-----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, HG8kXl+Knb+3yfpooJ2b9sUry6HitdwQ69PfAIK6tXLqij41MKRIAIBEV10wsslS UYl/Rcqn6b+vEpRzzZwsTQ== 0001026018-00-000013.txt : 20000516 0001026018-00-000013.hdr.sgml : 20000516 ACCESSION NUMBER: 0001026018-00-000013 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 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: 631422 BUSINESS ADDRESS: STREET 1: 40 UNDERHILL BLVD CITY: SYOSSET STATE: NY ZIP: 11791 BUSINESS PHONE: 5166821980 MAIL ADDRESS: STREET 1: 40 UNDERHILL BLVD CITY: SYOSSET STATE: NY ZIP: 11791 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 10-QSB FORM 10-Q. QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the period ended MARCH 31, 2000 Commission File Number: 0-19409 SYNERGY BRANDS, INC. (Exact name of registrant as it appears in its charter) Delaware 22-2993066 (State of incorporation) (I.R.S. Employer identification no.) 40 Underhill Blvd., Syosset NY 11791 (Address of principal executive offices) (zip code) 516-682-1980 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [x] YES [ ] NO APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. On May 11, 2000 there were 15,271,935 shares outstanding of the registrant's common stock. SYNERGY BRANDS, INC. FORM 10-Q SB MARCH 31, 2000 TABLE OF CONTENTS PART I: FINANCIAL INFORMATION Page Consolidated Balance sheets as of March 31, 2000 2-3 (Unaudited) and December 31, 1999 Consolidated Statements of Operations for the three months ended March 31, 2000 and 1999 (Unaudited) 4 Consolidated Statements of Cash Flows for the three months ended March 31, 2000 and 1999 (Unaudited) 5 - 6 Notes to Consolidated Financial Statements 7 - 13 Management's Discussion and Analysis of Financial Condition and Results of Operations 14 - 15 Forward Looking Information and Cautionary 16 - 20 Statements PART II: OTHER INFORMATION Item VI: Exhibits and Reports on Form 8-K 21 SYNERGY BRANDS, INC. CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2000 AND DECEMBER 31, 1999 March 31, 2000 December 31, 1999 -------------- ----------------- (Unaudited) ASSETS ------ Current Assets: - --------------- Cash and cash equivalents $ 326,187 $1,156,032 Accounts Receivable, less allowance for doubtful accounts of $69,965. 560,645 788,077 Inventory (note 4) 1,968,240 1,868,572 Other Current Assets 557,082 6,505 -------------- ----------------- Total Current Assets 3,412,154 3,819,186 Collateral and Security Deposit (note 2) 400,900 400,900 Property and Equipment - Net (note 3) 708,030 687,493 Trade Names, net of accumulated amortization of $158,496 2,538,568 2,657,440 -------------- ----------------- Total Assets $7,059,652 $7,565,019 ============== ================= See Accompanying Notes to Consolidated Financial Statements -2- SYNERGY BRANDS, INC. CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2000 AND DECEMBER 31, 1999
March 31, 2000 December 31, 1999 -------------- ----------------- (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Note Payable (Note 5) $ - $ 150,000 Accounts Payable & Accrued Expenses (note 7) 2,622,814 2,916,388 -------------- ----------------- Total Current Liabilities 2,622,814 3,066,338 Long-term debt (note 5) 465,000 465,000 Commitments and Contingencies (note 8) - - Minority Interest (note 6) 600,828 682,394 Preferred Stock of Subsidiary (note 6 ) 166,250 160,125 Stockholders' Equity: (Note 7) Class A Preferred stock - $.001 par value; 100,000 shares authorized 100 100 Common stock - $.001 par value; 29,900,000 Shares authorized 14,343,510 and 13,455,510 Shares were outstanding at 3/31/00 and 12/31/99 respectively: 14,344 13,456 Additional paid-in capital 26,841,821 25,219,431 Deficit (20,086,005) (18,542,575) Stockholders' notes receivable (398,000) (331,750) Advertising and in-kind services receivable from stockholder (3,000,000) (3,000,000) -------------- ----------------- 3,372,260 3,358,662 Less treasury stock at cost, 1,400 shares (167,500) (167,500) -------------- ----------------- Total stockholders' equity 3,204,760 3,191,162 Total Liabilities and Stockholders Equity 7,059,652 $ 7,565,019 ============== =================
See Accompanying Notes to Consolidated Financial Statements -3- SYNERGY BRANDS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
2000 1999 -------------- ------------ Net Sales $3,583,808 3,260,319 Cost of Sales 3,341,028 2,741,306 -------------- ------------ Gross Profit 242,780 519,013 Selling General and Administrative Expense 1,749,835 171,522 Depreciation and Amortization 134,537 5,869 -------------- ------------ Operating Income (Loss): (1,641,592) 341,622 -------------- ------------ Other Income (Expense): Miscellaneous Income (Expense) 36,078 1,776 Interest Income 4,051 22,537 Interest Expense (17,408) (47,752) -------------- ------------ Total Other Income (Expense) 22,721 (23,439) -------------- ------------ Income (Loss) Before Income Tax and Minority Interest (1,618,871) 318,183 Minority interest & dividends on preferred stock of subsidiary 75,441 -------------- ------------ Net Income (Loss) (1,543,430) 318,183 =============== ============== Income (Loss) Applicable to Common Stock (Note 1) (1,543,430) $ 318,183 =============== ============== Basic Earnings (Loss) Per Common Share $ (.11) $.04 -------------- ------------ Net Income (Loss) Per Common Share $ (.11) $.04 =============== ============== Weighted Average Number of Shares Outstanding 13,873,361 7,577,421
