0001026018-01-500013.txt : 20011008
0001026018-01-500013.hdr.sgml : 20011008
ACCESSION NUMBER: 0001026018-01-500013
CONFORMED SUBMISSION TYPE: 10QSB/A
PUBLIC DOCUMENT COUNT: 1
CONFORMED PERIOD OF REPORT: 20010630
FILED AS OF DATE: 20010919
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: SYNERGY BRANDS INC
CENTRAL INDEX KEY: 0000870228
STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-GROCERIES & GENERAL LINE [5141]
IRS NUMBER: 222993066
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10QSB/A
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-19409
FILM NUMBER: 1740503
BUSINESS ADDRESS:
STREET 1: 40 UNDERHILL BLVD
CITY: SYOSSET
STATE: NY
ZIP: 11791
BUSINESS PHONE: 5166821980
MAIL ADDRESS:
STREET 1: 40 UNDERHILL BLVD
CITY: SYOSSET
STATE: NY
ZIP: 11791
FORMER COMPANY:
FORMER CONFORMED NAME: DELTA VENTURES INC
DATE OF NAME CHANGE: 19600201
FORMER COMPANY:
FORMER CONFORMED NAME: KRANTOR CORP
DATE OF NAME CHANGE: 19930328
10QSB/A
1
file001.txt
FORM 10-QSB/A
FORM 10-Q/A. 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 JUNE 30, 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.)
1175 Walt Whitman Road, Melville NY 11747
(Address of principal executive offices) (zip code)
631-424-5500
(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 July 31, 2001 there were
4,052,809 shares outstanding of the registrant's common stock.
SYNERGY BRANDS, INC.
FORM 10-Q SB/A
JUNE 30, 2001
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION Page
Condensed Consolidated Balance sheet as of June 30, 2001
(Unaudited) 2-3
Condensed Consolidated Statements of Operations for the three
months ended June 30, 2001 and 2000 (Unaudited) 4
Condensed Consolidated Statements of Operations for the six
months ended June 30, 2001 and 2000 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2001 and 2000 (Unaudited) 6 - 7
Notes to Condensed Consolidated Financial Statements 8 - 15
Management's Discussion and Analysis of
Financial Condition and Results of Operations 16 -20
Forward Looking Information and Cautionary Statements 21 - 31
PART II: OTHER INFORMATION
Item VI: Exhibits and Reports on Form 8-K 32
SYNERGY BRANDS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2001
June 30, 2001
---------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,429,187
Collateral and Cash Security Deposit 573,315
Accounts Receivable, less allowance for doubtful accounts of $69,965. 1,149,175
Inventory 993,478
Prepaid assets 654,058
---------------
Total Current Assets 4,799,213
Property and Equipment - Net 606,379
Web Site Development Costs 772,724
Trade Names and Customer List, net of accumulated amortization of 1,841,113
$ 853,176.
---------------
Total Assets $8,019,429
See Accompanying Notes to Condensed Consolidated Financial Statements
-2-
SYNERGY BRANDS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2001
June 30, 2001
------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line-of-Credit $ 641,099
Note Payable to Stockholder 555,763
Accounts Payable and Accrued Expenses 2,590,837
------------
Total Current Liabilities 3,787,699
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; 49,900,000 Shares
authorized 3,840,484 were outstanding at 6/30/01 3,840
Additional paid-in capital 33,157,044
Deficit (27,423,315)
Stockholders' notes receivable 115,629)
Stockholder's advertising and in-kind services receivable (1,407,435)
------------
4,214,605
Less treasury stock at cost, 280 shares (167,500)
------------
Total stockholders' equity 4,047,105
Total Liabilities and Stockholders Equity $8,019,429
============
See Accompanying Notes to Condensed Consolidated Financial Statements
-3-
SYNERGY BRANDS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
2001 2000
---------------- ---------------
Net Sales $ 6,041,028 $5,035,140
Cost of Sales 5,485,408 4,711,551
---------------- ---------------
Gross Profit 555,620 323,589
Selling General and Administrative Expense 1,074,492 1,531,265
Depreciation and Amortization 234,156 187,539
---------------- ---------------
Operating Income (Loss): (753,028) (1,395,215)
---------------- ---------------
Other Income (Expense):
Miscellaneous Income (Expense) (281,586) (1,128)
Interest and Dividend Income 30,325 4
Interest and Financing Expenses (23,500) (22,444)
---------------- ---------------
Total Other Income (Expense) (274,761) (23,568)
---------------- ---------------
Income (Loss) Before Income Tax, Minority Interest and
Extraordinary Item (1,027,789) (1,418,783)
Minority interest & dividends on preferred stock of subsidiary - 48,055
Income Taxes (7,020) -
---------------- ---------------
