-----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, WtHTLXJEcm+aTCELslCkMbAIpTP6Hr0icYfiq8/IpismGS0JknjHD1HIfG0g9iuQ UwX511WhMYpsOwDn9gWAlg== 0001026018-04-000006.txt : 20040330 0001026018-04-000006.hdr.sgml : 20040330 20040330173151 ACCESSION NUMBER: 0001026018-04-000006 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040330 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: 04702870 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 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, 2003. 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] Synergy Brands Inc. revenues for its most recent fiscal year were $40,540,577 On March 30, 2004, 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 30, 2004) was approximately $4,000,000. 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 30, 2004 was 2,051,154. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for Registrant's 2003 Annual Meeting of Stockholders currently scheduled to be held June 2004 are incorporated by reference in Part III (for other documents incorporated by reference refer to Exhibit Index at page 38 and 39) 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. (SYBR or the Company) is a holding company that operates in wholesale distribution of consumer goods as well as retail distribution of premium cigars and salon products through three segments. It principally focuses on the sale of nationally known brand name consumer products manufactured by major U.S. manufacturers. The consumer products are concentrated within the Grocery and Health & Beauty Aids (HBA) industries as well as the premium cigar business. The company distributes and sells these products through wholly owned subsidiaries in two distinct manners. BUSINESS-TO-BUSINESS (B2B): THE COMPANY OPERATES TWO BUSINESSES WITHIN THE B2B SECTOR. B2B IS DEFINED AS SALES TO NON-RETAIL CUSTOMERS. PHS Group distributes Grocery and HBA products to retailers and wholesalers predominately located in the Northeastern United States. PHS is the largest subsidiary of the Company and represents about 86% of the overall company sales. PHS's core sales base remain the distribution of nationally branded consumer products in the grocery and health and beauty (HBA) sectors. PHS has positioned itself as a distributor for major manufacturers as opposed to a full line wholesaler. A full line wholesaler has the responsibility of servicing the entire needs of a retail operation, whereas a distributor caters to specific merchandising categories. As a result, PHS is able to plan the needs of its customers directly from the source of supply and in turn increase sales to its customers through this unique focus. PHS concentrates on the fastest moving promotional items such as: Tide, Bounty, Nyquil, Pantene, Clorox bleach, Scott tissues, Marcal tissues among many others, and uses promotions, logistics and distribution savings to streamline and reduce its sale prices. The second business segment within the Company's B2B sector is Proset Hair Systems (Proset). Proset distributes salon hair care products to wholesalers, distributors, chain drug stores and supermarkets in the Northeastern part of the United States. BUSINESS TO CONSUMER (B2C): THE COMPANY OPERATES THREE BUSINESSES WITHIN THE B2C SECTOR. B2C IS DEFINED AS SALES TO RETAIL CUSTOMERS. The Company's B2C activities are conducted through its wholly owned subsidiary Gran Reserve Corporation (GRC). GRC operates the following businesses o Cigars Around the World is a recently acquired company that sells premium cigars to restaurants, hotels, casinos, country clubs and many other leisure related destinations. This company was acquired in June, 2003. o CigarGold.com sells premium cigars through the Internet directly to the consumer. o BeautyBuys.com sells salon hair care products directly to the consumer. The Company also owns 20% of the outstanding common stock in Interline Travel and Tours, Inc. (ITT). The Company believes that its capital investment in this unique travel Company may provide for future capital appreciation. Synergy Brands does not manage ITT and relies on the management of ITT for day-to day operations. ITT provides cruise and resort hotel packages through a proprietary reservation system to airline employees and their retirees. ITT is believed to be the largest Company in this sector of the travel industry. Information on ITT can be found at www.perx.com. THE COMPANY'S CORPORATE OFFICES ARE 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. The Company is a reporting Company as defined in Regulation 12B of the Securities Exchange Act of 1934 and files electronically with the SEC the Company's quarterly 10QSB and year end 10-KSB reports and interim Form 8K reports. The general public may read and copy any materials the Company has filed with the SEC at the SEC Public Reference Room at 450 Fifth Street NW, Washington DC. The general public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC which website can be accessed at www.sec.gov. Filed reports by the Company may be viewed at the SEC Edgar filing website to which the Company's homepage website is directly linked. 2 B. BUSINESS TO BUSINESS OPERATIONS (B2B) The Company's B2B operations consist of two operating businesses, PHS Group and Proset Hair Systems. PHS Group is the grocery logistics business involved in 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 electronic commerce and just in time distribution. PHS's core sales base continues to be the distribution of nationally branded consumer products in the grocery and HBA sectors. Distribution of such products is directed to major retailers and wholesalers from major U.S. consumer product manufacturers. PHS has positioned itself as a distributor for major manufacturers as opposed to a full line wholesaler. A full line wholesaler has the responsibility of servicing the entire need of a retail operation, whereas a distributor caters to specific merchandising categories. As a result, PHS is able to plan the needs of its customers directly from the source of supply and in turn increase sales to its customers through this unique focus. PHS concentrates on the fastest moving promotional items and uses logistics and distribution savings to streamline and reduce its sale prices. PHS conducts its business through its sales offices in New York. The Company maintains its information system and warehousing operations in Long Island, NY. PHS services over 500 customers in the northeastern quadrant of the United States. PHS utilizes leased trucks in addition to consigning common carriers for overflow sales. The second business segment within the Company's B2B sector is Proset Hair systems (Proset). Proset distributes Salon hair care products to wholesalers, distributors, chain drug stores and supermarkets in the Northeastern part of the United Stated. Proset uses optimized inventory levels for just in time technology and continuous replenishment programs to stock, track and market defined planograms within the store's salon aisles. Planograms can range from 4 feet to 16 feet depending on the demographics of the store. C. BUSINESS TO CONSUMER OPERATIONS. (B2C) GRC manages multiple Internet domains that market directly to the retail consumer via standard and electronic commerce. GRC owns multiple domains including Netcigar.com, Cigargold.com and BeautyBuys.com. GRC focuses on sale of a mix of Brand name premium cigar items and cigar related accessories and markets them through multiple cigar domains including CigarGold.com and NetCigar.com. Beautybuys.com a subsidiary of GRC markets beauty related products on the Internet through multiple domains to the retail customer. The Company's B2C operations include three businesses. This segment includes Cigars Around the World, CigarGold/NetCigar and BeautyBuys. Cigars Around the World (CAW) was acquired in June of 2003. That Company sells premium cigars to Hotels, Restaurants, Casinos, PGA Clubs and other leisure related destinations. CAW sells its cigars in customized retail displayed humidors that it provides to its customers. CAW also has its own retail website that operates under the name www.CigarsAroundTheWorld.com. The displays range from counter top humidors to Walled Display units. CigarGold (CG) is the company's cigar online unit. CG sells premium cigars online to retail customers throughout the United States and elsewhere where internet access exists. It has a selection of over 1000 products, which include brand-name hand made premium cigars and cigar accessories. CigarGold operates under the domain names: www.CigarGold.com, www.NetCigar.com, and www.GoldCigar.com. The online unit also operates www.BeautyBuys.com. BeautyBuys.com sells salon hair products to the retail consumer. Previously the operation also sold fragrances and cosmetics to retail customers. However, the Company decided in 2003 to limit its selection to salon hair care products, since those items are already carried and stocked within its wholesale salon operation, Proset Hair Systems. -3- (i).NETCIGAR.COM and CIGARGOLD.COM In 1999, the Company launched through its GRC subsidiary NetCigar.com Inc. ("NetCigar") a web site (www.netcigar.com) for sale of premium cigar products. The Company acquired another domain name in CigarGold.com and the operations of NetCigar are now precessed under that name. Through CigarGold.com the Company offers information on and sales of 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 lease in Miami, Florida for storage of its entire inventory in a custom designed humidor warehouse. CigarGold'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 CigarGold's web site design is proprietary and CigarGold has had the site designed and has developed the site to accommodate specific marketing and record keeping requirements to enhance their customer service. Netcigar.com, Inc., utilizes a 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 75% of its product mix; the other 25% is purchased on a just-in-time basis. The distribution facility has sufficient space to handle the Company's anticipated growth in this area of product sales. After an order is shipped, customers can view order-tracking information through a customized profile for each customer. 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. 4 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 is an array of developed e-commerce cigar sites. The largest competitor, JR Cigars has developed an e-commerce web site for its product sales as an adjunct to their traditional brick and mortar retail stores and catalogue sales. 