See Accompanying Notes To Consolidated Financial Statements -4- SYNERGY BRANDS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
2000 1999 ------------- ----------- Cash Flows From Operating Activities: Net Income (Loss) $(1,543,430) $ 318,183 Adjustments to Reconcile Net Income (Loss) -- -- From Continuing Operations to Net Cash Flows From Continuing Operating Activities: Depreciation and Amortization 134,538 5,869 Non-Cash Expenses 1,181,233 1,927,792 Changes in Operating Assets and Liabilities: Minority Interest &Dividends on preferred stock subsidiary (75,441) Accounts Receivable 227,432 (664,273) Inventory (99,668) (225,495) Other Current Assets (444,327) (500,186) Other Assets -- 13,512 Accounts Payable & Accrued Expenses (293,524) (299,504) Income Taxes Payable -- (56) ------------- ----------- Net Cash Flows provided by (used in) operation activities (913,187) 575,842 Cash Flows From Investing Activities: Purchase of Furniture and Equipment (36,203) (1,682) Payment of Collateral Security Deposit -- -- ------------- ----------- Net Cash Flows (used in) in Investing activities (36,203) (1,682) Cash Flows From Financing Activities: Net Borrowing (Payments) on Notes Payable (150,000) (200,000) Proceeds from Issuance of Common Stock 269,545 -- Long Term Debt -- -- ------------- ----------- Net Cash Flows Provided by Financing Activities 119,545 (200,000) ------------- ----------- Net Increase (Decrease) in Cash (829,845) 374,160 Cash - Beginning of Period 1,156,032 325,699 ------------- ----------- Cash - End of Period $ 326,187 $ 699,859 ============= ===========
See Accompanying Notes To Consolidated Financial Statements -5- SYNERGY BRANDS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
2000 1999 ----------- ---------- Supplemental Disclosure of Cash Flow Information: Interest Paid $ 17,408 $ 47,752 Income Taxes Paid -- -- Supplemental Disclosure of Non-Cash Operating, Investing and Financing Activities: Stock issued in exchange for notes receivable 152,500 -- Prepaid Expenses paid via the distribution of registered shares of the Company's Common Stock through it's Compensation and Services Plan 106,250 -- ----------- ---------- Total Non-Cash Operating, Investing and Financing Activities 258,750 --
See Accompanying Notes to Consolidated Financial Statements -6- SYNERGY BRANDS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 2000 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Synergy Brands, Inc. (Synergy), (formerly Krantor Corporation) and its subsidiaries have developed and operate Internet platform operations and Internet-based businesses designed to sell a variety of products, including health and beauty aids and premium handmade cigars, directly to consumers (business to consumer) and to business (business to business). A summary of the related organizations and operations is provided below. In September 1996, Synergy formed a wholly-owned subsidiary, New Era Foods, Inc. (NEF), which represented manufacturers, retailers and wholesalers in connection with distribution of frozen seafood, grocery and general merchandise products. In October 1997, NEF formed a subsidiary, Premium Cigar Wrappers, Inc. (PCW), for the purpose of producing premium cigar wrappers in the Dominican Republic. NEF owns 66% of the common stock and approximately 22% of the preferred stock of PCW (see note 6). In October 1998, NEF formed a wholly-owned subsidiary, PHS Group, Inc. (PHS), which is a wholesale distributor of premium beauty salon products and such subsidiary was later transfered to BB (see note7). In January 1999, Synergy formed a wholly-owned subsidiary, Sybr.com, Inc. (Sybr), which is engaged in the development of Internet-based business to consumer and business to business opportunities focused on beauty, personal care, cigars and other consumer products through its subsidiaries, BB and NetCigar.com, Inc. In May 1999, Sybr formed a wholly-owned subsidiary, NetCigar.com, Inc. (NetCigar), which is engaged in the development of Internet-based business to consumer opportunities focused on cigars and related products. In June 1999, Sybr formed a wholly-owned subsidiary, BeautyBuys.com, Inc. (BB), which is engaged in the development of Internet-based business to consumer and business to business opportunities focused on beauty, personal care and other consumer products. In April 2000, Synergy formed a wholly-owned subsidiary, DealByNet.com, Inc., to engage in Internet-based business activities designed to create an integrated supply chain from manufactures of a variety of products to business customers. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Synergy, its wholly-owned subsidiaries, its majority-owned subsidiary and BB (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 issues credits to the customer for any returned items at the time the returned products are received. CASH AND CASH EQUIVALENTS The Company considers time deposits with maturities of three months or less when purchased to be components of cash. -7- MARKETABLE SECURITIES Management determines and appropriate classification of its investments in debt and equity securities at the time of purchase and re-evaluates such determination at each balance sheet date. No securities were outstanding at March 31, 2000. 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 that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company places its cash and cash equivalents with financial institutions it believes to be of high credit quality. 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 carry 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 3 to 10 years. Leasehold improvements are amortized over the shorter of the lease term or their estimated useful lives. Maintenance and repairs of a routine nature are charged to operations as incurred. Betterments and major renewals that 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. TRADE NAMES Trade names consist of the "Proset" and "Gran Reserve" trade names acquired in November 1999, which are being amortized over their expected useful lives not to exceed 5 years. LONG-LIVED ASSETS Long-lived assets and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. Impairment is measured by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from use of the assets and their ultimate disposition. In instances where impairment is determined to exist, the Company will write down the asset to its fair value based on the present value of estimated future cash flows. 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. Advertising expense for the three months ended March 31, 2000 was $224,251. -8- INCOME TAXES The Company uses the asset and liability method of computing deferred income taxes. In the event differences between the financial reporting bases and the tax bases 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. 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 may vary from managements 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. COLLATERAL SECURITY At March 31, 2000, the Company had a $400,900 security deposit with a major supplier, which serves as collateral for credit purchases made by the Company from the supplier. 3. PROPERTY AND EQUIPMENT Property and equipment as of March 31, 2000 consisted of the following: Office equipment $ 240,282 Machinery and equipment 48,825 Furniture and fixtures 75,000 Lease hold improvements 416,248 780,355 Less accumulated depreciation and amortization (72,325) ----------- $ 708,030 4. INVENTORY Inventory as of March 31, 2000 consisted of the following: Salon finished goods $ 943,606 Tobacco raw materials 495,534 Tobacco finished goods 529,100 ------------ $ 1,968,240 ============ -9- 5. NOTE PAYABLE AND LONG-TERM DEBT Unsecured note payable to minority stockholder, with interest at 7.5%; payable semi-annually beginning June 1, 2000 through maturity on November 23, 2002. $465,000 ======== In April 2000, the Company obtained a line-of-credit arrangement with a finance company that provides for borrowing based on a percentage of eligible receivables, as defined, and interest at the prime rate plus 2%. The arrangement is collateralized by accounts receivable and corporate guarantees. 6. MINORITY INTERESTS 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 outside investor 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 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 $61,250 of preferred stock dividends payable at March 31, 2000. The Company's portion of the dividend has been eliminated in consolidation. In the event of dissolution of PCW, the holders of the referred 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. BB was formed in June 1999 and in November 1999 was authorized to isuue 50,000,000 shares of $.001 par value common stock, of which 49,100,000 shares are Class A common stock and 900,000 shares are Class B common stock. At March 31, 2000, BB had 9,000,000 shares of Class A common stock and 900,00 shares of Class B common stock outstanding. The Company owns all of the Class A common stock and the Class B common stock is owned by the minority interest (see Note 7). For financial reporting purposes, the assets, liabilities, results of operations and cash flows of BB are included in the Company's consolidated financial statements, and the outside investor's interest in BB is reflected in minority interest liability. 