-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SvgjRionOF+GQH8mHDezcsyQZ+HLxoXo41Ru7Ji9/VAgRtLujdoeGykojZg9bNuI 5xQjID/YLRmxhW7f28h0bA== 0001026018-02-000006.txt : 20020415 0001026018-02-000006.hdr.sgml : 20020415 ACCESSION NUMBER: 0001026018-02-000006 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 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: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-19409 FILM NUMBER: 02597675 BUSINESS ADDRESS: STREET 1: 40 UNDERHILL BLVD CITY: SYOSSET STATE: NY ZIP: 11791 BUSINESS PHONE: 5166821980 MAIL ADDRESS: STREET 1: 40 UNDERHILL BLVD CITY: SYOSSET STATE: NY ZIP: 11791 FORMER COMPANY: FORMER CONFORMED NAME: KRANTOR CORP DATE OF NAME CHANGE: 19930328 FORMER COMPANY: FORMER CONFORMED NAME: DELTA VENTURES INC DATE OF NAME CHANGE: 19600201 10KSB 1 file001.txt FORM 10-KSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2001. Commission file number 0-19409 SYNERGY BRANDS INC. (Exact name of registrant as specified in its charter) DELAWARE 22-2993066 (State of incorporation) (I.R.S. Employer Identification No.) 1175 Walt Whitman Road Melville, NY 11747 (Address of corporate offices) Registrant's telephone number, including area code: 631-424-5500 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Exchange Common Stock, $.001 par value NASDAQ/Small-Cap System and Boston Stock Exchange 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. Yes_X_ NO__ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] On March 31, 2002, the aggregate market value of the voting stock of Synergy Brands Inc., held by non-affiliates of the Registrant (based on the closing price as reported on the NASDAQ for March 31, 2002) approximately $3,300,000. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of outstanding shares of the Registrant's Common Stock as of March 31, 2002 was 5,050,484. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for Registrant's 2001 Annual Meeting of Stockholders currently scheduled to be held June 2002 are incorporated by reference in Part III (for other documents incorporated by reference refer to Exhibit Index at page 50) -1- PART I Other than historical and factual statements, the matters and items discussed in this report on Form 10-KSB are forward-looking information 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 contribute to such differences are discussed in the forward-looking statements and are summarized in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Forward-Looking Information and Cautionary Statements." ITEM 1. DESCRIPTION OF BUSINESS A. OVERVIEW Synergy Brands Inc. (NASDAQ: SYBR) and its consolidated subsidiaries, ("SYBR" or "the Company") have developed, operate and continue to seek opportunities to establish, Internet Businesses directed at the sale of a variety of products as well as partnering and seeking to partner or invest with advanced technologies to enhance the Company's properties and participate in new ventures synergistic with the other operations of the Company (Internet Infrastructure), including establishment of strategic contacts and alliances with other companies. SYBR's Internet strategy includes the internal development and operation of subsidiaries as well as the taking of strategic positions in other Internet companies that have demonstrated synergies with SYBR's core businesses. The Company's strategy also envisions and promotes opportunities for synergistic business relationships among the Internet companies within its portfolio. SYBR and its consolidated subsidiaries have developed Internet properties that facilitate internet product sales and procurement as well as strategically partnering with off line and on- line media companies to build revenues. SYBR's business strategies are focused on developing business opportunities in three related sectors; Business to Consumer (B2C) Business to Business (B2B) and Enterprise Integration (EI). At March 31, 2002 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 (both being subsidiaries of New Era Foods Inc. which in turn is a wholly owned subsidiary of the Company), 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 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. 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 made a 20% investment in Interline Travel and Tours, Inc. (ITT) in the fourth quarter of Fiscal Year 2001. The Company believes that its capital investment in this unique travel company may provide for future capital appreciation. SYBR does not manage ITT and relies on its management for day to day operations. ITT provides travel packages including cruises and hotel deals solely for airline employees. ITT is believed to be the largest company in this sector of the travel industry. -2- SYBR has also established strategic alliances with media and technology partners in a way that minimizes cash outlay by offering equity in SYBR for media and technology credits. With such transactions not only does SYBR conserve its cash assets but also it gains the interest of important media partners. 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 related 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. THE COMPANY'S CORPORATE OFFICE IS LOCATED AT 1175 WALT WHITMAN ROAD, MELVILLE NEW YORK 11747, AND ITS TELEPHONE NUMBER IS (631) 424-5500. THE COMPANY MAINTAINS A CORPORATE WEBSITE AT WWW.SYNERGYBRANDS.COM. -3- B. INTERNET & LOGISTICS 1. GROCERY PRODUCTS. Dealbynet.Com Inc. (DBN) is considered a subsidiary of PHS Group (wholly owned subsidiary of Synergy Brands Inc.) and was formed and functions as the Company's B2B platform for sale of health and beauty care ("HBC") products as well as other grocery products marketed and sold through the Company's efforts. Dealbynet has developed a B2B platform designed to streamline supply chain management and reduce procurement and distribution expenses in the grocery general merchandise (GM) and HBC industry. The site (www.dealbynet.com) is designed for the procurement professional to access data and manipulate its value across multiple logistical platforms. DBN also uses e-commerce resources and Visionet (tm)(owned by Fleming NYSE:FLM) and Procter & Gamble's (NYSE: PG)on-line systems to integrate the vendor offerings in order to optimize its product offerings. DBN believes that logistics savings will result in product cost reductions to its customers through seamless electronic offerings. DBN plans to develop migration paths to its unix based internal system through a virtual private network (VPN) it is developing to allow for full accounting integration. There are current internet based product exchanges developed to accommodate mainly the grocery industry's needs to have prompt access to both availability of product and pricing. The main participants in this area of wholesale product distribution assistance, are Uniform Code Council (UCCnet), Transora, Global Net Exchange and World Wide Retail Exchange. The internet product exchanges and information therefrom are intended to be capable of integrating through the Dealbynet system which is compatible and conforms to such product exchanges so as to access the information supplied therefrom and is to be utilized as an adjunct thereto and is designed to customize acquisition to product availability and pricing to the individual subscriber to the Dealbynet platform. Accordingly, the Dealbynet system is designed to offer the following advantages to its business partners, regardless of size and market share: 1. Provides capacity for manufacturer's, wholesalers, distributors and retailers to gain access to real-time data. 2. Facilitates and streamline sales, procurement, logistical, financial and merchandising activities. 3. Automatically presents customized offerings and pricing depending upon user profile. 4. Enables users to process, track and manage orders. DBN has developed customer profiling database relationships for streamlining web order management in the grocery industry. Beta testing for the Proctor & Gamble pilot web order system, which was initiated in 1998, encouraged the Company to develop DBN. The Company has also taken the necessary steps to build enterprise integration (EI) connectivity tools that allow key data files to seamlessly flow through DealByNet. An alliance partner will be required and candidates are being considered for EI and other connectivity applications. The DealByNet exchange enables its business partners to search and find items online by replenishment cost, and intends to provide solutions for supply chain efficiencies that are expected to reduce purchasing errors, as well as transportation and storage costs, while increasing flexibility and access to real-time data. DealByNet is one of the first communities that uses P&G's streamline logistics model to drive fast-moving, nationally branded grocery products to its customer's docks via the internet. DealByNet focuses on selling the top moving national brands in the grocery industry by creating direct store delivery programs, thus avoiding costly warehousing and distribution costs. DealByNet does not replace the full-line wholesaler, but supplements their efficiencies by carefully selecting and profiling the cost of delivery of each selected product and creating a more effective supply chain for these items. -4- 2. HEALTH AND BEAUTY PRODUCTS In the first quarter of 1999, the Company established through its subsidiary BeautyBuys.Com Inc. (wholly owned through SYBR.com Inc.) an e-commerce website (www.BeautyBuys.com) to offer direct to the consumer via internet sales on a non-exclusive basis a popular selection of nationally branded beauty care products, including salon hair and skin care items, designer fragrances and cosmetics, and consumer health and beauty care products, most being previously sold by the Company as part of its more traditional distribution business. BeautyBuys.com Inc. has further expanded its internet operations into B2B sales of most products offered through its retail internet sales as well as adapting much of the Company's historical wholesale product trade outside the health and beauty care industry to the B2B platform. Advertising on radio, television and on-line channels was an integral part of the overall traffic-building plan for BeautyBuys.com. To further this area of expanded awareness of the BeautyBuys.com presence in the marketplace the Company has established for BeautyBuys.com a strategic alliance with a material advertising source in Sinclair Broadcasting Inc.(Sinclair). -5- Sinclair provides the Company with production, creative services, media planning placement in their online communities through their assistance and advertising time by contract devoted to BeautyBuys.com. The Company believes that the partnership with Sinclair Broadcast Group, Inc. and the exchange of media for equity was a milestone that accelerated the growth and development of BeautyBuys.com, Inc. In addition to the considerable media resources that are now available to BeautyBuys.com, Inc, there is a wealth of advertising and media management expertise that Sinclair is providing to the partnership. Sinclair owns and/or programs 63 television stations in the United States that reach almost 25% of the television viewing population in 40 markets that focus on the American middle market. Sinclair stations are affiliated with the 4 major networks (ABC, NBC, CBS, FOX) as well as Warner Bros. and UPN. Sinclair is the largest FOX & WB affiliates network in the US. SYBR, in December 2000, did in fact arrange for strategic sale of a portion of the media credits; from Sinclair Broadcasting, such being sold to ICON International, one of the largest media barter enterprises in the United States owned by Omnicom, a public entity (NYSE OMC). The sale was made for a combination of cash and trade credits, the trade credits further allowing for SYBR to acquire product from manufacturers through ICON. As part of the media credits sale, Sinclair reconveyed their interest in BeautyBuys.com to SYBR making BeautyBuys.com again a wholly owned subsidiary of SYBR and Sinclair is one of the largest shareholders of Synergy Brands Inc. BeautyBuys.com's website design work is proprietary. It was developed to accommodate the specific marketing and record keeping requirements of the Company. State-of-the-art technology is utilized in site design, tracking systems, hosting and affiliated programs. BeautyBuys.com strives through internal development efforts to create and enhance the specialized, proprietary software that is unique to its Business. BeautyBuys.com utilizes a proprietary computerized web based database management system that collects, integrates and allows analysis of data concerning sales, order processing, shipping, purchasers, receiving, inventories, and financial reporting. At any given time, management can determine the quantity of product stored by item, cost by item, aging and other characteristics necessary for expeditious fulfillment and distribution. -6- BeautyBuys.com has implemented a broad array of services and systems for site management, searching, customer interaction, transaction processing and fulfillment. BeautyBuys.com uses a set of software applications for: accepting and validating customer orders; organizing, placing, and managing orders with vendors and fulfillment partners; receiving product and assigning it to customer orders; and managing shipment of products to customers based on various ordering criteria. These services and systems use a combination of BeautyBuys' own proprietary technologies and commercially available licensed technologies. Products acquired for resale by BeautyBuys.com are shipped in bulk to the Company's warehouse facility. BeautyBuys.com maintains inventory on approximately 50% of its products and has arrangements to purchase the balance of its needs on a "just-in-time" basis. All orders are assembled in a single facility for shipment to the customer via UPS or confirmed priority mail. BeautyBuys' website can be shopped 24 hours a day, seven days a week from anywhere that a consumer has Internet access. BeautyBuys offers a large selection of products and in addition provides various levels of product content that includes a wealth of health-related information, buying guides and other tools designed to help consumers make educated purchasing decisions. Additionally, shopping list and e-mail reminders are designed to make it easier for customers to regularly purchase there preferred products. BeautyBuys believes that the breadth and depth of its product selection, together with the flexibility of its online store and its range of helpful and useful product information and other shopping services, enables BeautyBuys.com to provide a strong merchandising strategy. BeautyBuys continues to develop its web site through value added technologies, strategic partnerships and marketing programs. To date it has developed interest from in excess of 25,000 business affiliates and over 100,000 on-line customers. The web site currently receives in excess of 150,000 unique visitors per month with the average time visiting on site in excess of 13 minutes. BeautyBuys uses sophisticated micro-marketing techniques to increase its sales and enhance the customer's shopping experience. -7- BeautyBuys' marketing efforts are aimed at flexibility of presentation to attract new and repeat customers and give ease of access to product availability and information. BeautyBuys' online store provides flexibility to change featured products or promotions without having to alter the physical layout of a store. BeautyBuys.com is also able to dynamically adjust its product mix in response to changing customer demand, new seasons or holidays and special promotions. BeautyBuys has the ability to offer products to individual customers based on their brand preferences. BeautyBuys also cross-sells its departments to promote impulse buying by customers. BeautyBuys has programs that allow it to provide samples of products designed as personal gifts. BeautyBuys also plans to use sampling to work with manufacturers to introduce new products. BeautyBuys competes with several online merchants including Perfumania.com, Gloss.com, Fragrancenet.com, Drugstore.com, ibeauty.com and others. In addition, BeautyBuys competes with the traditional $100 billion retail market including department stores, chain stores and mass merchandisers. BeautyBuys' competitors can be divided into several groups: chain drugstores, such as Walgreen's, CVS and Eckerd; mass market retailers such as Wal-Mart, Kmart and Target; supermarkets, such as Safeway, Albertson's and Kroger; warehouse clubs; and mail order and major department stores, such as Nordstrom, Macy's and Bloomingdales. Each of these competitors offers one or more of the health, beauty, wellness and personal care product categories as offered BeautyBuys on and through its website. At this time there is no online vendor known to BeautyBuys that dominates the beauty and health care market. BeautyBuys believes that with its quality selection, competitive pricing, advertising, customer profiling and technology, it can become dominant in this industry. The Company plans to focus on direct consumer marketing and horizontal growth to expand its online beauty business. To that end BeautyBuys has acquired an additional site that selectively sells beauty products labeled fragrancesalon.com. Management believes that the following are principal competitive factors in the market place wherein it operates, all of which are acknowledged to exist and are focused upon in BeautyBuys' operations: brand recognition, selection, convenience, price, website performance and accessibility, customer service, quality of information services, reliability and speed of order shipment. -8- 3. CIGAR PRODUCTS In July 1999, the Company launched through its subsidiary NetCigar.com Inc. a web site (www.netcigar.com) for sale of premium cigar products. Through NetCigar.com Inc. the Company offers information and sales on a variety of cigars and cigar related products and content, including cigar news and events, editorials, and an array of cigars and cigar products of both proprietary labels and other popular brands. The Company also markets humidors, and sells golf oriented gifts and apparatus. The Company has a long term warehousing arrangement in Miami, Florida for storage of its proprietary cigars. There are no retail stores to upkeep. NetCigar.com Inc. is not locked into any traditional pricing mode for sale of its products so marketing quality products at significant discounts is possible and is a large part of its business. NetCigar's web site adds convenience to customer and potential customer shopping by being open and available 24 hours a day, seven days a week for access from anywhere that a consumer has internet access. A significant portion of NetCigar's web site design is proprietary and NetCigar has had the site designed and has developed the site to accommodate specific marketing and record keeping requirements to enhance customer service. In October 2000, NetCigar entered an arrangement through SYBR for media coverage through Premiere Radio Networks Inc. ("Premiere"), a subsidiary of Clear Channel Communications (NYSE:CCU). Premiere syndicates more than 60 radio programs to more than 7800 radio affiliations and reaches over 180 million listeners weekly. Specifically, Premiere exchanged $1 million of radio media credits for stock in SYBR and cash. Netcigar initiated similar programs with Bloomberg Radio and ESPN Radio. -9- Netcigar.com, Inc., utilizes a proprietary computerized database management system that collects, integrates and allows analysis of data concerning sales, order processing, procurement, shipping, receiving, inventory and financial reporting. At any given time, Company executives can determine the quantity of product stored by item, cost by item, aging and other characteristics necessary for expeditious fulfillment and distribution. A network system of the Company's office and warehousing facilities allows for online assessment and transactional reporting capabilities. It is the Company's policy that all consumer orders are shipped from the Company's warehouse within 3 days of order placement. Netcigar.com maintains an inventory on approximately 50% of its product mix; the other 50% is purchased on a just-in-time basis. The distribution facility is modular and sufficient space is available to handle the Company's anticipated growth in this area of product sales. After an order is shipped, customers can view order-tracking information on NetCigar's web site. As customers use NetCigar's web site, they provide NetCigar with information about their buying preferences and habits. NetCigar then can use this information to develop personalized communications and deliver useful information, special offers and new product announcements to its customers. In addition, NetCigar uses e-mail to alert customers to important developments and merchandising initiatives. NetCigar competes with many and varied sources for cigar products in a $1 billion market both large and highly fragmented. No single traditional retailer competes against the Company in all of its product lines and there are an array of recently developed e-commerce cigar sites. The largest competitor, JR Cigars has only recently developed an e-commerce web site for its product sales as an adjunct to their traditional brick and mortar retail stores and catalogue sales. -10- Traditional pre-internet cigar sales has evolved through the following four categories of retailing, which together remain the main source of cigar marketing: 1. Mom and Pop brick and mortar tobacco shops that typically average 2500 square feet and generate average annual volume of approximately $250,000 per store. 