Net Income (Loss) Before Extraordinary Item (1,034,809) (1,370,728)
Extraordinary gain 486,788 -
---------------- ---------------
Net Income (Loss) $ (548,021) $ (1,370,728)
================ ===============
Income (Loss) Applicable to Common Stock $ (548,021) $ (1,370,728)
================ ===============
Basic and Diluted loss Per Common Share:
Loss from operating before Extraordinary Item $ (.27) $ (.47)
Extraordinary Item $ .13 -
---------------- ---------------
Net Income (Loss) Per Common Share $ (.14) $ (.47)
================ ===============
Weighted Average Number of Shares Outstanding 3,837,540 2,922,980
See Accompanying Notes To Condensed Consolidated Financial Statements
-4-
SYNERGY BRANDS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2001AND 2000
(UNAUDITED)
2001 2000
------------- ------------
Net Sales $ 11,554,439 $ 8,618,948
Cost of Sales 10,484,485 8,052,579
------------- ------------
Gross Profit 1,069,954 566,369
Selling, General and Administrative Expense 1,901,371 3,281,100
Depreciation and Amortization 468,781 322,076
------------- ------------
Operating Income (Loss): (1,300,198) (3,036,807)
------------- ------------
Other Income (Expense):
Miscellaneous Income (Expense) (282,272) 34,950
Interest and Dividend Income 63,456 4,055
Interest and Financing Expense (57,583) (39,852)
Total Other Income (Expense) (276,399) (847)
------------- ------------
Income (Loss) Before Income Tax and Minority Interest and
Extraordinary Item (1,576,597) (3,037,654)
Minority interest & dividends on preferred stock of subsidiary - 123,496
Income Taxes (24,108) -
------------- ------------
Net Income (Loss) Before Extraordinary Item (1,600,705) (2,914,158)
Extraordinary Gain 486,788 -
------------- ------------
Net Income (Loss) $(1,113,917) $ (2,914,158)
============= =============
Income (Loss) Applicable to Common Stock $(1,113,917) $ (2,914,158)
============= =============
Basic and Diluted loss Per Common Share:
Loss from operating before Extraordinary Item $ (.42) $ (1.01)
Extraordinary Item $ .13 -
------------- ------------
Net Income (Loss) Per Common Share $ (.29) $ (1.01)
------------- ------------
Weighted Average Number of Shares Outstanding 3,833,081 2,897,359
See Accompanying Notes To Condensed Consolidated Financial Statements
-5-
SYNERGY BRANDS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
2001 2000
------------- ------------
Cash Flows From Operating Activities:
Net Income (Loss) $ (1,113,917) $ (2,914,158)
Adjustments to Reconcile Net loss to net cash
used in operation activities:
Depreciation and Amortization 468,782 322,076
Non-Cash Expenses - 1,605,048
Changes in Operating Assets and Liabilities:
Minority Interest &Dividends on preferred stock subsidiary - (123,496)
Accounts Receivable (228,297) (45,098)
Inventory 194,305 ( 18,997)
Other Current Assets 139,372 (283,012)
Accounts Payable & Accrued Expenses 25,230 (321,615)
------------- ------------
Net Cash used in operating activities (514,225) (1,779,252)
Cash Flows From Investing Activities:
Purchase of Furniture and Equipment (60,092) ( 42,135)
Purchase of Security Deposit (207,710) (1,136)
------------- ------------
Net Cash used in (267,802) (43,271)
Investing activities
Cash Flows From Financing Activities:
Payment on debt (5,564,962) (730,696)
Proceeds from debt 5,542,063 972,654
Proceeds from Issuance of Common Stock - 861,545
------------- ------------
Net Cash provided by Financing Activities (22,899) 1,103,503
------------- ------------
Net Increase (Decrease) in Cash (804,926) (719,020)
Cash - Beginning of Period 2,234,113 1,156,032
------------- ------------
Cash - End of Period $ 1,429,187 $ 437,012
============= ============
See Accompanying Notes To Condensed Consolidated Financial Statements
-6-
SYNERGY BRANDS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
2001 2000
--------- ---------
Supplemental Disclosure of Cash Flow Information:
Interest Paid $52,213 $34,492
Income Taxes Paid 24,106 9,781
Supplemental Disclosure of Non-Cash Operating,
Investing and Financing Activities: -
Stock issued in exchange for notes receivable 189,629
Prepaid Expenses paid via the distribution of
registered shares of the Company's Common
Stock through it's Compensation and Services Plan - 419,968
Prepaid Expenses, Commission Payable and Accounts Payable
Paid with Stock issued 881,649 253,616
See Accompanying Notes to Condensed Consolidated Financial Statements
-7-
SYNERGY BRANDS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 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. 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.