7. STOCKHOLDERS' EQUITY In 1994, Synergy adopted the 1994 Services and Consulting Compensation Plan (the Plan). Under the Plan, as amended, 8,400,000 shares of common stock have been reserved for issuance. Since the inception of the Plan, Synergy has issued 6,861,688 shares for payment of services to employees and professional service providers such as legal, marketing, promotional and investment consultants. 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, Synergy granted options to selected employees and professional service providers. In November 1999, Synergy entered into a stock purchase agreement with Sinclair Broadcast Group Inc. (NASDAQ Symbol SBGI) ("SBG") whereby SBG purchased 2,200,000 shares of Synergy's restricted $.001 par value common stock for $4,400,000. The purchase price consists of $1,400,000 cash, a credit for a minimum of $2,000,000 of radio advertising and a credit for a minimum of $1,000,000 of certain in-kind services, as defined. In November 1999, BB entered into a stock purchase agreement with SBG, whereby SBG purchased 900,000 shares of $.001 par value Class B common stock in BB for $765,000 cash. The Class B common shares constitute 50% of the voting power of the common stock issued and outstanding. At March 31, 2000 Sybr owned 9,000,000 shares of Class A common stock and SBG owned 900,000 shares of Class B common stock. -10- Simultaneously with the purchase of the Class B shares, BB and SBG entered into a Class A Common Stock Option Agreement providing of a grant by BB to SBG of the right to purchase 8,100,000 shares of its Class A common stock. In consideration for the grant, SBG agreed to provide $50,000,000 of radio and/or television advertising and promotional support, as defined, to be used from November 1999 through December 31, 2004. The Company may not use more than $10,000,000 of such advertising in any one calendar year and may carryover any unused advertising time from all previous calendar years through December 31, 2005. SBG may terminate its obligation to carryover any unused advertising time after December 31, 2001, by providing 90 days prior written notice to BB. As further consideration for the grant, SBG also agreed to provide $18,623,535 in certain in-kind services, as defined, at request of BB. In November 1999, BB acquired all of the outstanding $.001 par value common stock of PHS from NEF for an 8% convertible subordinated note payable of $750,000. Simultaneously with the transaction, $600,000 of PHS's convertible subordinated debentures were converted to Synergy common stock. The Company has also reserved 100,000 shares for a stock option plan (Option Plan) for non-employee, independent directors, which entitles each non-employee, independent director an option to purchase 10,000 shares of the Company's stock immediately upon election or re-election of the Board of Directors. Options granted under the Option Plan will be at the fair market value on the date of grant, immediately exercisable, and have a term of ten years. The following is a summary of such stock option transactions for the three months ended March 31, 2000 in accordance with the Plan and other restricted stock option agreements: Weighted Average Number of exercise Shares price ---------- -------- Outstanding at December 31, 1999 4,565,600 $ .60 Granted 620,000 $ 3.01 Exercised (459,055) $ .95 Outstanding at March 31, 2000 4,726,545 $ 1.63 ========== Option price $.40-4.00 ========== Available for grant: December 31, 1999 -- ========== March 31, 2000 -- ========== The Company applies APB 25 in accounting for its stock options. Compensation costs related to options and charged to operations were $165,750 in the three months ended March 31, 2000. Had compensation costs for the stock options been determined based on the fair value at the grant date consistent with the method of SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: 2000 ------------ Net income (loss): As reported $(1,543,430) ============ Pro forma $(2,216,315) ============ Net income (loss) per common share: As reported $ (.11) ============ Pro forma $ (.16) ============ -11- The weighted-average contractual life of options outstanding at March 31, 2000 was approximately 4 years. The fair value of each option grant is estimated using the Black-Shoales option-pricing model with the following weighted-average assumptions used: 2000 ------------ Dividend yield 0% Expected volatility 0% Risk-free rated of return 6.17-6.74% Expected life 1 to 5 years 8. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS The Company leases office and warehouse space in Wexford, Pennsylvania, Syosset, New York, and Miami, Florida under operating leases expiring in July 2002, April 2001, and January 2001, respectively. The Company is also leasing vehicles under operating leases expiring in 2004. Future minimum lease payments under non-cancelable operating leases as of March 31, 2000. Year ending December 31, ------------------------ 2000 $ 75,154 2001 57,056 2002 27,782 2003 10,836 2004 553 --------- 171,381 ========= SERVICE AGREEMENT BB's inventory is maintained in a public warehouse in South Kearny, New Jersey. The Company is required to make rental payments based on 4% of the Company's sales of inventory stored in the warehouse. The agreement expires in October 2018 and may be cancelled by either party with a 90 day written notice under certain circumstances, as defined. DISTRIBUTION AGREEMENTS 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 manufacture to which PCW will supply cigar wrappers. -12- 9. SEGMENT AND GEOGRAPHICAL INFORMATION The Company offers a broad range of Internet access services and related products to businesses and consumers throughout the United States and Canada. All of the Company's identifiable assets and results of operations are located in the United States. Management evaluates the various segments of the Company based on the types of products being distributed which were, as of March 31, 2000 as shown below:
Grocery, Salon Health & BeautyBuys Products Beauty B2B .com Sybr.com Total ---------- ----------- --------- ---------- -------- ---------- Revenue 1999 $ 592,152 2,652,167 -- 16,000 -- 3,260,319 2000 595,227 -- 2,650,267 235,834 102,480 3,583,808 Net earnings 1999 $ 28,250 272,829 -- 17,104 -- 318,183 2000 (361,930) -- 39,871 (418,162) (803,209) (1,543,430) Identifiable assets 1999 $ 1,277,417 7,223,110 -- -- -- 8,500,527 2000 3,352,354 -- 614,677 812,313 2,280,308 7,059,652 Interest expense 1999 $ 17,752 30,000 -- -- -- 47,752 2000 8,592 -- -- 8,816 -- 17,408
-13- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Synergy Brand's (SYBR or the "Company") Internet strategy includes the internal development and operation of subsidiaries as well as the taking of strategic positions in other Internet companies that have demonstrated synergies with SYBR's core businesses. The Company's strategy also envisions and promotes opportunities for synergistic Business relationships among the Internet companies within its portfolio. Synergy Brands, Inc. (NASDAQ: SYBR) develops Internet properties that strategically partner with off-line and on-line media companies to capture e-commerce markets within the Internet arena. The company has developed the following web sites: Netcigar.com, BeautyBuys.com and DealByNet.com. SYBR's subsidiaries include BeautyBuys.com, Netcigar.com, Dealbynet.com as well as PHS Group. BeautyBuys.com is a leading online Business to consumer beauty department store consisting of 7,000 unique brands. Dealbynet.com is SYBR's supply chain integration model for its Business-to-Business platform being developed in the Health and Beauty as well as grocery businesses. Netcigar.com is a leading online retailer of premium cigars and other related luxury items. PHS is the Company's fulfillment platform for its Internet and non-internet operations. The PHS facility allows for automated order processing, inventory management and customer service. The Company has adopted a strategy of seeking opportunities to realize gains through investments or having separate subsidiaries or affiliates buy or sell minority interests to outside investors. The Company believes that this strategy provides the ability to increase shareholder value as well as provide capital to support the growth in the Company's subsidiaries and investments. The Company expects to continue to develop and refine the products and services of its businesses focusing on the internet as the primary mode of distribution, with the goal of increasing revenue as new Products are commercially introduced, and to continue to pursue the acquisition of or the investment in, additional Internet companies. The Company will seek to continue to attract traditional media investments, partner with advanced value added technologies that will be synergistic to its internet platforms as well as partner with existing internet companies to achieve its goals of building a strategic portfolio of internet assets. RESULTS OF OPERATIONS FOR THE FIRST QUARTER ENDED MARCH 31, 2000 The Company's total revenues in the first quarter of 2000 grew by 9% to $3.5 million as compared to $3.2 million in 1999. Internet sales for the first quarter of 2000 reached $3.0 million as compared to $16,000 for the same period in 1999. The Company reported a net loss of $38,659 or 0.00 per share before one time and non-cash charges for the first quarter. Overall, the Company reported a $1.5 million loss or $.11 per share for the first quarter as compared to a $318,183 profit on $.04 per share. The loss in the first quarter of 2000 is attributable to a $1.5 million increase in non-cash and one time charges as compared to 1999. 