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 $1,000,000 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 should be the easiest to convert to ecommerce 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 advantages 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, acute knowledge of cigar brands, quality of products, stable source of supply, editorial contribution regarding cigar news and one on one online customer interaction. Greater than fifty percent of NetCigar customers are repeat customers on a daily basis. Many of the Company's off-line 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 may not be able to do. In June 2003 the Company acquired the ownership interest in The Ranley Group Inc. an Illinois corporation doing business as Cigars Around the World ("CAW") a Chicago based Midwest premium cigar distributor. CAW sells premium cigars to various leisure related destinations in customized retail desplays and maintains its own internet sales based website. The purchase price being paid for such subsidiary is based on the EBTDA (Earnings Before Taxes, Depreciation and Amortization)of CAW going forward over a three-year period. The purchase price paid for CAW is not anticipated to constitute more than (10%) of the Company's gross assets and is payable substantially in equity representing less than 10% of the Company's voting stock. -5- (ii). BEAUTYBUYS The Company has established through its subsidiary BeautyBuys.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 salon hair care items also sold in the Company's B2B businesses through Proset. Advertising on radio/television and on-line channels is an integral part of the overall traffic-building plan for BeautyBuys.com. The Company over the past year has decreased and in many respects eliminated the product category selection available (demphasizing skin care products, fragrances and cosmetics) and is currently, through Proset, concentrating solely on salon hair care products, most of which are also available for sale to the Company's BtoB sector through ProSet, which has helped streamline the Company's business in this consumer area, and this segment of the Company's. business has thereby been de-emphasized and currently accounts for only a small part of the Company's present operations. (iii). WEBSITE TECHNOLOGY FOR INTERNET SALES. The Company'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. The Company strives through internal development efforts to create and enhance the specialized, proprietary software that The Company believes is unique to its Business. The Company utilizes a 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. The Company has implemented a broad array of services and systems for site management, searching, customer interaction, transaction processing and fulfillment. The Company 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. 6 The Company's website can be shopped 24 hours a day, seven days a week from anywhere that a consumer has Internet access. The Company offers a large selection of products and in addition provides various levels of selected product content, 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 their preferred products. The Company's marketing efforts are aimed at flexibility of presentation to attract new and repeat customers and give ease of access to product availability and information. The Company's online store provides flexibility to change featured products or promotions without having to alter the physical layout of a store. The Company is also able to dynamically adjust its product mix in response to changing customer demand, new seasons or holidays and special promotions. The Company has the ability to offer products to individual customers based on their brand preferences. The Company also cross-sells its departments to promote impulse buying by customers. D. COMPETITION The Company is smaller in comparison to many of its competitors in the marketing of grocery and health and beauty care products and cigars. Access to product remains important but the Company is confident of the continued availability of product from manufactures, wholesalers, and distributors with whom the Company has successfully acquainted itself or developed in house. Source of supplies should be stable. Most of the Company's suppliers are regulated under fair trade and pricing regulations. As a result the Company can remain competitive as long as it purchases products at prescribed volume and credit limitation set by the suppliers. During the years ended December 31, 2003 and 2002, the Company purchased approximately 71% and 77% 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. The Company has maintained over a ten year relationship with this vendor and believes that the relationship with this vendor is satisfactory. E. MAJOR CUSTOMERS. During the year ended December 31, 2003, sales to two customers each of whom accounted for 11% of the Company's total sales and in 2002 sales to one customer accounted for 11% of total sales. These major customers relate to the grocery logistics business within its B2B sector. 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. The Company's home page website is linked directly to the SEC Edgar based listing of all Company SEC filings where further Company information disclosure as required by the SEC is contained. Internet sites presently available regarding Company business and product sales are: BeautyBuys.com NetCigar.com SynergyBrands.Com DealbyNet.com Perx.com (managed by ITT) SYBR.com CIGARGOLD.com Goldcigar.com CigarsAroundtheWorld.com 7 The Company also maintains a UNIX based Virtual Private Network (VPN). The network allows for real time sales and order processing across to Company's regional offers and warehouses. The network has been customized for logistics, warehousing accounting, management information systems, and distribution. G. SEASONALITY Sales by PHS Group and Proset usually peak at the end of the a calendar quarter, when the Company's suppliers offer promotions which lower prices and, in turn, the Company is able to lower its prices and increase sales volume. Suppliers tend to promote at quarter end and as a result reduced product costs may increase sales. In particular, the second and first quarters are usually better operating quarters. Sales of salon care products 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, as well as around special sporting events. In particular sales are stronger before Father's Day, the summer golf season and the Christmas holiday season. H. SHIPPING AND HANDLING Products sold on a Business to Business (B2B) basis by the Company are shipped in bulk from inventory maintained by the Company at its warehouse facilities by leased trucks and common carriers. All B2C orders are consolidated in Company leased fulfillment facilities then packed and shipped to the customer usually within 3 to 7 days mainly by UPS. Approximately 75% of B2C product inventory is in warehouse stock and 25% is purchased by the Company on an as needed "just in time" basis. The Company is dependent on common carriers and truck leases but also in 2003 acquired a fleet of trucks leased and operated directly by the Company. 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 utlized by the Company are prevented from or delayed in utilizing transportation lanes, the Company may incur higher freight costs due to the limited availability of trucks during any such period that transportation lanes are restricted. Trucking expenses are regulated by the cost of fuel and destination lanes. Increasing fuel prices can cause an increase in shipping rates. The Company attempts to pass along these charges through a fuel surcharge. This charge can not be passed to the customers on all occasions. I. TRADEMARKS, LICENSES AND PATENTS The Company has obtained rights to various trademarks and tradenames, and domain names in its internet business. The Company has obtained a wholesale drug license through the Drug Enforcement Agency (DEA) The Company has domestic rights to the "Suarez Gran Reserva", "Breton Legend", "Breton Vintage", "Anduleros", "Don Otilio","Alminante" "Nativo" and various other trade names in marketing of premium handmade cigars. GR also owns and utilizes in its cigar distribution business the following trade names: CigarGold, Netcigar, Gold Cigar, and Cigar Kingdom. Proset is the principal tradename utilized by the Company in its other business sectors. J. EMPLOYEES The Company and its subsidiaries in the aggregate as of the date of this report employ and contract approximately 30 full time persons all of whom work in executive, administrative sales, marketing, data processing, and accounting or clerical activities and certain work as Company employees that integrate with the various warehouses where Company products are stored and as drivers and delivery personnel in the Company leased trucks. The Company leases and staffs its warehouses in New York (PHS Group), New Jersey, (Proset), and Florida, and sales offices in Pennsylvania, Illinois, Maine and Toronto (Netcigar, CigarGold, and BeautyBuys) from where it facilitates storage, sorting, packing and shipping of products sold on its websites. Otherwise warehousing is contracted on an as needed arrangement staffed through the warehousing entity contracted with exception for supervisory personnel hired by the Company. The Company relies on a stable working environment with its contract warehousing and trucking. 8 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 and other federal assistance , 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. FDA jurisdiction is also the subject of current proposed federal legislation under the McIntyre-Davis Bill which will, if and when enacted, codify much of the past regulatory scheme established for tobacco products and as agreed in settlement agreements reached with the tobacco industry to avoid the myriad of lawsuits filed. Even within this bill however cigar products are not included but there is no assurance that they may not be included in these or similar regulations in the future. There is also a regulatory move toward taxing internet tobacco sales, which may also include cigar sales in the future but is presently concentrated on cigarette marketing. Such treatment of tobacco product tax issues is not a new phenomena however but a revisiting of and more active promotion of the federal Jenkins Act which originated in 1949 to address interstate tax issues regarding tobacco sales through use of United States mail. Cigars are not specifically included in the FDA's regulations. Present tobacco regulations which do appear applicable to cigars in addition to focusing on cigarettes are 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 who requests purchases of tobacco products, and requirement that cigars carry warning labels similar to those contained on cigarette packages which Cigar companies are now required to display clearly and permanently on packages, in print ads, on audio and video ads, on point of purchase displays and on the Internet. 