10QSB 1 file001.txt FORM 10-QSB FORM 10-QSB. QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the period ended MARCH 31, 2002 Commission File Number: 0-19409 SYNERGY BRANDS, INC. (Exact name of registrant as it appears in its charter) Delaware 22-2993066 (State of incorporation) (I.R.S. Employer identification no.) 1175 Walt Whitman Road, Melville NY 11747 (Address of principal executive offices) (zip code) 631-424-5500 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [x] YES [ ] NO APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. On May 1, 2002 there were 5,200,484 shares outstanding of the registrant's common stock. SYNERGY BRANDS, INC. FORM 10-Q SB MARCH 31, 2002 TABLE OF CONTENTS PART I: FINANCIAL INFORMATION Page Consolidated Balance Sheet as of March 31, 2002 (Unaudited) 2-3 Consolidated Statements of Operations for the three months ended March 31, 2002 and 2001 (Unaudited) 4 Consolidated Statements of Cash Flows for the three months ended March 31, 2002 and 2001 (Unaudited) 5-6 Notes to Consolidated Financial Statements 7-8 Management's Discussion and Analysis of 9-12 Financial Condition and Results of Operations Forward Looking Information and Cautionary Statements 13-27 PART II: OTHER INFORMATION Item VI: Exhibits and Reports on Form 8-K 28 SYNERGY BRANDS, INC. & SUBSIDIARIES CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2002 (Uuaudited)
March 31, 2002 --------------- (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 241,121 Cash Collateral Security Deposit 658,542 Accounts Receivable, less allowance for doubtful accounts of $108,220 1,171,846 Inventory 1,179,181 Related party note receivable 44,750 Prepaid assets 336,887 --------------- Total Current Assets 3,632,327 Property and Equipment - Net 551,960 Other Assets 324,783 Web Site Development Costs, net of accumulated amortization of $381,915 547,564 Trade Names and Customer List, net of accumulated amortization of $1,261,478 1,682,810 --------------- Total Assets $6,739,444 ===============
The accompanying notes are an integral part of this statement. -2- SYNERGY BRANDS, INC. & SUBSIDIARIES CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2002 (Unaudited)
March 31, 2002 --------------- (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Line-of-Credit $ 938,460 Note Payable to Stockholder 555,763 Accounts Payable and Accrued Expenses 1,901,078 Due to broker 25,000 --------------- Total Current Liabilities 3,420,301 Notes Payable 325,000 Other Liabilities 592,689 Commitments and Contingencies Minority Interest 215,250 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; 10,000,000 Shares authorized 5,050,484 shares outstanding 5,050 Additional paid-in capital 34,927,006 Deficit (31,716,142) Stockholders' notes receivable (2,500) Stockholder's advertising and in-kind services receivable, net of reserve of $500,000 (794,990) Less treasury stock at cost, 52,818 shares (232,320) --------------- Total stockholders' equity 2,186,204 --------------- Total Liabilities and Stockholders Equity $ 6,739,444 ===============
The accompanying notes are an integral part of this statement. -3- SYNERGY BRANDS, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2002 (UNAUDITED)
2002 2001 Net Sales $ 9,068,292 $ 5,513,411 ------------- ------------ Cost of Sales Cost of product 8,636,990 5,012,314 Shipping and handling costs 128,038 124,229 ------------- ------------ 8,765,028 5,136,543 ------------- ------------ Gross Profit 303,264 376,868 Operating expenses Selling General and Administrative Expense 954,378 689,414 Depreciation and Amortization 245,601 234,625 ------------- ------------ 1,199,979 924,039 ------------- ------------ Operating loss (896,715) (547,171) Other Income (Expense) Interest Income 18,942 33,130 Other Expense (58,398) (684) Interest and Financing Expense (49,860) (34,084) Dividends on preferred stock of subsidiary (6,125) - ------------- ------------ (95,441) (1,638) ------------- ------------ Loss from operations before income taxes (992,156) (548,809) Income tax expense 1,320 17,086 Loss from operations before extraordinary items (993,476) (565,895) Extraordinary items, net (113,129) - ------------- ------------ NET LOSS $ (1,106,605) $ (565,895) ============= ============ Basic and diluted loss per common share Loss from operations Extraordinary items $ 0.20 $ 0.15 0.02 - Net loss per common share ------------- ------------ $ 0.22 $ 0.15 ============= ============
The accompanying notes are an integral part of these statements. -4- SYNERGY BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2002 (UNAUDITED)
