10QSB 1 0001.txt 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 JUNE 30, 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 August 8, 2000 there were 15,611,135 shares outstanding of the registrant's common stock. SYNERGY BRANDS, INC. FORM 10-Q SB JUNE 30, 2000 TABLE OF CONTENTS PART I: FINANCIAL INFORMATION Page Consolidated Balance sheets as of June 30, 2000 2 - 3 (Unaudited) and December 31, 1999 Consolidated Statements of operations for the six months ended June 30, 2000 and 1999 (Unaudited) 4 Consolidated Statements of operations for the three months ended June 30, 2000 and 1999 (Unaudited) 5 Consolidated Statements of Cash Flows for the six months ended June 30, 2000 and 1999 (Unaudited) 6 - 7 Notes to Consolidated Financial Statements 8 - 14 Management's Discussion and Analysis of Financial Condition and Results of Operations 5 - 18 Forward Looking Information and Cautionary 19 - 23 Statements PART II: OTHER INFORMATION Item VI: Exhibits and Reports on Form 8-K 24 SYNERGY BRANDS, INC. CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2000 AND DECEMBER 31, 1999 June 30, 2000 December 31, 1999 ------------- ----------------- (Unaudited) ASSETS ---------- Current Assets: --------------- Cash and cash equivalents $ 437,012 $1,156,032 Accounts Receivable, less allowance for doubtful accounts of $69,965 833,175 788,077 Inventory (note 4) 1,887,569 1,868,572 Other Current Assets 709,485 6,505 ---------- ---------- Total Current Assets 3,867,241 3,819,186 Collateral and Security Deposit (note 2) 404,811 400,900 Property and Equipment - Net (note 3) 682,256 687,493 Trade Names, net of accumulated amortization of 2,379,961 2,657,440 ========== ========== Total Assets 7,334,269 $7,565,019 See Accompanying Notes to Consolidated Financial Statements -2- SYNERGY BRANDS, INC. CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2000 AND DECEMBER 31, 1999
June 30, 2000 December 31, 1999 ------------- ----------------- (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: -------------------- Note Payable (Note 5) $ 391,958 $ 150,000 Accounts Payable & Accrued Expenses (note 7) 2,341,107 2,916,388 ------------- ----------------- Total Current Liabilities 2,733,065 3,066,338 Long-term debt (note 5) 465,000 465,000 Commitments and Contingencies (note 8) -- -- Minority Interest (note 6) 546,648 682,394 Preferred Stock of Subsidiary (note 6 ) 172,375 160,125 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 15,358,435 and 13,455,510 Shares were outstanding at 6/30/00 and 12/31/99 respectively: 15,358 13,456 Additional paid-in capital 28,458,585 25,219,431 Deficit (21,456,733) (18,542,575) Stockholders' notes receivable (432,629) (331,750) Advertising and in-kind services receivable from stockholder (3,000,000) (3,000,000) ------------- ----------------- 3,584,681 3,358,662 Less treasury stock at cost, (167,500) (167,500) ------------- ----------------- Total stockholders' equity 3,417,181 3,191,162 Total Liabilities and Stockholder's Equity $7,334,269 $7,565,019 ============= =================
See Accompanying Notes to Consolidated Financial Statements -3- SYNERGY BRANDS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED)
2000 1999 -------------- ----------- Net Sales 8,618,948 6,660,045 Cost of Sales 8,052,579 5,518,853 -------------- ----------- Gross Profit 566,369 1,141,192 Selling General and Administrative Expense 3,281,100 535,620 Depreciation and Amortization 322,076 11,738 -------------- ----------- Operating Income (Loss): (3,036,807) 593,834 -------------- ----------- Other Income (Expense): Miscellaneous Income (Expense) 34,950 1,860 Interest Income 4,055 45,075 Interest Expense (39,852) (98,578) -------------- ------------ Total Other Income (Expense) (847) (51,643) -------------- ----------- Income (Loss) Before Income Tax and Minority Interest (3,037,654) 542,191 Minority interest & dividends on preferred stock of subsidiary 123,496 -- -------------- ----------- Net Income (Loss) (2,914,158) 542,191 ============== =========== Income (Loss) Applicable to Common Stock $( 2,914,158) $542,191 ============== =========== Basic Earnings (Loss) Per Common Share $ (.20) $.07 -------------- ----------- Net Income (Loss) Per Common Share $ (.20) $.07 ============== =========== Weighted Average Number of Shares Outstanding 14,486,795 8,266,859
See Accompanying Notes To Consolidated Financial Statements -4- SYNERGY BRANDS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED)