-8-
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
June 30, 2001 totaled approximately $ 1,200,000. .
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 and 2000, 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.
-9-
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. 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.
-10-
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
began 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 $ 217,000 for the six
months ended June 30, 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 June 30, 2001, the Company had a $ 559,000 security deposit with a
major supplier, which serves as collateral for credit purchases made by
the Company from the supplier. The Company has the right to offset the
deposit against any outstanding unpaid invoices due to the supplier.
-11-
3. PROPERTY AND EQUIPMENT
Property and equipment as of June 30, 2001 consisted of the following:
Office equipment $ 110,001
Machinery and equipment 48,825
Furniture and fixtures 231,265
Leasehold improvements 441,772
Less accumulated depreciation and amortization (225,484)
---------
$ 606,379
4. INVENTORY
Inventory as of June 30, 2001 consisted of the following:
Beauty Products $496,037
Tobacco finished goods $497,441
$993,478
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
($223,248 additional balance was available at June 30, 2001)
collateralized by accounts receivable. $ 641,099
===========
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 June 30,
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 issue
50,000,000 shares of $.001 par value common stock, of which 49,100,000
shares are Class A common stock and 900,000 shares are Class B common
stock. At June 30, 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).
-12-
7. STOCKHOLDERS' EQUITY
The Company has 100,000 authorized and outstanding shares of Class A
preferred stock A with a par value of $.001; 13 to one voting rights;
liquidation preference of $10.50 per share and before common stock and
redemption at option of company at $10.50 per share. Rights to
Dividends have been eliminated.
At June 30, 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 June 30, 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 1,596,800 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.
Simultaneously, Synergy sold advertising credits to a third party for
$2,660,000 in cash and in trade credits. Synergy paid a broker $375,000
in cash and the remaining balance with stock valued at $591,150 on
January 2, 2001.
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.
-13-
The following is a summary of such stock option transactions for the
six months ended June 30, 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 (315,889) 14.60
Outstanding at June 30, 2001 579,235 7.96
Option price 2.00-17.50
Available for grant: -
December 31, 2000
June 30, 2001 -
There were no compensation costs related to options for the months
ended June 30, 2001.
8. COMMITMENTS AND CONTINGENCIES
Lease commitments
The Company leases office and warehouse space in Wexford, Pennsylvania,
Syosset New York, Melville New York, and Miami, Florida under operating
leases expiring in July 2002, May 2003, and June 2008, and January 2002
respectively. The Company is also leasing vehicles under operating
leases expiring in 2004. Future minimum lease payments under
non-cancelable operating leases as of June 30, 2001:
Year ending December 31,
------------------------
2001 $ 131,909
2002 188,609
2003 140,330
2004 101,887
2005 96,980
Thereafter 250,266
----------
$ 909,981
==========
SERVICE AGREEMENT
BB's inventory is maintained in a public warehouse in South Kearny, New
Jersey. The Company is required to make rental payments based on 4% of
the Company's sales of inventory stored in the warehouse. The agreement
expires in October 2018 and may be cancelled by either party with a 90
day written notice under certain circumstances, as defined.