2002 2001 ---------------- ---------------- Cash Flows From Operating Activities: Net loss $(1,106,605) $ (565,895) Adjustments to Reconcile Net loss to net cash provided by (used in) operating activities Extraordinary loss 113,129 Depreciation and Amortization 245,601 234,625 Provision for doubtful accounts 58,000 Loss on sale of marketable securities 65,535 Dividends on preferred stock of subsidiary 6,125 Common stock and options issued in conjunction with compensation plan 143,825 Changes in Operating Assets and Liabilities: Net (increase) decrease in: Accounts Receivable (688,221) (120,604) Inventory 160,990 81,128 Prepaid assets, related party note receivable and other assets 34,093 48,365 Net increase (decrease) in: Accounts Payable and Accrued Expenses and other current liabilities (1,689,109) 69,361 ---------------- ---------------- Net cash used in operating activities (2,656,637) (253,020) Cash Flows From Investing Activities Purchase of marketable securities (536,012) Proceeds from sale of marketable securities 2,200,199 Purchase of property and equipment (3,379) (6,551) Purchase of trade names and customer lists (250,000) ---------------- ---------------- Net cash provided by (used in) investing activities 1,410,808 (6,551) Cash Flows From Financing Activities Borrowings under line of credit 3,066,451 2,827,534 Repayments of line of credit (2,526,328) (2,894,701) Proceeds from the issuance of notes payable 395,000 Repayments of notes payable (70,000) Proceeds from the sale of treasury stock 19,744 Purchase of treasury stock (9,233) ---------------- ---------------- Net cash provided by (used in) financing activities 875,634 (67,167) ---------------- ---------------- Net decrease in cash and cash equivalents (370,195) (326,738) Cash and cash equivalents, beginning of year 611,316 2,234,113 ---------------- ---------------- Cash and cash equivalents, end of year $ 241,121 $1,907,375 ================ ================
The accompanying notes are an integral part of these statements. -5- SYNERGY BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2002 (UNAUDITED) 2002 2001 ---------- -------- Supplemental disclosure of cash flow information: Cash paid for interest $ 31,938 $ 28,713 ========== ======== Cash paid for income taxes $ 1,320 $ 17,086 ========== ======== The accompanying notes are an integral part of these statements. -6- SYNERGY BRANDS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 2002 and 2001 NOTE A - UNAUDITED FINANCIAL STATEMENTS The consolidated balance sheet as of March 31, 2002 and the consolidated statements of operations for the three months ended March 31, 2002 and 2001 and the consolidated statements of cash flows for the three months ended March 31, 2002 and 2001, have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normally recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at March 31, 2002 (and for all periods presented) have been made. Certain information and note disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Annual Report on Form 10-KSB for the year ended December 31, 2001 filed by the Company. The results of operations for the periods ended March 31, 2002 and 2001 are not necessarily indicative of the operating results for the respective full years. NOTE B - IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS 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 Company adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 did not have a material effect on the Company's consolidated financial statements. NOTE C - INVENTORY Inventory as of March 31, 2002 consisted of the following: Grocery, health and beauty products $ 722,643 Tobacco finished goods 456,538 ----------- $1,179,181 =========== NOTE D - TRADE NAMES AND CUSTOMER LIST In February 2002, the Company purchased certain customer lists, the rights to the use of the trade names Fine Perfume, Corp. and Fineperfume.com and the ownership of the Internet domain, www.fineperfume.com. The cost of the assets of $250,000 has been recorded as trade names and customer list and will be amortized over five years. NOTE E - NOTES PAYABLE During the first quarter of 2002, the Company borrowed $265,000 from a lender pursuant to several cash advances made by the lender. On April 9, 2002, the Company and the lender executed a formal promissory note regarding these advances. The promissory note provides for borrowings of $543,000, bears interest at a rate of 12% per annum and is due of April 9, 2003. As of March 31, 2002, the Company has borrowed $265,000 on this promissory note. As partial security for this note, the Company has pledged as collateral its investment in the common and preferred stock of an investee. During the three month period ended March 31, 2002, the Company also entered into a promissory note with another lender that provides for borrowings of $60,000, bears interest at a rate of 9% per annum and is due on December 31, 2004. NOTE F - STOCKHOLDERS' EQUITY During the three months ended March 31, 2002, the Company purchased 9,314 shares of its stock on the open market. These shares were recorded as treasury stock at their aggregate cost of approximately $9,233. The Company sold 20,000 