2. Chain and franchise brick and mortar tobacco shops that average 12,000 to 15,000 square feet and generate approximately $5,000,000 in annual volume per store. 3. Catalog and mail order vendors that do monthly mailings to as many as 500,000 customers (in some instances as few as 25,000 customers), which is the portion of the market that will be the easiest to convert to e-commerce purchases, and 4. Drug stores and mass market retailers representing less than 10% of the market. The Company believes that the following are principal competitive factors present in its operations and product presentation: brand recognition, selection, convenience, price, web site performance and accessibility, customer service, quality of information provided and reliability and speed of order shipment. Many of the Company's store-based and online competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than Netcigar.com. Traditional store-based retailers also enable customers to see and feel products in a manner that is not possible over the Internet. Traditional store-based retailers can also sell products to address immediate needs, which the Company and other online sites cannot do. -11- 4. EQUITY INVESTMENT. In the fourth quarter of 2001 SYBR acquired a 20% interest in Interline Travel and Tours, Inc (ITT). ITT specializes in the travel packaging of cruises and resort hotels for airline employees. ITT services a data base of 120,000 members which represent approximately 10% of all airline employees. Resort hotels and cruise ships present ITT with unique premium travel plans for interliners (airline employees) and ITT through www.perx.com and ITT reservation agents makes these plans available to its customers. The Company utilizes a customized system similar to high level airline reservation systems, to track bookings and reservations. SYBR is a 20% shareholder and has the right to nominate one Board seat with ITT and relies on ITT management for day to day operations. The Company hopes to see growth in this business and plans on a long term growth strategy in this business. C. SALON HAIR CARE DISTRIBUTION. The Company services on a direct store basis (non-internet) through its subsidiary BeautyBuys.com Inc and affiliated parties several drug store and supermarket chains in the Northeast United States and numerous other retail outlets for the sale of hair and skin care products available to the Company through contacts made in the industry. Similar products are also made available to be sold direct to the consumer via internet sales (see "B. Internet Sales" supra). In this product area, Company affiliated sources stock the designated store shelves on the design of the planogram developed by Company affiliates which service is offered at no additional charge which aspect of sales helps maintain the client as long as awareness is maintained of and remedies for deficiencies are made in product shelf storage as it occurs. This aspect of the Company's business presently accounts for 8.8% of sales and is operated also through the Company's subsidiary BeautyBuys.com Inc. through its subsidiary PHS Group Inc. -12- D. COMPETITION The Company is small in both physical and financial attributes in comparison to many of its competitors in the marketing of grocery, health and beauty care products and cigars, and other business areas in which it participates. Such differences however do not act as a material hindrance to operations in e-commerce because where the traditional over the counter retailer model of business was location oriented, internet sales are not burdened with such fixed overhead. Access to product remains important but the Company is confident of the continued availability of product from it fulfillment sources with whom the Company has successfully acquainted itself or developed in house. For further discussion of particular competitive concerns in the e-commerce area of the Company's business refer to the particular discussion of the internet sales areas of business operations of the Company through its subsidiaries as heretofore-described (see Internet Sales, supra) The Company's knowledge and experience in and devotion to its business, receptiveness to general customers, and service, should also continue to benefit its operations and continue to allow it to compete with its more financially endowed competitors. -13- In the Salon and Skin care product market and that for fragrances and cosmetics, the primary thrust of the business, as the Company perceives it, is to secure market share which once established can be maintained with good service and maintenance of competitive pricing. Once the particular stores are acquired as clients and the service and price levels are maintained, it is difficult to lose the account. However, special circumstances beyond the Company's control such as acquisitions, other financial events, among others may cause the Company to lose customers. In internet sales the Company competes to obtain its product from manufacturers also supplying competing distributors. The leveling factor appears to be service and exposure on the internet. The Company is striving for expanded internet exposure and prides itself in offering good prices and service. The expanding presence of the Company on the Internet should act as a further balancing factor because of the enhancement of selling efforts such allows without the need for any corresponding expansion of the Company's physical business facilities and personnel. E. MAJOR CUSTOMERS. There was one customer whose sales exceeded 10% of total revenues in 2001 and 2000. F. INFORMATION SYSTEMS The various web sites established for sale of the Company's products are of multi-tier construction to allow for ease of administration and record keeping. Behind the screen not visible to the consumer when visiting the Company's various product category websites are internet based marketing and accounting information programs to allow the Company to review interest shown in its websites and account for sales made therefrom. The Company also maintains its own websites regarding information on the Company as a public entity and its various business interests. Internet sites presently available regarding Company business and product sales are: BeautyBuys.com NetCigar.com SynergyBrands.Com DealbyNet.com Frangrancesalon.com SupplyChainTechnologies.com PERX.com Jewelry-website.com GR Cigars.com SYBR.com CIGARGOLD.com -14- G. 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 products sales also increase during holiday periods and summer months, but also sales spurts occur during periods of special sporting events. -15- H. SHIPPING AND HANDLING Products sold on a B2B basis by the Company are shipped in bulk from inventory maintained by the Company at its warehouse facilities by common carriers. All B2C orders are consolidated in Company leased fulfillment facilities then packed and shipped to the customer usually within 7 days mainly by UPS. Approximately 50% of product inventory is in warehouse stock and 50% is purchased by the Company on an as needed "just in time" basis. The Company does not own its trucks and is dependent on common carriers and truck leases. Although the Company can call upon any of several hundred common carriers to distribute its products, from time to time the trucking industry is subject to strikes or work stoppages which could have a material adverse effect on the Company's operations if alternative modes of shipping are not then available. Additionally, the trucking industry is subject 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. The Company purchases name brand grocery products and HBA products for its dealbynet.com business to be sold B2B in truckload quantities to take advantage of better pricing from the supplier and lower freight costs. The Company does not foresee difficulty in arranging additional trucking if it increases its business volume. The Company has arranged for warehousing when and where necessary, on a contract basis and has thereby eliminated the existence of and need for centralized warehousing. I. TRADEMARKS, LICENSES AND PATENTS The Company has obtained rights to various copyrights, trademarks, tradenames, and domain names in its internet business. The Company has obtained a wholesale pharmaceutical license through the DEA, but to date has not utilized it. The Company has domestic rights to the "Suarez Gran Reserva", "Breton Legend", "Anduleros", "Don Otilio","Alminante" "Nativo" and various other trade names in marketing of premium handmade cigars. The cigar tradenames are owned by Gran Reserve Corp. as licensee ( a wholly owned subsidiary of New Era Foods Inc. itself a wholly owned subsidiary of SYBR). Others are owned directly by the Company or where applicable and appropriate by BeautyBuys.com Inc. Since most of the Company's business relies on the distribution of nationally branded products, proprietary trademarks are not material to the Company's business operations. -16- J. EMPLOYEES The Company and its subsidiaries in the aggregate as of the date of this report employ and contract approximately 26 full time/part time persons all of whom work in executive, administrative, marketing, data processing, accounting or clerical activities and certain work as Company employees that integrate with the various warehouses where Company products are stored. The Company does lease and staff its warehouses in New Jersey, (Beautybuys.com and Proset) and Florida, (Netcigar) from where it facilitates storage, sorting, packing and shipping of products sold in its website. Otherwise warehousing is contracted on an as needed arrangement staffed and through the warehousing entity contracted with except for supervisory personnel hired by the Company. The Company relies on a stable working environment with its contract warehousing and trucking. It is estimated that the Company outsources approximately 100 workers for its logistical networks. K. GOVERNMENT REGULATION 1. TOBACCO INDUSTRY REGULATION AND TOBACCO INDUSTRY LITIGATION The tobacco industry is subject to regulation at federal, state and local levels. Federal law has required States, in order to receive full funding for federal substance abuse block grants, to establish a minimum age of 18 years for the sale of tobacco products, together with an appropriate enforcement program. The recent trend is toward increasing regulation of the tobacco industry, and the increase in popularity of cigars could lead to an increase in regulation of cigars. The Food and Drug Administration (the "FDA") has determined that nicotine is a drug and that it has jurisdiction over cigarettes and smokeless tobacco products, as nicotine-delivering medical devices, and therefore, promulgated regulations restricting and limiting the sale, distribution and advertising of cigarette and smokeless tobacco products. Cigars were not specifically included in the FDA's regulations. The prohibition on retailers from selling cigarettes, cigarette tobacco or smokeless tobacco to persons under the age of 18 and requiring retailers to check the photographic identification of every person under the age of 27 became effective on February 28, 1997 and it is possible that in the future similar regulations will be applied to cigar sales as well. The U. S. Department of Health and Human Services ( the "HHS") Inspector General issued a report in February 1999, urging the Federal Trade Commission to require cigars to carry warning labels similar to those contained on cigarette packages. This report marked the first time that cigars had specifically been identified for increased regulatory oversight by a federal health agency. In 2002 new federally mandated health warnings go into effect on cigars. The enforcement follows a report by the National Cancer Institute which detailed the health risks of cigar smoking. Cigar companies are now required to display these warnings clearly and permanently on packages, in print ads, on audio and video ads, on point of purchase displays and on the Internet. -17- While the cigar industry historically has not been subject to federal regulatory efforts, focus has increased on possible need to increase regulation in this area and there can be no assurance that there will not be an increase in federal regulation in the future against cigar manufacturers or distributors. The HHS report indicates that federal regulatory effort directed toward cigar manufacturers and distributors may be increasingly likely. The costs to the Company of increased government regulations could have a material adverse effect on the Company's business and results of operations. In addition, the 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 have also increasingly moved to curtail smoking by prohibiting smoking in certain buildings or areas or by requiring designated "smoking" areas. Further restrictions of a similar nature could have an adverse effect on the sales or operations of the Company. Numerous proposals also have been considered at the state and local level restricting smoking in certain public areas, regulating point of sale placement and promotion and requiring warning labels. Consideration at both the federal and state level also has been given to consequences of tobacco on others that are not presently smoking (so-called "second-hand" smoke). There can be no assurance that regulations relating to second-hand smoke will not be adopted or that such regulations or related litigation would not have a material adverse effect on the Company's results of operations or financial condition. Increased cigar consumption and the publicity that such increase has received may increase the risk of additional regulation. There can be no assurance as to 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. Historically, the cigar industry has experienced less health-related litigation than the cigarette and smokeless tobacco industries have experienced. -18- Litigation against the cigarette industry has historically been brought by individual cigarette smokers. The United States Supreme Court has ruled that federal legislation relating to cigarette labeling requirements preempts claims based on failure to warn consumers about the health hazards of cigarette smoking, but does not preempt claims based on express warranty, misrepresentation, fraud, or conspiracy. Current tobacco litigation generally falls within one of three categories: class actions, individual actions or actions brought by individual States generally to recover Medicaid costs allegedly attributable to tobacco-related illnesses. Related litigation complaints allege a broad range of injuries resulting from the use of tobacco products or exposure to tobacco smoke and seek various remedies, including compensatory and, in some cases, punitive damages together with certain types of equitable relief such as the establishment of medical monitoring funds and restitution. The major tobacco companies are and have been vigorously pursuing defense to and otherwise the termination of these actions. The tobacco industry has negotiated settlements totaling more than $240 billion with the States seeking reimbursement for expenditures by state-funded medical programs for treatment of tobacco related illnesses. -19- The federal government has sued the tobacco industry seeking reimbursement for billions of dollars spent by government held programs to treat smoking-related illnesses. This type litigation could have a material adverse affect on the profitability of tobacco and tobacco related products. While the cigar industry has not been subject to similar health-related litigation to date, there can be no assurance that there will not be an increase in health-related litigation in the future against cigar manufacturers or distributors. The costs to the Company of defending prolonged litigation and settlement or successful prosecution of any health-related litigation could have a material adverse effect on the Company's business and results of operations. Cigars long have been subject to federal, state and local excise taxes, and such taxes frequently have been increased or proposed to be increased, in some cases significantly, to fund various legislative initiatives. The federal excise tax rate on large cigars (weighing more than three pounds per thousand cigars) is a material component of the manufacturer's selling price. Based on scheduled increases to the federal excise tax on cigarettes, which result in proportionate tax increases to the federal excise tax on all other tobacco products, the tax on large cigars is scheduled to be raised to at least 20.71% of the sale price with a cap presently at $48.75 per thousand large cigars. The Company believes that the enactment of significantly increased excise taxes could have a material adverse effect on the business of the Company. The Company is unable to predict the likelihood of the passage or the enactment of future increases in tobacco excise taxes as they relate to cigars. Tobacco products also are subject to certain state and local taxes. An example is the passage of the Proposition 10 referendum in California, an act used to fund early childhood development programs, children's health and development concerns at the state level. Proposition 10, which became effective on January 1, 1999, raised the tax on cigars in California from 26.17% of the manufacturer's selling price to 61.53%. The majority of states now impose excise taxes on cigars. In certain of the states without tobacco taxes proposals are pending to add such taxes. State cigar excise taxes are not necessarily subject to caps similar to the federal excise tax. From time to time, the imposition of state and local taxes has had some impact on sales regionally. The enactment of new state excise taxes and the increase in existing state excise taxes are likely to have an adverse effect on regional sales as cigar consumption generally declines. -20- 2. MISCELLANEOUS GOVERNMENT REGULATION. The United States Food and Drug Administration through the United States Food, Drug and Cosmetic Act and the Fair Packaging and Labeling Act and other various rules and regulations regulate, among other things, the purity and packaging of HBA products and fragrances and cosmetic products and various aspects of the manufacture and packaging of other grocery items sold by the Company. Similar statutes are in effect in various states. Manufacturers and distributors of such products are also subject to the jurisdiction of the Federal Trade Commission with respect to such matters as advertising content and other trade practices. To the Company's knowledge, it only deals with manufacturers and manufactured products in a manner which complies with such regulations and who periodically submit their products to independent laboratories for testing. However, the failure by the Company's manufacturers or suppliers to comply with applicable government regulations could result in product recalls that could adversely affect the Company's relationships with its customers. In addition, the extent of potentially adverse government regulations which might arise from future legislation or administrative action cannot be predicted. The Company is not aware of government regulation directly related to internet sales different from that applicable to traditional marketing but immense interest has been indicated on policing the internet focusing on contact and access but the nature of the products marketed by the Company over the internet does not appear to involve any of such concerns beyond product labeling and advertising content which would apply regardless of the medium in which the products are sold. For further discussion of other present and potential government regulation of the Internet see "Forward Looking Information and Cautionary Statements No.32 Government Regulation of the Internet may impede the Company's growth or add to its operating costs" infra. -21- ITEM 2: DESCRIPTION OF PROPERTY The Company's corporate offices and administrative headquarters are located in Melville, New York. The Company maintains satellite offices in New York, Pennslyvania, New Jersey and Florida. Warehousing facilities for BeautyBuys are located in New Jersey. Warehousing facilities for Netcigar are located in Florida. The Company maintains regular warehousing arrangements on a contract basis for Dealbynet throughout the northern quadrant of the United States. ITEM 3: LEGAL PROCEEDINGS The Company is a party to a number of legal proceedings as either plaintiff or defendant in connection with claims made for goods sold and various other aspects of its business, all of which are considered routine litigation incidental to the business of the Company. The Company is not aware of any other litigation pending which might be considered material and not in the ordinary course of business. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of 2001 no matters were submitted for shareholder approval. -22- PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's common stock trades on NASDAQ Small Cap under the Symbol "SYBR", and on the Boston Stock Exchange under the Symbol "SYN". The NASDAQ Stock Market, which began operation in 1971, is the world's first electronic securities market and the fastest growing stock market in the U.S. NASDAQ utilizes today's information technologies -computer and telecommunications- to unite its participants in a screen-based, floorless market. It enables market participants to compete with each other for investor orders in each NASDAQ security and surveillance of thousands of securities. This competitive marketplace, along with the many products and services available to issuers and their shareholders, attracts today's largest and fastest growing companies to NASDAQ. These include industry leaders in computers, pharmaceutical, telecommunications, biotechnology, and financial services. More domestic and foreign companies list on NASDAQ than on all other U.S. stock markets combined. The high and low sales prices in the NASDAQ Small Cap Market for the Company's Common Stock, as reported by the NASDAQ for each of the quarters of the Company's two most recent fiscal years are as follows: COMMON STOCK Quarter Ended High Low - ------------- ------- ------- March 31, 2000 20.65 12.05 June 30, 2000 15.65 4.05 September 30, 2000 7.05 3.75 December 31, 2000 5.15 2.80 March 31, 2001 5.47 2.35 June 30, 2001 2.58 1.75 September 30, 2001 1.95 1.14 December 31, 2001 1.45 1.05 March 31, 2002 1.40 .95 On March 31, 2002, the Company had approximately 6500 shareholders of record, with much of the stock being held in street name. The Company is currently listed on NASDAQ Small Cap. The stock prices listed through March 31, 2001 are shown as adjusted to reflect the 1 for 5 reverse split of the Company's stock effectuated in April 2001. The Company has never paid any dividends on its Common Stock and does not presently intend to pay any dividends on the Common Stock in the foreseeable future. There was an order by NASDAQ to delist the Company's common stock from the NASDAQ exchange issued October 2000 for failure of the Company's stock to maintain the required $1 bid price as quoted on NASDAQ, The Company satisfied the concerns of NASDAQ by effecting an increase in the quoted market price for its stock by instituting a 1 for 5 share reverse split of Company's common stock, effective April 19, 2001. The bid price for the Company's stock has remained above the required $1 price consistent since such time period, except for a 4 day period in January 2002 where the price was quoted slightly less but not for a period sufficient to cause any NASDAQ formal notice.. Also see "Forward Looking Information and Cautionary Statements No. 8 Possible Loss of NASDAQ Small Cap Listing" infra for further details. Refer to the Company's Consolidated Statement of Changes in Stockholders Equity in the Company's audited financial statements included in this report for information on issuances of equity securities during fiscal year 2001. These issuances were made either under exemption from registration allowed under Section 4 (2) or Regulation D of the Securities Act of 1933 as amended. -23- ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS OVERVIEW Synergy Brands Inc. (NASDAQ: SYBR) and its consolidated subsidiaries, ("SYBR" or "the Company") have developed, operate and continue to seek opportunities to establish, Internet Businesses directed at sale of variety of products as well as partnering and seeking to partner or invest with advanced technologies to enhance the Company's properties and participate in new ventures synergistic with the other operations of the Company (Internet Infrastructure), including establishment of strategic contacts and alliances with other companies. SYBR's Internet strategy includes the internal development and operation of subsidiaries as well as the taking of strategic positions in other Internet companies that have demonstrated synergies with SYBR's core businesses. The Company's strategy also envisions and promotes opportunities for synergistic business relationships among the Internet companies within its portfolio. SYBR and its consolidated subsidiaries have developed Internet properties that facilitate internet product sales and procurement as well as strategically partnering with off line and on- line media companies to build revenues. SYBR's business strategies are focused on developing business opportunities in three related sectors Business to Consumer (B2C) Business to Business (B2B) and Enterprise Integration (EI). At March 31, 2002 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 (both being subsidiaries of New Era Foods Inc. which in turn is a wholly owned subsidiary of the Company), 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 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. 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 made a 20% investment in Interline Travel and Tours, Inc. (ITT) in the fourth quarter of Fiscal Year 2001. The Company believes that its capital investment in this unique travel company may provide for future capital appreciation. SYBR does not manage ITT and relies on its management for day to day operations. ITT provides travel packages including cruises and hotel deals solely for airline employees. ITT is believed to be the largest company in this sector of the travel industry. -24- SYBR has also established strategic alliances with media and technology partners in a way that minimizes cash outlay by offering equity in SYBR for media and technology credits. With such transactions not only does SYBR conserve its cash assets but also it gains the interest of important media partners. 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 related 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. -25- RESULTS OF OPERATIONS Results Of Operations For The Year Ended December 31,2001 as Compared to the Year Ended December 31, 2000 The Company realized revenues of $24.3 million for the year ended December 31, 2001, a 17% increase from the prior year. PHS Group (Dealbynet) represented $20 million of the total sales; a 21% increase from the prior period. B2C revenues increased 49% to $2.2 million for the year ended December 31, 2001. The only operation that showed a reduction was the traditional hair care distribution business operated by the Company's Proset Division; its sales decreased by 21% to $2.1 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, an expanding market place and less online competition. The reduction in the hair-care business is attributable to an increase in BeautyBuys online business growth, which shares the same products that the traditional hair care business relies upon which is available in allocated supplies. Gross profit has increased to $1,342,000 as compared to $940,000 in fiscal 2000, an increase of 43% for the year ended December 31, 2001. This improvement is attributable to significant margin improvement, especially in the Company's B2C operations. Operating expenses decreased 33% to $5.6 million for the year ended December 31, 2001 as compared to December 31, 2000. The Company believes that the completion of its web site developments and a significant reduction in advertising and marketing expense have resulted in the decrease in operating expenses. The Company plans on increasing its operating expenses commensurate with increased revenues and operating profits. A major portion of operating expenses, totaling $3.4 million, during the year ended December 31, 2001 were non-cash charges and one time charges relating to media, equity, depreciation and amortization entries. Net loss before non-cash charges and one time charges for the year ended December 31, 2001 improved to $908,588 ($0.22 per share) as compared to a net loss before non-cash charges of $960,909 ($0.30 per share) for the same prior period. Net loss for the year ended December 31, 2001 improved by 45% to $4,300,139 (-$1.03 per share) as compared to a net loss of $7,766,823 (-$2.44 per share) for the year ended December 31, 2000. Most of the non cash charges incurred during the years ended December 31, 2001 and 2000 involve depreciation and amortization charges in connection with the Company's website development, media and equity related transactions. -26- The table below outlines the Company's operating performance: 12/31/01 12/31/00 change ---------- --------- -------- Statement of operations data Revenues PHS group (dealbynet) 20,036,232 16,495,662 21.46% Proset 2,144,905 2,719,525 (21.13)% B2C sites (beautybuys and netcigar) 2,166,791 1,449,831 49.45% Total 24,347,928 20,665,018 17.82% Net loss before non-cash charges* (908,588) (960,909) 5.44% Per share before non-cash charges* $ (.2184) $(.3013) 27.51% Non-cash and one time charges * 3,391,551 6,805,914 (50.17)% Net loss (4,300,139) (7,766,823) 44.63% Net loss per common share (1.03) (2.44) 57.79% weighted shares outstanding 4,159,443 3,188,771 30.44% * Non-cash charges include one time charges, media transactions, equity related charges, depreciation and amortization entries for both fiscal years. In fiscal year 2001 non-cash charges totaled $3.4 million, as compared to $6.8 million in fiscal year 2000. Net Profit (loss) before non-cash charges is commonly used in the Company's industry to measure cash flow and liquidity. It is not intended to represent results of operations or cash flows from operating activities determined in accordance with accounting principals generally accepted in the United States of America. -27- LIQUIDITY AND CAPITAL RESOURCES As of December 31, 2001, the Company's current assets have increased 2% from $5.2 million to $5.3 million. The increase is attributed to minor increases in inventory, cash and marketable securities. Working capital decreased by approximately $683,000 to $744,710 at December 31, 2001. The decrease in working capital is attributable to a $300,000 investment in Interline Travel and Tours (ITT) and cash loss of $908,000 for the year ended December 31, 2001. The Company completed a $1 million Private Placement in the third quarter of 2001, in order to increase inventory for the Company's B2B operations. In order to achieve continued growth additional inventory may be needed. The Company plans to explore opportunities for and attempt to gain inventory financing from a potential asset based lender. There are no assurances that the Company will be successful in obtaining such a lender. In the event that the Company does not obtain such a financing source, future growth may be limited. However, maintaining current levels of revenues does not require any external financing. The Company's operating forecasts should not require any major capital transactions, including offerings and/or private placement transactions for the remainder of fiscal 2002 except for merger and/or acquisition transactions. Sales are being financed by GE Capital through a conventional line of credit and the Company maintains a traditional business model that has enabled the Company to grow during the recent "dot-com" consolidation and correction. Furthermore, all of the Company's businesses rely on the marketing and merchandising of nationally branded products together with manufacturers that already spend billions of dollars to build their brands. The manufacturers of grocery products have encouraged DealByNet to use its platform to reduce product distribution costs through logistics. The Company plans to continue to partner with media and technology companies on a media for equity basis. The Company believes that this strategy allows its operating subsidiaries to brand and expand their respective franchises without causing adverse ramifications on the Company's working capital. In addition the Company plans to leverage its media assets to acquire interests in related companies that would complement its expansion strategy Management believes that cost containment, improved financial and operating controls, and a focused sales and marketing effort should provide positive results from operations and cash flows in the near term. Achievement of these goals, however, will be dependent upon the Company's attainment of increased revenues, improved operating costs and trade support levels that are consistent with management's plans. Such operating performance will be subject to financial, economic and other factors beyond its control, and there can be no assurance that the Company's goals will be achieved. Balance Sheet Table 12/31/01 12/31/00 Balance Sheet Data Cash, Marketable Securities (net) and Cash Security deposit $1,784,532 $2,599,719 Working Capital $ 744,710 $1,427,782 Total Assets $8,398,130 $8,840,215 CRITICAL ACCOUNTING POLICIES. ALLOWANCE FOR DOUBTFUL ACCOUNTS. The Company records a provision for doubtful accounts based on specific indentification of its accounts receivable. This involves a degree of judgment based on discussion with the Company's internal sales and marketing groups, cusotmer base and the examination of the financial stability of the Company's customers. There can be no assurance that management's estimates will match actual amounts ultimately written off. During periods of downturn in the market for the Company's products and services or economic recession, a greater degree of risk exists concerning the ultimate collectibility of accounts receivable. VALUATION OF DEFERRED TAX ASSETS. Deferred tax assets and liabilities represent temporary differences between the basis of assets and liabilities for financial reporting purposes and tax purposes. Deferred tax assets are primarily comprised of reserves which have been deducted for financial statement purposes, but have not been deducted for income tax purposes. The Company annually reviews the deferred tax asset accounts to determine if is appears more likely than not that the deferred tax assets will be fully realized. At December 31, 2001, the Company has established a full valuation allowance. -28- CRITICAL ACCOUNTING POLICIES. ALLOWANCE FOR DOUBTFUL ACCOUNTS. The Company records a provision for doubtful accounts based on specific indentification of its accounts receivable. This involves a degree of judgment based on discussion with the Company's internal sales and marketing groups, cusotmer base and the examination of the financial stability of the Company's customers. There can be no assurance that management's estimates will match actual amounts ultimately written off. During periods of downturn in the market for the Company's products and services or economic recession, a greater degree of risk exists concerning the ultimate collectibility of accounts receivable. VALUATION OF DEFERRED TAX ASSETS. Deferred tax assets and liabilities represent temporary differences between the basis of assets and liabilities for financial reporting purposes and tax purposes. Deferred tax assets primarily compised of reserves which have been deducted for financial statement purposes, but have not been deducted for income tax purposes. The Company annually reviews the deferred tax asset accounts to determine if is appears more likely than not that the deferred tax assets will be fully realized. At December 31, 2001, the Company has established a full valuation allowance. VALUATION OF LONG-LIVED ASSETS. The Company reviews its long-lived assets periodically to determine potential impairment by comparing the carrying value of the assets with net cash flows expected to be provided by the operating activities of the business or related products. Should the sum of the expected future net cash flows be less than the carrying value, the Company would determine whether an impairment loss should be recognized. An impairment loss would be measured by comparing the amount by which the carrying value exceeds the fair value of the asset based on the discounted cash flows expected to be generated by the asset. RECENTLY ISSUED ACCOUNTING ANNOUNCEMENTS. In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 modifies the rules for accounting for the impairment or disposal of long-lived assets. The new rules are effective for the Company as of January 1, 2002. Management does not believe that the impact of adopting SFAS No. 144 will have a material effect on the Company's consolidated financial statements. SEASONALITY 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. -29- 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. These statements relate to future events or the Company's future financial performance and include, but are not limited to, statements concerning: The anticipated benefits and risks of the Company's key strategic partnerships, business relationships and acquisitions; The Company's ability to attract and retain customers; The anticipated benefits and risks associated with the Company's business strategy, including those relating to its distribution and fulfillment strategy and its current and future product and service offerings; The Company's future operating results and the future value of its common stock; The anticipated size or trends of the market segments in which the Company competes and the anticipated competition in those markets; Potential government regulation; and The Company's future capital requirements and its ability to satisfy its capital needs. Furthermore, in some cases, you can identify forward-looking statements by terminology such as may, will, could, should, expect, plan, intend, anticipate, believe, estimate, predict, potential or continue, the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. Factors that could cause such differences include, but are not limited to, those identified herein and other risks included from time to time in the Company's other Securities and Exchange Commission ("SEC") reports and press releases, copies of which are available from the Company upon request. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, levels of activity, performance or achievements. Moreover the Company assumes no responsibility for the accuracy and completeness of the forward-looking statements to conform such statements to actual results or to changes in its expectations. In addition to the other information in this Form 10-KSB, the following risk factors should be carefully considered in evaluating the Company business because these factors may have a significant impact on the Company's business, operating results and financial condition. As a result of the risk factors discussed below and elsewhere in this Form 10-KSB and the risks discussed in the Company's other SEC filings, actual results could differ materially from those projected in any forward-looking statements. 1. THE COMPANY HAS INCURRED OPERATING LOSSES. While it is the Company's goal to achieve operating cash flow profits during 2002, the Company has experienced losses and negative cash flow in the past and, even though the Company has achieved 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/or other similar 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 relatively 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. -30- 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. 