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. 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). While the cigar industry historically has not been subject to government 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 costs to the Company of increased government regulations could have a material adverse effect on the Company's business and results of operations. 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. 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. 9 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 illnesse and in addition within such settlements have agreed to end all outdoor advertising and severely restrict other traditional marketing practices such as a ban on promoting tobacco products in media events and productions, to prohibit on brand name tobacco sponsorship of team sports and sport facilities and further agreed to fund a national research foundation as well as to prohibit advertising, promotions and marketing that target youth; and to give access by tobacco companies to the public of related litigation documentation; and strictly curtails traditional lobbying activities on behalf of the tobacco industry. 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 and/or other suppliers of cigar products marketed by 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. 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. 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. 2. OTHER 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 manufacturer or supplier contacts to comply with applicable government regulations could result in product recalls or lack of product availability 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. 10 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 except for developing limitations on internet sales of tobacco products as forementioned herein. 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. 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, Pennsylvania, New Jersey, Toronto, Maine, Illinois and Florida. Warehousing facilities utilized by the Company are located in New Jersey, New York and Florida. The Grocery inventory is warehoused in New York, Salon products are warehoused in New Jersey, and cigars are wharehoused in Florida. The facilities operate under contractual warehousing agreements except in Florida which facility is leased. ITEM 3: LEGAL PROCEEDINGS The Company is a party to a number of legal proceedings 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 2003 no matters were submitted for shareholder approval. 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 Market under the Symbol "SYBR", and on the Boston Stock Exchange under the Symbol "SYB". 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 Close Adj. Close* - ------------- ------- ------- ------ ----------- March 31, 2002 1.25 1.00 1.00 4.00 June 30, 2002 0.94 0.76 0.80 3.20 September 30, 2002 0.95 0.75 0.81 3.24 December 31, 2002 0.75 0.63 0.63 2.52 March 31, 2003 3.05 2.47 2.47 2.47 June 30, 2003 3.44 2.45 2.69 2.69 September 30, 2003 4.49 2.99 3.61 3.61 December 31, 2003 4.20 3.40 3.90 3.90 *Adjusted for reverse split 4 to 1 on 2/20/2003. On March 30, 2004, the Company had approximately 3000 shareholders of record. 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. 11 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 2003. 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. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF OPERATIONS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION OVERVIEW Synergy Brands Inc. (SYBR or the Company) is a holding company that operates in wholesale distribution of consumer goods as well as retail distribution of premium cigars and salon products through three segments. It principally focuses on the sale of nationally known brand name consumer products manufactured by major U.S. manufacturers. The consumer products are concentrated within the Grocery and Health & Beauty Aids (HBA) industries as well as the premium cigar business. The company distributes and sells these products through wholly owned subsidiaries in two distinct manners. Business-to-Business (B2B): The Company operates two businesses segments within the B2B sector. B2B is defined as sales to non-retail customers. PHS Group ("PHS") distributes Grocery and HBA products to retailers and wholesalers predominately located in the Northeastern United States. PHS is the largest subsidiary of the Company and represents about 86% of the overall Company sales. PHS's core sales base continues to be the distribution of nationally branded consumer products in the grocery and (HBA) sectors. PHS has positioned itself as a distributor for major manufacturers as opposed to a full line wholesaler. A full line wholesaler has the responsibility of servicing the entire needs of a retail operation, whereby a distributor caters to specific merchandising categories. As a result, PHS is able to plan the needs of its customers directly from the source of supply and in turn increase sales to its customers through this unique focus. PHS concentrates on the fastest moving promotional items such as: Tide, Bounty, Nyquil, Pantene, Clorox bleach, Scott tissues, Marcal tissues among many others, and uses logistics and distribution savings to streamline and reduce its sale prices. The second business segment within the Company's B2B sector is Proset Hair Systems (Proset). Proset distributes Salon Hair care products to wholesalers, distributors, chain drug stores and supermarkets in the Northeastern part of the United States. Business to Consumer (B2C): The Company operates three businesses within the B2C segment. B2C is defined as sales to retail customers. The Company's B2C activities are conducted through its wholly owned subsidiary Gran Reserve Corporation (GRC). GRC operates the following businesses o Cigars Around the World is a recently acquired company that sells premium cigars to restaurants, hotels, casinos, country clubs and many other leisure related destinations. The company was acquired in June 2003. o CigarGold.com sells premium cigars through the Internet directly to the consumer. o BeautyBuys.com sells salon hair care products directly to the consumer. The Company also owns 20% of the outstanding common stock of Interline Travel and Tours, Inc. (ITT). ITT provides cruise and resort hotel packages through a proprietary reservation system to airline employees and their retirees. ITT is believed to be the largest Company in this sector of the travel industry. Information on ITT can be found at www.perx.com. The Company believes that its capital investment in this unique travel Company may provide for future capital appreciation. Synergy Brands does not manage ITT's day-to day operations. For further information please visit our corporate website at www.sybr.com -12- CONSOLIDATED RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2003 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2002. SUMMARY OF OPERATING SEGMENTS AND SUMMARY CONSOLIDATED RESULTS OF OPERATIONS Operating Operating and Year ended 12/31/2003 Segments Corporate Segments
Revenue 40,540,577 28.53% 40,540,577 28.53% Gross Profit 2,809,199 65.41% 2,809,199 64.41% SG&A 2,655,864 13.71% 3,076,297 -16.09% Net loss (817,685) 28.43% 1,355,223 48.64% Net loss per common share (0.49) 43.59% (0.82) 59.52% Depreciation and amortization 600,730 -30.89% 692,698 -22.51% Interest income 13,805 356.51% 13,913 -47.88% Interest and financing expenses 689,286 257.27% 690,038 226.60% ---------- --------- EBITDA 458,553 640.28% 91,600 106.51% ========== ========= EBITDA net income per share .28 533.70% .06 105.13%
Year ended 12/31/2002 Revenue 31,540,675 31,540,675 Gross Profit 1,698,297 1,698,297 SG&A 2,335,719 3,666,235 Net loss (1,142,511) (2,486,567) Net loss per common share -0.88 -1.91 Depreciation and amortization 869,273 893,935 Interest income 3,024 26,695 Interest and financing expenses 192,931 211,279 ---------- --------- EBITDA (83,331) (1,408,048) ========== ========= EBITDA net income per share (.06) (1.08) Revenues increased by 29% to $40,540,577 for the year ended December 31 2003 as compared $31,540,675 for the year ended December 31, 2002. Revenues increased across all of the Company's business segments. The largest percentage increase was in the Company's B2C operations. Revenues increased in this segment as a result of the Company's acquisition of Cigars Around the World in June of 2003. The Company's grocery operation continued to develop additional vendor relationships in the grocery and HBA businesses as well as expand its sales in Canada. Proset increased its revenues by selling its products to larger distributors as well as retail customers. Gross profit increased by 65% to $2.8 million in 2003 as compared to 2002. The overall gross profit percentage increased to 6.9% to from 5.4%. The increase in gross profit is attributable to better operating margins in the B2B operations realized through higher vendor allowances as well as an increase of Direct Store Delivery sales, whose sales generate higher gross margins. The acquisition of CAW also helped increase gross profit. The following segment analysis will further define the components, which caused the increase in operating gross profit. In this period the Company utilized its own truck fleet and developed a Direct Store Delivery (DSD) warehousing operation which cost the Company $371,000 as compared to $209,000 in 2002. Management believes that this operation should increase the Company's sales and gross profit. In order for the Company to achieve improved profitability it needs to reduce its financing costs and increase revenues and operating margins. -13- Selling General and Administrative expenses (SGA) were reduced by 16% even though revenues increased by 28.5% for the period ended December 31, 2003 as compared to the prior annual period. The Company streamlined its operations by centralizing all administrative functions at its corporate offices, reduced staff in its Proset operation through