2000 1999 ----------- ----------- Internet Sales $ 2,988,581 $ 16,000 Non-internet sales $ 595,227 $ 3,244,319 Total Sales $ 3,583,808 $ 3,260,319 Non-cash and one time charges (a) $ 1,504,771 - Net Profit (loss) before non-cash charges $ (38,659) $ 318,183 Per share $ .00 $ .04 Net Profit (loss) $(1,543,430) $ 318,183 Per share $ (.11) $ .04 Weighted share outstanding $13,873,361 $ 7,577,421 (a) Includes $1.2 million in non cash expenses and 150,000 in one time charges related to the development of the Company's Internet platforms. -14- LIQUIDITY AND CAPITAL RESOURCES The Company's working capital increased to $790,000 at March 31, 2000. The increase in working capital is attributable to decreased advertising and development costs after the completion of the Sinclair acquisition. The Company utilized its resources to repay its debt and as of March 31 reduced its total debt from $615,000 to $465,000. Before Non-cash and one time charges, the Company incurred a $38,659 loss in the first quarter of 2000 and therefore suffered no changes in its working capital position. As a result of the Sinclair transaction, the Company expects that the $69.4 million in advertising credits utilized by BeautyBuys.com will support its continuing advertising needs. The Company's main operating subsidiaries, BeautyBuys.com Inc. and SYBR.com are expected to incur losses in 2000. The Company believes that it has sufficient working capital and resources to grow and expand the businesses of its operating subsidiaries. However, there can be no assurances that additional capital would not be required in the event the Company's business grows beyond its operating budgets. The Company plans to continue to partner with media and technology companies on a media for equity basis. The Company believes that this strategy allows its operating subsidiaries to brand and expand their respective franchises without causing adverse ramifications on the Company's working capital. In addition the Company plans to leverage its media assets to acquire interests in related companies that would complement its expansion strategy. SEASONALITY 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. Sales of beauty care products and fragrances increase over traditional gift giving holidays such as Christmas, Easter, Mother's Day, Father's Day, and Valentine's Day. Cigar products sales also increase during holiday periods and summer months, but also sales spurts occur during periods of special sporting events. INFLATION The Company believes that inflation, under certain circumstances, could be beneficial to the Company's business. When inflationary pressures drive product cost 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. -15- FORWARD LOOKING INFORMATION AND CAUTIONARY STATEMENTS Other than the factual matters set forth herein, the matters and items set forth in this report are forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, the following: 1. INTERNET. The internet environment is new to business and is subject to inherent risks as in any new developing business including rapidly developing technology with which to attempt to keep pace and level of acceptance and level of consumer knowledge regarding its use. 2. CASH FLOW. The Company has experienced cash shortages which continue to adversely affect its business. See "Liquidity and Capital Resources". The Company requires additional working capital in order to maintain and expand its business. 3. DEPENDENCE ON PUBLIC TRENDS. The Company's business is subject to the effects of changing customer preferences and the economy, both of which are difficult to predict and over which the Company has no control. A change in either consumer preferences or a down-turn in the economy may affect the Company's business prospects. 4. POTENTIAL PRODUCT LIABILITY. As a participant in the distribution chain between the manufacturer and consumer, the Company would likely be named as a defendant in any product liability action brought by a consumer. To date, no claims have been asserted against the Company for product liability; there can be no assurance, however, that such claims will not arise in the future. Currently, the company does not carry product liability insurance. In the event that any products liability claim is not fully funded by insurance, and if the Company is unable to recover damages from the manufacturer or supplier of the product that caused such injury, the Company may be required to pay some or all of such claim from its own funds. Any such payment could have a material adverse impact on the Company. 