FORM 10-Q. QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the period ended MARCH 31, 2000
Commission File Number: 0-19409
SYNERGY BRANDS, INC.
(Exact name of registrant as it appears in its charter)
Delaware 22-2993066
(State of incorporation) (I.R.S. Employer
identification no.)
40 Underhill Blvd., Syosset NY 11791
(Address of principal executive offices) (zip code)
516-682-1980
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[x] YES [ ] NO
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. On May 11, 2000 there were
15,271,935 shares outstanding of the registrant's common stock.
<PAGE>
SYNERGY BRANDS, INC.
FORM 10-Q SB
MARCH 31, 2000
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION Page
Consolidated Balance sheets as of March 31, 2000 2-3
(Unaudited) and December 31, 1999
Consolidated Statements of Operations for the three
months ended March 31, 2000 and 1999 (Unaudited) 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 2000 and 1999 (Unaudited) 5 - 6
Notes to Consolidated Financial Statements 7 - 13
Management's Discussion and Analysis of
Financial Condition and Results of Operations 14 - 15
Forward Looking Information and Cautionary 16 - 20
Statements
PART II: OTHER INFORMATION
Item VI: Exhibits and Reports on Form 8-K 21
<PAGE>
SYNERGY BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2000 AND DECEMBER 31, 1999
March 31, 2000 December 31, 1999
-------------- -----------------
(Unaudited)
ASSETS
------
Current Assets:
- ---------------
Cash and cash equivalents $ 326,187 $1,156,032
Accounts Receivable, less allowance for
doubtful accounts of $69,965. 560,645 788,077
Inventory (note 4) 1,968,240 1,868,572
Other Current Assets 557,082 6,505
-------------- -----------------
Total Current Assets 3,412,154 3,819,186
Collateral and Security Deposit (note 2) 400,900 400,900
Property and Equipment - Net (note 3) 708,030 687,493
Trade Names, net of accumulated amortization
of $158,496 2,538,568 2,657,440
-------------- -----------------
Total Assets
$7,059,652 $7,565,019
============== =================
See Accompanying Notes to Consolidated Financial Statements
-2-
<PAGE>
SYNERGY BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, 2000 December 31, 1999
-------------- -----------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Note Payable (Note 5) $ - $ 150,000
Accounts Payable & Accrued Expenses (note 7) 2,622,814 2,916,388
-------------- -----------------
Total Current Liabilities 2,622,814 3,066,338
Long-term debt (note 5) 465,000 465,000
Commitments and Contingencies (note 8) - -
Minority Interest (note 6) 600,828 682,394
Preferred Stock of Subsidiary (note 6 ) 166,250 160,125
Stockholders' Equity: (Note 7)
Class A Preferred stock - $.001 par value; 100,000 shares
authorized 100 100
Common stock - $.001 par value; 29,900,000 Shares
authorized 14,343,510 and 13,455,510 Shares were outstanding at
3/31/00 and 12/31/99 respectively: 14,344 13,456
Additional paid-in capital 26,841,821 25,219,431
Deficit (20,086,005) (18,542,575)
Stockholders' notes receivable (398,000) (331,750)
Advertising and in-kind services receivable from stockholder (3,000,000) (3,000,000)
-------------- -----------------
3,372,260 3,358,662
Less treasury stock at cost, 1,400 shares (167,500) (167,500)
-------------- -----------------
Total stockholders' equity 3,204,760 3,191,162
Total Liabilities and Stockholders Equity 7,059,652 $ 7,565,019
============== =================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
-3-
<PAGE>
SYNERGY BRANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
2000 1999
-------------- ------------
Net Sales $3,583,808 3,260,319
Cost of Sales 3,341,028 2,741,306
-------------- ------------
Gross Profit 242,780 519,013
Selling General and Administrative Expense 1,749,835 171,522
Depreciation and Amortization 134,537 5,869
-------------- ------------
Operating Income (Loss): (1,641,592) 341,622
-------------- ------------
Other Income (Expense):
Miscellaneous Income (Expense) 36,078 1,776
Interest Income 4,051 22,537
Interest Expense (17,408) (47,752)
-------------- ------------
Total Other Income (Expense) 22,721 (23,439)
-------------- ------------
Income (Loss) Before Income Tax and Minority Interest (1,618,871) 318,183
Minority interest & dividends on preferred stock of subsidiary 75,441
