-----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, BJH9Uc0YrWUisIWKXMqF0gdYUnt3fWtvMTn2fyOG9X9gBmASb0yxjbRoOPwIlD4I 7IhpX0j6WlMO8rF0TNmwfw== 0001026018-99-000029.txt : 19991117 0001026018-99-000029.hdr.sgml : 19991117 ACCESSION NUMBER: 0001026018-99-000029 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99752136 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 10QSB FORM 10-Q. QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the period ended SEPTEMBER 30, 1999 Commission File Number: 0-19409 SYNERGY BRANDS INC. (Exact name of registrant as it appears in its charter) Delaware 22-2993066 (State of incorporation) (I.R.S. Employer identification no.) 40 Underhill Blvd., Syosset New York 11791 (Address of principal executive offices) (zip code) 516-682-1980 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [x] YES [ ] NO APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. On November 1 there were 10,641,244 shares outstanding of the registrant's common stock. SYNERGY BRANDS INC. FORM 10-QSB SEPTEMBER 30, 1999 TABLE OF CONTENTS PART I: FINANCIAL INFORMATION Page Consolidated Balance sheets as of September 30, 1999 (Unaudited) and December 31, 1998 2-3 Consolidated Statements of Operations for the nine months ended September 30 1999 and 1998 (Unaudited) 4 Consolidated Statements of Operations for the three months ended September 30, 1999 and 1998 (Unaudited) 5 Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 and 1998 (Unaudited) 6-7 Notes to Consolidated Financial Statements 8-12 Management's Discussion and Analysis of Financial Condition and Results of Operations 13-16 Forward Looking Information and Cautionary 17-20 Statements PART II: OTHER INFORMATION Item VI: Exhibits and Reports on Form 8-K 21 SYNERGY BRANDS INC. CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
September 30, 1999 December 31, 1998 ---------------- --------------- ASSETS (Unaudited) Current Assets: Cash $ 444,130 $ 325,699 Accounts Receivable (note 4 ) 3,573,715 3,020,010 Inventory (notes 3 & 4) 2,282,327 1,374,808 Other Current Assets 1,084,864 53,650 ---------------- ---------------- Total Current Assets 7,385,036 4,774,167 Collateral and Security Deposit (note 7) 1,802,995 1,802,995 Property and Equipment - Net (note 2) 135,702 120,059 Other Assets 756,024 56,891 ---------------- ---------------- Total Assets $ 10,079,757 $ 6,754,112 =============== ===============
See Accompanying Notes to Consolidated Financial Statements -2- SYNERGY BRANDS INC. CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
September 30, 1999 December 31, 1998 ---------------- ---------------- LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) Current Liabilities: Current Portion of Long term debt (Note 4) $ 390,000 $ 1,475,000 Accounts Payable & Accrued Expenses 1,625,120 1,240,079 Income taxes payable 9,182 12,794 ---------------- ---------------- Total Current Liabilities 2,024,302 2,727,873 Vendor Debt due after one year - 128,384 Long Term Debt (note 4) 1,775,000 400,000 Commitments and Contingencies (note 7) - - Preferred Stock of Subsidiary (note 4) 135,625 135,625 Stockholders' Equity: (Note 6) Class A $2.20 Cumulative Preferred stock - $.001 par value; 100,000 shares authorized 100 100 Common stock - $.001 par value; 29,900,000 Shares authorized 10,558,744 and 6,327,086 shares were outstanding at 9/30/99 and 12/31/98 respectively 10,559 6,327 Additional Paid-in Capital 18,467,991 15,724,196 Accumulated Deficit (12,166,320) (12,200,893) ---------------- ---------------- 6,312,330 3,529,730 Less treasury stock at cost, 1,400 shares (167,500) (167,500) ---------------- ---------------- Total stockholders' equity 6,144,830 3,362,230 Total Liabilities & Stockholder's Equity $10,079,757 $ 6,754,112 ================ ================
See Accompanying Notes to Consolidated Financial Statements -3- SYNERGY BRANDS INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
1999 1998 ---------------- ---------------- Net Sales (note 8) $10,619,556 $ 7,872,274 Cost of Sales 9,086,112 6,707,286 ---------------- ------------ Gross Profit 1,533,444 1,164,988 Selling General and Administrative Expense 1,399,515 684,562 Depreciation and Amortization 17,607 603 ---------------- -------------- Operating Income (Loss): 116,322 479,823 ---------------- ---------------- Other Income (Expense): Miscellaneous Income (Expense) 1,865 (16,924) Interest Income 67,612 66,673 Interest Expense (151,226) (12,667) ---------------- ---------------- Total Other Income (Expense) (81,749) 37,082 =============== =============== Income (Loss) Before Income Taxes $ 34,573 $ 516,905 Income Taxes - - --------------- ---------------- Income (Loss) $ 34,573 $ 516,905 Income (Loss) Applicable to Common Stock (Note 1) $ 34,573 $ 516,905 =============== =============== Earnings (Loss) Per Common Share - $.12 =============== =============== Weighted Average Number of Shares Outstanding 8,746,437 4,271,480
See Accompanying Notes to Consolidated Financial Statements -4- SYNERGY BRANDS INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
1999 1998 ---------------- ---------------- Net Sales (note 8) $ 3,959,511 $ 2,918,138 Cost of Sales 3,567,259 2,524,059 ---------------- ---------------- Gross Profit 392,252 394,079 Selling General and Administrative Expense 863,895 213,050 Depreciation and Amortization 5,869 201 ---------------- ---------------- Operating Income (Loss): (477,512) 180,828 ---------------- ---------------- Other Income (Expense): Miscellaneous Income (Expense) 5 (18,225) Interest Income 22,537 15,973 Interest Expense (52,648) (12,667) ---------------- ---------------- Total Other Income (Expense) (30,106) (14,919) ================ ================ Income (Loss) Before Income Taxes $ (507,618) $ 165,909 Income Taxes - - ---------------- ---------------- Income (Loss) $ (507,618) $165,909 Income (Loss) Applicable to Common Stock (Note 1) $ (507,618) $ 165,909 ================ ================ Earnings (Loss) Per Common Share $ (.05) $.04 ================ ================ Weighted Average Number of Shares Outstanding 9,692,062 4,721,093