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 should 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 in the recent past been questioned, the focus being on the market quotes for the Company's stock, the current bid price having for a time been reduced 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, 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 -31- 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 except for limited periods of time 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 susceptibility to market deficiencies is in a much lessened state then in years past. -32- 9. RISKS OF BUSINESS DEVELOPMENT. Because still the lines of product and product distribution established for the Company are relatively new and different from its historical non-internet product distribution business, the Company's operations in these areas should continue to be considered subject to all of the risks inherent in a new business enterprise, including the absence of an appreciable operating history and the expense of new product development and uncertainties on demand and logistics of delivery and other satisfaction of customer demands. 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 and will likely be a drain on Company capital if revenue and revenue collection does not keep pace with Company expenses. There can be no assurance as to the continued availability of funds from any 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 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. -33- 11.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 may likely 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. Although, except for warning labeling and smoke free facilities, current legislation and regulation focuses on cigarette smoking and sales, there is no assurance that the scope of legislation will not be expanded in the future to encompass cigars as well. 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. These restrictions generally do not distinguish between cigarettes and cigars. These restrictions and future restrictions of a similar nature have and likely will continue to have an adverse effect on the Company's sales or operations because of resulting difficulty placed upon advertising and sale of tobacco products, such as restrictions and in many cases prohibition of counter access to or display of premium handmade cigars, and/or decisions by retailers not to advertise for sale and in many cases to sell tobacco products because of public pressure to stop the selling of tobacco products. Numerous proposals also have been and are being considered at the state and local levels, in addition to federal regulations, to restrict smoking in certain public areas, regulating point of sale placement and promotions of tobacco products and requiring warning labels. -34- 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(albeit focusing primarily on cigarette smoking) 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). -35- 12. 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. 13. POTENTIAL LIABILITY FOR CONTENT ON THE COMPANY'S WEB SITE. Because the Company posts product information and other content on its Web sites, 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 other Internet content distributors. In addition, the Company could be exposed to liability with respect to the unauthorized duplication of content or unauthorized use of other parties' proprietary technology or infiltration into the Company's system by unauthorized personnel. 14. 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 may be held liable for fraudulent credit card transactions where it does not obtain a cardholder's signature, a frequent practice in internet sales. 15. 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. -36- 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 and/or potential customer continued preferences for more traditional see and touch purchasing. 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 and hopeful continued shifting of potential customers shopping preferences to the internet. 16.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. -37- 17. 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 vast majority of 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. 18. 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 because of or become saturated with competitors, many of which may offer lower prices or broader distribution. The Company is also highly dependant on internet sales which require interest of potential suppliers in the internet mode of product purchasing. Some potential suppliers 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 thus limiting availability of product mix made available by the Company. If the Company cannot continue to bring new customers to its sites or maintain its existing customer base or attract listing of a mixture of product, 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. -38- 19. 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 enter the e-commerce market, and new competitors enter the market. 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 update or introduce new market pricing formats, selling techniques and/or other mechanics and administrative tools and formats for internet sales consistent with current technology 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. -39- 20. 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. 21. 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 discovered 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. 22. 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 trademarks 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 an intellectual property right of which it is unaware, or there may be applications to protect intellectual property rights 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 and/or utilize 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 and attention 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 the Company's inability to serve customers or from increases in costs to license third-party technologies. -40- 23. 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 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. 24. 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's reputation and expose it to a risk of loss or litigation and potential liability. 25. 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. -41- 26. 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. 27. 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 complementary or strategic 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 new acquisitions. They may not be able to identify, negotiate or finance any future acquisition successfully. Even if the Company does 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 anticipated benefits of any acquisition may not be realized or may depend on the continued service of acquired personnel who could choose to leave. 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 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. 28. THE COMPANY'S SUCCESS DEPENDS ON THE CONTINUED GROWTH OF THE INTERNET AND ONLINE COMMERCE. The Company's future revenues and profits depend to a large extent 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 relatively 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. 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. -42- 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 or be adequately available; - alternative-purchasing solutions may be implemented; - buyers may dislike the reduction in the human contact inherent in traditional purchasing methods; - 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. 29. 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. -43- 30. 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. The Company does not sell personal user information regarding its customers. 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. -44- 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. The Company is not aware of any recent related legislation not specifically mentioned herein but there can be no assurance that future government regulation will not be enacted further restricting use of the internet that might adversely affect the Company's business. -45- 31. 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 through the Company's internet websites. The Internet Tax Freedom Act of 1998, (extended through November 2003), prohibits the imposition of taxes on electronic commerce by United States federal and state taxing authorities. However, 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 and not in conflict with federal prohibitions, could substantially impair the growth of electronic commerce, and could adversely affect the Company's 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 should collect sales or other taxes on the sale of merchandise could impair its revenues and its ability to acquire and retain customers. 32. THERE MAY BE SIGNIFICANT SECURITY RISKS AND PRIVACY CONCERNS RELATING TO ONLINE COMMERCE. A significant barrier to online commerce and communications is the secure transmission of confidential information over public networks. A compromise or breach of the technology used to protect the Company's customers' and their end-users' transaction data could result from, among other things, advances in computer capabilities, new discoveries in the field of cryptography, or other events or developments. Any such compromise could have a material adverse effect on the Company's reputation and, therefore, on its business, results of operations and financial condition. Furthermore, a party who is able to circumvent the Company's security measures could misappropriate proprietary information or cause interruptions in its operations. The Company may be required to expend significant capital and other resources to protect against security breaches or to alleviate problems caused by such breaches. Concerns over the security of transactions conducted on the Internet and other online services and the privacy of users may also inhibit the growth of the Internet 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. 33. IF THE COMPANY'S FULFILLMENT CENTERS ARE NOT EFFECTIVELY OPERATED THE COMPANY'S BUSINESS MAY BE ADVERSELY AFFECTED. If the Company does not successfully operate its fulfillment centers such could significantly limit the Company's ability to meet customers demands, which would likely result in diminished revenues, adversely affecting the Company's business. Because it is difficult to predict sales increases the Company may not manage its facilities in an optimal way which may result in excess inventory, warehousing, fulfillment and distribution capacity having an adverse impact on working capital of the Company, or the lack of sufficiency in such areas causing delays in fulfillment of customer orders adversely affecting customer confidence and loyalty. -46- 34. 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 its development plans; - the demand for its 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. The Company's stock pricing has fluctuated significantly in the past and there is no assurance such trend may not continue in the future. ITEM 7. FINANCIAL STATEMENTS The following financial statements of the Company are contained in this Report on the pages indicated: Page ---- Report of Independent Certified Public Accountants: Grant Thornton LLP F-2 Report of Independent Certified Public Accountants: BDO Seidman LLP F-3 Consolidated Balance Sheet as of December 31, 2001 F-4 - F-5 Consolidated Statements of Operations for the Years Ended December 31, 2001 and 2000 F-6 Consolidated Statement of Changes in Stockholders' Equity for the Years Ended December 31, 2001 and 2000 F-7 - F-8 Consolidated Statements of Cash Flows for the Years Ended December 31, 2001 and 2000 F-9 - F-10 Notes to Consolidated Financial Statements F-11 - F-30 -47- ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE BDO Seidman LLP was previously the principal accountants for Synergy Brands, Inc. ("the Registrant"). On January 22, 2002, that firm's appointment as principal accountants was terminated by the Registrant and Grant Thornton LLP was engaged as principal accountants. The decision to change accountants was approved by the Board of Directors of the Registrant. In connection with the audits of the two fiscal years ended December 31, 2000, and the subsequent interim period through January 22, 2002, there were no disagreements with BDO Seidman LLP or Belew Averitt LLP, whose practice was combined with BDO Seidman LLP, on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements if not resolved to their satisfaction would have caused them to make reference in connection with their opinion to the subject matter of the disagreement. The audit report of BDO Seidman LLP on the consolidated financial statements of the Registrant as of and for the year ended December 31, 2000, did not contain any adverse opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope, or accounting principles. The audit report of Belew Averitt LLP on the consolidated financial statements of the Registrant as of and for the year ended December 31, 1999, did not contain any adverse opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope, or accounting principles. During the two years ended December 31, 2000 and the subsequent interim period preceding the termination of BDO Seidman LLP on January 22, 2002, no reportable events occurred in connection with the relationship between BDO Seidman LLP, Belew Averitt LLP and the Registrant. PART III The information required by items 9-12 are omitted pursuant to general instruction G(3) to form 10K. The Company has included this information in its proxy statement to be mailed and filed with the Commission on or before April 30, 2002. The annual meeting is scheduled to be in June 2002. Such Proxy Statement expected to be filed with the Commission by April 30, 2002 is incorporated herein by reference. ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K 1. (a) Exhibits: See Index to Exhibits 2. Reports on Form 8-K There were no reports on Form 8-K filed during the fourth quarter of 2001. However the Company did file January 30, 2002 on Form 8-K notice of their change in accountants with an effective date of January 22, 2002. 3. Financial Statement Schedules none -48- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities 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. by /s/ Mair Faibish -------------------------------- Mair Faibish Chairman of the Board Dated: April 1, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. by /s/ Mair Faibish ---------------------------------- Mair Faibish Chairman of the Board Signed: April 1, 2002 by /s/ Mitchell Gerstein ---------------------------------- Mitchell Gerstein, Director Chief Financial Officer Signed: April 1, 2002 -49- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Synergy Brands, Inc. We have audited the accompanying consolidated balance sheet of Synergy Brands, Inc. and Subsidiaries (the "Company") as of December 31, 2001, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Synergy Brands, Inc. and Subsidiaries as of December 31, 2001, and the consolidated results of their operations and their consolidated cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. /s/ GRANT THORNTON LLP Melville, New York March 5, 2002 -F2- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors Synergy Brands, Inc. We have audited the accompanying consolidated statements of operations, changes in stockholders' equity and cash flows for the year ended December 31, 2000 of Synergy Brands, Inc. and Subsidiaries (collectively, the Company) These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of their operations and their cash flow for the year ended December 31, 2000 of Synergy Brands, Inc. and Subsidiaries, in conformity with accounting principles generally accepted in the United States of America. Dallas, Texas February 28, 2001 /s/ BDO SEIDMAN LLP -F3- Synergy Brands, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEET December 31, 2001 ASSETS
CURRENT ASSETS Cash and cash equivalents $ 611,316 Collateral security deposit 658,542 Marketable securities 1,731,407 Accounts receivable, less allowance for doubtful accounts of $50,220 541,625 Inventory 1,340,171 Related party note receivable 44,750 Prepaid assets 386,186 ----------- Total current assets 5,313,997 PROPERTY AND EQUIPMENT, NET 577,849 OTHER ASSETS 309,577 WEB SITE DEVELOPMENT COSTS, net of accumulated amortization of $304,461 625,018 TRADE NAMES AND CUSTOMER LIST, net of accumulated amortization of $1,122,600 1,571,689 ----------- $8,398,130 ===========
The accompanying notes are an integral part of this statement. -F4- Synergy Brands, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEET December 31, 2001 LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES Line of credit $ 398,337 Note payable to stockholder 555,763 Accounts payable 2,120,729 Accrued expenses 277,725 Due to broker 1,216,733 ----------- Total current liabilities 4,569,287 OTHER LIABILITIES 592,689 COMMITMENTS AND CONTINGENCIES MINORITY INTEREST 209,125 STOCKHOLDERS' EQUITY Class A preferred stock - $.001 par value; 100,000 shares authorized and outstanding; liquidation preference of $10.50 per share 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; 4,950,484 shares outstanding 4,950 Additional paid-in capital 34,791,585 Deficit (30,609,537) Accumulated other comprehensive income 1,685 Stockholders' notes receivable (115,629) Stockholder's advertising and in-kind services receivable, net of reserve of $500,000 (794,990) ----------- 3,278,164 Less treasury stock, at cost, 63,504 shares (251,135) ----------- 3,027,029 ----------- $ 8,398,130 ===========
The accompanying notes are an integral part of this statement. -F5- Synergy Brands, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS Year ended December 31,
2001 2000 ----------- ----------- Net sales $24,347,928 $20,665,018 ----------- ----------- Cost of sales Cost of product 22,347,887 19,391,844 Shipping and handling costs 657,793 332,845 ----------- ----------- 23,005,680 19,724,689 ----------- ----------- Gross profit 1,342,248 940,329 Operating expenses Advertising and promotional 1,501,267 2,547,891 Development costs 16,133 632,696 General and administrative 3,072,900 4,419,753 Depreciation and amortization 1,004,553 663,146 ----------- ----------- 5,594,853 8,263,486 ----------- ----------- Operating loss (4,252,605) (7,323,157) Other income (expense) Interest income 128,189 66,183 Other expenses (461,401) (55,676) Interest and financing expenses (154,745) (178,964) Dividends on preferred stock of subsidiary (24,500) (24,500) ----------- ----------- (512,457) (192,957) ----------- ----------- Loss from continuing operations before minority Interest and income taxes (4,765,062) (7,516,114) Minority interest in loss - 266,258 ----------- ----------- Loss from continuing operations before income tax (4,765,062) (7,249,856) Income tax expense 21,865 21,433 ----------- ----------- Loss from continuing operations (4,786,927) (7,271,289) Discontinued operations Loss on discontinued operations of PCW, net of applicable income tax benefit of $0 - (495,534) ----------- ----------- Loss from operations before extraordinary items (4,786,927) (7,766,823) Extraordinary items, net 486,788 - ----------- ----------- NET LOSS $ (4,300,139) $ (7,766,823) =========== =========== Basic and diluted loss per common share Loss from continuing operations $(1.15) $(2.28) Discontinued operations - (.16) Extraordinary items .12 ----------- ----------- Net loss per common share $(1.03) $(2.44) =========== ===========
The accompanying notes are an integral part of these statements. -F6- Synergy Brands, Inc. and Subsidiaries CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY Years ended December 31, 2001 and 2000
Accumulated Class A Additional other Preferred stock Common stock paid-in comprehensive Shares Amount Shares Amount capital Deficit income ------- ------ --------- ------- ----------- ------------- ------------- Balance at January 1, 2000 100,000 $100 2,691,102 $2,691 $25,230,196 $(18,542,575) Issuance of common stock 307,320 307 1,669,668 Common stock issued in connection with compensation plan 353,877 354 2,660,548 Common stock issued in connection with compensation plan and cashless stock exchange 31,185 31 97,798 Common stock and warrants issued in exchange for minority interest of subsidiary and advertising credits, net of commissions 100,000 100 2,515,042 Advertising credits sold, net of commissions Common stock issued in connection with compensation plan for notes receivable from stockholders 42,000 42 102,458 Proceeds from stockholder receivables Advertising credits utilized Net loss (7,766,823) ------- ------ --------- ------- ----------- ------------- ------------- Comprehensive loss Balance at December 31, 2000 100,000 100 3,525,484 3,525 32,275,710 (26,309,398) - (carried forward)