-------------- ------------
Net Income (Loss) (1,543,430) 318,183
=============== ==============
Income (Loss) Applicable to Common Stock (Note 1) (1,543,430) $ 318,183
=============== ==============
Basic Earnings (Loss) Per Common Share $ (.11) $.04
-------------- ------------
Net Income (Loss) Per Common Share $ (.11) $.04
=============== ==============
Weighted Average Number of Shares Outstanding 13,873,361 7,577,421
</TABLE>
See Accompanying Notes To Consolidated Financial Statements
-4-
<PAGE>
SYNERGY BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
2000 1999
------------- -----------
Cash Flows From Operating Activities:
Net Income (Loss) $(1,543,430) $ 318,183
Adjustments to Reconcile Net Income (Loss) -- --
From Continuing Operations to Net Cash
Flows From Continuing Operating Activities:
Depreciation and Amortization 134,538 5,869
Non-Cash Expenses 1,181,233 1,927,792
Changes in Operating Assets and Liabilities:
Minority Interest &Dividends on preferred stock subsidiary (75,441)
Accounts Receivable 227,432 (664,273)
Inventory (99,668) (225,495)
Other Current Assets (444,327) (500,186)
Other Assets -- 13,512
Accounts Payable & Accrued Expenses (293,524) (299,504)
Income Taxes Payable -- (56)
------------- -----------
Net Cash Flows provided by (used in) operation activities (913,187) 575,842
Cash Flows From Investing Activities:
Purchase of Furniture and Equipment (36,203) (1,682)
Payment of Collateral Security Deposit -- --
------------- -----------
Net Cash Flows (used in)
in Investing activities (36,203) (1,682)
Cash Flows From Financing Activities:
Net Borrowing (Payments) on Notes Payable (150,000) (200,000)
Proceeds from Issuance of Common Stock 269,545 --
Long Term Debt -- --
------------- -----------
Net Cash Flows Provided by Financing Activities 119,545 (200,000)
------------- -----------
Net Increase (Decrease) in Cash (829,845) 374,160
Cash - Beginning of Period 1,156,032 325,699
------------- -----------
Cash - End of Period $ 326,187 $ 699,859
============= ===========
</TABLE>
See Accompanying Notes To Consolidated Financial Statements
-5-
<PAGE>
SYNERGY BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
2000 1999
----------- ----------
Supplemental Disclosure of Cash Flow Information:
Interest Paid $ 17,408 $ 47,752
Income Taxes Paid -- --
Supplemental Disclosure of Non-Cash Operating,
Investing and Financing Activities:
Stock issued in exchange for notes receivable 152,500 --
Prepaid Expenses paid via the distribution of
registered shares of the Company's Common
Stock through it's Compensation and Services Plan 106,250 --
----------- ----------
Total Non-Cash Operating, Investing and
Financing Activities 258,750 --
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
-6-
<PAGE>
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Synergy Brands, Inc. (Synergy), (formerly Krantor Corporation) and its
subsidiaries have developed and operate Internet platform operations
and Internet-based businesses designed to sell a variety of products,
including health and beauty aids and premium handmade cigars, directly
to consumers (business to consumer) and to business (business to
business). A summary of the related organizations and operations is
provided below.
In September 1996, Synergy formed a wholly-owned subsidiary, New Era
Foods, Inc. (NEF), which represented manufacturers, retailers and
wholesalers in connection with distribution of frozen seafood, grocery
and general merchandise products.
In October 1997, NEF formed a subsidiary, Premium Cigar Wrappers, Inc.
(PCW), for the purpose of producing premium cigar wrappers in the
Dominican Republic. NEF owns 66% of the common stock and approximately
22% of the preferred stock of PCW (see note 6).
In October 1998, NEF formed a wholly-owned subsidiary, PHS Group, Inc.
(PHS), which is a wholesale distributor of premium beauty salon
products and such subsidiary was later transfered to BB (see note7).
In January 1999, Synergy formed a wholly-owned subsidiary, Sybr.com,
Inc. (Sybr), which is engaged in the development of Internet-based
business to consumer and business to business opportunities focused on
beauty, personal care, cigars and other consumer products through its
subsidiaries, BB and NetCigar.com, Inc.