See Accompanying Notes to Consolidated Financial Statements -5- SYNERGY BRANDS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
1999 1998 ---------------- ---------------- Cash Flows From Operating Activities: Income (Loss) From Continuing Operations $ 34,573 $ 516,905 Adjustments to Reconcile Net Income (Loss) From Continuing Operations to Net Cash Flows From Continuing Operating Activities: Depreciation and Amortization 17,607 603 Non-Cash Expenses 745,965 804,857 Dividends on Preferred Stock of Subsidiary 18,375 Changes in Operating Assets and Liabilities: Accounts Receivable (553,705) (1,440,209) Promotional Rebates - ( 57,998) Inventory (907,519) (1,121,000) Other Current Assets (1,031,214) 51,090 Other Assets (699,133) - Accounts Payable & Accrued Expenses (828,343) (639,336) Income Taxes Payable (3,612) (10,041) ---------------- ---------------- Net Cash Flows Provided by (Used in) Operating Activities (3,225,381) (1,876,754) Cash Flows From Investing Activities: Purchase of Furniture and Equipment (33,250) (57,321) Payment of Collateral Security Deposit - 994,398 ---------------- ---------------- Net Cash Flows provided by (Used in) Investing Activities (33,250) 937,077 Cash Flows From Financing Activities: Net Borrowing (Payments) on Notes Payable 873,324 Proceeds from Issuance of Common Stock 2,002,062 - Long Term Debt 1,375,000 - ---------------- ---------------- Net Cash Flows Provided by Financing Activities 3,377,062 873,324 ---------------- ---------------- Net Increase (Decrease) in Cash 118,431 (66,353) Cash - Beginning of Period 325,699 189,626 ---------------- ---------------- Cash - End of Period $ 444,130 $ 123,273 ================ ================
See Accompanying Notes To Consolidated Financial Statements -6- SYNERGY BRANDS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED) 1999 1998 ---------- ---------- Supplemental Disclosure of Cash Flow Information: Cash Paid During the Period for: Interest Continuing Operations $ - $ - Discontinued Operation - - =========== ========== Income Taxes Continuing Operations $ - $ - Discontinued Operations - - =========== ========== Supplemental Disclosure of Non-Cash Operating, Investing and Financing Activities: Expenses paid via the distribution of registered shares of the Company's Common Stock through it's Compensation and Services Plan - - Prepaid Expenses paid via the distribution of registered shares of the Company's Common Stock through it's Compensation and Services Plan _ _ ----------- ---------- Total Non-Cash Operating, Investing and Financing Activities - - =========== ========== See Accompanying Notes to Consolidated Financial Statements -7- SYNERGY BRANDS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1999 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Synergy Brands, Inc. ("Synergy") through its subsidiaries (collectively the "Company") markets national brand name consumer products to numerous U.S. retailers and wholesalers as well as developing and selling proprietary brand consumer products to and through on line channels, including Health & Beauty Aids (HBA), Fragrances, Salon hair products, Groceries and Hand made premium Cigars. Synergy operates through three wholly owned subsidies, New Era Foods, Sybr.com and Island Wholesale Grocers. New Era Foods operates the Salon hair care business though PHS, Inc. and it's Premium Cigar business through PCW, Inc. (which is 66% owned). (See notes 5 & 7) Sybr.com operates through recently formed two subsidiaries, BeautyBuys.com and netcigar.com. BeautyBuys sells on a business to consumers and business to business model fragrances, hair care, beauty, health, wellness, personal care and gift products. netcigar sells through the Internet on a business to consumer model hand made premium cigars, cigar accessories, gifts, fragrances and leather goods. Island Wholesale Grocers integrates its purchasing of Grocery and HBA products through New Era Foods. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Synergy, its wholly-owned subsidiaries and its majority-owned subsidiary (collectively, the Company). All significant intercompany accounts and transactions have been eliminated in consolidation. REVENUE RECOGNITION The Company recognizes revenue at the time merchandise is shipped to the customer. The Company returns merchandise that is damaged or has the wrong specifications to the supplier. The cost is recovered from the trucking company, warehouse or the supplier, depending upon the nature of the return. MARKETABLE SECURITIES Management determines the appropriate classification of its investments in debt and equity securities at the time of purchase and re-evaluates such determination at each balance sheet date. No securities were outstanding at September 30, 1999. -8- 1. INVENTORY Inventory is stated at the lower of cost or market. The Company uses the first-in, first-out (FIFO) cost method of valuing its inventory. All tobacco inventory is included in current assets in conformity with standard industry practice, not withstanding the fact that significant quantities of inventory may be carried for several years for purposes of the curing process. CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of accounts receivable. The concentration of credit risk with respect to receivables is mitigated by the credit worthiness of the Company's major customers. The Company maintains an allowance for losses based upon the expected collectibility of all receivables. Fair value approximates carrying value for all financial instruments. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the assets, ranging from three to five years. Maintenance and repairs of a routine nature are charged to operations as incurred. Betterments and major renewals which substantially extend the useful life of an existing asset are capitalized and depreciated over the asset's estimated useful life. Upon retirement or sale of an asset, the cost of the asset and the related accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is credited or charged to income. PREFERRED STOCK OF SUBSIDIARY Changes in preferred stock of the subsidiary are accounted for as equity transactions and thus no gain or loss is recognized. Upon each new issuance of the subsidiary's preferred stock, the Company will evaluate whether or not its investment has been impaired and adjust accordingly. ADVERTISING The Company expenses advertising and promotional costs as incurred. INCOME TAXES The Company uses the asset and liability method of computing deferred income taxes. In the event differences between the financial reporting basis and the tax basis of an enterprise's assets and liabilities result in deferred tax assets, an evaluation of the probability of being able to realize the future benefits indicated by such assets is required. A valuation allowance is provided for a portion or all of the deferred tax assets when it is more likely than not that such portion or all of such deferred tax assets will not be realized. EARNINGS PER SHARE The Company calculates earnings per share pursuant to Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). SFAS 128 requires dual presentation of basic and diluted earnings per share (EPS) on the face of the statement of income for all entities with complex capital structures, and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS calculations are based on the weighted-average number of common shares outstanding during the period, while diluted EPS calculations are based on the weighted-average of common shares and dilutive common share equivalents outstanding during each period. -9- MANAGEMENT ESTIMATES In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses during the reporting period. Actual results could differ from management's estimates. STOCK-BASED COMPENSATION PLANS Statement of Financial Accounting Standards No. 123, 'Accounting for Stock-Based Compensation" (SFAS 123), encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has elected to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair market value of the Company's stock at the date of the grant over the amount the employees or non-employees must pay to acquire the stock. 2. PROPERTY AND EQUIPMENT Property and equipment as of September 30, 1999 consisted of the following: Office equipment $ 65,286 Machinery and equipment 50,698 Leasehold improvements 63,992 ---------- 179,976 Less accumulated depreciation and amortization (44,274) --------- $ 135,702 ========== 3. INVENTORY Inventory as of September 30, 1999 consisted of the following: Finished goods $ 1,737,929 Tobacco raw materials 544,398 ---------- $ 2,282,327 ========== 4. LONG-TERM DEBT Long-term debt at September 30, 1999 consisted of the following: Note payable to financial company due January 2001, bearing interest at 9%; collateralized by inventory of NEF 1,500,000 Secured debentures; bearing interest at 12% payable monthly; $200,000 principal due October 1999 and remainder maturing October 2000; collateralized by inventory and accounts receivable of PHS 600,000 Note payable to bank due July 5, 1996; non-interest bearing. 65,000 ---------- 2,165,000 -10- Less current portion 390,000 ------------ $ 1,775,000 ============= 5. MINORITY INTEREST PCW was incorporated in October 1997 with 7,750 shares of authorized $.001 par value common stock. At December 31, 1998, PCW had 1,000 shares of common stock outstanding which were issued at par value. The Company owns 66% of the common stock and an unrelated individual owns the minority interest. For financial reporting purposes, the assets, liabilities, results of operations and cash flows for PCW are included in the Company's consolidated financial statements and the outside investor's interest in PCW is reflected in the preferred stock of subsidiary. PCW had 2,250 shares of authorized $.001 par value preferred stock issued and outstanding at December 31,1998. PCW issued 1,750 shares of preferred stock at inception to two unrelated individuals at $60 per share, and 500 shares to the Company for a 22% minority interest in the preferred stock. The holders of PCW preferred stock are entitled to receive cumulative dividends at the rate of $14 per share before any dividends on the common stock are paid. Included in preferred stock of subsidiary is $30,625 of preferred stock dividends payable at December 31, 1998. The Company's portion of the dividend has been eliminated in consolidation. In the event of dissolution of PCW, the holders of the preferred shares are entitled to receive $60 per share together with all accumulated dividends, before any amounts can be distributed to the common stockholders. The shares are convertible only at the option of PCW at $120 per share. 