10QSB/A 1 file001.txt FORM 10-QSB/A 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/A [x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the period ended MARCH 31, 2001 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 1, 2001 there were 3,847,809 shares outstanding of the registrant's common stock. SYNERGY BRANDS, INC. FORM 10-Q SB/A MARCH 31, 2001 TABLE OF CONTENTS PART I: FINANCIAL INFORMATION Page Condensed Consolidated Balance sheet as of March 31, 2001 (Unaudited) 2-3 Condensed Consolidated Statements of Operations for the three months ended March 31, 2001 and 2000 (Unaudited) 4 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2001 and 2000 (Unaudited) 5-6 Notes to Condensed Consolidated Financial Statements 7-14 Management's Discussion and Analysis of Financial Condition and Results of Operations 15-18 Forward Looking Information and Cautionary Statements 19-29 PART II: OTHER INFORMATION Item VI: Exhibits and Reports on Form 8-K 30 SYNERGY BRANDS, INC. CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2001
March 31, 2001 -------------- (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 1,907,375 Accounts Receivable, less allowance for doubtful accounts of $69,965. 1,041,481 Inventory 1,106,655 Prepaid assets 734,545 --------------- Total Current Assets 4,790,056 Collateral and Security Deposit 365,606 Property and Equipment - Net 602,703 Web Site Development Costs 822,302 Trade Names and Customer List, net of accumulated amortization of $718,464. 1,975,825 ---------------- Total Assets $ 8,556,492 ================
See Accompanying Notes to Condensed Consolidated Financial Statements -2- SYNERGY BRANDS, INC. CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2001
March 31, 2001 ---------------- ( Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Line-of-Credit $ 596,832 Note Payable to Stockholder 555,763 Accounts Payable and Accrued Expenses 2,634,645 ---------------- Total Current Liabilities 3.787.240 Commitments and Contingencies Preferred Stock Of Subsidiary 184,625 STOCKHOLDERS' EQUITY: Class A Preferred stock - $.001 par value; 100,000 shares authorized and outstanding 100 Class B preferred stock - $.001 par value; 10,000,000 shares authorized, and no shares outstanding - Common stock - $.001 par value; 9,980,000 Shares authorized 3,835,484 were outstanding at 3/31/01 3,835 Additional paid-in capital 33,146,550 Deficit (26,875,294) Stockholders' notes receivable (115,629) Stockholder's advertising and in-kind services receivable (1,407,435) (1,407,435) ---------------- 4,752,127 Less treasury stock at cost, 280 shares (167,500) ---------------- Total stockholders' equity 4,584,627 ---------------- Total Liabilities and Stockholders Equity $ 8,556,492 ================
See Accompanying Notes to Condensed Consolidated Financial Statements -3- SYNERGY BRANDS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001AND 2000 (UNAUDITED)
2001 2000 ---------------- ---------------- Net Sales $ 5,513,411 $ 3,583,808 Cost of Sales 5,012,314 3,341,028 ---------------- ---------------- Gross Profit 501,097 242,780 Selling, General and Administrative Expense 813,643 1,749,835 Depreciation and Amortization 234,625 134,537 ---------------- ---------------- Operating Income (Loss): (547,171) (1,641,592) ---------------- ---------------- Other Income (Expense): Miscellaneous Income (Expense) (684) 36,078 Interest and Divided Income 33,130 4,051 Interest and Financing Expense (34,084) (17,408) ---------------- ---------------- Total Other Income (Expense) (1,638) 22,721 ---------------- ---------------- Income (Loss) Before Income Tax and Minority Interest (548,809) (1,618,871) Minority interest & dividends on preferred stock of subsidiary - 75,441 Income Taxes (17,086) - ---------------- ---------------- Net Income (Loss) (565,895) (1,543,430) ================ ================ Income (Loss) Applicable to Common Stock $ (565,895) $ (1,543,430) ================ ================ Basic Earnings (Loss) Per Common Share $ (.15) $ (.56) ---------------- ---------------- Net Income (Loss) Per Common Share $ (.15) $ (.56) ================ ================ Weighted Average Number of Shares Outstanding 3,828,595 2,774,672
See Accompanying Notes To Condensed Consolidated Financial Statements -4- SYNERGY BRANDS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED)
2001 2000 ----------- ----------- Cash Flows From Operating Activities: Net Income (Loss) (565,895) $(1,543,430) Adjustments to Reconcile Net loss to net cash used in operation activities: Depreciation and Amortization 234,626 134,538 Non-Cash Expenses - 1,181,233 Changes in Operating Assets and Liabilities: Minority Interest &Dividends on preferred stock subsidiary - (75,441) Accounts Receivable (120,604) 227,432 Inventory 81,128 ( 99,668) Other Current Assets 48,365 (444,327) Accounts Payable & Accrued Expenses 69,340 (293,524) ----------- ----------- Net Cash used in operating activities (253.020) (913,187) Cash Flows From Investing Activities: Purchase of Furniture and Equipment (6,551) ( 36,203) ----------- ----------- Net Cash used in Investing activities (6,551) ( 36,203) Cash Flows From Financing Activities: Payment on debt (2,894,701) (150,000) Proceeds from debt 2,827,534 - Proceeds from Issuance of Common Stock - 269,545 ----------- ----------- Net Cash provided by Financing Activities (67,167) 119,545 ----------- ----------- Net Increase (Decrease) in Cash (326,738) (829,845) Cash - Beginning of Period 2,234,113 1,156,032 ----------- ----------- Cash - End of Period $1,907,375 $ 326,187 ============ ============
See Accompanying Notes To Condensed Consolidated Financial Statements -5- SYNERGY BRANDS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED)
2001 2000 ---------- --------- Supplemental Disclosure of Cash Flow Information: Interest Paid $ 28,713 $17,408 Income Taxes Paid 17,086 - 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 Prepaid Expenses and Commission Payable Paid with Stock issued 871.150 -
See Accompanying Notes to Condensed Consolidated Financial Statements -6- SYNERGY BRANDS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2001 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Synergy Brands, Inc. (Synergy) 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). Synergy was incorporated on September 26, 1988 in the state of Delaware. 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. In October 1998, NEF formed a wholly-owned subsidiary, PHS Group, Inc. (PHS), which is a wholesale distributor of premium beauty salon products. 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 November 1999, NEF acquired all of the outstanding common stock (100 shares at $.001 par value) of Gran Reserve Corp. (GR), a distributor of handmade cigars, (formerly GR Cigars, Inc.) From Tenda Foods Inc. (Tenda), a wholly-owned subsidiary of Asia Legend Trading Co. (ALT), a Chinese trading company, for $1,066,840 in a business combination accounted for as a purchase. NEF then transferred all of the outstanding common stock of GR to NetCigar. Also in November 1999, NEF sold 100% of the outstanding stock of PHS Group, Inc. to BB for $750,000. Further, Sinclair Broadcast Group (SBG) acquired 440,000 shares of Synergy common stock in accordance with a stock purchase agreement and 900,000 shares of outstanding Class B common stock of BB for $765,000, all of which is more fully described in Note 7. In April 2000, Sybr formed a wholly-owned subsidiary, DealByNet.com, Inc., to engage in Internet-based business to business (B2B) activities in the grocery industry, designed to create an integrated supply chain from manufactures of a variety of products to business customers. In December 2000, Synergy, BB and SBG entered into a modification agreement pursuant to which SBG transferred to Synergy 900,000 shares of BB's Class B common stock in exchange for Synergy issuing 100,000 shares of common stock to SBG and options to acquire 100,000 additional shares of Synergy common stock, all of which is more fully described in Note 7. -7- In February 2001 Sybr.com formed, wholly-owned subsidiary, Supply Chain Technologies Inc. This recently formed subsidiary was created to coordinate development of the B2B internet platform designed for and by Dealbynet.com and expand it to present the supply chain technology to industries independent of the sale of grocery and health and beauty care products, marketing of which is handled by certain of the other SYBR subsidiaries. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Synergy, its wholly-owned subsidiaries, its majority-owned subsidiary (collectively, the Company). All significant intercompany accounts and transactions have been eliminated in consolidation. CASH AND CASH EQUIVALENTS The Company considers time deposits with maturities of three months or less when purchased to be components of cash. 