-F7- Synergy Brands, Inc. and Subsidiaries CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY Years ended December 31, 2001 and 2000 (CONTINUED)
Stockholders' advertising Stockholders' and in-kind Total Treasury notes services stockholders' Comprehensive Stock receivable receivable equity loss ---------- ------------ ------------- ------------ -------------- Balance at January 1, 2000 $(167,500) $(331,750) $(3,000,000) $3,191,162 Issuance of common stock 1,669,975 Common stock issued in connection with compensation plan 2,660,902 Common stock issued in connection with compensation plan and cashless stock exchange 97,829 Common stock and warrants issued in exchange for minority interest of subsidiary and advertising credits, net of commissions (2,660,000) (144,858) Advertising credits sold, net of commissions 2,660,000 2,660,000 Common stock issued in connection with compensation plan for notes receivable from stockholders (102,500) Proceeds from stockholder receivables 318,621 318,621 Advertising credits utilized 1,592,565 1,592,565 Net loss (7,766,823) $(7,766,823) ---------- ------------ ------------- ------------ ------------ Comprehensive loss $(7,766,823) ============= Balance at December 31, 2000 (167,500) (115,629) (1,407,435) 4,279,373 (carried forward)
-F7- Synergy Brands, Inc. and Subsidiaries CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY (continued) Years ended December 31, 2001 and 2000
Accumulated Class A Additional other Preferred stock Common stock paid-in comprehensive Shares Amount Shares Amount capital Deficit income ------- ------ --------- ------- ----------- ------------ ------------- Balance at December 31, 2000 100,000 $100 3,525,484 $3,525 $32,275,710 $(26,309,398) $ (brought forward) Issuance of common stock pursuant to a private offering 800,000 800 999,200 Costs incurred in conjunction with private offering of common stock (132,200) Common stock issued in connection with compensation plan 325,000 325 893,125 Issuance of common stock and warrants to guarantee a line of credit 200,000 200 439,800 Issuance of warrants as payment for services 191,050 Exercise of warrants 100,000 100 124,900 Purchase of treasury stock Advertising credits utilized Provision for advertising receivable Unrealized gain on marketable securities 1,685 Net loss (4,300,139) ------- ------ --------- ------- ----------- ------------ ------------- Comprehensive loss Balance at December 31, 2001 100,000 $100 4,950,484 $4,950 $34,791,585 $(30,609,537) $1,685 ======= ====== ========= ======= =========== ============ =============
The accompanying notes are an integral part of this statement. -F8- Synergy Brands, Inc. and Subsidiaries CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (continued) Years ended December 31, 2001 and 2000 (CONTINUED)
Stockholders' advertising and Stockholders' in-kind Total Treasury notes services stockholders' Comprehensive stock receivable receivable equity loss ---------- ------------- ----------- -------------- ------------- Balance at December 31, 2000 $(167,500) $(115,629) $(1,407,435) $4,279,373 (brought forward) Issuance of common stock pursuant to a private offering 1,000,000 Costs incurred in conjunction with private offering of common stock (132,200) Common stock issued in connection with compensation plan 893,450 Issuance of common stock and warrants to guarantee a line of credit 440,000 Issuance of warrants as payment for services 191,050 Exercise of warrants 125,000 Purchase of treasury stock (83,635) (83,635) Advertising credits utilized 112,445 112,445 Provision for advertising receivable 500,000 500,000 Unrealized gain on marketable securities 1,685 $ 1,685 Net loss (4,300,139) (4,300,139) ---------- ------------- ----------- ------------ ------------- Comprehensive loss $(4,298,454) ============= Balance at December 31, 2001 $(251,135) (115,629) (794,990) 3,027,029 ========== ============= =========== ============ =============
The accompanying notes are an integral part of this statement. -F8- Synergy Brands, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31,
2001 2000 -------------- ----------- Cash flows from operating activities Net loss $ (4,300,139) $(7,766,823) Adjustments to reconcile net loss to net cash provided by (used) in operating activities Extraordinary gain (486,788) Depreciation and amortization 1,004,553 663,146 Provision for doubtful accounts 25,000 31,417 Provision for advertising receivable 500,000 - Utilization of advertising credits 112,445 1,592,565 Gain on sale of marketable securities 7,874 - Dividends on preferred stock of subsidiary 24,500 24,500 Operating expenses paid with common stock and warrants 493,350 2,353,431 Common stock and warrants issued to guarantee line of credit 440,000 - Minority interest in loss (266,258) Changes in operating assets and liabilities Net (increase) decrease in Accounts receivable 343,528 (164,218) Inventory (152,388) 680,789 Trade credits receivable 2,660,000 Prepaid, related party note receivable and other assets 71,086 (43,425) Net increase (decrease) in Accounts payable, accrued expenses and other current liabilities 1,536,670 (726,033) Other liabilities 592,689 -------------- ----------- Net cash provided by (used in) operating activities 212,380 (960,909) Cash flows from investing activities Purchase of marketable securities (4,221,152) Proceeds from sale of marketable securities 2,483,556 Purchase of property and equipment (118,038) (52,580) Payment of collateral security deposit (300,000) Refund of collateral security deposit 38,069 Purchase of web site (32,166) (405,157) Investment in equity affiliate (290,880) Proceeds of note receivable from shareholders - 318,621 -------------- ----------- Net cash used in investing activities (2,478,680) (101,047)
-F9- Synergy Brands, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) Year ended December 31,
2001 2000 -------------- ------------ Cash flows from financing activities Borrowings under line of credit $ 9,782,032 $ 3,517,288 Repayments under line of credit (10,047,694) (2,912,526) Proceeds from issuance of common stock 1,000,000 1,535,275 Costs incurred in conjunction with private placement (132,200) Proceeds from the exercise of stock purchase warrants 125,000 Purchase of treasury stock (83,635) - -------------- ------------ Net cash provided by financing activities 643,503 2,140,037 -------------- ------------ NET (DECREASE) INCREASE IN CASH (1,622,797) 1,078,081 Cash and cash equivalents, beginning of year 2,234,113 1,156,032 -------------- ------------ Cash and cash equivalents, end of year $ 611,316 $ 2,234,113 ============== ============ Supplemental disclosures of cash flow information: Cash paid during the year for Interest $ 108,000 $ 190,000 ============== ============ Income taxes paid $ 22,000 $ 22,000 ============== ============ Supplemental disclosures of noncash operating, investing and financing activities: Commissions paid through the issuance of common stock $ 591,150 ============== Unrealized gains on marketable securities $ 1,685 ============== Common stock issued for notes receivable $ 102,500 ============ Common stock issued for prepaid assets and web site development $ 540,000 ============ Common stock issued in exchange for minority interest of subsidiary, web site development, and advertising credits, net of commissions $ 2,515,142 ============
The accompanying notes are an integral part of these statements. -F10- Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 and 2000 NOTE A - DESCRIPTION OF THE BUSINESS, LIQUIDITY AND CAPITAL RESOURCES Synergy Brands, Inc. and its subsidiaries (collectively, "Synergy" or the "Company") is engaged in the distribution business. In addition, the Company develops and operates 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 businesses (business to business). Synergy was incorporated on September 26, 1988 in the state of Delaware. At December 31, 2001, the Company had cash, cash equivalents and a collateral security deposits of approximately $1,269,900, net marketable securities, of approximately $514,700, working capital of approximately $745,000 and an accumulated deficit of approximately $30,610,000. The Company incurred a loss of approximately $4,300,000 during the year ended December 31, 2001. As discussed in Note I, the Company has a line of credit available to finance certain sales. In addition, the Company completed a $1 million Private Placement in the third quarter of 2001. The proceeds from this transaction were used to increase inventory for the Company's B2B operations. In order to achieve continued growth, additional inventory may be needed. The Company plans to explore opportunities for and attempt to gain inventory financing from a potential asset-based lender. There are no assurances that the Company will be successful in obtaining such a lender. In the event that the Company does not obtain such a financing source, future growth may be limited. Management believes that cost containment, improved financial and operating controls, and a focused sales and marketing effort should provide positive results from operations and cash flows in the near term. Achievement of these goals, however, will be dependent upon the Company's attainment of increased revenues, improved operating costs and trade support levels that are consistent with management's plans. Such operating performance will be subject to financial, economic and other factors beyond its control, and there can be no assurance that the Company's goals will be achieved. NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements is as follows: F-11- Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2001 and 2000 NOTE B (continued) 1. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Synergy, its wholly-owned subsidiaries and its majority-owned subsidiary (collectively, the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation. The equity method of accounting is used for investments in 50% or less owned companies over which the Company has the ability to exercise significant influence. 2. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity, at the purchase date, of three months or less to be cash equivalents. 3. MARKETABLE SECURITIES The Company determines the appropriate classification of securities at the time of purchase and reassesses the appropriateness of the classification at each reporting date. At December 31, 2001, all marketable securities held by the Company have been classified as available-for-sale and, as a result, are stated at fair value. Unrealized gains and losses on available-for-sale securities are recorded as a separate component of stockholders' equity. Realized gains and losses on the sale of securities, as determined on a specific identification basis, are included in the Consolidated Statements of Operations. 4. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, marketable securities 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 December 31, 2001 totaled approximately $446,000. Marketable securities are potentially subject to concentration of credit risk, but such risk is limited due to such amounts being invested in investment grade securities. -F12- Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2001 and 2000 NOTE B (continued) 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. 5. CONCENTRATION OF BUSINESS RISK During the years ended December 31, 2001 and 2000, the Company purchased over 85% and 71%, respectively, of its products from one supplier. If the Company were unable to maintain this relationship it might have a material impact on future operations. During the years ended December 31, 2001 and 2000, sales to one customer accounted for 22% and 17% of the Company's total sales, respectively, and 23% of accounts receivable at December 31, 2001. These concentrations relate to the Company's B2B segment. (See Note Q.) 6. 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. 7. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation of property and equipment is computed using the straight-line method over the assets' estimated useful lives, 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. 8. WEB SITE DEVELOPMENT COSTS In March 2000, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board reached a consensus on EITF Issue No. 00-2, "Accounting for Web Site Development Costs." This consensus provides guidance on what types of costs incurred to develop a web site -F13- Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2001 and 2000 NOTE B (continued) 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 during the year ended December 31, 2001, and the Company began to amortize these costs using the straight-line method over the estimated useful lives of the web sites, not to exceed 3 years. 9. 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. The Company re-evaluates the carrying value of these intangible assets and/or when factors indicating impairment are present, using an undiscounted operating cash flow assumption. 10. 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 writes down the asset to its fair value based on the present value of estimated future cash flows. 11. REVENUE RECOGNITION The Company recognizes revenue upon shipment of goods when title and risk of loss passes to the customer. The Company issues credits to the customer for any returned items at the time the returned products are received. Net sales include 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 costs of products sold to customers. 12. ADVERTISING The Company expenses advertising and promotional costs as incurred. -F14- Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2001 and 2000 NOTE B (continued) 13. SHIPPING AND HANDLING COSTS Pursuant to EITF 00-10, "Accounting for Shipping and Handling Fees and Costs," the Company includes fees billed to a customer relating to shipping and handling costs in net sales. All other shipping and handling expenses incurred by the Company are included in cost of sales. 14. INCOME TAXES Deferred income taxes are recognized for temporary differences between financial statement and income tax bases of assets and liabilities and net operating loss carryforwards for which income tax expenses or benefits are expected to be realized in future years. A valuation allowance is established if it is more likely than not that all, or some portion, of deferred tax assets will not be realized. 15. STOCK SPLIT On April 19, 2001, the Company's Board of Directors authorized a 1-for-5 reverse split of its common stock. Per share amounts in the accompanying consolidated financial statements have been retroactively adjusted for the reverse split. 16. BASIC AND DILUTED LOSS PER SHARE Basic and diluted loss per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding during each period. The incremental shares from assumed exercises of stock options and warrants are not included in the calculation of diluted loss per share since their effect would be antidilutive. 17. STOCK-BASED COMPENSATION PLANS Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation," 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 -F15- Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2001 and 2000 NOTE B (continued) to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued to Employees," 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. 18. SEGMENT INFORMATION Segment information is presented in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This standard is based on a management approach, which requires segmentation based upon the Company's internal organization that is used for making operating decisions and assessing performance as the source of the Company's reportable operating segments. SFAS No. 131 also requires disclosures about products and services, geographic areas and major customers. 19. RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARDS BOARD In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 modifies the rules for accounting for the impairment or disposal of long-lived assets. The new rules are effective for the Company on January 1, 2002. Management does not believe that the impact of adopting SFAS No. 144 will have a material effect on the Company's consolidated financial statements. 20. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may vary from management's estimates. 21. RECLASSIFICATIONS Certain 2000 amounts have been reclassified to conform to the 2001 presentation. -F16- Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2001 and 2000 NOTE C - FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of cash and cash equivalents, collateral security deposit, marketable securities and accounts receivable and accounts payable approximates fair value due to the short-term maturities of the instruments. The carrying amounts of borrowings under the line of credit agreement and the note payable to stockholder approximate their fair values. NOTE D - COLLATERAL SECURITY DEPOSIT At December 31, 2001, the Company had a security deposit with a major supplier aggregating approximately $658,500, which serves as collateral for credit purchases made by the Company from the supplier. NOTE E - MARKETABLE SECURITIES At December 31, 2001, the aggregate market value of marketable securities was $1,731,407, while the aggregate cost of such securities was $1,729,722. Unrealized holding gains at December 31, 2001 were $1,685 on a net of tax basis. Marketable securities consist of the following at December 31, 2001: Available-for-sale securities: Corporate equities $ 373,990 Mutual funds 393,357 Government bonds 964,060 ----------- $ 1,731,407 =========== Proceeds from the sale of available-for-sale securities and the resulting net realized gains included in the determination of net loss are as follows: Available-for-sale securities: Proceeds $2,483,556 Net realized gains $ 7,300 -F17- Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2001 and 2000 NOTE F - PROPERTY AND EQUIPMENT Property and equipment as of December 31, 2001 consisted of the following: Office equipment $ 165,384 Furniture and fixtures 231,265 Leasehold improvements 407,919 ----------- 804,568 Less accumulated depreciation and amortization (226,719) ----------- $ 577,849 =========== Depreciation and amortization expense for the years ended December 31, 2001 and 2000 was approximately $161,244 and $119,019, respectively. NOTE G - INVENTORY Inventory as of December 31, 2001 consisted of the following: Grocery, health and beauty products $ 844,092 Tobacco finished goods 496,079 ----------- $ 1,340,171 =========== NOTE H - OTHER ASSETS Other assets consist of the following at December 31, 2001: Investment $ 292,463 Other 17,114 ----------- $ 309,577 =========== In December 2001, the Company made an investment of approximately 20% in the outstanding common stock of an investee. The Company also purchased 288,000 shares of nonvoting redeemable preferred stock of the investee. The aggregate cost of the investment was $290,880. The Company accounts for this investment under the equity method. -F18- Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2001 and 2000 NOTE I - LINE OF CREDIT AGREEMENT AND NOTE PAYABLE TO STOCKHOLDER On April 17, 2000, the Company entered into a line of credit agreement with a financial institution (the "Lender") which may be terminated by the Lender or by the Company, provided 60 days' written notice is given. Under the terms of the agreement, the Company has the option to borrow against eligible receivables, with the Lender on a full recourse basis. The Company has the ability to obtain advances against eligible receivables up to 90% of the face amount of the eligible receivables. The agreement calls for a 0.25% fee on accounts receivable invoices which are borrowed against and a per annum rate equal to the prime rate plus 2% (6.75% at December 31, 2001) on funds borrowed against the eligible receivables. The Company had $210,996 available for advances under the agreement at December 31, 2001. Obligations due to the Lender under the Agreement are collateralized by a continuing security interest in all of the Company's accounts receivable, notes receivable, chattel paper, documents, instruments, inventory and general intangibles now existing or hereafter acquired of every kind wherever located, together with merchandise returns and goods represented thereby, and all proceeds there from of every kind and nature. As of December 31, 2001, the Company had outstanding borrowings from a stockholder totaling $555,763. This money was borrowed under an unsecured promissory notes bearing interest at 7.5%. These notes are due on December 31, 2002. NOTE J - MINORITY INTEREST Premium Cigar Wrappers, Inc. ("PCW") was incorporated in October 1997 with 7,750 shares of authorized $.001 par value common stock