6. STOCKHOLDERS' EQUITY In May 1997, the majority of common stockholders voted to authorize a 1-for-25 reverse split of the Company's $.001 par value common stock. Any stockholders entitled to fractional shares were paid with cash based upon the current fair market value of the stock. All references in the accompanying financial statements to the number of common shares have been restated to reflect the stock split. In November 1997, the Company redeemed 100% of the Class A preferred stock in exchange for $350,000 cash, 400,000 shares of common stock and options to purchase 500,000 shares of restricted common stock exercisable at $1 per share. Part of the cash payment was used to settle accrued dividends of $220,000. The options were to vest if the Company achieved $1,000,000 in pretax income within five years. During 1998, this restriction was removed and the options were granted at $.50 per share. The preferred stock was thereafter reissued, at par value, to an officer of the Company in recognition of services rendered; however, all dividend privileges and stock redemption rights were stripped from the stock. The stock retains the 13-to-1 voting privilege. At December 31, 1998, the Company had outstanding warrants to purchase 112,500 shares of the Company's common stock, at $1.10 per share. The warrants become exercisable when the shares are registered and expire at various dates through 2002. At December 31, 1998, 112,500 shares of common stock were reserved for that purpose. During 1997, the Company issued 1,612,200 shares in connection with a Regulation S offering at an average price of $.82 per share, resulting in $1,331,780 proceeds net of offering expenses, including the conversion of $377,000 of subordinated debt, and $125,000 of non-cash issuances as described in the consolidated statement of cash flows. In 1994, the Company adopted the 1994 Services and Consulting Compensation Plan (the Plan). Under this Plan, 6,100,000 shares of common stock have been reserved for issuance. Since the inception of the Plan, the Company has issued 5,944,312 shares for payment of services to employees and professional service providers such as legal, marketing, promotional and investment consultants. The Company has 155,688 available in reserve under the plan at September 30, 1999. Common stock issued in connection with the Plan was valued at the fair value of the common stock at the date of issuance at an amount equal to the service provider's invoice amount. Under the Plan, the Company granted options to selected employees and professional service providers. -11- 7. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS The Company leases office space in Wilmerding Pennsylvania, and Syosset, New York, under operating leases expiring in April 2001 and July 2002, respectively. The Company is also leasing a vehicle under an operating lease expiring in 2003. Future minimum lease payments under non-calculable operating leases as of September 30, 1999 were as follows: Year ending December 31, ------------ 1999 $ 13,755 2000 49,729 2001 31,193 2002 15,973 2003 3,196 -------- $113,846 ======== DISTRIBUTION AGREEMENTS In 1996, the Company entered into a ten-year agreement with a Chinese trading company (ALT) to distribute frozen seafood in the United States under a licensing arrangement. The Company acts as an agent for ALT. During 1997, the Company marketed ALT's frozen seafood products and earned commissions based on sales generated by the distribution agreement. Additionally, the Company sells promotional grocery products to an agent of ALT. ALT provides the funding for such purchases. In consideration for ALT providing products and funding to the Company for sale and distribution, and as security for doing so, the Company was required to provide $2,052,995 in 1996 and an additional $200,000 in 1997, as collateral security for performance by the Company under the terms of the agreement. The Company had $450,000 refunded to it in 1998. The collateral security deposit bears interest at 5% and is received quarterly. In December 1997, NEF entered into a 25-year exclusive worldwide distribution agreement with a Dominican Republic corporation (DR) for the sale and distribution of premium handmade cigars manufactured in the Dominican Republic. There is an option to extend the term of the distribution agreement up to an additional 25 years. LITIGATION The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial position, results of operations or cash flows of the Company. GUARANTEE In March 1998, the Company guaranteed a $1,000,000 line-of-credit facility to a Dominican cigar manufacturer, which is owned by a PCW stockholder. The purpose of the line-of-credit is to provide financing to the cigar manufacturer to which PCW will supply cigar wrappers. The guarantee was reduced to $500,000 in April, 1999. 8. MAJOR CUSTOMERS The Company facilitates its sales to grocery and drug store chains though the U.S. agent of Asia Legend Trading Company, which accounted for 100% of total sales for 1998 and 1997. -12- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Synergy Brands, Inc. ("Synergy") through its subsidiaries (collectively the "Company") markets national brand name consumer products to numerous US retailers and wholesalers through off line distribution channels including Salon, Vitamins, HB&A and Groceries as well as developing and selling proprietary brand consumer products to and through online channels, including Health & Beauty Aids, Fragrances, Salon hair products, Vitamins, Groceries and Hand made premium Cigars. SYBR.COM The Internet has presented an outstanding opportunity for low mass marketing and distribution of a wide variety of consumer products. As a result the company formed Sybr.com Inc. in the 1st quarter of 1999 for the purpose of developing and financing the expansion of the company's Internet operations. Sybr.com further formed BeautyBuys.com, netcigar.com and BeautyBuys.com wholesale for the purpose of segmenting its merchandising. By operating out of a warehouse configuration that requires less capital as well as lower labor and rent factors than conventional retail stores, e-tailers can experience substantial operating savings. These savings can be passed along to the consumer in the form of lower prices. In addition to significant savings, the convenience of shopping online at home instead of in line at a store makes