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. Cash balances in excess of Federally insured limits at March 31, 2001 totaled approximately $1,700,000. The concentration of credit risk with respect to accounts 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 such receivables. Fair value approximates carrying value for all financial instruments. CONCENTRATIONS OF BUSINESS RISK In 2001, the Company purchased over 71% of its products from one supplier. If the Company were unable to maintain its relationship, it might have a material impact on future operations. 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. 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 their estimated useful lives or the lease term. 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 AND CUSTOMER LIST Trade names consist of the "Proset" and "Gran Reserve" trade names and customer list acquired in November 1999, which are being amortized over their expected useful lives not to exceed 5 years. -8- 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. 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. Net sales included gross revenue from product sales and related shipping fees, net of discounts and provision for sales returns, third-party reimbursement and other allowances. Cost of sales consists primarily of cost of products sold to customers. 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 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. STOCK SPLIT On April 19, 2001, the Board of Directors authorized a 5-for-1 reverse split of its common stock to shareholders of record on April 20, 2001. Par value and per share amounts in the accompanying financial statements have been retroactively adjusted for the split. 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. Outstanding stock options and warrants issued by the Company were not included in diluted weighted-average shares as their effect was antidilutive for all periods. 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. For the Cashless Stock Option Plan the company uses variable plan accounting. -9- NEW ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission staff released Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. SAB 101 did not impact the Company's revenue recognition polices. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities. SFAS 133 is effective for fiscal years beginning after June 15, 2000, and requires all derivative instruments be recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designed as part of a hedge transaction and if so, the type of hedge transaction. Management does not believe the adoption of SFAS No. 133 will have a material effect on the consolidated financial statements because it does not currently hold any derivative instruments. In March 2000, the Emerging Issues Task Force (EITF) of the FASB reached a consensus on EITF issue 00-2, "Accounting for Web Site Development Costs." This consensus provides guidance on what types of costs incurred to develop a web site should be capitalized or expensed. The Company adopted this consensus in the third quarter of 2000. The Company's web sites were ready for application in 2001, and the Company will begin to amortize using the straight-line method over the estimated useful lives of the web sites, not to exceed 3 years. In May 2000, the EITF reached a consensus on EITF Issue 00-14, "Accounting for Certain Sales Incentives," which addresses the recognition, measurement and income statement classification for sales incentives (such as discounts, coupons and rebates) that a company offers to its customers for use in a single transaction. The Company's current accounting polices are in accordance with EITF Issue 00-14, which does not have a material impact on the Company's financial statements. In July 2000, the EITF reached a consensus on EITF Issue 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent." This consensus provides guidance on whether a company should recognize revenue in the amount billed to the customer because it has earned revenue from the sale of the goods or services or whether it should recognize revenue based on the net amount retained because, in substance, it has earned a commission from the vendor-manufacture of the goods or services on the sale. The Company's current accounting policies are in accordance with EITF Issue 99-19, which does not impact the Company's financial statements. In July 2000, the EITF reached a consensus on EITF Issue 00-10, "Accounting for Shipping and Handling Fees and Cost." This indicates that amounts billed to a customer in a sales transaction related to shipping and handling, if any, represents revenue to the vendor and should be classified as revenue. As the Company currently classifies shipping fees charged to a customer in net sales, this consensus did not have an impact on the Company's financial statements. In September 2000, the EITF reached a final consensus with respect to the classification of costs related to shipping and handling incurred by the seller. The Task Force determined that the classification of shipping and handling costs is an accounting policy decision that should be disclosed. A company may adopt a policy of including shipping and handling costs in cost of sales, or if shipping costs or handling costs are significant and not included in cost of sales, a company should disclose all such costs and the respective line items on the income statement in which they are included. The Company included shipping and handling costs of approximately $102,000 for the three months ended March 31, 2001 in general and administrative expenses. 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. RECLASSIFICATION Certain 2000 amounts have been reclassified to conform to the 2001 presentation. 2. COLLATERAL SECURITY At March 31, 2001, the Company had a $359,000 security deposit with a major supplier, which serves as collateral for credit purchases made by the Company from the supplier. -10- 3. PROPERTY AND EQUIPMENT Property and equipment as of March 31, 2001 consisted of the following: Office equipment $ 105,102 Machinery and equipment 48,825 Furniture and fixtures 231,265 Leasehold improvements 418,092 Less accumulated depreciation and amortization (200,581) ---------- $ 602,703 4. INVENTORY Inventory as of March 31, 2001 consisted of the following: Beauty Products $ 566,507 Tobacco finished goods 540,148 $1,106,655 5. LINE-OF-CREDIT AND NOTE PAYABLE Line-of-credit with interest at prime plus 2%; due on demand: cancelable upon 60-day notice of any party; available balance up to 90% of qualified receivables ($372,241additional balance was available at March 31, 2001) collateralized by accounts receivable. $ 596,832 =========== Unsecured note payable to stockholder, with interest at 7.5%; maturing on December 31, 2001. $ 555,763 =========== 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, 2001. 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, 2001, BB had 9,000,000 shares of Class A common stock and 900,000 shares of Class B common stock outstanding. The Company owns all of the Class A common stock and the Class B common stock (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 until December 2000 when the minority interest was exchanged for Synergy stock (see Note 7). -11- 7. STOCKHOLDERS' EQUITY The Company has 100,000 authorized and outstanding shares of preferred stock A with a par value of $.001; 13 to one voting rights; cumulative dividends at $2.20 per annum per share before common stock; liquidation of $10.50 per share and before common stock and redemption at option of company at $10.50 per share. At March 31, 2001, Synergy had issued outstanding warrants to SBG to purchase 100,000 shares of common stock at $3.50 per share. The warrants become exercisable when the shares are registered and expire in December 2010. At March 31, 2001, Synergy had issued outstanding restricted cashless warrants to purchase 90,000 shares of common stock ranging from $5 and $10 per share. In 1994, Synergy adopted the 1994 Services and Consulting Compensation Plan (the Plan). Under the Plan, as amended, 1,680,000 shares of common stock have been reserved for issuance. Since the inception of the Plan, Synergy has issued 1,281,800 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, 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, PHS's convertible subordinated debentures were converted to 120,000 shares of Synergy common stock. In November 1999, Synergy entered into a stock purchase agreement with SBG, whereby SBG purchased 440,000 share of Synergy's restricted $.001 par value common stock for $4,400,000. The purchase price consisted 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. 