2000 1999 ------------- -------------- Net Sales 5,035,140 3,399,726 Cost of Sales 4,711,551 2,777,547 ------------- -------------- Gross Profit 323,589 622,179 Selling General and Administrative Expense 1,531,265 364,098 Depreciation and Amortization 187,539 5,869 ------------- -------------- Operating Income (Loss): (1,395,215) 252,212 ------------- -------------- Other Income (Expense): Miscellaneous Income (Expense) (1,128) 84 Interest Income 4 22,538 Interest Expense (22,444) (50,826) ------------- -------------- Total Other Income (Expense) (23,568) (28,204) ------------- -------------- Income (Loss) Before Income Tax and Minority Interest (1,418,783) 224,008 Minority interest & dividends on preferred stock of subsidiary 48,055 - ------------- -------------- Net Income (Loss) (1,370,728) 224,008 ============= ============== Income (Loss) Applicable to Common Stock (1,370,728) $ 224,008 ============= ============== Basic Earnings (Loss) Per Common Share $ (.09) $.03 ------------- -------------- Net Income (Loss) Per Common Share $ (.09) $.03 ============= ============== Weighted Average Number of Shares Outstanding 14,614,902 8,956,296
See Accompanying Notes To Consolidated Financial Statements -5- SYNERGY BRANDS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED)
2000 1999 ---------------- -------------- Cash Flows From Operating Activities: Net Income (Loss) (2,914,158) $ 542,191 Adjustments to Reconcile Net Income (Loss) - - From Continuing Operations to Net Cash Flows From Continuing Operating Activities: Depreciation and Amortization 322,076 11,738 Non-Cash Expenses 1,605,048 2,631,501 Changes in Operating Assets and Liabilities: Minority Interest &Dividends on preferred stock subsidiary (123,496) - Accounts Receivable (45,098) (1,278,156) Inventory (18,997) 19,270 Other Current Assets (283,012) (428,655) Other Assets - (625,239) Accounts Payable & Accrued Expenses (321,615) (401,795) Income Taxes Payable - (56) ---------------- -------------- Net Cash Flows provided by (used in) operation activities (1,779,252) 470,799 Cash Flows From Investing Activities: Purchase of Furniture and Equipment (42,135) (10,148) Purchase of Security Deposit (1,136) - ---------------- -------------- Net Cash Flows (used in) in Investing activities (43,271) (10,148) Cash Flows From Financing Activities: Net Borrowing (Payments) on Notes Payable 241,958 (200,000) Proceeds from Issuance of Common Stock 861,545 - Long Term Debt - - ---------------- -------------- Net Cash Flows Provided by Financing Activities 1,103,503 (200,000) ---------------- -------------- Net Increase (Decrease) in Cash (719,020) 260,651 Cash - Beginning of Period 1,156,032 325,699 ---------------- -------------- Cash - End of Period $ 437,012 $ 586,350 ================ ==============
See Accompanying Notes To Consolidated Financial Statements -6- SYNERGY BRANDS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED)
2000 1999 ---------------- -------------- Supplemental Disclosure of Cash Flow Information: Interest Paid $ 34,492 $ 98,578 Income Taxes Paid 9,781 - Supplemental Disclosure of Non-Cash Operating, Investing and Financing Activities: Stock issued in exchange for notes receivable 189,629 - Stock issued in exchange for prepaid expenses 419,968 - Stock issued in exchange for accounts payable 253,616 - ---------------- -------------- Total Non-Cash Operating, Investing and Financing Activities 863,213 - ================ ==============
See Accompanying Notes to Consolidated Financial Statements -7- SYNERGY BRANDS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 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 transferred to BB (see note 7). 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. -8- 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 June 30, 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 six months ended June 30, 2000 was $541,421. -9- 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 June 30, 2000, the Company had a $404,811 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 June 30, 2000 consisted of the following: Office equipment $ 246,214 Machinery and equipment 48,825 Furniture and fixtures 75,000 Leasehold improvements 416,248 ------------ Less accumulated depreciation and amortization (104,031) ------------ $ 682,256 4. INVENTORY Inventory as of June 30, 2000 consisted of the following: Salon finished goods $ 878,618 Tobacco raw materials 495,534 Tobacco finished goods 513,417 -------------- $ 1,887,569 ============== -10- 5. LINE OF CREDIT AND LONG-TERM DEBT Revolving line-of-credit with a finance company, with interest at prime plus 2%; collateralized by accounts receivable and corporate guarantees. $ 391,958 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 ------------- $ 856,958 ============= 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 $67,375 of preferred stock dividends payable at June 30, 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 June 30, 2000, BB had 9,000,000 shares of Class A common stock and 900,000 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 7,381,613 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 June 30, 2000 Sybr owned 9,000,000 shares of Class A common stock and SBG owned 900,000 shares of Class B common stock. -11- 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 June 30, 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 665,000 $ 2.94 Exercised (534,980) $ .90 Outstanding at