CASH EQUIVALENTS The Company considers time deposits with original maturities of three months or less to be components of cash. CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of accounts receivable. The concentration of credit risk with respect to receivables is mitigated by the credit worthiness of the Company's major customers. The Company maintains an allowance for losses based upon the expected collectibility of all receivables. Fair value approximates carrying value for all financial instruments. During 1998, the Company distributed its products through an agency financing agreement and hence, all revenues were derived from this arrangement. As a result, the Company has an inherent business risk in concentrating its sales through this arrangement. -10- 1. INVENTORY (CONTINUED) Inventory consists of finished goods and is stated at the lower of cost of market (first-in, first-out method) INCOME TAXES The Company uses the asset and liability method of computing deferred income taxes. In the event differences between the financial reporting basis and the tax basis of an enterprise's assets and liabilities result in deferred tax assets, an evaluation of the probability of being able to realize the future benefits indicated by such assets is required. A valuation allowance is provided for a portion or all of the deferred tax assets when it is more likely than not that such portion or all of such deferred tax assets will not be realized. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the assets, ranging from three to five years. Maintenance and repairs of a routine nature are charged to operations as incurred. Betterments and major renewals which substantially extend the useful life of an existing asset are capitalized and depreciated over the asset's estimated useful life. Upon retirement or sale of an asset, the cost of the asset and the related accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is credited or charged to income. ADVERTISING The Company expenses advertising and promotional costs as incurred. EARNINGS PER SHARE The Company calculates earnings per share pursuant to statement of Financial Accounting Standards No. 128, "Earnings per Share" (FAS 128). FAS 128 requires dual presentation of basic and diluted earnings per share (EPS) on the face of the statement of income for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS calculations are based on the weighted-average number of common shares outstanding during the period, while diluted EPS calculations are based on the weighted-average common shares and diluted common share equivalents outstanding during each period. MANAGEMENT ESTIMATES In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses during the reporting period. Actual results could differ from management's estimates. STOCK-BASED COMPENSATION PLANS Statement of Financial Accounting Standards No. 123, "Accounting for Stock-based employee compensation" (SFAS 123), encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has elected to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair market value of the Company's stock at the date of the grant over the amount the employees or non-employees must pay -to acquire the stock. Disclosures required by SFAS 123 are not material to the Company's financial statements. -11- 2. NOTES PAYABLE Notes payable at September 30, 1998 consisted of the following:
Note payable to investment group. Principle due August, 1999 $ 1,000,000 Revolving line-of-credit 301,633 Note payable to investment company: non-interest bearing: principal due May 8, 1996, previously collateralized by 32,501 inventory of IFD Note payable to bank due July 5, 1996; non-interest bearing: 75,000 previously collateralized by inventory of IFD __________ $ 1,409,134
3. VENDOR DEBT In 1997, the Company entered into an agreement with a vendor to repay the December 31, 1996 accounts payable balance of $1,465,976. The Company was required to pay $50,000 and offset 50% of earned promotional rebates against the payable due to the vendor. In March 1998, the Company renegotiated with the vendor and modified the terms of the agreement to pay off the remaining balance. The Company renegotiated the settlement of amounts owing to a vendor on March 31, 1998. According to the terms of the agreement, the Company is required to issue $500,000 of common stock to the vendor during 1998, and repay the remaining balance in monthly payments of $22,222 from May 1998 through April 2000. No interest is being charged by the vendor. The following are the scheduled maturities of vendor debt at September 30, 1998: Year ending September 30, ------------------ 1999 266,664 2000 195,050 --------------- 461,714 4. PREFERRED STOCK OF SUBSIDIARY PCW was incorporated in October 1997. The Company owns 66% of the Common Stock and approximately 22% of the preferred stock of PCW. The holders of PCW preferred stock are entitled to receive cumulative dividends at the rate of $14 per share before any dividends on the common stock are paid. In the event of dissolution of PCW, the holders of the preferred shares are entitled to receive $60 per share together with all accumulated dividends, before any amounts can be distributed to the common stockholders. The shares are convertible only at the option of PCW at $120 per share. 