outsourcing, while also reducing the costs involved in retail sales. The Company reduced its advertising expenses on a corporate level as well as reduced developmental expenses in its B2C businesses. The largest subsidiary of the Company, PHS Group increased its SGA expenses by 33.2% to $1,323,877 in 2003 as compared to $993,664 in 2002. The increase in SGA for PHS group was caused by a 25% increase in revenues. PHS incurs variable expenses in connection with selling costs as well as its promotional expenses. As revenues rise sales commissions and certain operating expenses resulting from sales increase commensurately. The net loss of the Company was reduced by 49% to $1,277,223 in 2003 as compared to a net loss of $2,486,567 in 2002. The loss was reduced through sales growth, an increase in operating gross profit, a reduction of SG&A expenses and a significant reduction in corporate expenses. However, financing costs increased for the year as a result of the Company's growth. Material factors that affected the Company's costs were increased financing costs and the control of operating margins. The increase was attributable to the development of the Company's wholesaling operation. Corporate expenses such as legal, accounting, and regulatory costs represent the difference between the Company's consolidated results and operating results. Management believes that its corporate expenses may increase as a result of additional regulatory requirements that have been enacted by the Securities and Exchange Commission (SEC). The Company will be required to comply with additional governance and financial regulations that will likely result in additional corporate expenses. Corporate expenses for 2003 totaled $459,565, which include legal, accounting and regulatory expenses. Earnings before interest taxes, depreciation and amortization (EBITDA) improved from a loss of $1,408,048 to a profit of $91,600 for the year ended December 31, 2003 as compared to December 31, 2002. The improvement is attributable to an increase in revenues, an increase in operating gross profit and a reduction in SG&A. However financing costs increased by 226% to $690,038. Management believes that financing costs were increased as a result of revenue growth. As a result the Company was required to utilize its line of credit to support account receivable and inventory growth. Although the working capital needed to support revenue growth is directly related to the growth in accounts receivable and inventory, the Company has invested in capital assets, such as warehousing and trucks to support the growth of the business. EBITDA from the Company's operating businesses increased by 650% to $458,553 in 2003 as compared to a loss of $83,331 in 2002. In order to fully understand the company's results a discussion of the company's segments and their respective results follows; B2B OPERATIONS The Company's B2B operations consist of two operating businesses, PHS Group and Proset Hair Systems. PHS Group distributes Grocery and HBA products to retailers and wholesalers predominately located in the Northeastern United States and Canada. PHS is the largest subsidiary of the Company and represents about 86% of the overall company sales. PHS's core sales base remain the distribution of nationally branded consumer products in the grocery and health and beauty (HBA) sectors. PHS has positioned itself as a distributor for major manufacturers as opposed to a full line wholesaler. A full line wholesaler has the responsibility of servicing the entire needs of a retail operation, where as a distributor caters to specific merchandising categories. As a result, PHS is able to plan the needs of its customers directly from the source of supply and in turn increase sales to its customers through this unique focus. PHS concentrates on the fastest moving promotional items and uses logistics and distribution savings to streamline and reduce its sale prices. The second business segment within the company's B2B sector is Proset Hair Systems (Proset). Proset distributes Salon Hair care products to wholesalers, distributors, chain drug stores and supermarkets in the Northeastern part of the United States. -14- PHS SEGMENT INFORMATION OF OPERATING BUSINESSES B2B CHANGE Year ended December 31, 2003 Revenue 34,740,999 25.21% Gross Profit 1,927,416 77.96% SG&A 1,323,887 33.24% Net Loss (79,864) 72.75% Depreciation and amortization 272,812 0.05% Interest income 13,805 356.51% Interest and financing expenses 449,876 375.65% EBITDA 629,019 784.24% Year ended December 31, 2002 Revenue 27,745,818 Gross Profit 1,083,069 SG&A 993,644 Net Loss (293,088) Depreciation and amortization 272,667 Interest income 3.024 Interest and financing expenses 94,582 EBITDA 71,137 PHS increased its revenues by 25.2% to $34.7 million for the year ended December 31, 2003 as compared to the prior year. The increase in PHS business is attributable to the utilization of additional vendors, development of a wholesale operation and expansion of the Canadian distribution business in Ontario, Canada. The Company also benefited from increases in the vendor allowances it receives from its vendors, thereby providing its customers with additional discounts. This also resulted in increased sales. Gross profit increased by 78% to $1.9 million in 2003 as compared to 2002. PHS increased its gross profit by increasing DSD sales as well as focusing on promotional merchandise offered by its vendors. In 2003 several PHS vendors created special packaging with promotional pricing that enabled PHS to widen its margin. As an example, special packaging was created for Nyquil, Marcal paper, Clorox displays as well as Herbal essence shampoos among others, with unique retail display features, that PHS has been able to strongly promote during FY 2003 as opposed to marketing those products for normal replenishment. Promotional displays allow PHS to sell better mixes of product as well as introduce new items in combination with regularly stocked items. Vendor allowances as a result increased by 69% to $2.7 million in 2003 as compared to $1.6 million in 2002, thus materially increasing PHS gross profit in 2003. EBITDA increased by 9 times to $629,019 in 2003 as compared to $71,137 in 2002. As long as the Company maintains or expands its vendor relationships, management believes that it can continue to improve its operating results. Management needs to also reduce its financing costs for PHS as they represent 71% of EBITDA and a substantial component of the Company's overall expenditures. -15- PROSET SEGMENT INFORMATION OF OPERATING BUSINESSES SALON PRODUCTS CHANGE Year ended December 31, 2003 Revenue 3,671,106 44.69% Gross Profit 334,305 9.20% SG&A 429,684 -29.91% Net Loss (502,158) 39.77% Depreciation and amortization 213,198 -54.53% Interest and financing expenses 199,892 231.30% EBITDA (89,068) 70.75% Year ended December 31, 2002 Revenue 2,537,216 Gross Profit 315,290 SG&A 613,077 Net Loss (833,712) Depreciation and amortization 468.842 Interest and financing expenses 60,336 EBITDA (304,534) Proset increased its revenues by 44.7% in 2003 as compared to 2002. The growth in Proset business is attributable to increased wholesale and distribution activity, as opposed to Direct Store Delivery (DSD) business. As a result, the Company's customer base has expanded to include smaller distributors that purchase salon products in higher quantities, which in turn reduces the Company's gross profit, but increases revenues. However, distributor sales require less labor, warehousing and distribution costs, but rely on optimal market conditions and product availability. The salon business is highly fragmented and very competitive. Proset must maintain strong vendor relations, which include manufacturers, distributors and resellers in order to keep a supply chain for its customer base. EBITDA improved from a loss of $304,534 in 2002 to a loss of $89,068 in 2003. This improvement was caused by a reduction in labor cost, warehousing expenses, increased revenues and a reduction in freight expenses. Financing costs are also an important factor in the operation of Proset. As revenues increased financing costs increased by 231% to $199,892. In order to improve the profitability of proset, management believes that financing costs need to reduced. -16- B2C SEGMENT INFORMATION OF OPERATING BUSINESSES B2C CHANGE Year ended December 31, 2003 Revenue 2,128,472 69.24% Gross Profit 537,478 79.20% SG&A 888,293 21.85% Net Loss (235,636) -1399.82% Depreciation and amortization 114,720 -10.21% Interest and financing expenses 39,518 3.96% EBITDA (81,398) 154.24% Year ended December 31, 2002 Revenue 1,257,641 Gross Profit 299,938 SG&A 728,998 Net Loss ( 15,711) Depreciation and amortization 127,764 Interest and financing expenses 38,013 EBITDA 150,066 The Company's B2C segment includes three businesses, which include Cigars Around the World, CigarGold and BeautyBuys. Cigars Around the World (CAW) was acquired in June of 2003. CAW sells premium cigars to Hotels, Restaurants, Casinos, PGA Clubs and other leisure related destinations. CAW sells its cigars in through customized retail displayed humidors. CAW also has its own retail website that operates under the name www.CigarsAroundTheWorld.com. The displays range from counter top humidors to Walled Display units. CigarGold (CG) is the Company's cigar online unit. CG sells premium cigars online to retail customers throughout the United States. It has a selection of over 1000 products, which include brand-name hand made premium cigars and cigar accessories. CigarGold operates under the domain names: www.CigarGold.com, www.NetCigar.com, and www.GoldCigar.com. The online unit also operates www.BeautyBuys.com. BeautyBuys.com sells salon hair products to the retail consumer. Previously the operation also sold fragrances and cosmetics to retail customers. However, the Company decided in 2003 to limit its selection to salon hair care products, since those items are already carried and stocked within its wholesale salon operation, Proset Hair Systems. Revenues in the Company's B2C operation increased by 69.2% to $2.1 million from 2002 to 2003. The increase is predominately attributable to the acquisition of CAW. The Company's core operation grew by 25% assuming CAW figures were not included. CAW on a current operating basis represents approximately 60% of B2C revenues. Gross profit improved by 79% in FY 2003 as compared to FY 2002. The increase in gross profit is attributable to higher revenues realized through the acquisition of CAW in FY 2003. EBITDA