the Internet the preferred buying location for thousands of products. BEAUTYBUYS.COM In March 1999, the Company established BeautyBuys.com a web-site which offers direct to the consumer via the Internet, a popular selection of nationally branded health and beauty care products, including professional salon hair and skin care items, designer fragrances, cosmetics, vitamins, nutritional supplements and gift related products. The launch, which included approximately 2,000 individual items, has encouraged the Company to follow through with its marketing objective of increasing the variety to more than 5,000 items before the end of 1999. Market size for all of the combined categories offered on this site is in excess of fifty billion dollars, with online sales estimated at $1.2 billion by 2002 according to Jupiter Communication. Advertising through on-line and off line channels will be a part of the overall image building model for BeautyBuys.com. NETCIGAR.COM In May 1999, the Company expanded its premium cigar business by establishing netcigar.com as a web site for the sale of premium cigars and related products. Through the netcigar web site, the company will offer information on a variety of cigars and cigar related products for sale on the site. Additional content such as cigar news and events, editorials, cigar reviews, cigar chat rooms, free e-mail, a member's area and products of both the Company's proprietary labels and other popular brands are expected to be added to build a unique community for netcigar. The Market size for all of the combined categories offer on netcigar.com is in excess of ten billion dollars according to Jupiter Communication. The Company plans to optimize the traffic for potential customers by sponsoring an affiliates program, advertising on the Internet and traditional media channels, and initiating a public relations program. NEW ERA FOODS The Company markets, grocery, health and beauty aid products and salon hair care goods to major resellers and wholesalers through land channels in the northeastern part of the U.S. through (NEF). RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 1999 Nine Month Ended September 30, 1999 Revenues for the nine months increased by 35% to $10,619,556. Gross profit increased by 32% to $1,533,444 and generated a gross margin of 14.44%. Net profit decreased by 93% to $34,573 or $0.00 per share for the period. The increase in revenues is attributable to increase in sales of the two recently formed business segments which include Internet e-commerce sales and Salon Hair care sales. Gross profit increased as a result of additional operating margins realized from the Company's newly formed e-commerce subsidiary and hair business. -13- Net profit before Internet sales increased by 13% to $586,711 or .07 per share for the period. Internet marketing, advertising and technology costs were funded by the Company's cash flow from non-Internet businesses and general working capital, which reduced the Company's profit by $ 552,198. The table below compares the Company's Non-Internet business for the most recent nine month period against the Company's Non-Internet business for the similar period in 1998.
Consolidated Nine months Sept 30, 1999 Nine months Sept 30, 1998 Nine month (excluding Internet) comparison 1998 vs 1999 - ------------------- --------------------------- -------------------------- ---------------- Gross Sales 9,374,692 100.00% 7,872,274 100.00% 19.08% Cost of Goods 8,037,440 85.74% 6,707,286 85.20% 19.83% Gross Profit 1,337,252 14.26% 1,164,988 14.80% 14.79% SG&A 750,481 8.01% 648,083 8.23% 15.80% Net Profit (loss) 586,771 6.26% 516,905 6.57% 13.52% - ------------------ Weighted Shares 8,746,437 4,271,480 Per Share 0.07 0.12
The table below outlines the operating performance of each of the Company's three business segments for the most recent Nine months: NINE MONTHS SEPT. 30, 1999 Internet HB&A Grocery Salon Hair Care Total --------- ------------ --------------- -------- Gross Sales 1,244,864 7,186,473 2,188,219 10,619,556 Cost of Goods 1,048,672 5,975,446 2,061,994 9,086,112 Gross Profit 196,192 1,211,027 126,225 1,533,444 SG&A 748,390 694,825 55,656 1,498,871 Net Profit (552,198) 516,202 70,569 34,573 - ---------- Weighted Shares 8,746,437 Per Share (.06) .06 0.00 The Internet business for the nine months represented 12% of the Company's revenues. The company plans on converting as many of its off line sales to Internet sales on a business to consumer (BtoC) and business to business model (BtoB) through its online e-commerce sale channels. Three Month Ended September 30, 1999 Revenues for the three months ended September 30, 1999 increased to 3,959,511 a 36% increase from the prior period. Gross Profit decreased to 392,252 and generated a gross margin of 9.9%. Net loss for the period was 507,618 or (.05) per share. Net profit before Internet sales decreased by 59% to 67,770 or .01 per share. Internet marketing, advertising and technology cost was funded by the Company's cash flow from Non-Internet business and general working capital, which reduced the Company's profit by $ 575,388. The increase in revenues is attributable to the focus of the Company's sales being generated and redirected to e-commerce activities in addition to traditional wholesaling. The Company's business segments that have a direct affect on sales as it relates to Internet activities increased materially from the second quarter and did not exist in the comparable period in 1998. Please be advised that the Company transacted no Internet business and no Salon Hair Care business in the comparable period in 1998. -14- The table below compares the Company's Non-Internet business for the most recent three months against the Company's Non-Internet business for the same period in 1998.