In May 1999, Sybr formed a wholly-owned subsidiary, NetCigar.com, Inc.
(NetCigar), which is engaged in the development of Internet-based
business to consumer opportunities focused on cigars and related
products.
In June 1999, Sybr formed a wholly-owned subsidiary, BeautyBuys.com,
Inc. (BB), which is engaged in the development of Internet-based
business to consumer and business to business opportunities focused on
beauty, personal care and other consumer products.
In April 2000, Synergy formed a wholly-owned subsidiary, DealByNet.com,
Inc., to engage in Internet-based business activities designed to
create an integrated supply chain from manufactures of a variety of
products to business customers.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Synergy,
its wholly-owned subsidiaries, its majority-owned subsidiary and BB
(collectively, the Company). All significant intercompany accounts and
transactions have been eliminated in consolidation.
REVENUE RECOGNITION
The Company recognizes revenue at the time merchandise is shipped to
the customer. The Company issues credits to the customer for any
returned items at the time the returned products are received.
CASH AND CASH EQUIVALENTS
The Company considers time deposits with maturities of three months or
less when purchased to be components of cash.
-7-
<PAGE>
MARKETABLE SECURITIES
Management determines and appropriate classification of its investments
in debt and equity securities at the time of purchase and re-evaluates
such determination at each balance sheet date. No securities were
outstanding at March 31, 2000.
INVENTORY
Inventory is stated at the lower of cost or market. The Company uses
the first-in, first-out (FIFO) cost method of valuing its inventory.
All tobacco inventory is included in current assets in conformity with
standard industry practice, not withstanding the fact that significant
quantities of inventory may be carried for several years for purposes
of the curing process.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents and accounts receivable. The Company places its cash and
cash equivalents with financial institutions it believes to be of high
credit quality. The concentration of credit risk with respect to
receivables is mitigated by the credit worthiness of the Company's
major customers. The Company maintains an allowance for losses based
upon the expected collectibility of all receivables. Fair value
approximates carry value for all financial instruments.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of property and
equipment is computed using the straight-line method over the estimated
useful lives of the assets, ranging from 3 to 10 years. Leasehold
improvements are amortized over the shorter of the lease term or their
estimated useful lives.
Maintenance and repairs of a routine nature are charged to operations
as incurred. Betterments and major renewals that substantially extend
the useful life of an existing asset are capitalized and depreciated
over the asset's estimated useful life. Upon retirement or sale of an
asset, the cost of the asset and the related accumulated depreciation
or amortization are removed from the accounts and any resulting gain or
loss is credited or charged to income.
TRADE NAMES
Trade names consist of the "Proset" and "Gran Reserve" trade names
acquired in November 1999, which are being amortized over their
expected useful lives not to exceed 5 years.
LONG-LIVED ASSETS
Long-lived assets and intangible assets are reviewed for impairment
whenever events or changes in circumstances indicate the carrying value
may not be recoverable. Impairment is measured by comparing the
carrying value of the long-lived assets to the estimated undiscounted
future cash flows expected to result from use of the assets and their
ultimate disposition. In instances where impairment is determined to
exist, the Company will write down the asset to its fair value based on
the present value of estimated future cash flows.
PREFERRED STOCK OF SUBSIDIARY
Changes in preferred stock of the subsidiary are accounted for as
equity transactions and thus no gain or loss is recognized. Upon each
new issuance of the subsidiary's preferred stock, the Company will
evaluate whether or not its investment has been impaired and adjust
accordingly.
ADVERTISING
The Company expenses advertising and promotional costs as incurred.
Advertising expense for the three months ended March 31, 2000 was
$224,251.
-8-
<PAGE>
INCOME TAXES
The Company uses the asset and liability method of computing deferred
income taxes. In the event differences between the financial reporting
bases and the tax bases of an enterprise's assets and liabilities
result in deferred tax assets, an evaluation of the probability of
being able to realize the future benefits indicated by such assets is
required. A valuation allowance is provided for a portion or all of the
deferred tax assets when it is more likely than not that such portion,
or all of such deferred tax assets, will not be realized.