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. In December 2000, Synergy, BB and SBG entered into a modification agreement to which SBG transferred to Synergy 900,000 shares of BB's Class B common stock, $7,000,000 of transferable advertising credits, web site developments costs previously provided in exchange for Synergy issuing 100,000 shares of common stock to SBG and options to acquire 100,000 additional shares of Synergy common stock. Concurrently, Synergy sold the $7,000,000 advertising credits to a third party for $2,660,000 in cash and $4,340,000 in trade credits. Synergy paid a broker $375,000 in cash and the remaining balance in accrued expenses of $591,150 with stock valued at $591,150 on January 2, 2001. The Company accounted for the acquisition of the minority interest from SBG based on the value of the equity securities issued net of commissions and the cash received from the third party. As the value to be realized from the remaining $4,340,000 in barter trade credits is currently indeterminable, no value has been assigned to such credits. As these credits are used in the future, the goods or services received will be brought onto the Company's books at no basis. Previously issued financial statements reflected the estimated net present value of the trade credits of $3,439,000 as an asset on the Company's books. Due to the indeterminable value associated with these barter credits, the Company has restated its March 31, 2001 balance sheet to remove the asset. This restatement had no significant net affect on the Company's previously reported net loss or net loss per share. On January 2, 2001, Synergy issued 100,000 restricted shares of common stock for future services and warrants to purchase 40,000 restricted shares of common stock at $12.50 per share. -12- The following is a summary of such stock option transactions for the three months ended March 31, 2001 in accordance with the Plan and other restricted stock option agreements: Weighted Average Number of exercise Shares price ----------- -------- Outstanding at December 31, 2000 895,124 8.50 Canceled or Terminated (312,889) 14.84 Outstanding at March 31, 2001 582,235 7.98 Option price 2.00-17.50 Available for grant: - December 31, 2000 March 31, 2001 - There were no compensation costs related to options for the months ended March 31, 2001. 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 2002, respectively. The Company is also leasing vehicles under operating leases expiring in 2005. Future minimum lease payments under non-cancelable operating leases as of March 31, 2001. YEAR ENDING DECEMBER 31, 2001 $ 139,000 2002 101,000 2003 54,000 2004 14,000 2005 5,000 ---------------- $ 313,000 ================ SERVICE AGREEMENT B'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 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. -13- 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. 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, 2001 as shown below: Salon Products B2B B2C Total ---------- ----------- ------------ ------------ Revenue 2000 $ 595,227 $ 2,650,267 $ 338,314 $ 3,583,808 2001 509,566 4,581,327 422,518 5,513,411 Net earnings 2000 $ (361,930) $ 39,871 $(1,221,371) $(1,543,430) 2001 (133,801) (196,890) (235,204) (565,895) Identifiable assets 2000 $3,352,354 $ 614,677 $ 3,092,621 $ 7,059,652 2001 2,919,031 2,315,528 3,321,933 8,556,492 Interest expense and Financing Cost 2000 $ 8,592 - $ 8,816 $ 17,408 2001 9,848 24,236 - 34,084 Depreciation Amortization 2000 $ 126,372 $ 250 $ 7,915 $ 134,537 2001 131,517 68,373 34,735 234,625 -14- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION OVERVIEW Synergy Brands Inc. (NASDAQ: SYBR) and its consolidated subsidiaries, ("SYBR" or "the Company") have developed, operate and continue to seek opportunities to establish, Internet Businesses directed at sale of variety of products as well as Partnering and seeking to partner or invest with advanced technologies to enhance the Company's properties and participate in new ventures synergistic with the other operations of the Company (Internet Infrastructure), including establishment of strategic contacts and alliances with other companies. SYBR's 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. SYBR and its consolidated subsidiaries have developed Internet properties that facilitate internet product sales and procurement as well as strategically partnering with off line and on- line media companies to build revenues. SYBR's business strategies are focused on developing business opportunities in three related sectors Business to Consumer (B2C) Business to Business (B2B) and Enterprise Integration (EI). At March 31, 2001 SYBR's Internet subsidiaries included BeautyBuys.com (100% voting interest through the Company's wholly owned subsidiary SYBR.com Inc.) Netcigar.com (wholly owned by SYBR.com Inc.), SYBR.com Inc. as well as PHS Group (a subsidiary of BeautyBuys.com Inc.). Supply Chain Supply Chain Technologies Inc. (wholly owned by SYBR.com) and Dealbynet.com Inc. (wholly owned by Supply Chain Technologies Inc.) BeautyBuys.com is a leading online Business to Consumer beauty department store consisting of thousands of unique nationally branded beauty products. In addition the Company has developed through BeautyBuys.com Inc. Dealbynet.com as an internet domain further developed independently as SYBR's supply chain integration model for its Business to Business platform being developed in the Health and Beauty (HBC) 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 Business to Business Internet operations. The facility allows for automated order processing, inventory management and customer service. PHS Group Inc. is a subsidiary of BeautyBuys.com Inc. Supply Chain Technologies was recently formed to utilize, further develop and market a parallel internet platform to that developed by SYBR's subsidiary Dealbynet designed to accommodate distribution and inventory management logistics for other industries. 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. The present focus of the Company is on product sales through internet channels on a B2C and B2B basis and on the utilization of proprietary technology to accomplish this objective. Results Of Operations For The First Quarter Ended March 31, 2001 Sales for first quarter in 2001 rose 54% to $5.5 million as compared to 3.6 million in 2000. The Company's B2B operation, Dealbynet, represented approximately 83% of the total sales with the balance attributable to PHS Group, BeautyBuys.com and NetCigar.com. The Company improved its net cash used in operating activities by 73%. Net loss from operating activities declined to 253,020 or ($0.7) per share for the first quarter 2001 as compared to a net loss from operating activities of 913,187 or ($.33) per share, for the same period in 2000. Gross profit increase by 107% to $501,000. Operating margins increased from 6.7% to 9.1%. A significant part of the increase was achieved as a result of the streamlined logistics that are a part of the Company's DBN platform. -15- Operating expenses decreased to $813,000 from $1.7 million. However excluding non-cash charges, depreciation & amortization, and the ICON transaction, net cash used from operations totaled $253,020 for the first quarter compared to $913,187 in 2000. The company's operations benefited from its strategic relationship with its largest shareholder, Sinclair and its new relationship with ICON as well as the increase of its B2B revenue base. The company reduced its operating cash flow requirements from $913,000 to $253,020 at March 31, 2001 while increasing its revenue by 54%. The company's gross profit of $501,000 together with its $2.2 million cash gain from the sale of media to ICON allowed the company to increase its business and cover its operating requirements internally. Net loss decreased to $566,000 as compared to a loss of $1,543,000 for the same prior period. However, $316,875 of the loss were non-cash charges. B2B sales increased by 72% to $4.2 million at March 31, 2001 as compared to 2.6 million for the same period in 2000. The Company continued its initial model of Leveraging its non-Internet operations into its B2C operations by maintaining Internal fulfillment centers for BeautyBuys.com and NetCigar.com. The Company's strategy of using the Internet as a low cost marketing network has enabled its warehousing operations to capture additional gross profit while servicing its core salon hair care distribution business. The same is expected to be applied to the Company's B2B operations except that multiple logistical points will be developed as well as streamlined Distribution that would utilize the internet as a tool. Q1 2001 Q1 2000 change Total Sales $ 5,513,411 $ 3,583,808 53.84% Gross Profit $ 501,097 $ 242,780 106.39% 9.09% 6.77% Net Cash used in operating activities $ (253,020) $ (913,187) 72.29% Per share $ (0.07) $ (0.33) 79.92% Net Profit (loss) $ (565,895) $(1,543,430) 63.40% Per share $ (0.15) $ (0.56) 73.24% Working Capital $ 1,002,816 $ 789,340 27.04% Net Tangible Assets $ 4,584,627 $ 3,204,760 43.05% Per share $ 1.20 $ 1.16 3.44% Shares outstanding 3,835,484 2,868,702 33.70% Weighted shares outstanding 3,828,595 2,774,672 