for the purpose of producing premium cigar wrappers in the Dominican Republic. PCW had 1,000 shares of common stock outstanding, which were issued at par value. The Company owned 66% of the common stock and an outside investor owns the minority interest. In addition, 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 $104,125 of preferred stock dividends payable at December 31, 2001. The Company's portion of the dividend has been eliminated in consolidation. In the event of dissolution of PCW, the holders of the preferred shares are entitled to receive $60 per share together with all accumulated dividends, before any amounts can be distributed to the common stockholders. The shares are convertible only at the option of PCW at $120 per share. -F19- Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2001 and 2000 NOTE J (continued) During the year ended December 31, 2000, the Company abandoned the operations of PCW (see Note O). In June 1999, the Company formed BeautyBuys.com ("BB") and in November 1999 BB 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 December 31, 2001, BB had 9,000,000 shares of Class A common stock and 900,000 shares of Class B common stock outstanding. The Company owns all of the Class A common stock and the Class B common stock was formerly owned by the minority interest. In December 2000, the minority interest was exchanged for Synergy stock. For financial reporting purposes, 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 was reflected in the minority interest liability until December 2000, when the minority interest was exchanged for Synergy stock. (See Note K). NOTE K - STOCKHOLDERS' EQUITY The Company has 100,000 authorized and outstanding shares of Class A preferred stock with a par value of $.001; 13-to-one voting rights; cumulative dividends at $2.20 per annum per share before common stock; liquidation of $10.50 per share and before common stock and redemption at option of Company at $10.50 per share. During the year ended December 31, 2001, the Company repurchased 63,224 shares of treasury stock for an aggregate amount of $83,635. At December 31, 2001, Synergy had issued outstanding warrants to Sinclair Broadcast Group ("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 December 31, 2001, Synergy had issued outstanding restricted cashless warrants to purchase 90,000 shares of common stock ranging from $7.50 to $10 per share. These warrants expire in 2005. At December 31, 2001, the Company had outstanding 25,000 warrants to purchase common stock at $3.00 per share that expire in May 2004. The -F20- Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2001 and 2000 NOTE K (continued) Company has also issued 200,000 cashless warrants to purchase 100,000 shares of common stock at $3.00 and 100,000 shares of common stock at $5.00. These warrants expire in September 2002. The fair value of all warrants issued as payment for services in the 2001, as estimated using the Black-Scholes option-pricing model, of $191,050 was recorded as a charge to operations in the accompanying consolidated statement of operations. In September 2001, the Company raised $1,000,000 in a private offering by issuing 800,000 restricted shares of its common stock and warrants to purchase 200,000 shares of common stock at $1.25 per share. The Company incurred $132,000 in offering expenses in conjunction with the private placement. The Company also issued warrants to purchase 300,000 shares of common stock at $1.25 to investment bankers related to the private offering. All of the warrants issued in conjunction with the private offering expire in September 2006. In July 2001, the Company issued 200,000 shares of its stock and five year warrants to purchase 100,000 shares of common stock at an exercise price of $2.50 per share in connection with a guarantee of a line of credit by a subsidiary of the Company. (See Note N). In April 2001, the Company cancelled 244,889 outstanding cashless warrants in exchange for the forgiveness of $113,129 in shareholder indebtedness to the Company and 100,000 shares of common stock, which were issued in January 2002. On January 2, 2001, Synergy issued 100,000 restricted shares of common stock for services and warrants to purchase 40,000 restricted shares of common stock at $12.50 per share. The warrants expire on July 1, 2003. The fair value of the restricted stock and warrants of $320,800 was recorded as a charge to operations in the accompanying consolidated statement of operations. In November 1999, Synergy entered into a stock purchase agreement with SBG whereby SBG purchased 440,000 shares 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. The Class B -F21- Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2001 and 2000 NOTE K (continued) common shares constitute 50% of the voting power of the common stock issued and outstanding. At December 31, 1999, Synergy owned 9,000,000 shares of Class A common stock and SBG owned 900,000 shares of Class B common stock of BB. Simultaneously with the purchase of the Class B shares, BB and SBG entered into a Class A Common Stock Option Agreement providing for 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 by 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 the $7,000,000 advertising credits to a third party for $2,660,000 in cash and trade credits. Synergy paid a broker $375,000 in cash and the remaining balance with stock valued at $591,150 on January 2, 2001. In 1994, Synergy adopted the 1994 Services and Consulting Compensation Plan (the "Plan"). Under the Plan, as amended, 8,400,000 shares of common stock have been reserved for issuance. Since the inception of the Plan, Synergy has issued 1,391,800 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. -F22- Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2001 and 2000 NOTE K (continued) The following is a summary of such stock option transactions for the years ended December 31, 2001 and 2000 in accordance with the Plan and other restricted stock option agreements: Weighted- Number average of shares exercise price ----------- -------------- Outstanding at January 1, 2000 913,120 $ 6.80 Granted 135,000 14.50 Exercised (148,996) 3.90 Forfeited (4,000) 10.00 ----------- -------------- Outstanding at December 31, 2000 895,124 8.48 Granted Exercised Cancelled/ Forfeited (331,889) 9.25 ----------- -------------- Outstanding at December 31, 2001 563,235 $ 8.03 =========== ============== Option price $ 2.00 to $17.50 ---------------- Available for grant December 31, 2001 6,444,965 =========== December 31, 2000 - =========== The following table summarizes information concerning currently outstanding and exercisable stock options:
Options outstanding Options exercisable --------------------------------------- ------------------------- Weighted Number Average Weighted Number Weighted Outstanding at Remaining Average exercisable at average Ranges of December 31, contractual Exercise December 31, exercise exercise prices 2001 life (years) price 2001 price --------------- ------------- ------------ -------- ------------- ---------- $ 2.00 - $5.00 206,415 2.25 $3.67 206,415 $ 3.67 6.25 - 8.90 175,820 2.37 6.81 175,820 6.81 10.00 - 12.50 54,000 2.13 11.39 54,000 11.39 15.00 - 17.50 127,000 2.62 15.39 127,000 15.39 ------------ ------------- 563,235 563,235 ============ =============
-F23- Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2001 and 2000 NOTE K (continued) The Company applies APB No. 25 in accounting for its stock options. Compensation costs related to options and charged to operations were $0 and $212,650 in 2001 and 2000, respectively. Had compensation costs for the stock options been determined based on the fair value at the grant date consistent with the method of SFAS No. 123, the Company's net loss and per share would have been increased to the pro forma amounts indicated below: 2001 2000 ------------ ------------- Net loss As reported $(4,300,139) $(7,766,823) ============ ============= Pro forma $(4,300,139) $(7,916,423) ============ ============= Net loss per common share As reported $ (1.03) $ (2.44) ============ ============= Pro forma $ (1.03) $ (2.48) ============ ============= The weighted-average fair value at date of grant for options granted during 2000 was $5.06 per option. The weighted-average contractual life of options outstanding at December 31, 2001 was approximately 2.36 years. The fair value of each option grant is estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions used: 2000 ------------ Dividend yield 0% Expected volatility 25% Risk-free rate of return 6.17 - 6.72% Expected life 1 to 5 years The Company has also reserved 100,000 shares for a stock option plan ("Option Plan") for nonemployee, independent directors, which entitles each nonemployee, independent director an option to purchase 10,000 shares of the Company's stock immediately upon election or re-election to the Board of Directors. Options granted under the Option Plan will be at the fair market value on the date of grant, immediately exercisable, and have a term of ten years. The Company had no options outstanding and exercisable and 94,000 shares available for grant at December 31, 2001 at an option price of $1.25 per share. -F24 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2001 and 2000 NOTE L - TRANSACTIONS WITH RELATED PARTIES The Company pays consulting fees to two entities, one of which is owned by the Company's Chairman and Chief Executive Officer and the other is owned by the Company's President and Chief Operating Officer. Consulting fees paid during the years ended December 31, 2001 and 2000 aggregated approximately $172,000 and $129,000, respectively. In addition, at December 31, 2001, there is an amount receivable from the entity that is owned by the Company's Chairman and Chief Executive Officer aggregating $44,750. NOTE M - INCOME TAXES At December 31, 2001, the Company had a net operating loss carryforward of approximately $25,321,000, which, if not utilized, will begin expiring in 2011. During the last three years, issuances of stock have effected an ownership change under Internal Revenue Code Section 382. The ownership change resulting from these stock issuances will likely limit the Company's ability to utilize any net operating loss carryforwards or credits generated before the change in ownership. The components of the deferred tax asset at December 31, 2001 were approximately as follows: Net operating loss carryover $ 8,694,000 Deferred compensation 108,000 Allowance for doubtful accounts 187,000 Inventory 131,000 Capital losses 10,000 Other 53,000 Valuation allowance (9,183,000) ------------ $ - ============ Taxes for the years ended December 31, 2001 and 2000 consisted of the following: 2001 2000 ------- ------- State and local income tax expense $21,865 $21,433 ======= ======= -F25- Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2001 and 2000 NOTE M (continued) A reconciliation of income tax expense computed at the U.S. Federal statutory rate of 34% and the Company's effective tax rate for the years ended December 31, 2001 and 2000 are as follows: 2001 2000 Federal income tax expense at statutory rate (34)% (34)% Increase (decrease) resulting from Increase in valuation allowance 34 34 State and local income taxes, net of Federal Benefit .5 .3 ----- ----- .5 % .3% ===== ===== NOTE N - COMMITMENTS AND CONTINGENCIES 1. LEASE COMMITMENTS The Company leases office and warehouse space in Wilmerding, Pennsylvania, Syosset, New York, Melville, New York, and Miami, Florida under operating leases expiring in July 2002, May 2003, June 2008 and January 2003, respectively. The Company is also leasing vehicles under operating leases expiring in 2004. Future minimum lease payments under noncancelable operating leases as of December 31, 2001 were as follows: Year ending December 31, ------------------------ 2002 $197,643 2003 142,407 2004 107,486 2005 96,980 2006 96,708 Thereafter 153,738 -------- $794,962 ======== Rent expense under operating leases for the years ended December 31, 2001 and 2000 was approximately $252,000 and $213,000, respectively. -F26- Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2001 and 2000 NOTE N (continued) 2. 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 BB'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. 3. DISTRIBUTION AGREEMENTS A wholly-owned subsidiary of the Company, New Era Foods, Inc., maintains a 25-year exclusive worldwide distribution agreement expiring in December 2022, with a Dominican Republic corporation for the sale and distribution of premium handmade cigars manufactured in the Dominican Republic. There is an option to extend the term of the distribution agreement up to an additional 25 years. 4. 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, if any, with respect to these actions will not materially affect the Company's financial position, results of operations or cash flows. 5. GUARANTEE In March 1998, the Company guaranteed a $1,000,000 line-of-credit facility to a Dominican cigar manufacturer, which is owned by a PCW stockholder. The purpose of the line-of-credit is to provide financing to the cigar manufacturer to which PCW will supply cigar wrappers. In July 2001, the Company issued 200,000 shares of its stock and five year warrants to purchase 100,000 shares of common stock at an exercise price of $2.50 per share to satisfy the guarantee and receive brand names as part of the agreement. The fair value of the warrants of $186,000 was recorded as a charge to operations in the accompanying consolidated statement of operations. -F27- Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2001 and 2000 NOTE N (continued) 6. OTHER LIABILITIES Since 1999, the Company has disputed services performed by a vendor and the Company has indicated that its proposed exclusive contract was in violation. The vendor has not sought payment since December 1999. The Company does not believe that it will have to use any current working capital since the vendor services have been disputed. NOTE O - DISCONTINUED OPERATIONS In 2000, the Company abandoned the operations of PCW. Accordingly, PCW is accounted for as a discontinued operation in the accompanying 2000 consolidated financial statements and had no revenues from continued operations in 2000. The liabilities of PCW included in the accompanying consolidated balance sheet as of December 31, 2001 consisted of $209,125 related to the "minority interest." This liability may only be funded by available funds within PCW. NOTE P - EXTRAORDINARY ITEM The Company recorded a $486,788 extraordinary gain as a result of nonperformance by a vendor at June 30, 2001. NOTE Q - 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 December 31, 2001, as shown below: -F28 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2001 and 2000 NOTE Q (continued)
Salon products B2B B2C Total ---------- ----------- ---------- ----------- Revenue 2001 $2,144,905 $20,036,232 $2,166,791 $24,347,928 2000 $2,719,525 $16,495,662 $1,449,831 $20,665,018 Net 2001 (847,351) (864,732) (2,588,056) (4,300,139) Earnings 2000 (1,445,049) (10,624) (6,311,150) (7,766,823) Interest 2001 33,119 65,088 56,538 154,745 Expense 2000 48,337 17,363 113,264 178,964 Depreciation and 2001 526,068 272,559 205,926 1,004,553 amortization 2000 525,784 1,605 135,757 663,146 Discontinued 2001 Operations 2000 (495,534) (495,534) Extraordinary 2001 486,788 486,788 Items 2000 Identifiable 2001 2,437,719 2,344,607 3,615,804 8,398,130 Assets 2000 3,026,477 2,089,808 3,723,930 8,840,215
NOTE R - FOURTH QUARTER ADJUSTMENTS During the year ended December 31, 2001, the Company made fourth quarter adjustments to record the estimated fair value of warrants issued during the year of $377,050 and to record an allowance of $500,000 in connection with advertising credits. During the year ended December 31, 2000, the Company made fourth quarter adjustments to record advertising and promotional expenses of approximately $500,000 and discontinued operations adjustments of approximately $495,600. -F29- Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2001 and 2000 NOTE S - NET LOSS PER SHARE The following data shows the amounts used in computing basic and dilutive earnings per share: 2001 2000 ------------ ------------ Net loss applicable to common stock $(4,300,139) $(7,766,823) ============ ============ Weighted-average number of shares in basic and dilutive EPS 4,159,443 3,188,771 ============ ============ -F30- EXHIBIT INDEX
Exhibit No. Description Page - ----------- ----------- ---- 3.1 Certificate of Incorporation and amendments thereto (1) -- 3.2 By-Laws (2) -- 4 Warrants and debentures defining rights of security holders -- (3) 10.3 Synergy Brands Inc. 1994 Services and Consulting Compensation EX-3.1 Plan, as amended (4) 10.4 Stock Purchase Agreement dated November 23, 1999 by and between -- the Company and Sinclair Broadcast Group Inc. (5) 10.5 Stock Purchase Agreement dated November 23, 1999 between -- BeautyBuys.com Inc., and Sinclair Broadcast Group Inc. (5) 16. Letter on changes in certifying accountant (6) -- 21 Listing of Company Subsidiaries EX-21 99 Listing of Company Intellectual Properties EX-99
(1) Only a copy of the amendment to the Certificate of Incorporation filed April 2001 is included in the Exhibits. The amendments to Certificate of Incorporation filed 7/29/96 and filed 6/24/98 and Certificate of Designation regarding Preferred Stock filed 6/24/98, are incorporated by reference to the exhibits filed to the Form 10K/A of the Company filed 9/3/98. The amendment to the Certificate of Incorporation filed July 2000 is incorporated by reference to the exhibits filed to the form 10KSB/A of the Company filed 8/9/01. The original Certificate of Incorporation and other amendments thereto are incorporated by reference to the exhibits filed to the registration statement of the Company on Form S-1 (File No. 33-83226) filed by the Company with the Commission on August 24, 1994. (2) The amendment to the By-Laws approved by the Company's Board of Directors on March 7, 1997 are incorporated by reference to the exhibits filed to the Form 10K/A of the Company filed 9/3/98. The original By-Laws are incorporated by reference to the exhibits filed to the registration statement of the Company on Form S-1 (File No. 33-83226) filed by the Company with the Commission on August 24, 1994 (3) Copies of outstanding warrants and debentures are incorporated by reference to the exhibits filed to the Form 8-K/A of the Company filed with the Commission (File No. 0-19409) on 2/3/98. Description of rights of Preferred Stock are included in Certificate of Designation regarding Preferred Stock, as amended, and included as exhibit to the Form 10K/A of the Company filed 9/3/98 as well as the amendment to the certificate of incorporation filed in July 2000 and included as an exhibit to the Form 10KSB/A of the Company filed 8/9/01. Description of the Company's Common Stock is incorporated by reference to the description contained in the Company's Registration Statement on Form 8-A (File No. 0-19409) filed with the Commission pursuant to Section 12(b) of the Exchange Act on July 16, 1991, including any amendments or reports filed for the purpose of updating such description. A facsimile of the latest warrants issued in the private placement completed in fiscal tear 2001 is included herewith as an exhibit. (4) Incorporated by reference to the Registration Statement of the Company on Form S-8 (File No. 333-92243) filed with the Commission on 12/17/99. (5) incorporated by reference to exhibits filed to the form 8-k of the company filed with the commission (file no. 0-19409) on 12/7/99. (6) incorporated by reference to exhibits filed to the Form 8-K of the Company filed with the Commission (File No. 0-19409 on 1/30/02) -50- EX-3.1 3 file002.txt EXHIBT 3.1 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF SYNERGY BRANDS INC. Synergy Brands Inc. (the "Corporation"), organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "DGCL") does hereby certify: FIRST: That the Board of Directors of the Corporation duly adopted resolutions setting forth the following amendment to the Certificate of Incorporation of the Corporation (the "Amendment'), declaring the Amendment to be advisable and calling for the submission of the proposed Amendment to the stockholders of the Corporation for consideration thereof. The resolution setting forth the proposed Amendment is as follows: ARTICLE FOURTH of the Certificate of Incorporation of Synergy Brands Inc., a Delaware corporation, is hereby amended by adding thereto the following paragraphs to read as follows: Reverse Split (i) Effective immediately upon the filing of this Amendment to the Certificate of Incorporation in the office of the Secretary