EARNINGS PER SHARE
The Company calculates earnings per share pursuant to Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS
128). SFAS 128 requires dual presentation of basic and diluted earnings
per share (EPS) on the face of the statement of income for all entities
with complex capital structures, and requires a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. Basic EPS calculations
are based on the weighted-average number of common shares outstanding
during the period, while diluted EPS calculations are based on the
weighted-average of common shares and dilutive common share equivalents
outstanding during each period.
MANAGEMENT ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses during the reporting period. Actual results may
vary from managements estimates.
STOCK-BASED COMPENSATION PLANS
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), encourages, but does not require,
companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has elected to continue
to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related
interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the fair market value of the
Company's stock at the date of the grant over the amount the employees
or non-employees must pay to acquire the stock.
2. COLLATERAL SECURITY
At March 31, 2000, the Company had a $400,900 security deposit with a
major supplier, which serves as collateral for credit purchases made by
the Company from the supplier.
3. PROPERTY AND EQUIPMENT
Property and equipment as of March 31, 2000 consisted of the following:
Office equipment $ 240,282
Machinery and equipment 48,825
Furniture and fixtures 75,000
Lease hold improvements 416,248
780,355
Less accumulated depreciation and amortization (72,325)
-----------
$ 708,030
4. INVENTORY
Inventory as of March 31, 2000 consisted of the following:
Salon finished goods $ 943,606
Tobacco raw materials 495,534
Tobacco finished goods 529,100
------------
$ 1,968,240
============
-9-
<PAGE>
5. NOTE PAYABLE AND LONG-TERM DEBT
Unsecured note payable to minority stockholder,
with interest at 7.5%; payable semi-annually beginning
June 1, 2000 through maturity on November 23, 2002. $465,000
========
In April 2000, the Company obtained a line-of-credit arrangement with a
finance company that provides for borrowing based on a percentage of
eligible receivables, as defined, and interest at the prime rate plus
2%. The arrangement is collateralized by accounts receivable and
corporate guarantees.
6. MINORITY INTERESTS
PCW was incorporated in October 1997 with 7,750 shares of authorized
$.001 par value common stock. At December 31, 1998, PCW had 1,000
shares of common stock outstanding, which were issued at par value. The
Company owns 66% of the common stock and an outside investor owns the
minority interest. For financial reporting purposes, the assets,
liabilities, results of operations and cash flows for PCW are included
in the Company's consolidated financial statements and the outside
investor's interest is reflected in the preferred stock of subsidiary.
PCW had 2,250 shares of authorized $.001 par value preferred stock
issued and outstanding at December 31, 1998. PCW issued 1,750 shares of
preferred stock at inception to two unrelated individuals at $60 per
share, and 500 shares to the Company for a 22% minority interest in the
preferred stock. The holders of PCW preferred stock are entitled to
receive cumulative dividends at the rate of $14 per share before any
dividends on the common stock are paid. Included in preferred stock of
subsidiary is $61,250 of preferred stock dividends payable at March 31,
2000. The Company's portion of the dividend has been eliminated in
consolidation. In the event of dissolution of PCW, the holders of the
referred shares are entitled to receive $60 per share together with all
accumulated dividends, before any amounts can be distributed to the
common stockholders. The shares are convertible only at the option of
PCW at $120 per share.
BB was formed in June 1999 and in November 1999 was authorized to isuue
50,000,000 shares of $.001 par value common stock, of which 49,100,000
shares are Class A common stock and 900,000 shares are Class B common
stock. At March 31, 2000, BB had 9,000,000 shares of Class A common
stock and 900,00 shares of Class B common stock outstanding. The
Company owns all of the Class A common stock and the Class B common
stock is owned by the minority interest (see Note 7). For financial
reporting purposes, the assets, liabilities, results of operations and
cash flows of BB are included in the Company's consolidated financial
statements, and the outside investor's interest in BB is reflected in
minority interest liability.
7. STOCKHOLDERS' EQUITY
In 1994, Synergy adopted the 1994 Services and Consulting Compensation
Plan (the Plan). Under the Plan, as amended, 8,400,000 shares of common
stock have been reserved for issuance. Since the inception of the Plan,
Synergy has issued 6,861,688 shares for payment of services to
employees and professional service providers such as legal, marketing,
promotional and investment consultants. Common stock issued in
connection with the Plan was valued at the fair value of the common
stock at the date of issuance at an amount equal to the service
provider's invoice amount. Under the Plan, Synergy granted options to
selected employees and professional service providers. In November
1999, Synergy entered into a stock purchase agreement with Sinclair
Broadcast Group Inc. (NASDAQ Symbol SBGI) ("SBG") whereby SBG purchased
2,200,000 shares of Synergy's restricted $.001 par value common stock
for $4,400,000. The purchase price consists of $1,400,000 cash, a
credit for a minimum of $2,000,000 of radio advertising and a credit
for a minimum of $1,000,000 of certain in-kind services, as defined.