37.98% -16- LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2001, shareholder equity increased 43% from $3.2 million ($1.16 per share) to $4.6 million ($1.20 per share). Working capital increased by $200,000 at March 31, 2001 primarily as a result of its increase in revenues for the period. The Company's internal resources and line of credit with GE together with developing relationships with its primary vendors, should allow the Company to achieve its 2001 results without raising external funds from the capital markets. The Company's operating forecasts should not require any capital transactions, including offerings and/or private placement transactions for the remainder of fiscal 2001. Sales are being financed by GE Capital through a conventional line of credit and the Company maintains a traditional business model that has enabled the Company to grow during the recent dot com consolidation and correction. Furthermore, all of the Company's businesses rely on the marketing and merchandising of nationally branded products together with manufacturers that already spend billions of dollars to build their brands. The manufacturers of grocery products have encouraged DealByNet to use its platform to reduce product distribution costs through logistics. These potential cost reductions could be very substantial and could result in the acceleration of the usage of the DealByNet grocery exchange by the 500 billion-dollar Grocery and Health and Beauty care industry. In December 1999, the Securities and Exchange Commission staff released Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. SAB 101 did not impact the Company's revenue recognition policies. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities. SFAS 133 is effective for fiscal years beginning after June 15, 2000, and requires all derivative instruments be recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designed as part of a hedge transaction and if so, the type of hedge transaction. Management does not believe the adoption of SFAS No. 133 will have a material effect on the consolidated financial statements because it does not currently hold any derivative instruments. In March 2000, the Emerging Issues Task Force (EITF) of the FASB reached a consensus on EITF Issue 00-2, "Accounting for Web Site Development Costs." This consensus provides guidance on what types of costs incurred to develop a web site should be capitalized or expensed. The Company adopted this consensus in the third quarter of 2000. The Company's web sites were ready for application in 2001, and the Company will begin to amortize using the straight-line method over the estimated useful lives of the web sites, not to exceed 3 years. In May 2000, the EITF reached a consensus on EITF Issue 00-14, "Accounting for Certain Sales Incentives," which addresses the recognition, measurement and income statement classification for sales incentives (such as discounts, coupons and rebates) that a company offers to its customers for use in a single transaction. The Company's current accounting policies are in accordance with EITF Issue 00-14, which does not have a material impact on the Company's financial statements. In July 2000, the EITF reached a consensus on EITF Issue 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent." This consensus provides guidance on whether a company should recognize revenue in the amount of the gross amount billed to the customer because it has earned revenue from the sale of the goods or services or whether it should recognize revenue based on the net amount retained because, in substance, it has earned a commission from the vendor-manufacturer of the goods or services on the sale. The Company's current accounting policies are in accordance with EITF Issue 99-19, which does not impact the Company's financial statements. In July 2000, the EITF reached a consensus on EITF Issue 00-10, "Accounting for Shipping and Handling Fees and Costs." This indicates that amounts billed to a customer in a sales transaction related to shipping and handling, if any, -17- represents revenue to the vendor and should be classified as revenue. As the Company currently classifies shipping fees charged to a customer in net sales, this consensus did not have an impact on the Company's financial statements. In September 2000, the EITF reached a final consensus with respect to the classification of costs related to shipping and handling incurred by the seller. The Task Force determined that the classification of shipping and handling costs is an accounting policy decision that should be disclosed. A company may adopt a policy of including shipping and handling costs in cost of sales, or if shipping costs or handling costs are significant and not included in cost of sales, a company should disclose all such costs and the respective line items on the income statement in which they are included. The company included shipping and handling cost of approximately $102,000 for the three months ended March 31, 2001 in general and administrative expenses. SEASONALITY The Company generally experiences lower sales volume in the first quarter and a stronger fourth quarter in its B2B operation. Sales of beauty care products and fragrances increase over traditional gift giving holidays such as Christmas, Mother's Day, Father's Day, and Valentine's Day. Cigar product 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 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. -18- FORWARD LOOKING INFORMATION AND CAUTIONARY STATEMENTS Other than the factual matters set forth herein, the matters and items set forth in this report are forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, the following: 1. THE COMPANY HAS INCURRED SUBSTANTIAL OPERATING LOSSES. While it is the Company's goal to achieve operating cash flow profits during 2001, the Company has experienced losses and negative cash flow in the past and, even if the Company achieves profitability, it may be unable to sustain or increase the Company's profitability in the future. The Company has been able to minimize its losses through barter transactions in the media and technology industries. These transactions have afforded the Company the utilization of technology and media assets that were needed to develop the Company's Internet properties. The Company's operating model relies on these types of transactions for its expansion. Failure to attract barter transactions and alliances may cause the company to incur operating losses beyond its available resources. However, the Company plans to limit its expansion if these resources are not available, rather then incur a risk of expansion without meaningful alliances. 2. 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. 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 effect on the Company's operations if alternative modes of shipping are not then available. Additionally the trucking industry is susceptible to various natural disasters which can close transportation lanes in any given region of the country. To the extent common carriers are prevented from or delayed in utilizing local transportation lanes, the Company will likely incur higher freight costs due to the limited availability of trucks during any such period that transportation lanes are restricted. -19- 6. COMPETITION. The Company is subject to competition in all of its various product sale 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's qualification for trading on the Nasdaq Small Cap system has recently been questioned, the focus being on the market quotes for the Company's stock, the bid price having been below the minimum NASDAQ standard of $1 and having been below such level for an appreciable period of time. 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 alternative criteria which are now eliminated under the new rules. If the bid price dips below $1.00 per share as have recently been the case with the company's stock, and is not brought above such level for a sustained period of time 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 historically remained at NASDAQ trading levels above $1 bid and such historical stability combined with the Company's 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 subceptibilty to market deficiencies is in a much lessened state then in years past. However, presently the Company's stock bid price has risen above a dollar as a result of, among other factors, the company's recent one for five reverse split, and NASDAQ has confirmed the company's current compliance with NASDAQ listing qualifications. 9. RISKS OF BUSINESS DEVELOPMENT. The Company has ventured into new lines of product and product distribution (Cigars) (1997) (salon HBA products - (1999) and internet sales-see B (Internet Sales)- (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 and sales have increased. 