-14-
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. In July 2001, the Company issued 200,000 shares of stock
to satisfy the guarantee and receive brand names as part of the
agreement. The liability has been accrued at June 30, 2001 and the
related expense of $ 253,800 has been included in miscellaneous
expenses.
9. SEGMENT AND GEOGRAPHICAL INFORMATION
The Company offers a broad range of Internet access services and
related products to businesses and consumers throughout the United
States and Canada. All of the Company's identifiable assets and results
of operations are located in the United States. Management evaluates
the various segments of the Company based on the types of products
being distributed which were, as of June 30, 2001 as shown below:
Salon
Products B2B B2C Total
----------- ----------- ----------- -----------
Revenue
2000 $ 1,406,105 $ 6,559,911 $ 652,932 $ 8,618,948
2001 $ 1,144,739 $ 9,280,980 $ 1,128,720 $ 11,554,439
Net earnings
2000 $ (651,898) $ 86,518 $(2,348,778) $(2,914,158)
2001 $ (279,589) $ (401,265) $ (433,063) $(1,113,917)
Identifiable assets
2000 $ 3,840,752 $ 818,910 $ 2,674,607 $ 7,334,269
2001 $ 2,775,292 $1,966,468 $ 3,277,669 $ 8,019,429
Interest expense and Financing Cost
2000 $ 14,473 $ 5,067 $ 20,312 $ 39,852
2001 $ 18,839 $ 37,699 $ 1,045 $ 57,583
Depreciation Amortization
2000 $ 252,744 $ 500 $ 68,832 $ 322,076
2001 $ 263,034 $136,279 $ 69,468 $ 468,781
10. EXTRAORDINARY ITEM
The Company recorded a $486,788 extra-ordinary gain as a result of
non-performance by a vendor.
-15-
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, 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, including establishment of
strategic contacts and alliances with other companies that would help the
Company merchandise nationally branded products in its business categories.
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 June 30, 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 SIX MONTHS ENDED JUNE 30, 2001
Second quarter net sales have increased 20% to $6.0 million versus $5.0
million for the same prior period . The Company's B2B (dealbynet) operation,
represented over 78% of the total sales. In particular the Company's B2C
(BeautyBuys and netcigar) operations increased by 125% to $706,202 in revenues
in the second quarter. For the six months revenues increased 34% to $11.5
million with the Company's B2B operations representing 80% of sales. The Company
attributes its revenue growth to increased customer penetration in its B2B and
B2C operations.
Net Profit before non-cash charges * increased to $85,962, $0.02 per share
as compared to a net loss before non-cash charges of $632,728 (-$0.22 per share)
for the same prior period. Net loss before non-cash charges for the six months
ended June 30, 2001 totaled $167,058 (-$0.04 per share) as compared to a net
loss before non-cash charges of $976,158 (-$0.34 per share) for the same prior
-16-
period. Most of the non cash charges involve depreciation and amortization
charges in connection with the Company's website development and the
amortization of the Sinclair advertising transaction consummated in November
1999 and further amended in December of 2000. The Company attributes this
improvement in operating performance to increased revenues, better operating
margins and a reduction in operating expenses.
The Company realized revenues of $11,554,439 for the six months ended June
30, 2001 a 34% jump from the prior year. Dealbynet represented $9.3 million of
the total sales a 42% jump from the prior period. B2C revenues increased 73% to
$1.1 million for the period. The only operation that showed a reduction was the
traditional hair care distribution business operated by BeautyBuys; its sales
were reduced by 19% to $1.1 million. The Company attributes its strong growth in
its B2B and B2C operations to strong customer acquisition, a streamlined product
acquisition system and additional sales staff. The Company's B2C operation has
benefited from e-mail promotions and a streamlined staff. The reduction in the
hair-care business is attributable to an increase in BeautyBuys Internet
business, which relies on the same products that the hair care business relies
upon. The Company is planning to increase its hair care inventory levels to
accommodate the growth of BeautyBuys while still planning to grow its
traditional distribution business. Gross profit has increased to $1.1 million as
compared to $566,000 an increase of 89% for the six months ended June 30, 2001.