Consolidated Three months Sept 30, 1999 Three months Sept 30,1998 Three month (excluding Internet) comparison 1998 vs 1999 - -------------------- -------------------------- -------------------------- --------------- Gross Sales 3,052,780 100.00% 2,918,138 100.00% 4.61% Cost of Goods 2,752,349 90.16% 2,524,059 86.50% 9.04% Gross Profit 300,431 9.84% 394,079 13.50% -23.76% SG&A 232,661 7.62% 228,170 7.82% 1.97% Net Profit (loss) 67,770 2.22% 165,909 5.69% -59.15% - ------------------- Weighted Shares 9,692,062 4,721,093 Per Share 0.01 0.04
The table below represents the segments of business for the three months ended September 30,1999: Internet HB&A` Grocery Salon Hair Care Total --------- ------------- --------------- ---------- Gross Sales 906,731 2,232,139 820,641 3,959,511 Cost of Goods 814,910 1,972,740 779,609 3,567,259 Gross Profit 91,821 259,399 41,032 392,252 SG&A 667,209 213,738 18,923 899,870 Net Profit (575,388) 45,661 22,109 (507,618) - ------------ Weighted Shares 9,692,002 Per Share (.06) .01 (.05) The Internet business for the three months represented 23% of the Company's revenues. The Company plans on converting as many of its off line sales to Internet sales on a business to consumer (BtoC) business to business model (BtoB) through its online e-commerce sale channels. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital increased to 5.4 million at September 30, 1999, a 162% increase from December 31, 1998. The Company believes that it has sufficient working capital to fund its non-Internet operations but requires additional financing to expand its Internet e-commerce operations. The Company has streamlined its financing requirements by repaying its revolving secured debt and established secured term financing. The Company currently borrows $2.1 million at an average 10% rate. The current maturities of the term loans extend from November 2000 to January 2001. The Company's Internet budget is significant and currently estimated at $ 4 million for 1999, of which $2.1 million has been expended in the first nine months of 1999. The Company plans to incur a significant amount of expense in developing marketing and advertising its web sites on both the Internet and traditional media outlets. As a result the Company plans on raising additional capital to support its anticipated expenditures. Failure to raise additional capital to support the Internet business may adversely effect the Company's overall business. Management is not aware of negative trends in the Company's area of business or other economic factors which may cause a significant change in the Company's viability or financial stability, except as specified herein and in "Forward-Looking Information and Cautionary Statements." Management has no plans to alter the nature of its business. SEASONALITY Seasonality affects the demand for certain products sold by the Company. Manufacturers tend to promote more heavily towards the close of the fiscal quarters and during the spring and early summer months. Accordingly, the Company is able to purchase more products, increase sales during these periods and reduce its product cost due to these promotions. The Company generally experiences lower sales volume in the fourth quarter due to the reduced number of selling days resulting from the concentration of holidays in the quarter. -15- Seasonality is a factor in the Internet business especially as it relates to holiday promotions, therefore it is anticipated that sales would be higher during the Christmas holiday, Mother's Day and other peak holidays. INFLATION The Company believes that inflation, under certain circumstances, could be beneficial to the Company's business. When inflationary pressures drive product costs up, the Company's customers sometimes purchase greater quantities of product to expand their inventories to protect against further pricing increases. This enables the Company to sell greater quantities of products that are sensitive to inflationary pressures. However, inflationary pressures frequently increase interest rates. Since the Company is dependent on financing, any increase in interest rates will increase the Company's credit costs, thereby reducing its profits. -16- FORWARD LOOKING INFORMATION AND CAUTIONARY STATEMENTS Other than the factual matters set forth herein, the matters and items set forth in this report are forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, the following: 1. INTERNET The internet environment is new to the business and is subject to inherent risks as in any new developing business including rapidly developing technology with which to attempt to keep pace and level of acceptance and level of consumer knowledge regarding its use. 2. CASH FLOW. The Company has experienced cash shortages which continue to adversely affect its business. See "Liquidity and Capital Resources". The Company requires additional working capital in order to maintain and expand its business. 3. DEPENDENCE ON PUBLIC TRENDS. The Company's business is subject to the effects of changing customer preferences and the economy, both of which are difficult to predict and over which the Company has no control. A change in either consumer preferences or a down-turn in the economy may affect the Company's business prospects. 4. POTENTIAL PRODUCT LIABILITY. As a participant in the distribution chain between the manufacturer and consumer, the Company would likely be named as a defendant in any product liability action brought by a consumer. To date, no claims have been asserted against the Company for product liability; there can be no assurance, however, that such claims will not arise in the future. Currently, the company does not carry product liability insurance. In the event that any products liability claim is not fully funded by insurance, and if the Company is unable to recover damages from the manufacturer or supplier of the product that caused such injury, the Company may be required to pay some or all of such claim from its own funds. Any such payment could have a material adverse impact on the Company. 5. RELIANCE ON COMMON CARRIERS. The Company does not utilize its own trucks in its business and is dependent, for shipping of product purchases, on common carriers in the trucking industry. Although the Company uses several hundred common carriers, the trucking industry is subject to strikes from time to time, which could have material adverse affect on the Company's operations if alternative modes of shipping are not then available. Additionally the trucking industry is susceptible to various natural disasters which can close transportation lanes in any given region of the country. To the extent common carriers are prevented from or delayed in utilizing local transportation lanes, the Company will likely incur higher freight costs due to the limited availability of trucks during any such period that transportation lanes are restricted. 