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 -20- 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 and to continue to have access to such products from their sources on a pricing schedule conducive to the Company operating at a profit. 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 and be made available for sale by the Company conducive to the Company's fiscal needs. Any delay or failure of these products to achieve market acceptance or limits on their availability for sale by the Company 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 meet and enhance upon the Company's operating and financial requirements should provide the opportunity for the Company to continue as a going concern. However, Management cannot predict the outcome of future operations and no adjustments have been made to offset the outcome of this uncertainty. 11. DEPENDENCE UPON ATTRACTING AND HOLDING. The Company's future success depends in large part on the continued service of its key technical, marketing, sales and management personnel and on its ability to continue to attract, motivate and retain highly qualified employees. Although the Company's key employees, have stock options, its key employees do not have long term employment contracts assuring of their continued participation in the operations of the Company and may voluntarily terminate their employment with the Company at any time. Competition for such employees is intense and the process of locating technical and management personnel with the combination of skills and attributes required to execute the Company's strategy is often lengthy. Accordingly, the loss of the services of key personnel could have a material adverse effect upon the Company's operating efforts and on its research and development efforts. The Company does not have key person life insurance covering its management personnel or other key employees. 12.EXTENSIVE AND INCREASING REGULATION OF TOBACCO PRODUCTS AND LITIGATION MAY IMPACT CIGAR INDUSTRY. The tobacco industry in general has been subject to extensive regulation at the federal, state and local levels. Recent trends have increased regulation of the tobacco industry. Although regulation initially focused on cigarette manufacturers, it has begun to have a broader impact on the industry as a whole and may focus more directly on cigars in the future. The 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 -21- 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 (see "Government Regulation - Tobacco Industry Regulation and Tobacco Industry Litigation" supra). 13. RISKS RELATING TO MARKETING OF CIGARS. The Company primarily will distribute premium handmade cigars which are hand-rolled and use tobacco aged over one year. The Company believes that there is an abundant supply of tobacco available through its supplier in the Dominican Republic for the types of premium handmade cigars the Company primarily will sell. However, there can be no assurance that increases in demand would not adversely affect the Company's ability to acquire higher priced premium handmade cigars. While the cigar industry has experienced increasing demand for cigars during the last several years, there can be no assurance that the trend will continue. If the industry does not continue as the Company anticipates or if the Company experiences a reduction in demand for whatever reason, the Company's supplier may temporarily accumulate excess inventory which could have an adverse effect on the Company's business or results of operations. 14. 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. 15. POTENTIAL LIABILITY FOR CONTENT ON THE COMPANY'S WEB SITE. Because the Company posts product information and other content on its Web site, the Company faces potential liability for negligence, copyright, patent, trademark, defamation, indecency and other claims based on the nature and content of the materials that the Company posts. Such claims have been brought, and sometimes successfully pressed, against Internet content distributors. In addition, the Company could be exposed to liability with respect to the unauthroized duplication of content or unauthroized use of other parties' proprietary technology or infiltration into the Company's system by unauthorized personnel. Although the Company maintains general liability insurance, its insurance may not cover potential claims of this type or may not be adequate to indemnify for all liability that may be imposed. Any imposition of liability that is not covered by insurance or is in excess of insurance coverage could harm the Company's business. 16. THE COMPANY'S NET SALES WOULD BE HARMED IF IT EXPERIENCES SIGNIFICANT CREDIT CARD FRAUD. A failure to adequately control fraudulent credit card transactions would harm the Company's net sales and results of operations because it does not carry insurance against such risk. Under current credit card practices, the Company is liable for fraudulent credit card transactions because it does not obtain a cardholder's signature. -22- 17. THE COMPANY DEPENDS ON CONTINUED USE OF THE INTERNET AND GROWTH OF THE ONLINE PRODUCT PURCHASE MARKET. The Company's future revenues and profits, if any, substantially depend upon the widespread acceptance and use of the internet as an effective medium of business and communication by the Company's target customers. Rapid growth in the use of and interest in the Internet has occurred only recently. As a result, acceptance and use may not continue to develop at historical rates, and a sufficiently broad base of consumers may not adopt, and continue to use, the Internet and other online services as a medium of commerce. In addition, the Internet may not be accepted as a viable long-term commercial marketplace for a number of reasons, including potentially inadequate development of the necessary network infrastructure or delayed development of enabling technologies and performance improvements. The Company's success will depend, in large part, upon third parties maintaining the Internet infrastructure to provide a reliable network backbone with the speed, data capacity, security and hardware necessary for reliable Internet access and services. 18. IF THE COMPANY DOES NOT RESPOND TO RAPID TECHNOLOGY CHANGES, ITS SERVICES COULD BECOME OBSOLETE AND ITS BUSINESS WOULD BE SERIOUSLY HARMED. As the Internet and online commerce industry evolve, the Company must license leading technologies useful in its business, enhance its existing services, develop new services and technology that address the increasingly sophisticated and varied needs of its prospective customers and respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. The Company may not be able to successfully implement new technologies or adapt its proprietary technology and transaction-processing systems to customer requirements or emerging industry standards. If the Company is unable to do so, it could adversely impact its ability to build on its varied businesses and attract and retain customers. 19. GOVERNMENTAL REGULATION OF THE INTERNET AND DATA TRANSMISSION OVER THE INTERNET COULD AFFECT THE COMPANY'S BUSINESS. Laws and regulations directly applicable to communications or commerce over the Internet are becoming more prevalent. The most recent session of the U.S. Congress resulted in Internet laws regarding children's privacy, copyrights, taxation and the transmission of sexually explicit material. The European Union recently enacted its own privacy regulations. In particular, many government agencies and consumers are focused on the privacy and security of personal records. The law of the Internet, however, remains largely unsettled, even in areas where there has been some legislative action. It may take years to determine whether and how existing laws such as those governing privacy, libel and taxation apply to Internet transactions such as practiced by the Company. The rapid growth and development of the market for online commerce may prompt calls for more stringent consumer protection laws, both in the United States and abroad, that may impose additional burdens on companies conducting business online. The adoption or modification of laws or regulations relating to Internet businesses could adversely affect the Company's ability to attract and serve customers. 20. POTENTIAL FUTURE SALES OF COMPANY STOCK. The majority of the shares of common stock of the Company outstanding are "restricted securities" as that term is defined in Rule 144 promulgated under the Securities Act of 1933. In general under Rule 144 a person (or persons whose shares are aggregated) who has satisfied a one year holding period may, under certain circumstances, sell within any three month period a number of shares which does not exceed the greater of 1% of the then outstanding shares of common stock or the average weekly trading volume during the four calendar weeks prior to such sale. Rule 144 also permits, under certain circumstances, the sale -23- of shares by a person who is not an affiliate of the Company and who has satisfied a two year holding period without, any quantity limitation. The holders of the shares of the outstanding common stock of the Company deemed "restricted securities" have already satisfied at least their one year holding period or will do so with the next fiscal year, and such stock is either presently or within the next fiscal year will become eligible for sale in the public market (subject to volume limitations of Rule 144 when applicable). The Company is unable to predict the effect that sales of its common stock under Rule 144, or otherwise, may have on the then prevailing market price of the common stock. However, the Company believes that the sales of such stock under Rule 144 may have a depressive effect upon the market. 