In November 1999, BB entered into a stock purchase agreement with SBG,
whereby SBG purchased 900,000 shares of $.001 par value Class B common
stock in BB for $765,000 cash. The Class B common shares constitute 50%
of the voting power of the common stock issued and outstanding. At
March 31, 2000 Sybr owned 9,000,000 shares of Class A common stock and
SBG owned 900,000 shares of Class B common stock.
-10-
<PAGE>
Simultaneously with the purchase of the Class B shares, BB and SBG
entered into a Class A Common Stock Option Agreement providing of a
grant by BB to SBG of the right to purchase 8,100,000 shares of its
Class A common stock. In consideration for the grant, SBG agreed to
provide $50,000,000 of radio and/or television advertising and
promotional support, as defined, to be used from November 1999 through
December 31, 2004. The Company may not use more than $10,000,000 of
such advertising in any one calendar year and may carryover any unused
advertising time from all previous calendar years through December 31,
2005. SBG may terminate its obligation to carryover any unused
advertising time after December 31, 2001, by providing 90 days prior
written notice to BB. As further consideration for the grant, SBG also
agreed to provide $18,623,535 in certain in-kind services, as defined,
at request of BB.
In November 1999, BB acquired all of the outstanding $.001 par value
common stock of PHS from NEF for an 8% convertible subordinated note
payable of $750,000. Simultaneously with the transaction, $600,000 of
PHS's convertible subordinated debentures were converted to Synergy
common stock.
The Company has also reserved 100,000 shares for a stock option plan
(Option Plan) for non-employee, independent directors, which entitles
each non-employee, independent director an option to purchase 10,000
shares of the Company's stock immediately upon election or re-election
of the Board of Directors. Options granted under the Option Plan will
be at the fair market value on the date of grant, immediately
exercisable, and have a term of ten years.
The following is a summary of such stock option transactions for the
three months ended March 31, 2000 in accordance with the Plan and other
restricted stock option agreements:
Weighted
Average
Number of exercise
Shares price
---------- --------
Outstanding at December 31, 1999 4,565,600 $ .60
Granted 620,000 $ 3.01
Exercised (459,055) $ .95
Outstanding at March 31, 2000 4,726,545 $ 1.63
==========
Option price $.40-4.00
==========
Available for grant:
December 31, 1999 --
==========
March 31, 2000 --
==========
The Company applies APB 25 in accounting for its stock options.
Compensation costs related to options and charged to operations were
$165,750 in the three months ended March 31, 2000. Had compensation
costs for the stock options been determined based on the fair value at
the grant date consistent with the method of SFAS 123, the Company's
net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
2000
------------
Net income (loss):
As reported $(1,543,430)
============
Pro forma $(2,216,315)
============
Net income (loss) per common share:
As reported $ (.11)
============
Pro forma $ (.16)
============
-11-
<PAGE>
The weighted-average contractual life of options outstanding at March
31, 2000 was approximately 4 years. The fair value of each option grant
is estimated using the Black-Shoales option-pricing model with the
following weighted-average assumptions used:
2000
------------
Dividend yield 0%
Expected volatility 0%
Risk-free rated of return 6.17-6.74%
Expected life 1 to 5 years
8. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases office and warehouse space in Wexford, Pennsylvania,
Syosset, New York, and Miami, Florida under operating leases expiring
in July 2002, April 2001, and January 2001, respectively. The Company
is also leasing vehicles under operating leases expiring in 2004.
Future minimum lease payments under non-cancelable operating leases as
of March 31, 2000.
Year ending December 31,
------------------------
2000 $ 75,154
2001 57,056
2002 27,782
2003 10,836
2004 553
---------
171,381
=========
SERVICE AGREEMENT
BB's inventory is maintained in a public warehouse in South Kearny, New
Jersey. The Company is required to make rental payments based on 4% of
the Company's sales of inventory stored in the warehouse. The agreement
expires in October 2018 and may be cancelled by either party with a 90
day written notice under certain circumstances, as defined.