shares of its treasury stock during the three months ended March 31, 2002, for aggregated proceeds of $19,744. During the three months ended March 31, 2002, the Company granted 876,500 stock options to employees of the Company. In connection with these grants, the Company recorded a $43,825 charge to operations during the first quarter of 2002. -7- On January 2, 2002, the Company issued 100,000 shares of its common stock to the Company's Chairman and Chief Executive Officer and forgave $113,129 in stockholder indebtedness to the Company. The Company recorded a charge to earnings of $100,000 for the issuance of the common stock and recorded an extraordinary loss of $113,129 related to the forgiveness of the indebtedness. NOTE G - SEGMENT AND GEOGRAPHICAL INFORMATION The Company offers a broad range of Internet access services and related products to businesses and consumers throughout the United States and Canada. All of the Company's identifiable assets and results of operations are located in the United States. Management evaluates the various segments of the Company based on the types of products being distributed which were, as of March 31, 2002 and 2001, as shown below: Salon Grocery and products HBA (BtoB) B2C Total ------------ ----------- ---------- ---------- Revenue 2002 $ 796,134 $7,937,925 $ 334,233 $9,068,292 2001 $ 509,566 $4,581,327 $ 422,518 $5,513,411 Net 2002 $(256,756) $(189,612) $(660,237) $(1,106,605) Earnings 2001 $(133,801) $(196,890) $(235,204) $(565,895) Interest 2002 $17,025 $18,274 $14,561 $49,860 Expense 2001 $9,848 $24,236 $34,084 Depreciation and 2002 $131,517 $68,140 $45,944 $245,601 amortization 2001 $131,517 $68,373 $34,735 $234,625 Extraordinary 2002 $(113,129) $(113,129) Items 2001 Identifiable 2002 $2,183,270 $2,578,301 $1,977,873 $6,739,444 Assets 2001 $2,919,031 $2,315,528 $3,321,933 $8,556,492 Included in net earnings for the B2C segment were general corporate expenses which aggregated $465,910 and $140,094 for the three months ended March 31, 2002 and 2001, respectively. NOTE H - NET 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 antidliutive. The following data shows the amounts used in computing basic and diluted earnings per share: 2002 2001 ---------- -------- Net loss applicable to common stock $(1,106,605) $(565,895) Weighted-average number of shares in basic and diluted EPS $ 5,049,373 $ 3,828,595 -8- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION OVERVIEW Synergy Brands, Inc. (NASDAQ:SYBR) is a holding company, which operates through three unique business segments that all utilize logistics for effective traditional distribution of goods. The DealByNet (DBN) sector is the Company's grocery logistics model that relies on a web based procurement model for the purchase of name brands grocery and Health and Beauty Aids (HBA) products and their further resale to traditional customers utilizing the logistics and networking advantages of the Internet. DBN was developed as an end-to-end solution whereby vendors, customers and the necessary transportation components would be linked through a buying exchange. To date, the Company has integrated many of its vendors to its model, but has not fully integrated all customers into its system. The Netcigar.com and BeautyBuys.com sectors manage multiple domains that directly market to the ultimate consumer via the Internet. Netcigar focuses on a mix of Brand name premium cigar items and cigar related accessories. BeautyBuys markets Beauty related products on the Internet through multiple domains. The Proset sector is an off-line distribution model that was the core of developing the Company's Internet logistics goals. Every distribution operation that was developed by Synergy relied on the traditional distribution expertise of Proset's business. Proset distributes Salon Hair care products to chain drug stores and supermarkets in the Northeastern part of the United States. Proset uses Just in time technology and continuous replenishment programs to stock, track and market defined planograms within the store's beauty aisles. Planograms can range from 4 feet to 16 feet depending on the demographics of the store. The technical evolution of Proset enabled the development of the Company's B2C sites. Since Proset was already a pick and pack operation, evolving to online order taking, was a simple process for the Company's B2C sectors. In fact, the direct store delivery system of Proset was more complicated then online order fulfillment. In the case of Proset, the logistics require multiple transportation options. In the case of The B2C sector, the transportation is simple and merely requires a relationship with UPS, the postal service or Federal Express. DBN required a more complex network. DBN relies on the electronic integration among vendor, customer, trucker and internal documentation that can be electronically disseminated. By working with the large Grocery Manufacturers and large Grocery distributors, DBN has automated its supply side needs through Internet logistics. However, creating full loop enterprise integration models have not been fulfilled as of this date. Full customer integration has been slow to mature and the Company expects to fully integrate its exchange as the technological capacity of its customer's increases. 