21. THE COMPANY MAY NOT BE ABLE TO CONTINUE ATTRACTING NEW CUSTOMERS. The success of the Company's business model depends in large part on its continued ability to increase its number of customers. The market for its businesses may grow more slowly than anticipated or become saturated with competitors, many of which may offer lower prices or broader distribution. Some potential customers may not want to join the Company's networks because they are concerned about the possibility of their products being listed together with their competitors' products. If the Company cannot continue to bring new customers to its sites or maintain its existing customer base, the Company may be unable to offer the benefits of the network model at levels sufficient to attract and retain customers and sustain its business. 22. BECAUSE THE COMPANY'S INDUSTRY IS HIGHLY COMPETITIVE AND HAS LOW BARRIERS TO ENTRY, THE COMPANY MAY NOT BE ABLE TO EFFECTIVELY COMPETE. The U.S. market for e-commerce services is extremely competitive. The Company expects competition to intensify as current competitors expand their product offerings and new competitors enter the market, in addition to competition from internally developed solutions by individual organizations. The principal competitive factors are the quality and breadth of services provided, potential for successful transaction activity and price. E-commerce markets are characterized by rapidly changing technologies and frequent new product and service introductions. The Company may fail to introduce new online auction or other market pricing formats and features on a timely basis or at all. If its fails to introduce new service offerings or to improve its existing service offerings in response to industry developments, or if its prices are not competitive, the Company could lose customers, which could lead to a loss of revenues. Because there are relatively low barriers to entry in the e-commerce market, competition from other established and emerging companies may develop in the future. Many of the Company's competitors may also have well-established relationships with the Company's existing and prospective customers. Increased competition is likely to result in fee reductions, reduced margins, longer sales cycles for the Company's services and a decrease or loss of its market share,any of which could harm its business, operating results or financial condition. Many of the Company's competitors have, and new potential competitors may have, more experience developing Internet-based software applications and integrated purchasing solutions, larger technical staffs, larger customer bases, more established distribution channels, greater brand recognition and greater financial, marketing and other resources than the Company has. In addition, competitors may be able to develop products and services that are superior to those of the Company or that achieve greater customer acceptance. There can be no assurance that the e-commerce solutions offered by the Company's competitors now or in the future will not be perceived as superior to those of the Company by either businesses or consumers. 23. THE COMPANY'S BUSINESS MAY SUFFER IF IT IS NOT ABLE TO PROTECT IMPORTANT INTELLECTUAL PROPERTY. The Company's ability to compete effectively against other companies in its industry will depend, in part, on its ability to protect its proprietary technology and systems designs relating to its technologies. The Company does not know whether it has been or will be completely successful in doing so. Further, its competitors may independently develop or patent technologies that are substantially equivalent or superior to those of the Company. 24. THE COMPANY MAY NOT BE ABLE TO MAINTAIN THE CONFIDENTIALITY OF ITS PROPRIETARY KNOWLEDGE. The Company relies, in part, on contractual provisions to protect its trade secrets and proprietary knowledge. These agreements may be breached, and the Company may not have adequate remedies for any breach. Its trade secrets may -24- also be known without breach of such agreements or may be independently developed by competitors. Its inability to maintain the proprietary nature of its technology could harm its business, results of operations and financial condition by adversely affecting its ability to compete. 25. OTHERS MAY ASSERT THAT THE COMPANY'S TECHNOLOGY INFRINGES THEIR INTELLECTUAL PROPERTY RIGHTS. The Company believes that its technology does not infringe the proprietary rights of others. However, the e-commerce industry is characterized by the existence of a large number of patents and frequent claims and litigation based on allegations of patent infringement and violation of other intellectual property rights. As the e-commerce market and the functionality of products in the industry continues to grow and overlap, the Company believes that the possibility of an intellectual property claim against it will increase. For example, the Company may inadvertently infringe a patent of which it is unaware, or there may be patent applications now pending of which it is unaware which it may be infringing when they are issued in the future, or the Company's service or systems may incorporate third party technologies that infringe the intellectual property rights of others. The Company has been and expects to continue to be subject to alleged infringement claims. The defense of any claims of infringement made against the Company by third parties, whether or not meritorious, could involve significant legal costs and require The Company's management to divert time from its business operations. Either of these consequences of an infringement claim could have a material adverse effect on the Company's operating results. If the Company is unsuccessful in defending any claims of infringement, it may be forced to obtain licenses or to pay royalties to continue to use its technology. The Company may not be able to obtain any necessary licenses on commercially reasonable terms or at all. If the Company fails to obtain necessary licenses or other rights, or if these licenses are costly, its operating results may suffer either from reductions in revenues through our inability to serve customers or from increases in costs to license third-party technologies. 26. THE COMPANY'S BUSINESS MAY BE ADVERSELY AFFECTED IF IT IS UNABLE TO CONTINUE TO LICENSE SOFTWARE THAT IS NECESSARY FOR ITS SERVICE OFFERING. Through distributors, the Company licenses a variety of commercially available Internet technologies, which are used in its services and systems to perform key functions. As a result, the Company is to a certain extent dependent upon continuing to maintain these technologies. There can be no assurance that the Company would be able to replace the functionality provided by the much of its purchased Internet technologies on commercially reasonable terms or at all. The absence of or any significant delay in the replacement of that functionality could have a material adverse effect on the Company's business, financial condition and results of operations. 27. THE COMPANY'S SYSTEMS INFRASTRUCTURE MAY NOT KEEP PACE WITH THE DEMANDS OF ITS CUSTOMERS. Interruptions of service as a result of a high volume of traffic and/or transactions could diminish the attractiveness of the Company's services and its ability to attract and retain customers. There can be no assurance that the Company will be able to accurately project the rate or timing of increases, if any, in the use of its service, or that it will be able to expand and upgrade its systems and infrastructure to accommodate such increases in a timely manner. The Company currently maintains systems in the U.S. Any failure to expand or upgrade its systems could have a material adverse effect on its results of operations and financial condition by reducing or interrupting revenue flow and by limiting its ability to attract new customers. Any such failure could also have a material adverse effect on the business of its customers, which could damage the Company reputation and expose it to a risk of loss or litigation and potential liability. 