DISTRIBUTION AGREEMENTS
In December 1997, NEF entered into a 25-year exclusive worldwide
distribution agreement with a Dominican Republic corporation (DR) for
the sale and distribution of premium handmade cigars manufactured in
the Dominican Republic. There is an option to extend the term of the
distribution agreement up to an additional 25 years.
LITIGATION
The Company is subject to legal proceedings and claims which arise in
the ordinary course of its business. In the opinion of management, the
amount of ultimate liability with respect to these actions will not
materially affect the financial position, results of operations or cash
flows of the Company.
GUARANTEE
In March 1998, The Company guaranteed a $1,000,000 line-of-credit
facility to a Dominican cigar manufacturer, which is owned by a PCW
stockholder. The purpose of the line-of-credit is to provide financing
to the cigar manufacture to which PCW will supply cigar wrappers.
-12-
<PAGE>
9. SEGMENT AND GEOGRAPHICAL INFORMATION
The Company offers a broad range of Internet access services and
related products to businesses and consumers throughout the United
States and Canada. All of the Company's identifiable assets and results
of operations are located in the United States. Management evaluates
the various segments of the Company based on the types of products
being distributed which were, as of March 31, 2000 as shown below:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Grocery,
Salon Health & BeautyBuys
Products Beauty B2B .com Sybr.com Total
---------- ----------- --------- ---------- -------- ----------
Revenue
1999 $ 592,152 2,652,167 -- 16,000 -- 3,260,319
2000 595,227 -- 2,650,267 235,834 102,480 3,583,808
Net earnings
1999 $ 28,250 272,829 -- 17,104 -- 318,183
2000 (361,930) -- 39,871 (418,162) (803,209) (1,543,430)
Identifiable assets
1999 $ 1,277,417 7,223,110 -- -- -- 8,500,527
2000 3,352,354 -- 614,677 812,313 2,280,308 7,059,652
Interest expense
1999 $ 17,752 30,000 -- -- -- 47,752
2000 8,592 -- -- 8,816 -- 17,408
</TABLE>
-13-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Synergy Brand's (SYBR or the "Company") Internet strategy includes the
internal development and operation of subsidiaries as well as the taking of
strategic positions in other Internet companies that have demonstrated synergies
with SYBR's core businesses. The Company's strategy also envisions and promotes
opportunities for synergistic Business relationships among the Internet
companies within its portfolio. Synergy Brands, Inc. (NASDAQ: SYBR) develops
Internet properties that strategically partner with off-line and on-line media
companies to capture e-commerce markets within the Internet arena. The company
has developed the following web sites: Netcigar.com, BeautyBuys.com and
DealByNet.com.
SYBR's subsidiaries include BeautyBuys.com, Netcigar.com, Dealbynet.com as
well as PHS Group. BeautyBuys.com is a leading online Business to consumer
beauty department store consisting of 7,000 unique brands. Dealbynet.com is
SYBR's supply chain integration model for its Business-to-Business platform
being developed in the Health and Beauty as well as grocery businesses.
Netcigar.com is a leading online retailer of premium cigars and other related
luxury items. PHS is the Company's fulfillment platform for its Internet and
non-internet operations. The PHS facility allows for automated order processing,
inventory management and customer service.
The Company has adopted a strategy of seeking opportunities to realize
gains through investments or having separate subsidiaries or affiliates buy or
sell minority interests to outside investors. The Company believes that this
strategy provides the ability to increase shareholder value as well as provide
capital to support the growth in the Company's subsidiaries and investments. The
Company expects to continue to develop and refine the products and services of
its businesses focusing on the internet as the primary mode of distribution,
with the goal of increasing revenue as new Products are commercially introduced,
and to continue to pursue the acquisition of or the investment in, additional
Internet companies. The Company will seek to continue to attract traditional
media investments, partner with advanced value added technologies that will be
synergistic to its internet platforms as well as partner with existing internet
companies to achieve its goals of building a strategic portfolio of internet
assets.