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 cruises and Hotel packages through a proprietary reservation system, solely for airline employees. ITT is believed to be the largest independent company in this sector of the travel industry. Results of Operations for the First Quarter Ended March 31, 2002 The Company realized revenues of $9.1 million for the first quarter 2002, a 64% increase from the first quarter 2001. DealByNet represented $8 million of the total sales; a 73% increase from the first quarter 2001. Proset revenue increased 56% to $796,134 at March 31, 2002 from $509,566 for the three months ended March 31, 2001. B2C revenues decreased 21% to $334,233 for the three months ended March 31, 2002 from similar period last year. Proset's rapid first quarter growth reduced product availability for BeautyBuys which relies on the same inventory. The Company plans to increase its B2C inventory in the second quarter of 2002, if product is available at appropriate margins. The Company attributes its strong growth in its B2B sectors to increased customer acquisition costs, a streamlined product acquisition system and additional sales staff. Operating expenses increased to $1.2 million at March 31, 2002, predominately due to customer acquisition cost in the Company's B2B subsidiaries. The Company plans to increase its operating expenses commensurate with increased revenues and operating profits. -9- Gross profit decreased by 20% to $303,264 in the first quarter of 2002 as compared to the first quarter of 2001. The predominant reason for this decrease is the acquisition of a major HBA customer during the first quarter of 2002. The Company estimates that the cost of the acquisition and slotting for this customer totaled $400,000 in the three-month period ended March 31, 2002. Sales from this customer totaled about $900,000 during the three-month period ended March 31, 2002. Without these additional costs, gross profit levels during the first quarter of 2002 would have been consistent with the first quarter of 2001. Selling, general and administrative expenses decreased from 13% to 11% of sales for the three-month period ended March 31, 2002. The Company was able to increase sales without the need for additional labor. However, sales-related expenses remained consistent with the prior periods. Non cash and one time charges include depreciation and amortization, bad debt expense, equity-based compensation costs and one time customer acquisition costs, described above, totaling about $1.1 million for the three month period ended March 31, 2002. Net loss for the first quarter 2002 increased to $1,106,605 ($0.22 per share) as compared to a net loss of $565,895 ($0.15 per share) for the three months ended March 31, 2001. -10- LIQUIDITY AND CAPITAL RESOURCES Working capital was $212,000 in the first quarter of 2002. In order to fund its operations, the Company relied on its credit availabilities. The Company utilized its revolving line agreement to finance its sales with GE capital as well as borrowed $325,000 to finance its inventory needs. Rates on borrowings varied between 9% to 12%. The Company is developing and acquiring web sites that are consistent with its e-commerce businesses. The Company invested about $250,000 for the purchase of certain customer lists, the right to the use of certain trade names and the ownership of an Internet domain in the first quarter of 2002. The Company's guidance and 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. 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's working capital metrics are stable and rely on continuous sales flow. As in the past the Company is constantly creating valuation plans for its subsidiaries that may result in capital transactions. 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. The Company believes that the full value of its majority and minority owned operations are undervalued relative to its market capitalization and will strive to maximize shareholder value through mergers or acquisition strategies. 