More importantly gross profit has increased to 9.3% as compared to 6.5% for the
same period. This improvement is attributable to significant margin improvement,
especially in the Company's B2C operations. Operating expenses dropped 42% to
$1.9 million for the six months. The Company believes that the completion of its
web site developments and a significant reduction in advertising and marketing
expense have resulted in the drop in operating expenses. The Company plans on
increasing its operating expenses commensurate with increased revenues and
operating profits.
The Company realized revenues of $6,041,028 for the three months ended June
30, 2001 a 20% jump from the prior year. Dealbynet represented $4.7 million of
the total sales a 20% jump from the prior period. B2C revenues increased 124% to
$706,202 for the period. The only operation that showed a reduction was the
traditional hair care distribution business operated by BeautyBuys; its sales
were reduced by 22% to $635,000. The Company attributes its strong growth in its
B2B and B2C operations to strong customer acquisition, a streamlined product
acquisition system and additional sales staff. The Company's B2C operation has
benefited from e-mail promotions and a streamlined staff. The reduction in the
hair-care business is attributable to an increase in BeautyBuys Internet
business, which relies on the same products that the hair care business relies
upon. The Company is planning to increase its hair care inventory levels to
accommodate the growth of BeautyBuys while still planning to grow its
traditional distribution business. Gross profit has increased to $555,000 as
compared to $323,000 an increase of 72% for the three months ended June 30,
2001. More importantly gross profit has increased to 9.2% as compared to 6.4%
for the same prior period. This improvement is attributable to significant
margin improvement, especially in the Company's B2C operations. Operating
expenses dropped 30% to $1.1 million for the three months. The Company believes
that the completion of its web site developments and a significant reduction in
advertising and marketing expense have resulted in the drop in operating
expenses. The Company plans on increasing its operating expenses commensurate
with increased revenues and operating profits.
-17-
3 months 3 months 6 months 6 months
6/30/01 6/30/00 change 6/30/01 6/30/00 change
---------- --------- ------- --------- ---------- -------
Statement of operations data
Revenues
PHS group (dealbynet) 4,699,653 3,909,644 20.21% 9,280,980 6,559,911 41.48%
Proset 635,173 810,878 -21.67% 1,144,739 1,406,105 -18.59%
B2C sites (beautybuys and netcigar) 706,202 314,618 124.46% 1,128,720 652,932 72.87%
Total 6,041,028 5,035,140 19.98% 11,554,439 8,618,948 34.06%
Net Profit (loss) before non-cash charges $ 85,962 (632,728) 836.06% (167,058) (976,158) 82.89%
Per share 0.02 (0.22) 1066.36% (0.04) (0.34) 87.06%
Non-cash and one time charges * 633,983 738,000 -14.09% 946,859 1,938,000 51.14%
Net Profit (loss) $ (548,021) (1,370,728) 60.02% (1,113,917) (2,914,158) 61.78%
Per share (0.14) (0.47) 69.55% (0.29) (1.01) 71.11%
weighted shares outstanding 3,837,540 2,922,980 31.29% 3,833,081 2,897,359 32.30%
* non-cash charges include equity transctions, depreciation and amortization
-18
LIQUIDITY AND CAPITAL RESOURCES
The Company made a balance sheet adjustment in the second quarter in
connection with the trade credits that it received from its Sinclair transaction
in December of 2000. Upon the sale of its Sinclair unused advertising inventory
the Company received $2.7 million in cash and $4.3 million in trade credits from
Icon International (ICON), one of the largest media bartering companies in the
U.S. The Company capitalized $3.4 million of these credits, which increased its
stockholders' equity to $8 million as of March 31, 2001. Following conversations
with NASDAQ, the Company with the concurrence of its auditors has determined to
remove the trade credits as a capitalized item. This will result in the Company
reporting additional gross profit as the trade credits are used in the future.