June 30, 2000 4,695,620 $ 1.65 ============== Option price $ .40 - 4.00 ============== Available for grant: December 31, 1999 - ============== June 30, 2000 - ============== The Company applies APB 25 in accounting for its stock options. Compensation costs related to options and charged to operations were $212,650 in the six months ended June 30, 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 $ (2,914,158) ================ Pro forma $ (3,587,044) ================ Net income (loss) per common share: As reported $ (.20) ================ Pro forma $ (.25) ================ -12- The weighted-average contractual life of options outstanding at June 30, 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 June 30, 2000. Year ending December 31, ------------------------ 2000 $ 61,464 2001 88,386 2002 57,208 2003 22,871 2004 553 ----------- 230,482 =========== 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. -13- 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 June 30, 2000 as shown below:
Grocery, Beauty Health & Products Beauty B2B B2C Total ---------------------------------------------------------------------------------------------------- Revenue 1999 $ 1,367,578 4,954,334 - 338,133 6,660,045 2000 1,406,105 - 6,559,911 652,932 8,618,948 ---------------------------------------------------------------------------------------------------- Net earnings 1999 $ 48,460 470,541 - 23,190 542,191 2000 (651,898) - 86,518 (2,348,778) (2,914,158) ---------------------------------------------------------------------------------------------------- Identifiable assets 1999 $ 1,221,465 8,104,488 - - 9,325,953 2000 3,840,752 - 818,910 2,674,607 7,334,269 ---------------------------------------------------------------------------------------------------- Interest expense 1999 $ 35,703 62,875 - - 98,578 2000 14,473 - 5,067 20,312 39,852 ----------------------------------------------------------------------------------------------------
-14- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company and its consolidated subsidiaries have developed Internet properties that strategically partner with off-line and on-line companies to capture e-commerce markets within the Internet arena. Synergy Brands's Internet strategy includes the internal development and operation of subsidiaries as well as taking positions in other Internet companies that have demonstrated synergies with its own core businesses. The strategy also fosters opportunities for synergistic business relationships among the Internet companies within its portfolio. Additionally, management will focus the Company's resources on creating a diversified network of Internet businesses that would be potentially attractive IPO on M&A candidates. Synergy Brands launched two Internet subsidiaries in 1999: BeautyBuys.com Inc. and Netcigar.com, Inc., each of which has B2C operations. DealByNet.com, the Company's third e-commerce venture, was launched in late 2000. The distribution expertise of each entity's management and the facilities they currently operate also create an opportunity to offer order fulfillment services to other e-commerce ventures. 1. BEAUTYBUYS.COM Synergy Brands and Sinclair Broadcast Group, Inc. (NASDAQ: SBGI) jointly own BeautyBuys.com. The B2C e-commerce site - accessible via www.BeautyBuys.com- is a virtual beauty department store consisting of over 7,000 unique brands, including salon hair and skin care items, designer fragrances and cosmetics and consumer health and beauty care products. Sinclair Broadcast Group (NASDAQ: SBGI), the largest independent TV network in the United States, acquired a 50% voting interest in BeautyBuys.com for up to $69.4 million in advertising, cash and in-kind services. Advertising credits are valued at the best rates a cash customer received for the aired spots in their time slots. *Sinclair covers 61 stations in 40 markets reaching 80 million viewers in the United States and Canada. *Sinclair is the largest affiliate network for the FOX, WB and UPN television networks in the United States. * BeautyBuys.com handles approximately 100,000 unique visitors, 3.5 million hits per month an average of 15 minutes stay per unique visitors. It is estimated that over 60% of the traffic comes from TV advertising. In addition to beauty and health items, BeautyBuys.com has added a wide selection of gift products, including seasonal, holiday and special occasion items that will provide customers the opportunity to purchase unique gifts. Management believes its early entry into this market may enable the Company to gain a significant share of the on-line gift market before competitors have an opportunity to imitate their programs. In just one year of operation, BeautyBuys.com has been recognized as one of the top Web sites of its kind by such publications as FamilyCircle, Mademoiselle, WWWD Friday, Drug Store News and Business 2.0 magazine. The Web site is continuously being improved to provide