5. STOCKHOLDERS' EQUITY During 1997, the Company redeemed 100% of the Class A preferred stock in exchange for $350,000, 400,000 shares of common stock and options to purchase 500,000 shares of restricted common stock exercisable at $1 per share. The options will vest if the Company achieves $1,000,000 in pretax income within five years. The preferred stock was thereafter reissued, at par value, to an officer of the Company in recognition of services rendered, however, all dividend privileges and stock redemption rights were stripped from the stock. The stock retains the 13 to 1 voting privilege. AT September 30, 1998, the company had outstanding warrants to purchase 578,000 shares of the Company's common stock, at $1.10 per share. The warrants become exercisable when the shares are registered and expire at various dates through 2002. At September 30, 1998, 578,000 shares of common stock were reserved for that purpose. In 1994, the Company registered with the Securities and Exchange Commission on Form S-8, 600,000 shares of the Company's common stock to be distributed under the Company's 1994 Services and Consulting Compensation Plan (Plan). An additional 3,900,000 shares have been registed and reserved since that date. Through September 30, 1998 the Company has issued 2,210,950 and has 2,289,050 available in reserve under the plan. -12- 6. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS The Company leases office space in Wexford, Pennsylvania under an operation lease which expires in August 2000. The Company also leases office in New York, under an operating lease which expires in April 2002. Rent expense for the nine months ended September 30, 1998 & 1997 were $20,515 and 18,950. Future minimum lease commit-ments are $ 8,505, $34,020, $31,480, and $8800 for the years ending December 31, 1998, 1999, 2000 and 2001. DISTRIBUTION AGREEMENT In 1996, the Company entered into a ten-year agreement with a Chinese trading company to distribute grocery and frozen seafood in the United States under a licensing arrangement. The Chinese trading company finances the purchase and sale of products marketed on its behalf, based on sales generated by the distribution agreement. In consideration for the Chinese trading company providing products and financing to the Company, the Company was required to provide $2,052,995 in 1996 and an additional $200,000 in 1997, as collateral security for performance by the Company under the terms of the agreement. The collateral and security deposit balance at September 30, 1998 is $ 1,258,597. The collateral and security deposit bears interest at 5% and is received quarterly. LITIGATION The Company is a named defendant in various lawsuits arising from the liquidation of IFD. While it is not reasonably possible to estimate the amount of losses in excess of amounts accrued at September 30, 1998, if any that may arise out of such litigation, management believes the outcome could have a adverse effect on the financial statements taken as a whole of the Company. The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial position, results of operations or cash flows of the Company. 7. MAJOR CUSTOMERS The Company has one major customer, the U.S. agent of the Chinese Trading Company that provides factored financing to the Company, which accounted for 100% of total sales for 1997. Accounts receivable from this customer accounted for approximately $2,400,000 (94.2%) of total trade accounts receivable at September 30, 1998. 8. DISCONTINUED OPERATIONS On June 30, 1996, the Company adopted a formal plan to discontinue the operations of IFD through a liquidation that is expected to be completed during 1998. During 1997, the Company incurred additional expenses related to the liquidation of IFD and related litigation. The Company has approximately $400,000 in notes payable and $30,000 in accounts payable related to IFD at September 30, 1998. -13- MANAGEMENT=S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company primarily distributes and merchandises promotional brand name grocery products and frozen squid through an agency agreement with Asia Legend Trading Ltd (ALT), a Chinese trading company. The Company=s current assets consist primarily of accounts receivable, inventory, prepaid expenses and cash. The Company=s liabilities consist of accounts payable, short and long term debt. The Company also recently entered the business of the sale and distribution of Dominican premium handrolled cigars. RESULTS OF OPERATION Revenues from continued operations increased for the nine months ended September 30, 1998 to $ 7.8 million a (102%) increase as compared to the prior period. The Company's grocery distribution business increased significantly as compared to the prior period. The Company attributes the increase in sales due to increase business with its primary suppliers and especially the renewed relationship with Procter and Gamble (P&G) and additional revenue from its cigar business. Cost of sales from continued operations increased for the nine months ended September 30, 1998 to $6.7 million a (123%) increase compared to the prior period. The Company attributes the increase in costs due to increase business with its primary suppliers and especially the renewed relationship with Procter and Gamble (P&G)and its cigar business. Selling General & Administrative (S,G&A) expenses from continuing operations increased to $684,562 for the period a 3.5% increase. The Company is attempting to maintain a static S,G&A while increasing sales in order to increase profitability. Income from continuing operations for the nine months ended September 30, 1998 totaled $ 516,905 as compared to a $133,057 profit for the prior period. The Company recognized a greater profit