6. COMPETITION. The Company is subject to intense competition in its Internet business , promotional grocery, squid, and premium handmade cigars businesses. While these industries may be highly fragmented, with no one distributor dominating the industry, the Company is subject to competitive pressures from other distributors based on price and service and product quality and origin. -17- 7. TRADE RELATIONS WITH CHINA. The Company is dependent on trade financing with the People's Republic of China (PRC). Any government sanctions that cause an interruption of trade or prohibit trade with PRC through higher duties or quotas could have a material adverse effect on the Company's business. China currently maintains a Most Favored Nation status with the United States, which it has maintained continuously since 1980, renewal of which is done on an annual basis each May. Loss of such status could have a material adverse effect on Company business. 8. LITIGATION The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial position, results of operations or cash flows of the Company, but there can be no assurance as to this. 9. POSSIBLE LOSS OF NASDAQ SMALL-CAP LISTINGS. Synergy Brands currently qualifies for trading on the Nasdaq Small Cap system. Nasdaq has adopted, and the Commission has approved, certain changes to its maintenance requirements which became effective as of February 20, 1998, including the requirement that a stock listed in such market have a bid price greater than or equal to $1.00. The bid price per share for the Common Stock of Synergy Brands has been below $1.00 in the past and the Common Stock has remained on the Nasdaq Small Cap system because Synergy Brands has complied with the alternative criteria which are now eliminated under the new rules. If the bid price falls below $1.00 per share, the Common Stock could be delisted from the Nasdaq Small Cap System and thereafter trading would be reported in the NASD's OTC Bulletin Board or in the "pink sheets." In the event of delisting from the Nasdaq Small Cap System, the Common Stock would become subject to rules adopted by the Commission regulating broker-dealer practices in connection with transactions in "penny stocks." The disclosure rules applicable to penny stocks require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized list disclosure document prepared by the Commission that provides information about penny stocks and the nature and level of risks in the penny stock market. In addition, the broker-dealer must identify its role, if any, as a market maker in the particular stock, provide information with respect to market prices of the Common Stock and the amount of compensation that the broker-dealer will earn in the proposed transaction. The broker-dealer must also provide the customer with certain other information and must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. Further, the rules require that following the proposed transaction the broker-dealer provide the customer with monthly account statements containing market information about the prices of the securities. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to the penny stock rules. If the Common Stock became subject to the penny stock rules, many broker-dealers may be unwilling to engage in transactions in the Company's securities because of the added disclosure requirements, thereby making it more difficult for purchasers of the Common Stock in this offering to dispose of their shares of the Common Stock. 10. RISK OF BUSINESS DEVELOPMENT. The Company has ventured into new lines of product and Internet distribution and such product and product distribution lines are expected to constitute a material part of the Company's revenue stream. The Company has not restored its level of product sales to that of previous years but with the addition of these new product lines the Company is hopeful of reaching and hopefully exceeding those prior levels. Because of the newness of these lines of products to the Company, the Company's operations in these areas should be considered subject to all of the risks inherent in a new business enterprise, including the absence of a profitable operating history and the expense of new product development. Various problems, expenses, complications and delays may be encountered in connection with the development of the Company's new products. These expenses must either be paid out of the proceeds of future offerings or out of generated revenues and Company profits. There can be no assurance as to the availability of funds from either of these sources. -18- 11. RAPIDLY CHANGING MARKET MAY IMPACT OPERATIONS. The market for the Company's products is rapidly changing with evolving industry standards and frequent new product introductions. The Company's future success will depend in part upon its continued ability to enhance its existing products and to introduce new products and features to meet changing customer requirements and emerging industry standards. The Company will have to develop and implement an appropriate marketing strategy for each of its products. There can be no assurance that the Company will successfully complete the development of future products or that the Company's current or future products will achieve market acceptance levels conducive to the Company's fiscal needs. Any delay or failure of these products to achieve market acceptance would adversely affect the Company's business. In addition, there can be no assurance that the products or technologies developed by others will not render the Company's products or technologies non-competitive or obsolete. 12. DEPENDENCE UPON ATTRACTING AND HOLDING. The Company's future success depends in large part on the continued service of its key technical, marketing, sales and management personnel and on its ability to continue to attract, motivate and retain highly qualified employees. Although the Company's key employees have stock options, its key employees may voluntarily terminate their employment with the Company at any time. Competition for such employees is intense and the process of locating technical and management personnel with the combination of skills and attributes required to execute the Company's strategy is often lengthy. Accordingly, the loss of the services of key personnel could have a material adverse effect upon the Company's operating efforts and on its research and development efforts. The Company does not have key person life insurance covering its management personnel or other key employees. 