of State of the State of Delaware, each outstanding share of previously existing Common Stock shall be and hereby is converted into and reclassified as one-fifth of a share of Common Stock; provided, however, that fractional shares of Common Stock will not be issued and each holder of a fractional share of Common Stock shall receive in lieu thereof a cash payment from the Corporation determined by multiplying such fractional share of Common Stock by the average closing price of a share of previously existing Common Stock on the NASDAQ Small Cap Market for the five trading days immediately preceding the effective date, and upon such other terms as the officers of the Corporation, in their sole discretion, deem to be advisable and in the best interests of the Corporation. (ii) Certificates representing reclassified shares are hereby canceled and upon presentation of the canceled certificates to the Corporation, the holders thereof shall be entitled to receive certificate(s) representing the new shares into which such canceled shares have been converted. SECOND: That the Amendment was submitted for shareholder approval and received consent of a majority of stockholders by written consent with notice of such approval sent by mail to all other shareholders in compliance with Section 228 of the DGCL. THIRD: That the Amendment was duly adopted in accordance with the provisions of Section 242 of the DGCL. FOURTH: That the Amendment shall be effective on the date this Certificate of Amendment is filed and accepted by the Secretary of State of the State of Delaware. IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed by Mair Faibish, its Chief Executive Officer, and attested by Mitchell Gerstein, its Secretary, this day of , 2001. SYNERGY BRANDS INC. By: ---------------- Mair Faibish, CEO ATTEST: ----------------- Mitchell Gerstein Secretary EX-3.1 EX-4 4 file003.txt EXHIBT 4 NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER ANY APPLICABLE STATE SECURITIES LAWS. NEITHER THIS WARRANT NOR ANY OF SUCH SHARES MAY BE OFFERED OR TRANSFERRED BY SALE, ASSIGNMENT, PLEDGE OR OTHERWISE UNLESS (I) A REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE ACT IS IN EFFECT OR (II) THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL, WHICH OPINION IS REASONABLY SATISFACTORY TO THE COMPANY, TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT. SYNERGY BRANDS INC. 1175 Walt Whitman Road Melville, NY 11747 COMMON STOCK PURCHASE WARRANT Date of Issuance: September 24, 2001 Right to Purchase Shares of Common Stock Warrant No: For value received, SYNERGY BRANDS INC., a Delaware corporation (the "Company"), hereby grants to , or its registered assigns (the "Registered Holder"), the right to purchase from the Company up to shares of the Company's Common Stock, par value $.001 per share ("Common Stock") (as adjusted pursuant to Section 3 hereof), and at the price per share determined initially as provided in Section 3.1 hereof (as adjusted pursuant to Section 3 hereof). This Warrant is one of a series of warrants to purchase up to 200,000 shares of Common Stock issued by the Company in a private offering of Common Stock and warrants to certain investors (the "Offering"). This Warrant is subject to the following provisions: 1. DEFINITIONS. As used in this Warrant, the following terms have the meanings set forth below: "AFFILIATE" of any Person means a Person which controls, is controlled by or its under common control with, such Person. EX-4 "CAPITAL STOCK" means the Company's Common Stock, preferred stock, and any other equity securities of the Company. "COMMON STOCK" means the Company's Common Stock, $.001 par value per share. "CURRENT MARKET PRICE" means as to any security the average of the daily closing prices for the 30 consecutive business days ending with the day immediately prior to the day in question. The closing price for each day shall be the last reported sales price regular way or, in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices regular way, in either case on the principal national securities exchange on which the security is listed or admitted to trading, or if not listed or admitted to trading on any national securities exchange, the average of the highest reported bid and lowest reported asked prices as furnished by the National Association of Securities Dealers, Inc.'s Automated Quotation System, or the nearest comparable system, or, in the absence of either, by a nationally recognized independent investment banking firm selected mutually by the holders representing a majority of the outstanding Warrants and the Board of Directors of the Company (or if such selection cannot be made, by a nationally recognized investment banking firm selected by the American Arbitration Association in accordance with its commercial rules). "PERSON" means an individual, a partnership, a corporation, a trust, a joint venture, a limited liability company, an unincorporated organization, a government or any department or agency thereof or any other entity. "WARRANTS" means this Warrant and all other common warrants issued pursuant to the Offering, and all common stock purchase warrants issued in exchange therefor pursuant to the terms hereof and thereof. "WARRANT STOCK" means shares of the Company's authorized but unissued Common Stock issuable upon the exercise of the Warrants; provided that if there is a change such that the securities issuable upon exercise of the Warrant are issued by an entity other than the Company or there is a change in the class of securities so issuable, then the term "Warrant Stock" will mean one share of the security issuable upon exercise of the Warrant if such security is issuable in shares, or will mean the smallest unit in which such security is issuable if such security is not issuable in shares. 2. EXERCISE OF WARRANT. 2.1 EXERCISE PERIOD. The Registered Holder may exercise this Warrant, in whole or in part (but not as to a fractional share of Warrant Stock), at any time and from time to time after the Date of Issuance and prior to 5:00 p.m. (New York time) on September 24, 2006 (the "Exercise Period"). EX-4 2.2 EXERCISE PROCEDURE. (a) This Warrant will be deemed to have been exercised at such time as the Company has received all of the following items (the "EXERCISE DATE"): (i) a completed Exercise Agreement, as described below, executed by the Person exercising all or part of the purchase rights represented by this Warrant (the "PURCHASER"); (ii) this Warrant; (iii) if this Warrant is not registered in the name of the Purchaser, an Assignment or Assignments in the form set forth in Exhibit II hereto, evidencing the assignment of this Warrant to the Purchaser; and (iv) a check payable to the Company (or cash or wire transfer) in an amount equal to the product of the Exercise Price multiplied by the number of shares of Warrant Stock being purchased upon such exercise (the "PURCHASE PRICE"). (b) Certificates for shares of Warrant Stock purchased upon exercise of this Warrant will be delivered by the Company to the Purchaser within five (5) business days after the Exercise Date. Unless this Warrant has expired or all of the purchase rights represented hereby have been exercised, the Company will prepare a new Warrant, substantially identical hereto, representing the rights formerly represented by this Warrant which have not expired or been exercised. The Company will, within such five-day period, deliver such new Warrant to the Person designated for delivery in the Exercise Agreement. (c) The Warrant Stock issuable upon the exercise of this Warrant will be deemed to have been issued to the Purchaser on the Exercise Date, and the Purchaser will be deemed for all purposes to have become the record holder of such Warrant Stock on the Exercise Date. (d) The issuance of certificates for shares of Warrant Stock upon exercise of this Warrant will be made without charge to the Registered Holder or the Purchaser for any issuance tax in respect thereof or any other cost incurred by the Company in connection with such exercise and the related issuance of shares of Warrant Stock; provided, however, that if the shares of Warrant Stock are to be issued in a name other than that of the Registered Holder, then such Warrant Stock shall be delivered only when the person requesting such delivery has paid to the Company the amount of transfer taxes or charges required in connection with such issuance, if any. (e) The Company will not close its books for the transfer of this Warrant or of any share of Warrant Stock issued or issuable upon the exercise of this Warrant in any manner which interferes with the timely exercise of this Warrant. The Company will from time to time take all such action as may be necessary to assure that the par value per share of the unissued Warrant Stock acquirable upon exercise of this Warrant is at all times equal to or less than the Exercise Price then in effect. EX-4 2.3 EXERCISE AGREEMENT. The Exercise Agreement will be substantially in the form set forth in Exhibit I hereto, except that if the shares of Warrant Stock are not to be issued in the name of the Registered Holder of this Warrant, the Exercise Agreement will also state the name of the Person to whom the certificates for the shares of Warrant Stock are to be issued, and if the number of shares of Warrant Stock to be issued does not include all the shares of Warrant Stock purchasable hereunder, it will also state the name of the Person to whom a new Warrant for the unexercised portion of the rights hereunder is to be delivered. 2.4 FRACTIONAL SHARES. If a fractional share of Warrant Stock would be issuable upon exercise of the rights represented by this Warrant, the Company will, within five (5) days after the Exercise Date, deliver to the Purchaser a check payable to the Purchaser in lieu of such fractional share, in an amount equal to the Current Market Price of such fractional share as of the close of business on the Exercise Date. 3. EXERCISE PRICE AND ADJUSTMENT OF NUMBER OF SHARES. 3.1 GENERAL. (a) The initial exercise price for the shares which may be purchased upon the exercise of this Warrant shall be $1.25 per share, or, in case an adjustment of such price has taken place pursuant to the further provisions of this Section 3, then at the price as last adjusted and in effect on the date this Warrant is presented for exercise (such price or such price as last adjusted, as the case may be, being referred to herein as the "Exercise Price"). In order to prevent dilution of the rights granted under this Warrant, the Exercise Price and the number of shares issuable upon exercise of this Warrant will be subject to adjustment from time to time pursuant to this Section 3. (b) If at any time after the Date of Issuance and prior to the Exercise Date, the Company shall issue any shares of Common Stock or any shares of a class or series of stock or other securities convertible into Common Stock ("CONVERTIBLE SECURITIES") or any Rights or Related Rights each (as herein defined) (such Convertible Securities, Rights and Related Rights collectively the "DERIVATIVE SECURITIES") (including any dividend or other distribution payable in such Common Stock or Derivative Securities) for a consideration per share of Common Stock (the consideration in each case to be determined in the manner provided in Section 3.2(e) or (f) below) less than the Exercise Price in effect immediately prior to the issuance of such Common Stock or Derivative Securities, then the Exercise Price in effect immediately prior to each such issuance shall forthwith be reduced to an Exercise Price determined by dividing: (x) an amount equal to the sum of (A) the total number of shares of Common Stock, including the number of shares of Common Stock issuable upon exercise or conversion of all such Derivative Securities, outstanding immediately prior to such issuance multiplied by the Exercise Price in effect immediately prior to such issuance, plus (B) the aggregate consideration, if any, received by the Company in connection with such issuance, determined as provided in Section 3.2, by (y) the total number of shares of Common Stock, including the number of shares of Common Stock issuable upon exercise or conversion of all such Derivative Securities, outstanding immediately after such issuance (including the number of shares of Common Stock into which any newly issued Derivative Securities are then convertible or issuable upon the exercise of Rights or Related Rights). EX-4 3.2 EFFECT OF CERTAIN EVENTS ON ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES. For the purpose of determining whether any adjustment of the Exercise Price pursuant to Section 3.1 is required, the following provisions shall be applicable: (a) In the case of the issuance of options or warrants to purchase or rights to subscribe for Common Stock (collectively, such "RIGHTS"), the aggregate maximum number of shares of Common Stock deliverable upon exercise of such Rights shall be deemed to have been issued at the time such Rights were issued, for a consideration equal to the consideration (determined in the manner provided in (e) and (f) below), if any, received by the Company upon the issuance of such Rights, plus the minimum purchase price provided in such Rights for the Common Stock covered thereby. (b) In the case of the issuance of Convertible Securities, or options or warrants to purchase or rights to subscribe for securities by their terms convertible or exchangeable for Common Stock (collectively, such "RELATED RIGHTS") the aggregate maximum number of shares of Common Stock deliverable upon conversion, exchange or exercise of any such Convertible Securities or such Related Rights shall be deemed to have been issued at the time such Convertible Securities or such Related Rights were issued and for a consideration equal to the consideration received by the Company upon issuance of such Convertible Securities or such Related Rights (excluding any cash received on account of accrued interest or accrued dividends), plus the additional consideration, if any, to be received by the Company upon the conversion, exchange or exercise of such Convertible Securities or Related Rights (the consideration in each case to be determined in the manner provided in (e) and (f) below). (c) On any change in the number of shares of Common Stock deliverable upon the exercise of such Rights or Related Rights or upon the conversion, exchange or exercise of such Convertible Securities or on any change in the minimum purchase price of such Rights, Related Rights or Convertible Securities other than any change resulting from the anti-dilution provisions of such Rights, Related Rights or Convertible Securities, the Exercise Price shall forthwith be readjusted to such Exercise Price as would have been in effect had the adjustment that was made upon the issuance of such Rights, Related Rights or Convertible Securities not converted, exchanged or exercised prior to such change been made on the basis of such change, but no further adjustment shall be made for the actual issuance of Common Stock upon the exercise or conversion of any such Right, Related Right or Convertible Security. (d) On the expiration of any such Rights, Related Rights or Convertible Securities, the Exercise Price shall forthwith be readjusted to the Exercise Price as would have been obtained had the adjustment made upon the issuance of such Rights or Related Rights or the issuance of any such Convertible Securities been made upon the basis of the issuance of only the number of shares of Common Stock actually issued upon the exercise of such Rights or Related Rights or the conversion, exchange or exercise of any such Convertible Securities; provided, however, if as a result of such readjustment following any such expiration the Exercise Price would be increased and the Registered Holder has previously exercised this Warrant in full or in part, the Registered Holder will not be obligated to the Company with respect to the amount of such increase which is applicable to the shares of Common Stock covered by such previous exercise. EX-4 (e) In the case of the issuance of such Common Stock or Securities for cash, the consideration shall be deemed to be the amount of cash paid therefor. (f) In the case of the issuance of such Common Stock or Securities for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined in good faith by the Board of Directors of the Company, and a certified copy of the resolution(s) of the Board of Directors relating to such determination shall be delivered to the Registered Holder upon request. (g) In the event of any adjustment to the Exercise Price resulting from the issuance of any Derivative Securities, no further adjustment shall be made for the actual issuance of Common Stock upon the exercise or conversion of any such Derivative Securities. (h) Anything to the contrary contained in this Section 3.2 notwithstanding, no adjustment shall be made in the Exercise Price as a result of or pursuant to (i) the granting of any Right or Related Right, or the issuance of Common Stock to, officers, employees or directors of, or consultants to, the Company, pursuant to any agreement, plan or arrangement approved by the Board of Directors of the Company; (ii) the granting of any Right or Related Right, or the issuance of Common Stock to, providers of goods and services (including licensees) to the Company in any such case with the prior approval of the Board of Directors of the Company; or (iii) a dividend or distribution on any series of preferred stock of the Company; provided, however, no more than an aggregate of 1,000,000 shares of Common Stock (including shares of Common Stock underlying grants of Rights or Related Rights) are issued or reserved for issuance pursuant to clauses (i), (ii) and (iii) above. (i) In case the Company shall effect a reorganization, shall merge with or consolidate into another corporation, or shall sell, transfer or otherwise dispose of all or substantially all of its property, assets or business and, pursuant to the terms of such reorganization, merger (other than a reincorporation transaction), consolidation or disposition of assets, shares of stock or other securities, property or assets of the Company, successor or transferee or an affiliate thereof are to be received by or distributed to the holders of Capital Stock, then each Registered Holder shall be provided with written notice from the Company informing each Registered Holder of the terms of such reorganization, merger, consolidation or disposition of assets and of the record date thereof for any distribution pursuant thereto, at least 45 days in advance of such record date, and each Registered Holder shall have, in addition to the rights provided for herein, the right to receive, at the Registered Holder's election, either (i) upon exercise of the Warrants held by such Registered Holder, the number of shares of stock or other securities, property or assets of the Company, successor or transferee or affiliate thereof or cash receivable by the holders of the Common Stock upon or as a result of such reorganization, merger, consolidation or disposition of assets, or (ii) a new warrant giving such Registered Holder the right to exercise such new warrant and procure upon such exercise, in lieu of each share of Common Stock theretofore issuable upon exercise of the predecessor Warrant, the number of shares of stock or other securities, property or assets described in clause (i) hereof. The provisions of this paragraph (i) shall similarly apply to successive reorganizations, mergers, consolidations or dispositions of assets. The Company shall require any subsequent issuer of any shares of stock or other securities or property thereafter deliverable on the exercise of this Warrant to be responsible for all of the agreements and obligations of the Company hereunder. EX-4 (j) If the Company shall effect a subdivision of the outstanding Common Stock, the Exercise Price then in effect immediately before such subdivision shall be proportionately decreased. If the Company shall combine the outstanding shares of Common Stock, the Exercise Price then in effect immediately before the combination shall be proportionately increased. If the Company shall make or issue a dividend or other distribution payable in securities, then and in each such event provision shall be made so that the Registered Holders shall receive upon exercise of the Warrants in addition to the number of shares of Common Stock receivable thereupon, the amount of securities that they would have received had their Warrants been exercised on the date of such event and had they thereafter during the period from the date of such event to and