from continuing operations due to increase grocery and cigar sales contribution. The following table sets forth selected operational data of the Company: Nine Months Ended September 30, 1998 1997 ---- ---- Revenues $ 7,872,274 $ 3,883,260 Income (Loss) from Continuing Operations $ 516,905 $ 133,057 Earnings (Loss) Per Common Share From Continuing Operations $ .12 $ .11 Weighted Average Number of Shares Outstanding 4,271,480 1,248,104 -14- LIQUIDITY AND CAPITAL RESOURCES The company increased it's working capital to $2,163,075 at September 30, 1998. Liabilities increased to 2.2 million a 10% increase. Reaching a positive working capital position is a significant milestone for the Company. The Company raised sufficient capital and turned its operations to profitability which enhanced the liquidity of the Company. As a result the Company has secured vendor credits and secured financing to grow its operating businesses. These changes reflect a positive working capital position of the Company after absorbing all costs related to discontinued operation (IFD). The Company believes that it has sufficient working capital to fund its continuing operations but requires additional financing to expand. In March 1998, the Company guaranteed a $1,000,000 line-of-credit facility to a Dominican cigar manufacturer, which is owned by a PCW stockholder. The purpose of the line-of-credit is to provide financing to the cigar manufacturer to which PCW will supply the cigar wrappers. The line is secured by the inventory and accounts receivables of the Dominican factory. Advances against the line are at a 75% rate and the interest paid is 12%. Advances as of September 30, 1998 totalled $1,000,000. The Company's receivables at September 30, 1998 increased by 127% to $ 2.6 million. The increase in receivables is attributable to increased sales and manufactures rebates due to the Company. Management is not aware of negative trends in the Company's area of business or other economic factors which may cause a significant change in the Company's viability or financial stability, except as specified herein and in "Forward-Looking Information and Cautionary Statements.". Management has no plans to alter the nature of its business. Subject to available financing, the Company intends to further expand its continuing business through its distribution agreement by merchandising well accepted readily marketable promotional brand-name grocery products, frozen squid and handmade premium cigars. However, there can be no assurance that the Company's proposed expansion plans will be successful. The following table sets forth selected balance sheet data of the Company: 9/30/98 12/31/97 Total Assets $ 5,658,792 $ 4,094,708 Total Stockholders Equity $ 3,271,242 $ 1,949,480 Working Capital $ 2,163,075 $ 85,256 SEASONALITY Seasonality affects the demand for certain products sold by the Company, such as juice drinks in the summer months or hot cereals in fall and winter months. However, all these products are available to the Company throughout the year. Manufacturers also tend to promote more heavily towards the close of the fiscal quarters and during the spring and early summer months. Accordingly, the Company is able to purchase more products, increase sales during these periods and reduce its product cost due to these promotions. The Company generally experiences lower sales volume in the fourth quarter due to the reduced number of selling days resulting from the concentration of holidays in the quarter. Sale of frozen squid and cigars is more significant in the third and fourth quarters due to the seasonal catch and holiday promotions. -15- 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- FORWARD LOOKING INFORMATION AND CAUTIONARY STATEMENTS Other than the factual matters set forth herein, the matters and items set forth in this report are forward-looking statements that involve risks and uncertainties. The Company=s actual results may differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, the following: 1. CASH FLOW. The Company has experienced cash shortages which continue to adversely affect its business. See ALiquidity and Capital Resources@. The Company requires additional working capital in order to maintain and expand its business. 2. DEPENDENCE ON PUBLIC TRENDS. The Company's business is subject to the effects of changing customer preferences and the economy, both of which are difficult to predict and over which the Company has no control. A change in either consumer preferences or a down-turn in the economy may affect the Company=s business prospects. 3. POTENTIAL PRODUCT LIABILITY. As a participant in the distribution chain between the manufacturer and consumer, the Company would likely be named as a defendant in any product liability action brought by a consumer. To date, no claims have been asserted against the Company for product liability; there can be no assurance, however, that such claims will not arise in the future. Currently, the company does not carry product liability insurance, but relies on its agency agreement for product insurance. In the event that any products liability claim is not fully funded by insurance, and if the Company is unable to recover damages from the manufacturer or supplier of the product that caused such injury, the Company may be required to pay some or all of such claim from its own funds. Any such payment could have a material adverse impact on the Company. 