improved by 154% for the same period. The table above provides comparative details for the Company's B2C operation. -17- LIQUIDITY AND CAPITAL RESOURCES The Company's predominant need for working capital financing is to finance its Receivables and Inventory levels. In order to finance its requirements the Company relies on secured asset based lending, trade financing as well as its cash flow. The Company's major lender, International Investment Group Trade Opportunities Fund (IIG), provides receivable and inventory financing to its three operating segments. In addition, most of the Company's major vendors provide trade credit for purchases ranging from 10 to 30 days. One vendor to the Company represents over 70% of the Company's purchases. Loss of this vendor would have a material adverse effect on the Company's operations. year ended 2003 2002 Working Capital 1,131,027 51,542 2094.38% Assets 11,082,645 5,871,669 88.75% Liabilities 8,048,813 3,789,132 112.42% Equity 3,033,832 2,082,537 45.68% Line of Credit Facility 4,013,680 1,754,119 128.82% Receivable Turnover (days) 33 21 53.18% Inventory Turnover (days) 19 12 56.64% Tangible Assets 9,388,717 4,200,560 125.89% The Company has a revolving loan and security agreement with IIG for financing its operations. The line of credit under the loan allows borrowings up to $7 million for accounts receivable, purchase orders, and inventory. The term of the agreement is for one year and allows for automatic renewals. As of December 31, 2003 the Company's borrowing under its agreement were $4 million and increase of 128% as compared to 2002. In November of 2003, the PHS secured a $2 million stand by letter of credit (LC) for the purpose of increasing its line of credit to $3.5 million with a major vendor. The LC was secured by a $500,000 cash deposit as well as certain reserves modified under the loan and security agreement with IIG. The LC expires in May 2004, at which time the cash deposit and reserves will be released. In the event that PHS requires an extension of this facility, the modification to the loan and security agreement will remain in effect. The increased vendor line of credit facility has enabled the Company to secure special promotional products specifically designed for the cold and flu season, which increases the Company's average purchases from approximately $40,000 per order to approximately $150,000 per order. The Management believes that its IIG facility has enabled the Company to achieve its recent growth. By providing financing on all of the Company's tangible assets, the Company has been able to expand its sales through receivable order and inventory financing support. In addition IIG provides the Company with a financing option in Canada, borrowing against anticipated vendor allowances as well as securing product through sales order financing. However IIG's financing rate is 17% and as a result caused financing charges to increase materially in 2003 as compared to 2002. Management believes that to achieve profitable operations, financing costs must be reduced. By improving its operating results and especially EBITDA, management expects to generate positive cash flow, assuming financing costs can be reduced. However, there can be no assurance that the Company will reduce its financing costs, so that it can improve its operating results. Failure to reduce financing costs will inhibit the Company's growth. Management believes that its current capital structure needs to be improved in order to secure a profitable operation. -18- As the Company's operations have grown the Company has been able to raise additional capital predominately through its shareholders. In 2003, the Company raised $1.6 million through the issuance of Series A Class B preferred Stock and $850,000 through 12% notes secured by its investment in ITT. The Company has used these financings to reduce its borrowings with IIG as well as provide working capital. As the Company grows it intends to raise additional capital to accommodate its growth plans however, there can be no assurance that additional capital can be attained. Working capital at December 31, 2003 totaled approximately $1.3 million a increase of 1.25 million from 2002. The Company's operations require financing of inventory and receivables. IIG provides the company's operating subsidiaries a facility that allows for borrowings of up to 85% against eligible accounts receivables and 50% against eligible inventory and orders in transit. As of December 31, 2003, the company had available under its borrowing base $500,000. It is important to note that as the borrowings increase from IIG, commensurate with increased revenues and additional need for inventory, additional capital will be needed to support the borrowing base with IIG. Therefore as the financial leverage of the company increases, additional capital is needed to support the company's growth. The Company turns its overall inventory on average approximately every 19 days, its receivables average 33 days of collections and its account payables average 30 days. Management believes that continued 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. The following table presents the Company's expected cash requirements for Contractual obligations outstanding as of December 31, 2003. Payments Due By Period Contractual Obligations Less Than 1-3 4-5 After 5 1 Year Years Years Years Total Line-Of-Credit $4,013,680 $4,013,680 Notes Payable $850,000 $850,000 Operating Leases $10,856 $382,565 $153,378 $546,799 Total Contractual Cash Obligations $4,024,536 $1,232,565 $153,378 $5,410,479 CRITICAL ACCOUNTING POLICIES. The discussion and analysis of the Company's financial condition and results of operations are based upon its financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of financial statements requires management to make estimates and disclosures on the date of the financial statements. On an on going basis, management evaluates its estimates. Management uses authoritative pronouncements, historical experience and other assumptions as the basis for making judgments. Actual results could differ from those estimates. Management believes that the following critical accounting policies affect its more significant judgments and estimates in the preparation of the Company's financial statements. -19- ACCOUNTS RECEIVABLE/ALLOWANCE FOR DOUBTFUL ACCOUNTS. The Company's accounts receivable are due from businesses engaged in the distribution of grocery, health and beauty products as well as from consumers who purchase health and beauty products and premium handmade cigars from the Company's Web sites. Credit is extended based on evaluation of a customers' financial condition and, generally, collateral is not required. Accounts receivable are due within 30 days and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered past due. Estimates are used in determining the allowance for doubtful accounts based on the Company's historical collections experience, current trends, credit policy and a percentage of its accounts receivable by aging category. In determining these percentages, the Company looks at historical write-offs of its receivables. The Company also looks at the credit quality of its customer base as well as changes in its credit policies. The Company continuously monitors collections and payments from its customers. The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. 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 as well as net operating loss carry forwards. 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, 2003, 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. 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. To the extent impairment has occurred, the carrying amount of the asset would be written down to an amount to reflect the fair value of the asset. RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARDS BOARD ("FASB"). In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN No. 46") "Consolidation of Variable Interest Entitles." In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. A variable interest entity often holds financial assets, including loans for receivables, real estate or other property. A variable interest entity may be essentially passive or it may engage in activities on behalf of another company. Until now, a company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN No. 46 changes that by requiring a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. FIN No. 46's consolidation requirements apply immediately to variable interest entities created or acquired after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after December 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company has adopted FIN No. 46 effective January 31, 2003. In December 2003, the FASB issued FASB Interpretation No. 46R, "consolidation of Variable Interest Entities an interpretation of ARB 51 (revised December 2003)" ("FIN 46R"), which includes significant amendments to the previously issued FIN 46. Among other provisions, FIN 46R includes revised transition dates based on the nature as well as the creation date of the variable interest entity. The Company is now required to adopt the provisions of FIN 46R no later than the end of the first reporting period that ends after March 15, 2004. The adoption of these pronouncements has not and is not expected to have a material impact on the Company's consolidated financial condition or results of operations taken as whole. -20- In April 2003, the FASB issued SFAS No. 149 ("SFAS No. 149"), "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 except for the provisions that were cleared by the FASB in prior pronouncements. The adoption of SFAS No. 149 has not had a material impact on the Company's financial position and results of operations. In May 2003, the FASB issued SFAS No. 150 ("SFAS No. 150"), "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. In accordance with the standard, financial instruments that embody obligations for the issuer are required to be classified as liabilities. This Statement shall be effective for financial instruments entered into or modified after May 31, 2003 and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003. The Company adoption of SFAS No. 150 has not had a material impact on its financial position and results of operations. In November 2002, the Emerging Issues Task Force ("EITF") reached a consensus on the application of EITF No. 2-16 "Accounting by a Customer (including a reseller) for Certain Consideration Received from a Vendor. EITF No. 02-16 addresses how a reseller of a vendors products should account for cash consideration received from a vendor. The adoption of EITF No. 02-16 has not had a material effect on the Company's financial position and results of operations. In December 2003, the Securities and Exchange Commission ("SEC") issued Staff Accountant Bulletin No. 104, "Revenue recognition" ("SAB No.104"), which codifies, revises and rescinds certain sections on SAB No. 101, "Revenue Recognition" in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The changes noted in SAB No. 104 did not have a material effect on the Company's financial position or results of operations. SEASONALITY Sales by PHS Group and Proset usually peak at the end of the a calendar quarter, when the Company's suppliers offer promotions which lower prices and, in turn, the Company is able to lower its prices and increase sales volume. Suppliers tend to promote at quarterly end and as a result reduced products costs may increase sales. In particular, the second and first quarters are usually better operating quarters. 