including the Exercise Date retained such securities receivable by them as aforesaid during such period giving effect to all adjustments called for during such period under this paragraph, with respect to the rights of the Registered Holders. (k) In case the Company shall distribute to the holders of Common Stock evidences of indebtedness issued by the Company, or assets (excluding cash dividends) then, in each such case, immediately following the record date fixed for the determination of the holders of such securities entitled to receive such distribution, the Exercise Price in effect thereafter shall be reduced immediately to the price determined by multiplying the Exercise Price in effect immediately prior to such record date by a fraction (i) the numerator of which shall be an amount equal to the remainder of (A) the Current Market Price of one share of Common Stock, less (B) the fair value (as determined in good faith by the Company's Board of Directors, and a certified copy of the resolution(s) of the Board of Directors relating to such determination shall be delivered to the Registered Holder upon request) of the evidences of indebtedness or assets so distributed in respect of one share of Preferred Stock or Common Stock, and (B) the denominator of which shall be the Current Market Price of one share of Common Stock. Such adjustment shall be made on the date such distribution is made, and shall become effective at the opening of business on the business day following the record date for the determination of stockholders entitled to such distribution. (l) In case the Company makes a distribution of its assets or securities to its shareholders pursuant to any voluntary or involuntary liquidation, dissolution or winding up of the Company, whether as a dividend in liquidation or partial liquidation or by way of return of capital or as a dividend payable out of funds legally available for dividends, each Registered Holder shall be provided with written notice from the Company informing the Holder of the terms of such liquidation, dissolution or winding up, and of the record date thereof for any distribution pursuant thereto, at least 45 days in advance of such record date, and the Holder shall have, in addition to any other rights provided for herein, the right to receive, upon exercise hereof, such assets or securities as would have been distributable to him or it as owner of that number of shares of Common Stock receivable upon exercise of this Warrant, had the holder been the holder of record of such shares on the record date for such distribution, and an appropriate provision therefor shall be made a part of any such distribution. EX-4 (m) Upon the occurrence of each adjustment or readjustment of the Exercise Price pursuant to this Section 3, the Company at its expense shall promptly compute such adjustment or readjustment in accordance with terms hereof and cause its principal financial officer to verify such computation and prepare and furnish to the Registered Holder a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Company shall, upon the written request at any time of the Registered Holder furnish or cause to be furnished to such Holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Exercise Price in effect at the time for the Warrant and (iii) the number of shares of Common Stock that at the time would be received upon the exercise of the Warrant. A copy of each such certificate shall also be maintained at the principal office of the Company and at the office of its transfer agent for the Warrants, if any. (n) In the event of (i) any taking by the Company of a record of the holders of any class or series of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution or (ii) any reclassification or recapitalization of the capital stock of the Company, any merger or consolidation of the Company, or any transfer of all or substantially all of the property and the assets of the Company to any other Company, entity, or person, or any voluntary or involuntary dissolution, liquidation, or winding up of the Company, the Company, unless a notice of record date shall have been mailed to the Registered Holder pursuant to any other paragraph hereof, shall mail to the Registered Holder at least 45 days prior to the record date specified therein, a notice specifying (A) the date on which any such record is to be taken for the purpose of such dividend or distribution and a description of such dividend or distribution, (B) the date on which any such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation, or winding up is expected to become effective, and (C) the time, if any is to be fixed, as to when the holders of record of Common Stock (or other securities) shall be entitled to exchange their shares of Common Stock (or other securities) for securities or other property deliverable upon such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation, or winding up. 3.3 ADJUSTMENT TO NUMBER OF SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE. Upon each adjustment of the Exercise Price with respect to the Common Stock pursuant to Section 3.2, the total number of shares of Common Stock issuable upon the exercise of this Warrant shall be such number of shares of Common Stock (calculated to the nearest 1/one-thousandth of a share) issuable at the Exercise Price with respect to such Common Stock in effect immediately prior to such adjustment multiplied by a fraction, the numerator of which shall be such Exercise Price in effect immediately prior to such adjustment and the denominator of which shall be such Exercise Price in effect immediately after such adjustment. EX-4 3.4 CERTAIN EVENTS. If any event occurs of the type contemplated by the provisions of this Section 3 but not expressly provided for by such provisions, then the Company's Board of Directors will make an appropriate adjustment in the applicable Exercise Price so as to protect the rights of the Registered Holders; provided, however, that no such adjustment will increase the applicable Exercise Price as otherwise determined pursuant to this Section 3 or decrease the number of shares of Common Stock issuable upon exercise of each Warrant. 4. RESERVATION OF COMMON STOCK. The Company shall at all times reserve and keep available, free from preemptive rights, solely for issuance upon the exercise of the Warrants such number of its authorized but unissued shares of Common Stock as will be sufficient to permit the exercise in full of all outstanding Warrants, and the Company covenants that upon such issuance such shares of Common Stock will be validly issued, fully paid and nonassessable, and free of preemptive or similar rights. 5. LIMITATIONS OF LIABILITY. No provision of this Warrant, in the absence of affirmative action by the Registered Holder to purchase Warrant Stock, and no enumeration in this Warrant of the rights or privileges of the Registered Holder, will give rise to any liability of such Registered Holder for the Exercise Price of Warrant Stock acquirable by exercise hereof or as a stockholder of the Company. 6. REGISTRATION, TRANSFER, EXCHANGE AND REPLACEMENT OF WARRANTS. (a) The Warrants shall be issued in registered form and the Company shall keep at its principal executive office a register in which, subject to such reasonable regulations as it may prescribe, but at its expense (other than transfer taxes, if any), the Company shall provide for the registration and transfer of the Warrants. (b) This Warrant and all rights hereunder are transferable, in whole or in part, without charge to the Registered Holder, upon surrender of this Warrant with a properly executed Assignment (in the form of Exhibit II hereto) at the principal office of the Company, provided that any transfer tax relating to such transaction shall be paid by the holder requesting the same. (c) Each Registered Holder of this Warrant acknowledges that this Warrant has not been registered under the Securities Act, and agrees not to sell, pledge, distribute, offer for sale, transfer or otherwise dispose of this Warrant or any Warrant Stock issued upon its exercise in the absence of (i) an effective registration statement as to this Warrant or such Warrant Stock under the Act or any similar statute then in effect), or (ii) an opinion of counsel reasonably satisfactory to the Company to the effect that such registration is not, under the circumstances, required; provided, that an opinion of counsel shall not be required for transfers of this Warrant or interests therein to any partner, stockholder, subsidiary, parent or Affiliate of the Registered Holder. EX-4 (d) The Company may treat the person in whose name any Warrant is registered as the owner of such Warrant for the purpose of receiving shares of Common Stock upon exercise thereof and for all other purposes. The Company shall not be affected by any notice to the contrary. (e) Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of any Warrant and (in case of loss, theft or destruction) of indemnity satisfactory to it, and upon surrender and cancellation of such Warrant, if mutilated, the Company at its expense will execute and deliver in lieu of such security a new security of like tenor. 7. WARRANT EXCHANGEABLE FOR DIFFERENT DENOMINATIONS. This Warrant is exchangeable, upon the surrender hereof by the Registered Holder at the principal office of the Company, for new Warrants of like tenor representing in the aggregate the purchase rights hereunder, and each of such new Warrants will represent such portion of such rights as is designated by the Registered Holder at the time of such surrender, provided that any transfer tax relating to such transaction shall be paid by the holder requesting the same. The date the Company initially issues this Warrant will be deemed to be the date of issuance of this Warrant regardless of the number of times new certificates representing the unexpired and unexercised rights formerly represented by this Warrant are issued. 8. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to the Registered Holder that: (a) ORGANIZATION. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and is duly qualified as a foreign corporation and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the condition (financial or other), business, prospects, properties, net worth or results of operations of the Company (a "MATERIAL ADVERSE EFFECT"). (b) POWER AND AUTHORITY; AUTHORIZATION. The Company has all requisite corporate power and authority to own, lease and operate its properties and to conduct its business, to execute and deliver this Warrant and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Warrant and the consummation transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Company, and upon execution and delivery, this Warrant will constitute a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as may be limited by applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or similar laws relating to or affecting creditors' rights generally and by general principles of equity (regardless as to whether such enforceability is considered in a proceeding in equity or at law). EX-4 (c) NO VIOLATION; CONSENTS AND APPROVALS. The execution and delivery by the Company of this Warrant does not, and the consummation of the transactions contemplated hereby will not, (i) contravene, result in any breach of, or constitute a default under, result in the acceleration of , create any rights accelerate, terminate, modify or cancel or result in the creation of any lien in respect of any property of the Company under, any indenture, mortgage, deed of trust, loan, purchase or credit agreement, lease, license, corporate charter or bylaws, or any other agreement or instrument to which the Company is bound or by which the Company or any of its properties may be bound or affected, (ii) violate, conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or governmental authority applicable to the Company or its properties or assets or (iii) violate any provision of any statute or other rule or regulation of any governmental authority applicable to the Company, except, in each case, as would not have a Material Adverse Effect. 9. REPORTS OF THE COMPANY. (a) The Company is subject to the reporting requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"). With a view to making available the benefits of certain rules and regulations of the U.S. Securities and Exchange Commission (the "COMMISSION") that may permit the resale of unregistered securities, the Company agrees to use its reasonable best efforts to make and keep public information regarding the Company available as those terms are understood and defined in Rule 144 under the Securities Act of 1933, as amended (the "SECURITIES ACT"), at all times and to file with the Commission in a timely manner all reports and other documents required by the Company under the Securities Act and the Exchange Act. (b) In the event the Company no longer becomes subject to such reporting requirements, for so long as the Registered Holder beneficially owns (within the meaning of Rule 13d-3 under the Exchange Act) at least ten percent (10%) of the outstanding Common Stock of the Company, including the Warrant Shares owned by the Registered Holder, the Company shall deliver to the Registered Holder, (i) within 60 days after the end of each fiscal quarter, copies of a consolidated balance sheet as of the end of such quarter and consolidated statements of income, changes in stockholders' equity and cash flows for such quarter and for the portion of the fiscal year ending with such quarter, setting forth in each case in comparative form the figures for the corresponding periods in the previous fiscal year, all in reasonable detail, prepared in accordance with U.S. generally accepted accounting principles ("GAAP") and (ii) with 120 days after the end of each fiscal year, copies of a consolidate balance sheet as of the end of such fiscal year and consolidated statements of income, changes in stockholders' equity and cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP. EX-4 10. INSPECTION. For as long as the Registered Holder beneficially owns (within the meaning of Rule 13d-3 under the Exchange Act) at least ten percent (10%) of the outstanding Common Stock of the Company, including the Warrant Shares owned by the Registered Holder, the Company shall permit the Registered Holder to visit and inspect any of the offices and properties of the Company, to examine all of the books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss the Company's affairs, finances and accounts with its officers and independent public accountants (and by this provision the Company authorizes said accountants to discuss the affairs, finances and accounts of the Company), all at such times and as often as may be reasonably requested. 11. MISCELLANEOUS. 11.1 AMENDMENT AND WAIVER. The provisions of the Warrants may be amended and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only with the affirmative consent or approval of Registered Holders representing at least 66-2/3% of the shares of Warrant Stock for which the outstanding Warrants issued in the Offering are exercisable. 11.2 NOTICES. Any notices required to be sent to a Registered Holder will be delivered to the address of such Registered Holder shown on the books of the Company. All notices referred to herein will be delivered in person or sent by first class mail, postage paid, and will be deemed to have been given when so delivered or sent. 11.3 DESCRIPTIVE HEADINGS; GOVERNING LAW. The descriptive headings of the paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. The construction, validity and interpretation of this Warrant will be governed by the laws of the State of New York without giving effect to the conflicts of laws principles thereof. The parties consent to the exclusive jurisdiction of the state and Federal courts located in Nassau or Suffolk County, New York, to adjudicate any disputes arising hereunder. 11.4 REMEDIES. The Company stipulates that the remedies at law of the Registered Holder in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate, and that such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof. 11.5 SEVERABILITY. In the event that any provision of this Warrant or the application thereof becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of this Warrant will continue in full force and effect and the application of such provision to other persons or circumstances will be interpreted so as reasonably to effect the intent of the parties hereto. The parties further agree to replace any such void or unenforceable provisions of this Warrant with a valid enforceable provision that will achieve, to the extent possible, the economic, business and other purposes of such void or unenforceable provision. 11.6 SUCCESSORS, ASSIGNS. All the terms and provisions of this Warrant shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto. 11.7 CLARIFICATIONS. The Board of Directors is authorized to amend this Warrant, or take any further action required, to correct any inconsistency or to clarify the terms hereof consistent with the intent of the parties. EX-4 IN WITNESS WHEREOF, the Company has caused this Warrant to be signed and attested by its duly authorized officers under its corporate seal. SYNERGY BRANDS INC. by: ----------------- Mair Faibish President ATTEST: - ------------------- Secretary EX-4 EXHIBIT I EXERCISE AGREEMENT Dated: --------------------- To: SYNERGY BRANDS INC. 1175 Walt Whitman Road Melville, NY 11747 The undersigned, pursuant to the provisions set forth in the within Warrant, hereby agrees to subscribe for and purchase shares of the Warrant Stock covered by such Warrant and makes payment herewith in full for such Warrant Stock at the price per share provided by such Warrant. Signature: -------------------------- Address: --------------------------- EX-4 ASSIGNMENT FOR VALUE RECEIVED, _____________________________ hereby sells, assigns and transfers all of the rights of the undersigned under the within Warrant with respect to the number of shares of the Warrant Stock covered thereby set forth below, unto: Name of Assignee Address No. of Shares IN WITNESS WHEREOF, the undersigned sets his hand and seal this ______ day of _______________, 200__. -------------------------- Assignor EX-4 EX-21 5 file004.txt EXHIBIT 21 List of Subsidiaries Corporation State of Incorporation Status - ----------- ------------- ------ New Era Foods Inc. Nevada wholly owned-active but no direct business- parent company of Premium Cigars Wrappers Inc. SYBR.Com Inc. Island Wholesale Grocers Inc. New York wholly owned inactive Premium Cigar Wrappers Inc. New York active majority owned by New Era Foods Inc. Synergy Brands Distribution Inc. New York wholly owned inactive PHS Group Inc. Pennsylvania active wholly owned by New Era Foods Inc. d.b.a. Pro Set Distributors SYBR.Com Inc. New Jersey active wholly owned by New Era Foods Inc. Net Cigar.Com Inc. New York inactive wholly owned by SYBR.Com Inc. Net Cigar.Com Inc. Florida active wholly owned by SYBR.Com Inc. BeautyBuys.com Inc. New Jersey active wholly owned by SYBR.com Inc. Dealbynet.com Inc. New York active wholly owned by Supply Chain Technologies Inc. Supply Chain Technologies Inc. New York active wholly owned by SYBR.com Inc. Gran Reserv Corp. Nevada active wholly owned by New Era Foods Inc. EX-21 EX-99 6 file005.txt EXHIBIT 99 EXHIBIT Intellectual Property The tradenames "BeautyBuys" and "NetCigar", for which U.S. trademark applications have been filed. THE COMPANY OR ITS SUBSIDIARIES ARE LICENSED TO USE THE FOLLOWING TRADEMARKS: Suarez Gran Reserve Breton Legend Breton Corojo Vintage Corojo 2000 Andulleros Alimerante Don Otilio THE COMPANY OR ITS SUBSIDIARIES OWN THE ADDITIONAL DOMAIN NAMES: REGISTERED TO SYNERGY BRANDS INC.: SYBR.COM ADD2CART.COM SYNERGYBRANDS.COM SALEBYNET.COM BEAUTYBONUS.COM** DEALBYNET.COM SALONCOUNTER.COM** DEALBUYNET.COM FRAGANCESALON.COM** BEAUTYBUYS.COM** GLOBALSALON.COM** BEAUTYBUY.COM** FRAGRANCESALON.COM** SALONBUY.COM** REGISTERED TO NETCIGAR.COM, INC.: NETCIGAR.COM COROJO2000.COM ** Denotes ownership by BeautyBuys regardless of which entity registered the domain name. The Company also is studying the advantages and marketing potential of establishing private label sales in the health and beauty aids and cosmetics business areas to take advantage of certain inroads to these type consumer products the Company has historically located and developed. The Company also has entered multiple licensing and production agreements regarding the establishment of internet sites for sale of the Company's products. The Company has trademarked its websites on the internet. EX-99 -----END PRIVACY-ENHANCED MESSAGE-----