4. RELIANCE ON COMMON CARRIERS. The Company does not utilize its own trucks in its business and is dependent, on its agent for shipping of product purchases, on common carriers in the trucking industry. Although the Company uses several hundred common carriers, the trucking industry is subject to strikes from time to time, which could have material adverse affect on the Company's operations if alternative modes of shipping are not then available. Additionally the trucking industry is susceptible to various natural disasters which can close transportation lanes in any given region of the country. To the extent common carriers are prevented from or delayed in utilizing local transportation lanes, the Company will likely incur higher freight costs due to the limited availability of trucks during any such period that transportation lanes are restricted. 5. COMPETITION. The Company is subject to intense competition in its promotional grocery, squid, and premium handmade cigars businesses. While these industries may be highly fragmented, with no one distributor dominating the industry, the Company is subject to competitive pressures from other distributors based on price and service and product quality and origin. -17- 6. TRADE RELATIONS WITH CHINA. The Company is dependent on trade with the People's Republic of China (PRC). The Company's financing arrangements and distribution contracts with ALT involve a Chinese trading company, which is directly supplied through the PRC. Any government sanctions that cause an interruption of trade or prohibit trade with PRC through higher duties or quotas could have a material adverse effect on the Company's business. China currently maintains a Most Favored Nation status with the United States, which it has maintained continuously since 1980, renewal of which is done on an annual basis each May. Any disruption could have a material adverse effect on Company business. 7. LITIGATION The Company is named as a defendant in various lawsuits arising from the liquidation of Island Frozen and Dairy ("IFD"), a previous wholly-owned subsidiary of the Company. The Company has reserved and accrued on its books minimal funds to cover these possible claims. In June 1996, a complaint was filed in Superior Court Law Division, Essex County, New Jersey, Docket No. ESX-L-6491-96 by New Jersey National Bank against the Company, Affiliated Island Grocers, the then affiliate of the Company, and certain other defendants, seeking payment on secured business financing, to which claim the Company believes it has and has asserted significant claims to monetary offsets. The principal amount claimed owed by the Company in such lawsuit is $350,000.00. The Company does not believe that the extent of the balance of above mentioned lawsuits exceeds $100,000. While it is not reasonably possible to estimate the amount of losses in excess of amounts accrued and reserved for such losses, if any, that may arise out of such litigation, management believes that the outcome may have a material effect on the operations of the Company. Action was brought by Synergy Brands Inc. and Island Wholesale Grocers Inc., an affiliated company of Synergy Brands Inc. against The Procter & Gamble Distributing Company, in which case The Procter & Gamble Distributing Company counterclaimed, which action was brought in United States District Court, Eastern District of New York under docket no. CIV. 96-1503 (FB), the nature of the claims relating to promotional rebates which the Company claims from Procter & Gamble and accounts payable from the Company to Procter & Gamble which are claimed as due and outstanding. The Company has negotiated a settlement agreement with Procter and Gamble in connection with this matter entered in May 1997. The settlement involves recognition of debt due to Procter & Gamble in the amount of $1,465,976 which the Company shall pay in cash and stock, as reduced by promotional rebates expected to offset at least one third of such settled amount. Full payment is due by April 30, 2000. The balance due on September 30, 1998 is $461,714. Failure to abide by the terms of such settlement may have a material adverse effect on the Company's business. Two former officer's of IFD were awarded through arbitration $467,000 under disputed employment contracts. The award was converted to a judgment against Synergy and Affiliated Island Grocers d/b/a Island Frozen & Dairy. An involuntary Bankruptcy petition was attempted and was immediatily dismissed by the court. The company settled all actions relating to this case for $300,000 in shares of the Common Stock by stipulation entered in the Eastern District of New York, Case No. 897-87458-478 dated November 6, 1997. The stipulation has been fully satisfied and is no longer in effect. The Company is subject to other legal proceedings and claims which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability with respect to these actions may materially affect the financial position, results of operations or cash flows of the Company. -18- 8. POSSIBLE LOSS OF NASDAQ SMALL-CAP LISTINGS. Synergy Brands Inc. currently does not qualify for trading on the Nasdaq Small Cap system. Nasdaq has adopted, and the Commission has approved, certain changes to its maintenance requirements which became effective as of February 20, 1998, including the requirement that a stock listed in such market have a bid price greater than or equal to $1.00. The bid price per share for the Common Stock of Synergy has been below $1.00 and the Common Stock has remained on the Nasdaq Small Cap system because Synergy has 90 days