28. A SYSTEM FAILURE COULD CAUSE DELAYS OR INTERRUPTIONS OF SERVICE TO THE COMPANY'S CUSTOMERS. Service offerings involving complex technology often contain errors or performance problems. Many serious defects are frequently found during the period immediately following introduction and initial implementation of new services or enhancements to existing services. Although the Company attempts to resolve all errors that it believes would be considered serious by its customers before implementation, its systems are not error-free. Errors or performance problems could result in lost revenues or cancellation of customer agreements and may expose the Company to litigation and potential liability. In the past, the Company has discovered errors in software used in the Company after its incorporation into Company sites. The Company cannot assure that undetected errors or performance problems in its existing or future services will not be -25- discovered or that known errors considered minor by it will not be considered serious by its customers. The Company has experienced periodic minor system interruptions, which may continue to occur from time to time. 29. THE FUNCTIONING OF THE COMPANY'S SYSTEMS OR THE SYSTEMS OF THIRD PARTIES ON WHICH IT RELIES COULD BE DISRUPTED BY FACTORS OUTSIDE THE COMPANY'S CONTROL. The Company's success depends on the efficient and uninterrupted operation of its computer and communications hardware systems. These systems are vulnerable to damage or interruption from natural disasters, fires, power loss, telecommunication failures, break-ins, sabotage, computer viruses, intentional acts of vandalism and similar events. Despite any precautions the Company takes or plans to take, the occurrence of a natural disaster or other unanticipated problems could result in interruptions in its services. In addition, if any hosting service fails to provide the data communications capacity the Company requires, as a result of human error, natural disaster or other operational disruption, interruptions in the Company's services could result. Any damage to or failure of its systems could result in reductions in, or terminations of, its services, which could have a material adverse effect on its business, results of operations and financial condition. 30. THE COMPANY MAY ACQUIRE OTHER BUSINESSES OR TECHNOLOGIES, WHICH COULD RESULT IN DILUTION TO ITS STOCKHOLDERS, OR OPERATIONAL OR INTEGRATION DIFFICULTIES WHICH COULD IMPAIR ITS FINANCIAL PERFORMANCE. If appropriate opportunities present themselves, the Company may acquire businesses, technologies, services or products that it believes will be useful in the growth of its business. The Company does not currently have any commitments or agreements with respect to any acquisition. They may not be able to identify, negotiate or finance any future acquisition successfully. Even if we do succeed in acquiring a business, technology, service or product, the process of integration may produce unforeseen operating difficulties and expenditures and may require significant attention from the Company's management that would otherwise be available for the ongoing development of its business. Moreover, the Company has not made any recent material acquisitions, has little experience in integrating an acquisition into our business and may never achieve any of the benefits that it might anticipate from a future acquisition. If the Company makes future acquisitions, it may issue shares of stock that dilute other stockholders, incur debt, assume contingent liabilities or create additional expenses related to amortizing goodwill and other intangible assets, any of which might harm its financial results and cause its stock price to decline. Any financing that it might need for future acquisitions may only be available to it on terms that restrict its business or that impose on it costs that reduce its revenue. 31. THE COMPANY'S SUCCESS DEPENDS ON THE CONTINUED GROWTH OF THE INTERNET AND ONLINE COMMERCE. The Company's future revenues and profits depend upon the widespread acceptance and use of the Internet and other online services as a medium for commerce by merchants and consumers. The use of the Internet and e-commerce may not continue to develop at past rates and a sufficiently broad base of business and individual customers may not adopt or continue to use the Internet as a medium of commerce. The market for the sale of goods and services over the Internet is a new and emerging market. Demand and market acceptance for recently introduced services and products over the Internet are subject to a high level of uncertainty, and there exist few proven services and products. Growth in the Company's customer base depends on obtaining businesses and consumers who have historically used traditional means of commerce to purchase goods. For the Company to be successful, these market participants must accept and use novel ways of conducting business and exchanging information. E-commerce may not prove to be a viable medium for purchasing for the following reasons, any of which could seriously harm the Company's business: - the necessary infrastructure for Internet communications may not develop adequately; - the Company's potential customers, buyers and suppliers may have security and confidentiality concerns; - complementary products, such as high-speed modems and high-speed communication lines, may not be developed; - alternative-purchasing solutions may be implemented; -26- - use of the Internet and other online services may not continue to increase or may increase more slowly than expected; - the development or adoption of new technology standards and protocols may be delayed or may not occur; and - new and burdensome governmental regulations may be imposed. 32. THE COMPANY'S SUCCESS DEPENDS ON THE CONTINUED RELIABILITY OF THE INTERNET. The Internet continues to experience significant growth in the number of users, frequency of use and bandwidth requirements. There can be no assurance that the infrastructure of the Internet and other online services will be able to support the demands placed upon them. Furthermore, the Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure, and could face such outages and delays in the future. These outages and delays could adversely affect the level of Internet usage and also the level of traffic and the processing of transactions. In addition, the Internet or other online services could lose their viability due to delays in the development or adoption of new standards and protocols required to handle increased levels of Internet or other online service activity, or due to increased governmental regulation. Changes in or insufficient availability of telecommunications services or other Internet service providers to support the Internet or other online services also could result in slower response times and adversely affect usage of the Internet and other online services generally and the Company's service in particular. If use of the Internet and other online services does not continue to grow or grows more slowly than expected, if the infrastructure of the Internet and other online services does not effectively support growth that may occur, or if the Internet and other online services do not become a viable commercial marketplace, the Company will have to adapt its business model to the new environment, which would materially adversely affect its results of operations and financial condition. 33. GOVERNMENT REGULATION OF THE INTERNET MAY IMPEDE THE COMPANY'S GROWTH OR ADD TO ITS OPERATING COSTS. Like many Internet-based businesses, the Company operates in an environment of tremendous uncertainty as to potential government regulation. The Internet has rapidly emerged as a commerce medium, and governmental agencies have not yet been able to adapt all existing regulations to the Internet environment. Laws and regulations have been introduced or are under consideration and court decisions have been or may be reached in the U.S. and other countries in which the Company does business that affect the Internet or other online services, covering issues such as pricing, user privacy, freedom of expression, access charges, content and quality of products and services, advertising, intellectual property rights and information security. In addition, it is uncertain how existing laws governing issues such as taxation, property ownership, copyrights and other intellectual property issues, libel, obscenity and personal privacy will be applied to the Internet. The majority of these laws were adopted prior to the introduction of the Internet and, as a result, do not address the unique issues of the Internet. Recent laws that contemplate the Internet, such as the Digital Millennium Copyright Act in the U.S., have not yet been fully interpreted by the courts and their applicability is therefore uncertain. The Digital Millennium Copyright Act provides certain "safe harbors" that limit the risk of copyright infringement liability for service providers such as the Company with respect