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 as well as around special sporting events. INFLATION The Company believes that inflation, under certain circumstances, could be beneficial to the Company's major business, PHS Group. 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. 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. However, since the company currently pays above market rates for financing, management believes that inflationary pressures on pricing may be beneficial to sales growth and operating margins. 21 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. The Company has a long history of operating losses. To date, a large portion of the Company's expenses have been financed through capital raising activities. Although the Company has narrowed its losses, it still continues to report operating deficits as opposed to profits. A large portion of the Company's historical losses are a direct result of fees and expenses paid for in stock and/or barter. and working capital financing. Due to a pattern of historical losses, there is no assurance that further financing will not be needed for operating purposes. 2. INTERNET The internet environment is still 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. 22 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 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. Although the Company has in the last year leased a fleet of trucks operated by the Company to make deliveries, the Company is still 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. 23 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, as well as the Company also being notified that stockholders' equity has fallen below minimum NASDAQ continued listing standard of $2,500,000. NASDAQ has adopted, and the Commission has approved, certain changes to its maintenance requirements including the requirement that a stock listed in such market have a bid price greater than or equal to $1.00 and the listed Company maintain stockholders equity above $2,500,000. 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 or the Company fails to maintain stockholders' equity at a level of at least $2,500,000 the Common Stock could be delisted from the NASDAQ Small Cap System and thereafter trading would be reported in the NASDAQ's OTC Bulletin Board or in the "pink sheets." (see Item 5-"Market For The Registrant's Common Stock and Related Stockholder Matters" supra for a more in depth discussion of the Company's current NASDAQ listing status)In the event of delisting from the NASDAQ Small Cap System, the Common Stock would become subject to the rules adopted by the Commission regulating broker-dealer practices in connection with transactions in "penny stocks." The disclosure rules applicable to penny stocks require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized list disclosure document prepared by the Commission that provides information about penny stocks and the nature and level of risks in the penny stock market. In addition, the broker-dealer must identify its role, if any, as a market maker in the particular stock, provide information with respect to market prices of the Common Stock and the amount of compensation that the broker-dealer will earn in the proposed transaction. The broker-dealer must also provide the customer with certain other information and must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. Further, the rules require that following the proposed transaction the broker-dealer provide the customer with monthly account statements containing market information about the prices of the securities. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to the penny stock rules. If the Common Stock became subject to the penny stock rules, many broker-dealers may be unwilling to engage in transactions in the Company's securities because of the added disclosure requirements, thereby making it more difficult for purchasers of the Common Stock to dispose of their shares. The Company's common stock has historically remained at NASDAQ trading levels above $1 except for limited periods of time and the Company has achieved and is confident of maintaining a level of Stockholders' equity above $2,500,000. 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 and that it can continue to achieve and maintain NASDAQ listing compliance, but of this there can be no assurance. 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. 24 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 taken and presently being taken to meet and enhance the Company's operating and financial requirements should assure and 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. 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). 25 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. 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. 26 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. 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. 27 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. 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. 28 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 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. 29 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. 30 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 limits 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. 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 prohibitions 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. 31 The Company is not aware of any recent related legislation 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. The Company is not aware of any further extensions regarding but understands that more permanent application is currently being discussed in the federal legislature. 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. There has been recent activity in attempts to enforce the federal Jenkins Act which historically allowed State taxation of sales of goods made through use of the United States mail and is currently being reviewed toward possibly allowing the States to tax internet sales. . 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 it's 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 customer's 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. 32 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: F-2 Consolidated Balance Sheet as of December 31, 2003 F-3 - F-4 Consolidated Statements of Operations for the Years Ended December 31, 2003 and 2002 F-5 Consolidated Statement of Changes in Stockholders' Equity for the Years Ended December 31, 2003 and 2002 F-6 - F-7 Consolidated Statements of Cash Flows for the Years Ended December 31, 2003 and 2002 F-8 - F-9 Notes to Consolidated Financial Statements F-10-F-36 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NONE 33 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, 2004. The annual meeting is scheduled to be in June 2004. Such Proxy Statement expected to be filed with the Commission by April 30, 2004 and is incorporated herein by reference. The Company has established and adopted a Code of Ethics outlining and providing guidelines for executive and employer conduct regarding the disclosure, promotion and handling of Company business and business relationships and the Company has also established a Nominating Committee of certain of its Directors to assist in the election and succession of members of the Company's Board of Directors. Copies of the Company's Code of Ethics and Nominating Committee Charter are included as exhibits to this Report and in the future are expected to be disclosed in the Company's Internet home page website. ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K 1. (a) Exhibits: See Index to Exhibits 2. Reports on Form 8-K A Form 8-K report was filed November 18, 2003 regarding the announcement by the Company of its 3rd quarter 2003 financial results on which the Company published a press release made an exhibit to such Form 8-K. Such was the only 8K report filed during the fourth quarter of 2003. 3. Financial Statement Schedules None ITEM 14. CONTROLS AND PROCEDURES As certified herein by the Company's Chief Executive Officer and Chief Financial Officer, they have within 90 days of the date of this report evaluated the disclosure controls and procedures of the Company and believe same to be adequate to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the Company sufficient to allow evaluation by the Company of accuracy in their recording, processing, summarizing and reporting financial and other Company information and data, and there do not appear to be any deficiencies in the design or operation of such internal controls which would adversely and materially affect the Company's ability to discover, evaluate and report such information. The Company is evaluating and is hopeful at completing the adoption of a revised Audit Committee Charter providing expanded authority of such committee and the independent nature and identify of its director participants as required by the recent enactment of the Sarbanes-Oxley Act. The Company believes that at least one director participant therein will be qualified as an "audit committee financial expert" as defined in such Act. There have been no significant changes in the Registrants internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation thereof, including any corrective actions with regard to significant deficiencies and material weaknesses. Fees paid to the Company's independent auditors in the last two years were as follows: 2003 2002 audit fees 130,000 85,000 audit related fees - - tax fees 32,500 25,000 other fees 25,000 5,500 34 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: March 30, 2004 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: March 30, 2004 by /s/ Mitchell Gerstein ---------------------------------- Mitchell Gerstein, Director Chief Financial Officer Signed: March 30, 2004 35 Certifications I, Mair Faibish, certify that: 1. I have reviewed this annual report on Form 10-KSB of Synergy Brands, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 30, 2004 /s/ Mair Faibish - ---------------- Mair Faibish Chief Executive Officer 36 I, Mitchell Gerstein, certify that: 1. I have reviewed this annual report on Form 10-KSB of Synergy Brands, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 30, 2004 /s/ Mitchell Gerstein - --------------------- Mitchell Gerstein Chief Financial Officer 37 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, 2003, and the related consolidated statements of operations, changes in stockholders' equity and comprehensive loss and cash flows for each of the two years in the period ended December 31, 2003. 