to comply under the new rules ending January 4, 1999. The company is considering several options available to cure the current NASDAQ deficiency. If the bid price continues below $1.00 per share, the Common Stock could be delisted from the Nasdaq Small Cap System and thereafter trading would be reported in the NASD's OTC Bulletin Board or in the "pink sheets." In the event of delisting from the Nasdaq Small Cap System, the Common Stock would become subject to rules adopted by the Commission regulating broker-dealer practices in connection with transactions in "penny stocks." The disclosure rules applicable to penny stocks require a broker-dealer, prior to a transaction in a penny stock not other wise exempt from the rules, to deliver a standardized list disclosure document prepared by the Commission that provides information about penny stocks and the nature and level of risks in the penny stock market. In addition, the broker-dealer must identify its role, if any, as a market maker in the particular stock, provide information with respect to market prices of the Common Stock and the amount of compensation that the broker-dealer will earn in the proposed transaction. The broker-dealer must also provide the customer with certain other information and must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. Further, the rules require that following the proposed transaction the broker-dealer provide the customer with monthly account statements containing market information about the prices of the securities. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to the penny stock rules. If the Common Stock became subject to the penny stock rules, many broker-dealers may be unwilling to engage in transactions in the Company's securities because of the added disclosure requirements, thereby making it more difficult for purchasers of the Common Stock in this offering to dispose of their shares of the Common Stock. 9. RISK OF BUSINESS DEVELOPMENT. The Company has ventured into new lines of product distribution and such product lines are expected to constitute a material part of the Company's revenue stream. The Company has not restored its level of product sales to that of previous years but with the addition of these new product lines the Company is hopeful of reaching and hopefully exceeding those prior levels. Because of the newness of these lines of products to the Company, the Company's operations in these areas should be considered subject to all of the risks inherent in a new business enterprise, including the absence of a profitable operating history and the expense of new product development. Various problems, expenses, complications and delays may be encountered in connection with the development of the Company's new products. These expenses must either be paid out of the proceeds of future offerings or out of generated revenues and Company profits. There can be no assurance as to the availability of funds from either of these sources. -19- 10. RAPIDLY CHANGING MARKET MAY IMPACT OPERATIONS. The market for the Company's products is rapidly changing with evolving industry standards and frequent new product introductions. The Company's future success will depend in part upon its continued ability to enhance its existing products and to introduce new products and features to meet changing customer requirements and emerging industry standards. The Company will have to develop and implement an appropriate marketing strategy for each of its products. There can be no assurance that the Company will successfully complete the development of future products or that the Company's current or future products will achieve market acceptance levels conducive to the Company's fiscal needs. Any delay or failure of these products to achieve market acceptance would adversely affect the Company's business. In addition, there can be no assurance that the products or technologies developed by others will not render the Company's products or technologies non-competitive or obsolete. The Company's revenue base has been slowly recovering from losses of 1996 generating from the discontinuation of its Kosher Food business. In order for the Company to increase grocery sales, it must reestablish it's relationships with the major grocery manufactures. The Company is vigorously attempting to reestablish these ties to prior customers as well as develop new ones. Failure to re-establish these ties would have an adverse effect on the Company. Furthermore, the Company has entered new markets which include squid, and premium handmade cigars for sale to its existing customers and newly found sources. These product lines have lower sales volume than the Company's traditional business, but higher margins and greater advertising and promotional expenses. The Company believes that developing propriety products is in the best interest of the Company's expansion. Failure to secure market penetration in the new product lines would however have an adverse effect on the Company's profitability. Management believes actions presently being taken to revise the Company's operating and financial requirements should provide the opportunity for the Company to continue as a going concern. However, Management cannot predict the outcome of future operations and no adjustments have been made to offset the outcome of this uncertainty. 