to infringing activities engaged in by users of the service, such as end-users of the Company's customers' auction sites. The Company has adopted and is further refining its policies and practices to qualify for one or more of these safe harbors, but there can be no assurance that its efforts will be successful since the Digital Millennium Copyright Act has not been fully interpreted by the courts and its interpretation is therefore uncertain. In the area of user privacy, several states have proposed legislation that would limit the uses of personal user information gathered online or require online services to establish privacy policies. The Federal Trade Commission also has become increasingly involved in this area, and recently settled an action with one online service regarding the manner in which personal information is collected from users and provided to third parties. The Company does not sell personal user information from its customers' auction sites. The Company does use aggregated data for analysis regarding the Company network, and does use personal user information in the performance of its services for its customers. Since the Company does not control what its customers do with the personal user information they collect, there can be no assurance that its customers' sites will be considered compliant. -27- As online commerce evolves, the Company expects that federal, state or foreign agencies will adopt regulations covering issues such as pricing, content, user privacy, and quality of products and services. Any future regulation may have a negative impact on its business by restricting its methods of operation or imposing additional costs. Although many of these regulations may not apply to its business directly, the Company anticipates that laws regulating the solicitation, collection or processing of personal information could indirectly affect its business. Title V of the Telecommunications Act of 1996, known as the Communications Decency Act of 1996, prohibits the knowing transmission of any comment, request, suggestion, proposal, image or other communication that is obscene or pornographic to any recipient under the age of 18. The prohibition's scope and the liability associated with a violation are currently unsettled. In addition, although substantial portions of the Communications Decency Act of 1996 have been held to be unconstitutional, the Company cannot be certain that similar legislation will not be enacted and upheld in the future. It is possible that such legislation could expose companies involved in online commerce to liability, which could limit the growth of online commerce generally. Legislation like the Communications Decency Act could reduce the growth in Internet usage and decrease its acceptance as a communications and commerce medium. The worldwide availability of Internet web sites often results in sales of goods to buyers outside the jurisdiction in which the Company or its customers are located, and foreign jurisdictions may claim that the Company or its customers are required to comply with their laws. As an Internet company, it is unclear which jurisdictions may find that the Company is conducting business therein. Its failure to qualify to do business in a jurisdiction that requires it to do so could subject the Company to fines or penalties and could result in its inability to enforce contracts in that jurisdiction. 34. NEW TAXES MAY BE IMPOSED ON INTERNET COMMERCE. In the U.S., the Company does not collect sales or other similar taxes on goods sold by customers and users through the Company network or service taxes on fees paid by end-users of its customers' auction sites. The Internet Tax Freedom Act of 1998, which expires on October 21, 2001, prohibits the imposition of taxes on electronic commerce by United States federal and statetaxing authorities. However, after the expiration of the Internet Tax Freedom Act, one or more states may seek to impose sales tax collection obligations on out-of-state companies which engage in or facilitate online commerce, and a number of proposals have been made at the state and local level that would impose additional taxes on the sale of goods and services through the Internet. Such proposals, if adopted, could substantially impair the growth of electronic commerce, and could adversely affect its opportunity to derive financial benefit from such activities. In addition, non-U.S. countries may seek to impose service tax (such as value-added tax) collection obligations on companies that engage in or facilitate Internet commerce. A successful assertion by one or more states or any foreign country that the Company or its customers should collect sales or other taxes on the exchange of merchandise or, in the U.S., the exchange site usage fees or that the Company or its customers should collect Internet-based taxes could impair our revenue and its ability to acquire and retain customers. 35. THERE MAY BE SIGNIFICANT SECURITY RISKS AND PRIVACY CONCERNS RELATING TO ONLINE COMMERCE. A significant barrier to online commerce and communications is the secure transmission of confidential information over public networks. A compromise or breach of the technology used to protect the Company's customers' and their end-users' transaction data could result from, among other things, advances in computer capabilities, new discoveries in the field of cryptography, or other events or developments. Any such compromise could have a material adverse effect on the Company's reputation and, therefore, on its business, results of operations and financial condition. Furthermore, a party who is able to circumvent the Company's security measures could misappropriate proprietary information or cause interruptions in its operations. The Company may be required to expend significant capital and other resources to protect against security breaches or to alleviate problems caused by such breaches. Concerns over the security of transactions conducted on the Internet and other online services and the privacy of users may also inhibit the growth of the Internet -28- and other online services generally, especially as a means of conducting commercial transactions. The Company currently has practices and procedures in place to protect the confidentiality of its customers' and their end-users' information. However, its security procedures to protect against the risk of inadvertent disclosure or intentional breaches of security might fail to adequately protect information that its obligated to keep confidential. The Company may not be successful in adopting more effective systems for maintaining confidential information, and its exposure to the risk of disclosure of the confidential information of others may grow with increases in the amount of information it possesses. To the extent that the Company activities involve the storage and transmission of proprietary information, such as credit card numbers, security breaches could damage its reputation and expose it to a risk of loss or litigation and possible liability. The Company's insurance policies may not be adequate to reimburse it for losses caused by security breaches. 36. THE COMPANY'S STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE. The stock market, and in particular the market for Internet-related stocks, has, from time to time, experienced extreme price and volume fluctuations. Many factors may cause the market price for the Company's common stock to decline, perhaps substantially, including: - failure to meet our development plans; - the demand for our common stock; - downward revision in securities analyst's estimates or changes in general market conditions; - technological innovations by competitors or in competing technologies; and - investor perception of the Company's industry or its prospects. -29- Item 4-Submission of matters to vote of security holders. (a) One matter was submitted to vote of shareholders for the first quarter ended March 31, 2001. 1. On or about March 12, 2001, stockholders holding of record a majority of the outstanding stock of Synergy Brands Inc., ("the Company") consented to a reverse split of the Company's stock and authorized the company's Board of Directors to implement a one for five reverse split. Item 6- Exhibits and Reports on Form 8-K (1) Exhibits - none (b) There was one report filed on 8-k for the relevant period. 1) The report disclosed that the registrant's auditors who have audited the financial records of the registrant for at least the last two years, Belew Averitt LLP, have merged into BDO Siedman, LLP, and the registrant has engaged as of February 28, 2001 the surviving entity BDO Seidman, LLP. -30- 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: 05/08/01 -------------------------- By: Mair Faibish Chairman of the Board /S/ Mitchell Gerstein ----------------------- Date: 05/08/01 --------------------------- By: Mitchell Gerstein Chief Financial Officer