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. -11- CRITICAL ACCOUNTING POLICIES. ALLOWANCE FOR DOUBTFUL ACCOUNTS. The Company records a provision for doubtful accounts based on specific identification of its accounts receivable. This involves a degree of judgment based on discussion with the Company's internal sales and marketing groups, customer based 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 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 March 31,2002 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 expected 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. RECENT 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 Company adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 did not 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. -12- 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-QSB, the following risk factors should be carefully considered in evaluating the Company business because these factors may have a significant impact on its business, operating results and financial condition. As a result of the risk factors discussed below and elsewhere in this Form 10-QSB 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. 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. -13- 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. 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 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 -14- 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 $1bid, 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. 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 a 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. -15- Management believes actions presently being taken to meet and enhance upon the Company's operating and financial requirements should provide the opportunity for the Company to continue as a going concern. However, management cannot predict the outcome of future operations and no adjustments have been made to offset the outcome of this uncertainty. 11.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. -16- 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. 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). 12. NO DIVIDENDS LIKELY. No dividends have been paid on the Company's 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 on 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. The Company is presently involved in one such lawsuit by one of its primary competitors, JR Cigars, which claims are vehemently denied by the Company. Although the Company maintains general liability insurance, its insurance may not cover potential claims of this type or may not be adequate to indemnify for all liability that may be imposed. Any imposition of liability that is not covered by insurance or is in excess of insurance coverage could harm the Company's business. 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. -17- 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. 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. -18- 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. 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. -19- 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. 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. -20- 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 our inability to serve customers or from increases in costs to license third-party technologies. 23. THE COMPANY'S BUSINESS MAY BE ADVERSELY AFFECTED IF IT IS UNABLE TO CONTINUE TO LICENSE SOFTWARE THAT IS NECESSARY FOR ITS SERVICES 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 reputation and expose it to a risk of loss or litigation and potential liability. -21- 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. 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 goodwill and other intangible assets, any of which might harm its financial results and cause its stock price to decline. Any financing that it might need for future acquisitions may only be available to it on terms that restrict its business or that impose on it costs that reduce its revenue. -22- 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. 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; -23- - 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. 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. -24- 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. 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. -25- 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. 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. -26- 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. 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. Part II - Other Information -27- Item 4-Submission of matters to vote of security holders. 1. No matters were submitted to vote of shareholders for the first quarter ended March 31, 2002. Item 6- Exhibits and Reports on Form 8-K (a) Exhibits - none (b) There were no reports filed on 8-k for the relevant period. -28- SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Synergy Brands, Inc. /s/ Mair Faibish -------------------- /s/ Mair Faibish Date: 5/15/02 ----------------------- By: Mair Faibish Chairman of the Board /s/ Mitchell Gerstein --------------------- /s/ Mitchell Gerstein Date: 5/15/02 ------------------------- By: Mitchell Gerstein Chief Financial Officer