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 audits. We conducted our audits 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 audits provide 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, 2003, and the consolidated results of their operations and their consolidated cash flows for each of the two years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. /s/ GRANT THORNTON LLP New York, New York March 5, 2004 F-2 Synergy Brands, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEET December 31, 2003 ASSETS
CURRENT ASSETS Cash and cash equivalents $ 777,522 Cash collateral security deposit 500,000 Marketable securities 46,035 Accounts receivable trade, less allowance for doubtful accounts of $127,481 3,630,007 Other receivables 674,519 Inventory 2,164,116 Prepaid assets and other current assets 509,479 --------- Total current assets 8,301,678 PROPERTY AND EQUIPMENT, NET 379,224 OTHER ASSETS 186,057 NOTES RECEIVABLE 437,133 Intangible assets, net of accumulated amortization of $1,780,736 1,524,256 GOODWILL 164,297 --------- $ 10,992,645 ==========
The accompanying notes are an integral part of this statement. F-3 Synergy Brands, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEET December 31, 2003 LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES Lines of credit $ 4,013,680 Accounts payable 3,108,695 Related party note payable 100,800 Accrued expenses 37,476 ----------- Total current liabilities 7,260,651 NOTES PAYABLE 788,162 COMMITMENTS AND CONTINGENCIES 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 - $.001 par value; 9,900,000 shares authorized, none issued - Class B Series A Preferred stock-$.001 per value; 500,000 shares authorized; 160,000 shares issued and outstanding; liquidation preference of $10.00 per share 160 Common stock - $.001 par value; 49,900,000 shares authorized; 1,919,359 shares issued and outstanding 1,919 Additional paid-in capital 37,748,004 Deficit (34,373,327) Unearned Compensation (426,252) Accumulated other comprehensive loss (1,772) ----------- 2,948,832 Less treasury stock, at cost, 1,000 shares (5,000) ----------- 2,943,832 ----------- $10,992,645 ===========
The accompanying notes are an integral part of this statement. F-4 Synergy Brands, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS Year ended December 31,
2003 2002 Net sales $40,540,577 $31,540,675 ----------- ----------- Cost of sales Cost of product 36,837,796 29,241,384 Shipping and handling costs 893,582 600,994 ----------- ----------- 37,731,378 29,842,378 ----------- ----------- Gross profit 2,809,199 1,698,297 Operating expenses Advertising and promotional 91,634 469,965 General and administrative 2,984,663 3,196,270 Depreciation and amortization 692,698 893,935 ----------- ----------- 3,768,995 4,560,170 ----------- ----------- Operating loss (959,796) (2,861,873) Other income (expense) Interest income 13,913 26,695 Other income (expenses) 298,932 514,860 Equity in earnings of investee 92,424 67,717 Interest and financing expenses (690,038) (211,279) ----------- ----------- (284,769) 397,993 ----------- ----------- Loss before income taxes (1,244,565) (2,463,880) Income tax expense 32,658 22,687 ----------- ----------- NET LOSS (1,277,223) (2,486,567) Dividend-Preferred Stock (78,000) - ----------- ----------- Net loss attributable to common stockholders $ (1,355,223) $ (2,486,567) =========== =========== Basic and diluted net loss per common share: $(0.82) $(1.91) =========== =========== Weighted-average shares used in the computation of loss per common share: Basic and diluted 1,652,019 1,302,042 =========== ===========
The accompanying notes are an integral part of these statements F-5 Synergy Brands, Inc. and Subsidiaries CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY AND COMPREHENSIVE LOSS Years ended December 31, 2003 and 2002
Class A Class B - Series A Additional preferred stock Preferred stock Common stock paid-in Shares Amount Shares Amount Shares Amount capital Deficit Balance at January 1, 2002 100,000 $100 1,237,621 $1,238 $34,795,297 $(30,609,537) Common stock and options issued in connection with compensation Plan 85,500 85 301,360 Intrinsic value of stock options issued in connection with compensation plan 49,825 Issuance of restricted stock 1,250 1 4,199 Purchase of treasury stock Sale of treasury stock (24,451) Retirement of treasury stock (167,500) Extinguishment of notes receivable 25,000 25 99,975 Extinguishment of advertising and in-kind services receivable from stockholder 18,750 19 151,981 Change in unrealized gain on marketable securities Cumulative translation adjustments Net loss (2,486,567) ------- ----- ------ ------- --------- ------ ------- ----------- Comprehensive loss Balance at December 31, 2002 100,000 $ 100 -- -- 1,368,121 $1,368 $35,210,686 $(33,096,104) ======= ===== ====== ======= ========= =====- ======= =========== Common stock and options issued in connection with compensation plan 93,438 93 212,133 Common stock issued 30,000 30 47,170 Net proceeds from issuance of common stock in connection with private placement 160,000 160 160,000 160 1,509,680 Issuance of common stock in satisfaction of note payable 15,300 15 39,985 Issuance of restricted stock in Connection with notes payable 42,500 43 97,957 Issuance of common stock for services 185,000 185 493,315 Issuance of common stock in connection with CAW acquisition 25,000 25 99,975 Purchase of treasury stock Sale of treasury stock 115,103 Preferred stock dividend (78,000) Consulting expense Change in unrealized gain on marketable securities Cumulative translation adjustments Net loss (1,277,223) ------- ----- ------ ------- --------- ------ ------- ----------- Comprehensive loss Balance at December 31, 2003 100,000 $100 160,000 $160 1,919,359 $1,919 $37,748,004 $(34,373,327) ======= ===== ====== ======= ========= =====- ======= ===========
F-6 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (continued) Years ended December 31, 2003 and 2002
Stockholder's Accumulated advertising other Stockholders' and in-kind Total Compreh comprehensive treasury unearned notes' services stockholder's sive income (loss) stock Compensation receivable Receivable equity Loss Balance at January 1, 2002 $1,685 $(251,135) $ (115,629) $(794,990) $3,027,029 Common stock and options issued in connection with compensation Plan (2,500) 298,945 Intrinsic value of stock options issued in connection with compensation plan 49,825 Issuance of restricted stock 4,200 Purchase of treasury stock (75,752) (75,752) Sale of treasury stock 130,948 106,497 Retirement of treasury stock 167,500 - Extinguishment of notes receivable 113,129 213,129 Extinguishment of advertising and in-kind services receivable from stockholder 794,990 946,990 Change in unrealized gain on marketable securities (1,583) (1,583) $ (1,583) Cumulative translation adjustments (176) (176) (176) Net loss (2,486,567) (2,486,567) -------- --------- -------- --------- --------- ------------ ---------- Comprehensive loss $(2,488,326) ============ Balance at December 31, 2002 $ (74) $(28,439) = $(5,000) - $ 2,082,537 ======== ========= ======== ========= ========= ============ ========= Common stock and options issued in connection with compensation plan 5,000 217,226 Common stock issued 47,200 Net proceeds from issuance of common stock in connection with private placement 1,510,000 Issuance of common stock in satisfaction of note payable 40,000 Issuance of restricted stock in connection with notes payable 98,000 Issuance of common stock for services (493,500) Issuance of common stock in connection with CAW acquistion 100,000 Purchase of treasury stock (122,779) (122,779) Sale of treasury stock 146,218 261,321 Preferred Stock Dividend (78,000) Consulting expense 67,248 67,248 Change in unrealized gain on marketable securities 4,003 4,003 4,003 Cumulative translation adjustments (5,701) (5,701) (5,701) Net loss (1,277,223)(1,277,223) -------- --------- -------- --------- --------- -------------- -------- Comprehensive loss $1,278,921 ========== Balance at December 31, 2003 $(1,772) $(5,000) $426,252) -- $2,943,832 -------- --------- -------- --------- --------- ------------ --------
The accompanying notes are an integral point of this statement F-7 Synergy Brands, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31,
2003 2002 Cash flows from operating activities Net loss $ (1,277,223) $ (2,486,567) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 625,450 893,935 (Recovery of)/Provision for doubtful accounts (35,090) 112,351 Amortization of financing costs 82,142 - Loss (gain) on sale of marketable securities (10,828) 71,237 Loss on sale of preferred stock of investee - 57,600 Equity in earnings of investee (92,424) (67,717) Loss on forgiveness of stockholder's note receivable - 213,129 Loss on forgiveness of advertising receivable from a stockholder - 290,217 Gain on dissolution of subsidiary - (215,250) Gain on settlement of liabilities due to vendors (282,750) (592,689) Dividends on preferred stock of subsidiary - 6,125 Non-Cash Compensation 67,248 49,825 Operating expenses paid with common stock and warrants 100,725 303,145 Changes in operating assets and liabilities Net (increase) decrease in Accounts receivable and other receivables (2,095,518) (1,440,824) Inventory (1,089,208) 265,263 Prepaid expenses, related party note receivable and other assets (122,354) 26,050 Net increase (decrease) in Accounts payable, related party note payable, accrued expenses and other current liabilities 1,231,455 (605,182) Other liabilities - 282,750 ---------- ----------- Net cash used in operating activities (2,898,375) (2,836,602) Cash flows from investing activities Purchase of business, net of cash acquired (414,000) - Purchase of marketable securities (488,868) (979,379) Proceeds from sale of marketable securities 460,060 2,635,571 Purchase of property and equipment (28,638) (14,342) Payment of collateral security deposit (500,000) - Refund of collateral security deposit - 658,542 Proceeds from sale of preferred stock of investee - 230,400 Purchase of customer lists - (250,000) Payments received on notes receivable 2,267 - Issuance of notes receivable (329,000) (110,400) ---------- ----------- Net cash provided by (used in) investing activities (1,298,179) 2,170,392 ---------- -----------