The affect of this accounting change will be that the Company reduces its
product costs from ICON and thereby is likely to increase its gross profit. As a
result of this change, Stockholders equity was reduced to $4 million in the
second quarter of 2001. The March 31, 2001 10QSB and December 31, 2000 10KSB
were also restated to reflect this change. The Company will still have the full
utilization of the $4.3 million of ICON trade credits, but has decided not to
capitalize their value in case they are not utilized or have a limited value.
This change had no cash effect and did not impact the operating statements of
the Company.
Working capital increased 21% to $1.0 million at June 30, 2001from December
31, 2000 primarily as a result of increased revenues, recognition of a net
profit before non-cash changes and a reduction in operating expenses. Current
assets did not materially change in this period. Cash flow from operations, as
well as its line of credit from its GE Commercial is believed to be sufficient
to cover the Company's operating needs and forecasted 2001growth. However, any
external transactions such as mergers or acquisitions may require the Company to
raise additional capital.
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.
-19-
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,
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 $217,000 for the six months ended June 30, 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.
-20-
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.
-21-
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
-22-
products to the Company, the Company's operations in these areas should be
considered subject to all of the risks inherent in a new business enterprise,
including the absence of a appreciable operating history and the expense of new
product development. Various problems, expenses, complications and delays may be
encountered in connection with the development of the Company's new products and
methods of product distribution. These expenses must either be paid out of the
proceeds of future offerings or out of generated revenues and Company profits.
There can be no assurance as to the continued availability of funds from either
of these sources.
10. RAPIDLY CHANGING MARKET MAY IMPACT OPERATIONS.
The market for the Company's products is rapidly changing with evolving
industry standards and frequent new product introductions. The Company's future
success will depend in part upon its continued ability to enhance its existing
products and to introduce new products and features to meet changing customer
requirements and emerging industry standards 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
-23-
effect on the Company's sales or operations, such as banning counter access to
or display of premium handmade cigars, or decisions by retailers because of
public pressure to stop selling all tobacco products. Numerous proposals also
have been considered at the state and local level restricting smoking in certain
public areas, regulating point of sale placement and promotions and requiring
warning labels.
Increased cigar consumption and the publicity such increase has received
may increase the risk of additional regulation. The Company cannot predict the
ultimate content, timing or effect of any additional regulation of tobacco
products by any federal, state, local or regulatory body, and there can be no
assurance that any such legislation or regulation would not have a material
adverse effect on the Company's business.
In addition numerous tobacco litigation has been commenced and may in the
future be instituted, all of which may adversely affect the cigar consumption
and sale and may pressure applicable government entities to institute further
and stricter legislation to restrict and possibly prohibit cigar sale and
consumption, any and all of which may have an adverse affect on Company business
(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.
-24-
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 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.
-25-
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
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.
-26-
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
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.
-27-
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;
- buyers may dislike the reduction in the human contact inherent in
traditional purchasing methods;
-28-
- 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.
-29
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
-30-
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
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.
-31-
Part II - Other Information
Item 4-Submission of matters to vote of security holders.
1. There were no reports filed on 8-k for the relevant period.
At the Company's annual meeting on June 28, 2001 the following matters were
submitted.
1) Election of the Company's board of directors, where in the following
persons were elected, such persons being all of the same persons then
acting as directors.
The following persons:
For Against Abstain
1. Henry Platek 4,177,746 7,555 -
2. Mair Faibish 4,177,746 7,555 -
3. Mitchell Gerstein 3,637,746 7,555 540,000
4. Dominic Marsicovetere 4,177,746 7,555 -
5. Michael Ferrone 4,177,746 7,555 -
6. Donald E. Butler 4,177,746 7,555 -
2) To re-elect current auditors.
Where BDO Seidman LLP the current auditors was re-elected for December
31, 2001:
For Against Abstain
3,639,513 7,548 541,240
Item 6- Exhibits and Reports on Form 8-K
(1) Exhibits - none
(2) There were no reports filed on 8-k for the relevant period.
-32-
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: 08/13/01
-----------------------------
By: Mair Faibish
Chairman of the Board
---------------------
/S/ Mitchell Gerstein
Date: 08/13/01
-----------------------------
By: Mitchell Gerstein
Chief Financial Officer