11. DEPENDENCE UPON ATTRACTING AND HOLDING. The Company's future success depends in large part on the continued service of its key technical, marketing, sales and management personnel and on its ability to continue to attract, motivate and retain highly qualified employees. Although the Company's key employees have stock options, its key employees may voluntarily terminate their employment with the Company at any time. Competition for such employees is intense and the process of locating technical and management personnel with the combination of skills and attributes required to execute the Company's strategy is often lengthy. Accordingly, the loss of the services of key personnel could have a material adverse effect upon the Company's operating efforts and on its research and development efforts. The Company does not have key person life insurance covering its management personnel or other key employees. 12. EXTENSIVE AND INCREASING REGULATION OF TOBACCO PRODUCTS AND LITIGATION MAY IMPACT CIGAR INDUSTRY. The tobacco industry in general has been subject to extensive regulation at the federal, state and local levels. Recent trends have increased regulation of the tobacco industry. Although regulation initially focused on cigarette manufacturers, it has begun to have a broader impact on the industry as a whole and may focus more directly on cigars in the future. The recent increase in popularity of cigars could lead to an increase in regulation of cigars. A variety of bills relating to tobacco issues have been introduced in the U.S. Congress, including bills that would have (1) prohibited the advertising and promotion of all tobacco products or restricted or eliminated the deductibility of such advertising expense, (ii) increased labeling requirements on tobacco products to include, among others things, addiction warnings and lists of additives and toxins. -20- (iii) shifted control of tobacco products and advertisements from the Federal Trade Commission (the "FTC") to the Food and Drug Administration (the "FDA"), (iv) increased tobacco excise taxes and (v) required tobacco companies to pay for health care costs incurred by the federal government in connection with tobacco related diseases. Future enactment of such proposals or similar bills may have an adverse effect on the results of operations or financial condition of the Company. In addition, a majority of states restrict or prohibit smoking in certain public places and restrict the sale of tobacco products to minors. Local legislative and regulatory bodies also have increasingly moved to curtail smoking by prohibiting smoking in certain buildings or areas or by designated "smoking" areas. Further restrictions of a similar nature could have an adverse effect on the Company's sales or operations, such as banning counter access to or display of premium handmade cigars, or decisions by retailers because of public pressure to stop selling all tobacco products. Numerous proposals also have been considered at the state and local level restricting smoking in certain public areas, regulating point of sale placement and promotions and requiring warning labels. Although federal law has required health warnings on cigarettes since 1965 and on smokeless tobacco since 1986, there is no federal law requiring that cigars carry such warnings. California, however, requires "clear and reasonable" warning to consumers who are exposed to chemicals determined by the state to cause cancer on reproductive toxicity, including tobacco smoke and several of its constituent chemicals. Similar legislation has been introduced in other states, but did not pass. There can be no assurance that other states will not enact similar legislation. Consideration at both the federal and state level also has been given to consequences of tobacco smoke on others who are not currently smoking (so called "second-hand" smoke). There can be no assurance that regulations relating to second hand smoke will not be adopted or that such regulations or related litigation would not have a material adverse effect on the Company's results of operations or financial condition. Increased cigar consumption and the publicity such increase has received may increase the risk of additional regulation. The Company cannot predict the ultimate content, timing or effect or any additional regulation of tobacco products by any federal, state, local or regulatory body, and there can be no assurance that any such legislation or regulation would not have a material adverse effect on the Company's business. See "Recent Developments" On June 20, 1997 the Attorneys General of 40 states and the major United States cigarette manufacturers announced a proposed settlement of a lawsuit filed by the states. The proposed settlement, which will require that the United States Congress take certain action, is complex and may change significantly or be rejected. However, the proposal would require significant changes in the way United States cigarette and tobacco companies do business. Among other things: the tobacco companies will pay hundreds of billions of dollars; the EDA could regulate nicotine as a drug; class action lawsuits and punitive damages would be banned; tobacco billboards and sporting event sponsorships would be prohibited. The potential impact, if any, of the settlement and related legislation on the cigar industry is uncertain. In addition to the 40-state litigation referred to in the preceding paragraph, the tobacco industry has experienced and is experiencing significant health-related litigation involving tobacco and health issues. Plaintiffs in such litigation have sought and are seeking compensatory, and in some cases punitive