13. Extensive and Increasing Regulation of Tobacco Products and Litigation May Impact Cigar Industry. The tobacco industry in general has been subject to extensive regulation at the federal, state and local levels. Recent trends have increased regulation of the tobacco industry. Although regulation initially focused on cigarette manufacturers, it has begun to have a broader impact on the industry as a whole and may focus more directly on cigars in the future. The recent increase in popularity of cigars could lead to an increase in regulation of cigars. A variety of bills relating to tobacco issues have been introduced in the U.S. Congress, including bills that would have (1) prohibited the advertising and promotion of all tobacco products or restricted or eliminated the deductibility of such advertising expense, (ii) increased labeling requirements on tobacco products to include, among others things, addiction warnings and lists of additives and toxins. (iii) shifted control of tobacco products and advertisements from the Federal Trade Commission (the "FTC") to the Food and Drug Administration (the "FDA"), (iv) increased tobacco excise taxes and (v) required tobacco companies to pay for health care costs incurred by the federal government in connection with tobacco related diseases. Future enactment of such proposals or similar bills may have an adverse effect on the results of operations or financial condition of the Company. In addition, a majority of states restrict or prohibit smoking in certain public places and restrict the sale of tobacco products to minors. Local legislative and regulatory bodies also have increasingly moved to curtail smoking by prohibiting smoking in certain buildings or areas or by designated "smoking" areas. Further restrictions of a similar nature could have an adverse effect on the Company's sales or operations, such as banning counter access to or display of premium handmade cigars, or decisions by retailers because of public pressure to stop selling all tobacco products. Numerous proposals also have been considered at the state and local level restricting smoking in certain public areas, regulating point of sale placement and promotions and requiring warning labels. Increased cigar consumption and the publicity such increase has received may increase the risk of additional regulation. The Company cannot predict the ultimate content, timing or effect or any additional regulation of tobacco products by any federal, state, local or regulatory body, and there can be no assurance that any such legislation or regulation would not have a material adverse effect on the Company's business. -19- In addition numerous tobacco litigations have been commenced and may in the future be instituted, all of which may adversely affect the cigar consumption and sale and may pressure applicable government entities to institute further and stricter legislation to restrict and possibly prohibit cigar sale and consumption, any and all of which may have an adverse affect on Company business (see "Government Regulation - Tobacco Industry Regulation and Tobacco Industry Litigation" supra). 14. RISKS RELATING TO MARKETING OF CIGARS. The Company primarily will distribute premium handmade cigars which are hand-rolled and use tobacco aged over one year. The Company believes that there is an abundant supply of tobacco available through its supplier in the Dominican Republic for the types of premium handmade cigars the Company primarily will sell. However, there can be no assurance that increases in demand would not adversely affect the Company's ability to acquire higher priced premium handmade cigars. While the cigar industry has experienced increasing demand for cigars during the last several years, there can be no assurance that the trend will continue. If the industry does not continue as the Company anticipates or if the Company experiences a reduction in demand for whatever reason, the Company's supplier may temporarily accumulate excess inventory which could have an adverse effect on the Company's business or results of operations. 15. Social, Political And Economic Risks Associated With Foreign Trade May Adversely Impact Business. The Company purchases all of its premium handmade cigars from manufactures located in countries outside the United States. In addition, the Company acquires squid through the People's Republic of China ("PRC"). Social and economic conditions inherent in foreign operations and international trade may change, including changes in the laws and policies that govern foreign investment and international trade. To a lesser extent social, political and economic conditions may cause changes in United States laws and regulations relating to foreign investment and trade. Social, political or economic changes could among other things, interrupt cigar supply or cause significant increases in cigar prices. In particular, political or labor unrest in the Dominican Republic could interrupt the production of premium handmade cigars, which would inhibit the Company from buying inventory. Any government sanctions that cause an interruption of trade or prohibit trade with the PRC through higher duties or quotas could have a material adverse effect on the Company's business. Accordingly, there can be no assurance that changes in social, political or economic conditions will not have a material adverse affect on the Company's business. 16. YEAR 2000 ISSUE. The Company's management recognizes the need to ensure that its operations and relationship with vendors, and other third parties will not be adversely impacted by software processing errors arising from calculations using the year 2000 and beyond. Many existing computer programs and databases use only two digits to identify a year in the date filed (i.e. 99 would represent 1999). If not corrected, many computer systems could fail or create erroneous results in the year 2000. The Company believes all of its internal information systems currently in use are year 2000 ready. The majority of the Company's critical business applications have been developed internally, in the past year with Year 2000 ready tools. Should any or all of the applications fail to perform properly on January 1, 2000, the Company will resort to temporary manual processing, which is not expected to have a material adverse impact on its short-term operations. Failure to achieve Year 2000 readiness by any of the Company's vendors, while expected to cause some disruption to operations in the short-term, is not expected to have a material impact on the Company's operations. 17. NO DIVIDENDS LIKELY. No dividends have been paid on the Common Stock since inception, nor, by reason of its current financial status and its contemplated financial requirements, does Synergy Brands contemplate or anticipate paying any dividends upon its Common Stock in the foreseeable future. -20- Item 4-Submission of matters to vote of security holders. (a) No matters were submitted to vote of shareholders for the third quarter ended September 30, 1999. Item 6- Exhibits and Reports on Form 8-K (a) Exhibits - none (b) There was no reports filed on Form 8-K for the relevant period. -21- SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SYNERGY BRANDS INC. /s/ Mair Faibish Date 11/8/99 ------------------- /s/ Mair Faibish /s/ Mair Faibish ----------------------------- By: /s/ Mair Faibish Chief Financial Officer Date: 11/8/99 /s/ Mitchell Gerstein ----------------------- /s/ Mitchell Gerstein /s/ Mitchell Gerstein - --------------------------- By: /s/ Mitchell Gerstein Treasurer -----END PRIVACY-ENHANCED MESSAGE-----