RESULTS OF OPERATIONS FOR THE FIRST QUARTER ENDED MARCH 31, 2000
The Company's total revenues in the first quarter of 2000 grew by 9% to
$3.5 million as compared to $3.2 million in 1999. Internet sales for the first
quarter of 2000 reached $3.0 million as compared to $16,000 for the same period
in 1999. The Company reported a net loss of $38,659 or 0.00 per share before one
time and non-cash charges for the first quarter. Overall, the Company reported a
$1.5 million loss or $.11 per share for the first quarter as compared to a
$318,183 profit on $.04 per share. The loss in the first quarter of 2000 is
attributable to a $1.5 million increase in non-cash and one time charges as
compared to 1999.
2000 1999
----------- -----------
Internet Sales $ 2,988,581 $ 16,000
Non-internet sales $ 595,227 $ 3,244,319
Total Sales $ 3,583,808 $ 3,260,319
Non-cash and one time charges (a) $ 1,504,771 -
Net Profit (loss) before non-cash charges $ (38,659) $ 318,183
Per share $ .00 $ .04
Net Profit (loss) $(1,543,430) $ 318,183
Per share $ (.11) $ .04
Weighted share outstanding $13,873,361 $ 7,577,421
(a) Includes $1.2 million in non cash expenses and 150,000 in one time
charges related to the development of the Company's Internet platforms.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased to $790,000 at March 31, 2000. The
increase in working capital is attributable to decreased advertising and
development costs after the completion of the Sinclair acquisition. The Company
utilized its resources to repay its debt and as of March 31 reduced its total
debt from $615,000 to $465,000. Before Non-cash and one time charges, the
Company incurred a $38,659 loss in the first quarter of 2000 and therefore
suffered no changes in its working capital position.
As a result of the Sinclair transaction, the Company expects that the $69.4
million in advertising credits utilized by BeautyBuys.com will support its
continuing advertising needs. The Company's main operating subsidiaries,
BeautyBuys.com Inc. and SYBR.com are expected to incur losses in 2000. The
Company believes that it has sufficient working capital and resources to grow
and expand the businesses of its operating subsidiaries. However, there can be
no assurances that additional capital would not be required in the event the
Company's business grows beyond its operating budgets.
The Company plans to continue to partner with media and technology
companies on a media for equity basis. The Company believes that this strategy
allows its operating subsidiaries to brand and expand their respective
franchises without causing adverse ramifications on the Company's working
capital. In addition the Company plans to leverage its media assets to acquire
interests in related companies that would complement its expansion strategy.
SEASONALITY
The Company generally experiences lower sales volume in the fourth quarter
due to the reduced number of selling days resulting from the concentration of
holidays in the quarter.
Sales of beauty care products and fragrances increase over traditional gift
giving holidays such as Christmas, Easter, Mother's Day, Father's Day, and
Valentine's Day.
Cigar products sales also increase during holiday periods and summer
months, but also sales spurts occur during periods of special sporting events.
INFLATION
The Company believes that inflation, under certain circumstances, could be
beneficial to the Company's business. When inflationary pressures drive product
cost up, the Company's customers sometimes purchase greater quantities of
product to expand their inventories to protect against further pricing
increases. This enables the Company to sell greater quantities of products that
are sensitive to inflationary pressures.
However, inflationary pressures frequently increase interest rates. Since
the Company is dependent on financing, any increase in interest rates will
increase the Company's credit costs, thereby reducing its profits.
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<PAGE>
FORWARD LOOKING INFORMATION AND CAUTIONARY STATEMENTS
Other than the factual matters set forth herein, the matters and items set
forth in this report are forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, the following:
1. INTERNET.
The internet environment is new to 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.
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<PAGE>
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.
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<PAGE>
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.
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<PAGE>
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.
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<PAGE>
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.
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<PAGE>
Item 4-Submission of matters to vote of security holders.
(a) No matters were submitted to vote of shareholders for the first quarter
ended March 31, 2000
Item 6- Exhibits and Reports on Form 8-K
(a) Exhibits - none
(b) There were no reports filed on 8-k for the relevant period.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Synergy Brands, Inc.
/s/ Mair Faibish
by----------------------
Mair Faibish
Chief Financial
Officer
Date: 05/11/00
/s/ Mitchell Gerstein
by------------------------
Mitchell Gerstein
Treasurer
Date: 05/11/00