photos of products, full product description and color shading of makeup. It will also provide order history, automatic reorder, gift certificates, message boards, upselling techniques and an "ask the expert" section. -15- 2. DEALBYNET.COM Synergy Brands launched its DealByNet.com B2B e-commerce Web site in June 2000. DealByNet is believed to be the first Electronic Commerce Network (ECN) that intends for manufacturers, supermarket chains, chain drug stores and distributors to seamlessly integrate their product needs within an e-commerce environment. DealByNet should allow the manufactures of the major grocery and health and beauty aid products to offer their promotional merchandise through DealByNet via a UCCnet based system that is expected to handle all the logistical, financial and merchandising details for the products offered on its system. DealByNet is being developed to become an end-to-end solution that makes the grocery and health and beauty aids business as efficient as the other ECN markets created in the brokerage business such as Instinet and Island that utilize state-of-the-art SQL technology to provide the necessary data for its vendors and customers to streamline the market place via an efficient electronic network. 3. NETCIGAR.COM The premium cigar market is estimated to be $1 billion in annual sales according to RTDA. In 1999, Synergy Brands expanded its premium cigar business by establishing NetCigar.com as a Web site for the sale of premium cigars and luxury related products. In less then a year NetCigar has built a site with; * Strong male demographics for advertising and marketing purposes with approximately 10,000 customers. * Approximately 60% of all orders are repeat customers, an estimated 10% of unique visitors choose to purchase from Netcigar.com * Netcigar.com receives about 1 million hits per month with about 25,000 unique visitors spending an average of 25 minutes per session. * Netcigar.com fulfills orders from its own distribution center. Average order exceeds $100. * The mail order portion of the premium cigar industry accounts for 40% of the $1 billion market, thereby creating an opportunity for efficient e-commerce conversion for $400 million worth of orders. Results Of Operations For The Six Months Ended June 30, 2000 Total second quarter revenues were $5 million representing a 48% increase over the 3.4 million reported for the same period in 1999, and a 40% increase over first quarter 2000 revenues of $3.6 million. Revenues for the six-month period ended June 30, 2000 totaled $8.6 million compared to $6.7 million reported in 1999. Pro-Forma net loss for the second quarter was $632,232, or $0.04 per share, compared with a Pro-Forma profit of $224,008, or $0.03 per share, in the second quarter of 1999. For the six-month period ended June 30, 2000, Pro - Forma net loss was $670,891, or $0.05 per share, compared with a Pro-Forma profit of $542,191, or $0.07 per share for the first six months of 1999. Pro-Forma net loss and net loss per share excludes non-cash and one-time charges. Total second quarter Internet sales soared from $322,133 in 1999 to $4.2 million for the three months ended June 30, 2000, Internet sales jumped 20 fold to $7.2 million over the $338,133 reported for the first six months of 1999. Overall, the Company reported a $1.4 million loss or $.09 per share for the second quarter as compared to a $224,000 profit or $.03 per share. -16- Management's business strategy for the remainder of the year is to explore the strategic sale of BeautyBuys.com by a tier one-investment. The Company recently retained a tier one-investment banker to explore a strategic placement of BeautyBuys.com. The Company believes that the total value of BeautyBuys.com retail operation presents an opportunity for mature e-commerce operations or Chain 'brick and mortar' retail operations that can utilize television advertising and an operating online platform. In November of 1999 Synergy Brands, Inc. sold a 50% voting interest of BeautyBuys.com Inc. to Sinclair Broadcast Group for approximately $70 million of television advertising, in-kind services and cash. Sinclair currently owns approximately 15% of Synergy Brands, Inc. Synergy's Netcigar.com Web site grew 50% sequentially in the second quarter of 2000 from the first quarter of 2000. The business strategy for Netcigar.com includes partnering with media operations on a strategic basis as well as the possible acquisition of mail order catalog properties so that Netcigar can develop a national footprint in the $400 million cigar mail order catalog market. The Company's DealbyNet.com, Inc. subsidiary was launched in June of 2000. The Web site, which is designed to create a seamlessly integrated grocery supply chain from manufacturers to business customers using a sophisticated database platform, should allow for real-time trading of more than 2,000 of the most popular name brand consumer products on a B2B basis.