damages for various injuries claimed to result from the use of tobacco products or exposure to tobacco smoke. The proposed settlement of the 40-state litigation may have a material impact to limit litigation, but there can be no assurance that there would not be an increase in health-related litigation against the cigarette and smokeless tobacco industries or similar or successful prosecution of any material health-related litigation against manufacturers of cigars, cigarettes or successful prosecution of any material health-related litigation -21- against manufacturers of cigars, cigarettes or smokeless tobacco or suppliers to the tobacco industry could have a material adverse effect on the Company's results of operations and /or financial condition. The recent increase in the sales of cigars and the publicity such increase has received may have the effect of increasing the probability of legal claims. Also, a recent study published in the journal Science reported that a chemical found in tobacco smoke has been found to cause genetic damage in lung cells that is identical to damage observed in many malignant tumors of the lung and thereby directly inks lung cancer to smoking. This study and other reports could affect pending and future tobacco regulation or litigation relating to cigar smoking. 13. RISKS RELATING TO MARKETING OF CIGARS. The Company primarily will distribute premium handmade cigars which are hand-rolled and use tobacco aged over one year. The Company believes that there is an abundant supply of tobacco available through its supplier in the Dominican Republic for the types of premium handmade cigars the Company primarily will sell. However, there can be no assurance that increases in demand would not adversely affect the Company's ability to acquire higher priced premium handmade cigars. While the cigar industry has experienced increasing demand for cigars during the last several years, there can be no assurance that the trend will continue. If the industry does not continue as the Company anticipates or if the Company experiences a reduction in demand for whatever reason, the Company's supplier may temporarily accumulate excess inventory which could have an adverse effect on the Company's business or results of operations. 14. SOCIAL, POLITICAL AND ECONOMIC RISKS ASSOCIATED WITH FOREIGN TRADE MAY ADVERSELY IMPACT BUSINESS. The Company purchases all of its premium handmade cigars from manufactures located in countries outside the United States. In addition, the Company acquires squid through the People's Republic of China ("PRC"). Social and economic conditions inherent in foreign operations and international trade may change, including changes in the laws and policies that govern foreign investment and international trade. To a lesser extent social, political and economic conditions may cause changes in United States laws and regulations relating to foreign investment and trade. Social, political or economic changes could among other things, interrupt cigar supply or cause significant increases in cigar prices. In particular, political or labor unrest in the Dominican Republic could interrupt the production of premium handmade cigars, which would inhibit the Company from buying inventory. Any government sanctions that cause an interruption of trade or prohibit trade with the PRC through higher duties or quotas could have a material adverse effect on the Company's business. Accordingly, there can be no assurance that changes in social, political or economic conditions will not have a material adverse affect on the Company's business. 15. SEASONALITY. Seasonality affects the demand for certain products sold by the Company, such as juice drinks in the summer months or hot cereals in fall and winter months. However, all these products are available to the Company throughout the year. Manufacturers also tend to promote more heavily towards the close of the fiscal quarters and during the spring and early summer months. Accordingly, the Company is able during these periods to purchase more products, increase sales during these periods and reduce its product cost due to these promotions. The Company generally experiences lower sales volume in the fourth quarter due to the reduced number of selling days resulting from the concentration of holidays in the quarter. Sale of frozen squid is more significant in the third and fourth quarters due to the seasonal catch which occurs in the second quarter. 16. NO DIVIDENDS LIKELY. No dividends have been paid on the Common Stock since inception, nor, by reason of its current financial status and its contemplated financial requirements, does Synergy contemplate or anticipate paying any dividends upon its Common Stock in the foreseeable future. -22- PART II- OTHER INFORMATION Item 4-Submission of matters to vote of security holders. (a) No matters were submitted to vote of shareholders for the third quarter ended September 30, 1998. Item 6- Exhibits and Reports on Form 8-K (a) Exhibits - none (b) There was no reports filed on Form 8-K for the relevent period. -23- SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SYNERGY BRANDS INC. /s/ Mair Faibish Date: 11/3/98 ----------------------------- Mair Faibish /s/ Mair Faibish - ----------------------------- By: Mair Faibish Chief Financial Officer /s/ Mitchell Gerstein Date: 11/3/98 ----------------------------- Mitchell Gerstein /s/ Mitchell Gerstein - ----------------------------- By: Mitchell Gerstein Treasurer -----END PRIVACY-ENHANCED MESSAGE-----