5. RELIANCE ON COMMON CARRIERS. The Company does not utilize its own trucks in its business and is dependent, for shipping of product purchases, on common carriers in the trucking industry. Although the Company uses several hundred common carriers, the trucking industry is subject to strikes from time to time, which could have material adverse affect on the Company's operations if alternative modes of shipping are not then available. Additionally the trucking industry is susceptible to various natural disasters which can close transportation lanes in any given region of the country. To the extent common carriers are prevented from or delayed in utilizing local transportation lanes, the Company will likely incur higher freight costs due to the limited availability of trucks during any such period that transportation lanes are restricted. -16- 6. COMPETITION. The Company is subject to intense competition in its promotional grocery, squid, and premium handmade cigars businesses. While these industries may be highly fragmented, with no one distributor dominating the industry, the Company is subject to competitive pressures from other distributors based on price and service and product quality and origin. 7. 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. 8. POSSIBLE LOSS OF NASDAQ SMALL CAP LISTING. Synergy 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 28, 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 in the past and the Common Stock has remained on the Nasdaq Small Cap System because Synergy has complied with the alternative criteria which are now eliminated under the new rules. If the bid price dips 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 to dispose of their shares. The Company's common stock has consistently remained at NASDAQ trading levels above $1 bidover the past year and such historical stability combined with the Company increasing business share in the market and its continuing establishment as a viable force in the industries wherein it participates gives the Company confidence that its subseptibilty to market deficiencies is in a much lessened state then in years past. -17- 9. RISKS OF BUSINESS DEVELOPMENT. The Company has ventured into new lines of product and product distribution (Cigars) in 1997, salon and HBA products in 1999 and Internet Sales in 1998) and such product and product distribution lines are expected to continue to constitute a material part of the Company's revenue stream. With the addition of these new product and product distribution lines the Company is hopeful of reaching and hopefully exceeding prior historic levels of product sales. 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 appreciable 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 and methods of product distribution. 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 continued availability of funds from either of these sources. 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. 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 KEY PERSONNEL. 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. -18- 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 (i) prohibit the advertising and promotion of all tobacco products or restrict or eliminate the deductibility of such advertising expense, (ii) increase labeling requirements on tobacco products to include, among others things, addiction warnings and lists of additives and toxins, (iii) shift control of tobacco products and advertisements from the Federal Trade Commission (the "FTC") to the Food and Drug Administration (the "FDA"), (iv) increase tobacco excise taxes and (v) require 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 designating "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 of any additional regulation of tobacco products by any federal, state, local or regulatory body, and there can be no assurance that any such legislation or regulation would not have a material adverse effect on the Company's business. In addition numerous tobacco litigation has been commenced and may in the future be instituted, all of which may adversely affect the cigar consumption and sale and may pressure applicable government entities to institute further and stricter legislation to restrict and possibly prohibit cigar sale and consumption, any and all of which may have an adverse affect on Company business. 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. -19- 14. 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. -20- Item 4-Submission of matters to vote of security holders. (a) No matters were submitted to vote of shareholders for the first quarter ended March 31, 2000 Item 6- Exhibits and Reports on Form 8-K (a) Exhibits - none (b) There were no reports filed on 8-k for the relevant period. -21- SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Synergy Brands, Inc. /s/ Mair Faibish by---------------------- Mair Faibish Chief Financial Officer Date: 05/11/00 /s/ Mitchell Gerstein by------------------------ Mitchell Gerstein Treasurer Date: 05/11/00 -----END PRIVACY-ENHANCED MESSAGE-----