3 Months 3 Months 6 Months 6 Months Ended Ended Ended Ended 6/30/2000 6/30/1999 6/30/2000 6/30/1999 Internet Sales $ 4,224,262 $ 322,133 $ 7,212,843 $ 338,133 Non-internet sales $ 810,878 $ 3,077,593 $ 1,406,105 $ 6,321,912 Total Sales $ 5,035,140 $ 3,399,726 $ 8,618,948 $ 6,660,045 Net Profit (loss) $ (1,370,728)(a) $ 224,008 $ (2,914,158)(b) $ 542,191 Per share $ (.09) $ .03 $ (.20) $ .07 Weighted share outstanding $ 14,614,902 $ 8,956,296 $ 14,486,795 $ 8,266,859
(a) Includes $738,000 of non cash charges, $275,000 one time charges in connection with the development of the Company's sites and marketing and advertising for the branding of the e-commerce properties for the three months ended June 30, 2000. (b) Includes $1,938,000 of non cash charges, $580,000 one time charges in connection with the development of the Company's sites and marketing and advertising for the branding of the e-commerce properties for the six months ended June 30, 2000. (a) -17- LIQUIDITY AND CAPITAL RESOURCES The Company's working capital increased to $1.1 million at June 30, 2000, a 43% increase from the first quarter of 2000. The increase in working capital is attributable to decreased cash, advertising, technology and marketing costs after the completion of the Sinclair transaction and increased revenues. As a result of the Sinclair transaction, the Company expects that the $70 million in advertising credits utilized by BeautyBuys.com should support its continuing advertising needs. The Company's Business to Business operation, DealByNet is expected to be profitable in fiscal 2000. 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. PHS Group (DealByNet.com) secured a line of credit from GE commercial services to finance up to 90% of its accounts receivable. As of June 30th, its balance totaled $400,000. The Company believes that its line of credit should be able to finance the needs of its Business to Business operations. The Company plans to continue to explore partnerships with media and technology companies on a barter 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. GE Capital Commercial Services, Inc., a wholly owned subsidiary of GE Capital, the financial services arm of The General Electric Corporation (NYSE: GE), is expected to facilitate expansion of B2B operations and finance up to 90% of the B2B accounts receivables on a revolving secured line of credit. GE should permit DealByNet to grow the B2B segment of its operations geometrically annual rate from its current $15 million annual rate. Selected Financial Date ----------------------- June 30, 2000 March 31, 2000 ------------- -------------- Working Capital 1,134,176 789,340 Long Term Debt 465,000 465,000 Shareholders Equity 3,417,181 3,204,760 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 and Luxury 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. -18- 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. -19- 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. -20- 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. -21- 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. -22- 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. -23- Part II - Other Information Item 4-Submission of matters to vote of security holders. 1. There were no reports filed on 8-k for the relevant period. At the Company's annual meeting on July 5, 2000 the following matters were submitted. (a) Election of the Company's board of directors, where in the following persons were elected, such persons being all of the same persons then acting as directors. The following persons: For Against Abstain 1. Henry Platek 16,638,969 23,087 - 2. Mair Faibish 16,638,969 23,087 - 3. Mitchell Gerstein 14,438,969 23,087 2,200,000 4. Dominic Marsicovetere 16,638,969 23,087 - 5. Michael Ferrone 14,438,969 23,087 2,200,000 (b) To re-elect current auditors. Where Belew Averitt LLP the current auditors was re-elected for December 31, 2000: For Against Abstain 14,436,565 2,218,291 7,200 (c) To amend its certificate of Incorporation to increase its authorized stock to 60,000,000 shares and create a Class B preferred stock. For Against Abstain 9,136,075 8,883,134 2,456 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. -24- 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 08/09/00 /s/ Mitchell Gerstein -------------------- By: Mitchell Gerstein Treasurer Date 08/09/00