F-8 Synergy Brands, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) Year ended December 31,
2003 2002 Cash flows from financing activities Borrowings under line of credit $19,432,524 $10,486,724 Repayments under line of credit (17,172,964) (9,130,942) Increase in deferred financing cost (18.750) - Proceeds from the issuance of notes payable 850,000 722,778 Repayments of notes payable (20,000) (662,778) Due from broker - (1,216,733) Proceeds from issuance of common stock 47,200 - Net Proceeds from the issuance of common and preferred stock in a private placement 1,510,000 - Proceeds from the exercise of stock purchase options 111,500 - Proceeds from the sale of treasury stock 261,321 106,497 Proceeds from stock subscription 5,000 - Purchase of treasury stock (122,779) (75,752) Payment of dividends (78,000) - --------- ---------- Net cash provided by financing activities 4,805,052 229,794 --------- ---------- Foreign currency translation (5,700) (176) --------- ---------- NET INCREASE (DECREASE) IN CASH 602,798 (436,592) Cash and cash equivalents, beginning of year 174,724 611,316 --------- ---------- Cash and cash equivalents, end of year $777,522 $174,724 --------- ---------- Supplemental disclosures of cash flow information: Cash paid during the year for Interest $590,126 $164,000 --------- ---------- Income taxes paid $ 32,658 $ 23,000 --------- ---------- Supplemental disclosures of noncash operating, investing and financing activities: Common stock issued for acquistion $100,000 $ - --------- ---------- Unrealized gains on marketable securities $ 4,105 $ 102 --------- ---------- Common stock issued for notes receivable $ - $ 2,500 --------- ---------- Common stock issued in satisfaction of note payable $ 40,000 $ - --------- ---------- Common stock issued in connection with consulting agreement and services $493,500 $ - --------- ----------
The accompanying notes are an integral part of these statements. F-9 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 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, 2003, the Company had cash and cash equivalents, cash collateral security deposit and marketable securities of approximately $1,324,000, working capital of approximately $1,041,000 and an accumulated deficit of approximately $34,373,000. The Company incurred a loss of approximately $1,277,000 during the year ended December 31, 2003. As discussed in Note J, the Company maintains a line of credit which provides the Company with financing based upon eligible accounts receivable and inventory, as defined. On March 1, 2004, the Company received $490,000 pursuant to the issuance of three promissory notes bearing interest at 12% per annum which are due February 28, 2006. The Company is not required to repay the principal until the maturity date of the notes, February 28, 2006. 19,600 restricted shares of the Company's common stock were also issued as part of the financing. Management believes that continued 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. F-10 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2003 and 2002 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: 1. Principles of Consolidation The accompanying consolidated financial statements include the accounts of Synergy, its wholly-owned subsidiaries and it's majority-owned subsidiary (collectively, the "Company"). During the year ended December 31, 2002, the Company dissolved its majority-owned subsidiary (see Note K). 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, 2003 and 2002, 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. Accounts Receivable Trade The Company's accounts receivable trade are due from businesses engaged in the distribution of grocery, health and beauty products as well as from consumers who purchase health and beauty products and premium handmade cigars either direct or from the Company's Web sites. Credit is extended based on evaluation of a customers' financial condition and, generally, collateral is not required. Accounts receivable are due within 30 days and are stated at amounts generally due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are F-11 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2003 and 2002 NOTE B (continued) considered past due. Estimates are used in determining the allowance for doubtful accounts based on the Company's historical collections experience, current trends, credit policy and a percentage of its accounts receivable by aging category. In determining these percentages, the Company looks at historical write-offs of its receivables. The Company also looks at the credit quality of its customer base as well as changes in its credit policies. The Company continuously monitors collections and payments from its customers. The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. Accounts receivable trade, net consist of the following components at December 31, 2003: Accounts receivable - business to business $3,635,741 Accounts receivable - business to consumer 121,747 Total 3,757,488 Less allowance for doubtful accounts (127,481) $3,630,007 Changes in the Company's allowance for doubtful accounts during the year ended December 31, 2003 are as follows: Beginning balance $ 162,571 Provision for (reduction in) doubtful accounts (35,090) Ending balance $127,481 5. Business and Credit Concentrations 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, 2003 totaled approximately $629,164. 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. F-12 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2003 and 2002 NOTE B (continued) During the year ended December 31, 2003 sales to two customers each, accounted for 11% of total sales, and in 2002, sales for one customer accounted for 11% of total sales, respectively. Two customers accounted for 30% and 21%, respectively of accounts receivable at December 31, 2003. These concentrations relate to the Company's PHS Group segment. In addition, one customer in the Proset segment accounted for 12% of accounts receivable at December 31, 2003 (See Note S.) During the years ended December 31, 2003 and 2002, the Company purchased approximately 71% and 77%, 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. 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 asset's 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 Capitalized website cost are amortized using the straight-line method over the estimated useful lives of the Web sites, not to exceed three years. F-13 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2003 and 2002 NOTE B (continued) 9. Vendor Allowances The Company recognizes vendor allowances, which are classified as reductions in cost of sales, at the date goods are purchased and recorded, and under fixed and determined arrangements. During the fourth quarter of 2003, the Company recognized approximately $318,000 in vendor allowances arising from arrangements with a major supplier that met the critieria for being fixed and determinable. The Company expects to record such vendor allowances principally based on purchases, which were previously not under fixed arrangements, on a current as purchases are recorded and the arrangements are in effect that meet the aforementioned criteria. Vendor allowances from manufacturers, included in other receivables in the accompanying consolidated balance sheet aggregated $674,519 at December 31, 2003. 10. Intangible Assets Intangible assets consist of the "Proset" and "Gran Reserve" trade names and customer lists acquired in November 1999. The Company re-evaluates the carrying value of these intangible assets when factors indicating impairment are present, using an undiscounted operating cash flow assumption. In February 2002, the Company acquired certain customer lists, the rights to the use of the trade names Fine Perfume and Fineperfume.com and the ownership of the Internet domain, www.fineperfume.com for aggregate consideration of $250,000. On June 1, 2003, the Company acquired the common stock of Ranley Group, Inc. (d.b.a. cigars Around the World ("CAW") of Chicago, Illinois). Intangible assets acquired, which consist primarily of customer lists, are being amortized over a six (6) year estimated useful life from the date of acquisition. (see Note C) Prior to the adoption of Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible Assets," these intangible assets were amortized over their estimated useful life of five years. As a result of the adoption of SFAS No. 142, intangible assets with indefinite useful lives will no longer be amortized but instead will be reviewed for impairment at least annually and more often when impairment indicators are present. As a result, the Company's trade names will no longer be amortized. The Company's customer lists have finite lives. Management considered various factors, including appraisals, in determining that a revision to the estimated useful life of the Company's customer lists should be made. Based upon the analysis, it was determined that the estimated useful life should be extended prospectively, by a term of six years from the original useful life of five years. This modification decreased amortization expense by approximately $129,000 during the year ended December 31, 2002. As a result, the remaining carrying amount will be amortized prospectively over the remaining useful life. In 2003, the amortization expense recorded for the year was $192,354. F-14 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2003 and 2002 NOTE B (continued) At December 31, 2003, intangible assets are comprised of the following: Amortized intangible assets Customer lists $ 3,114,629 Less accumulated amortization (1,680,773) 1,433,856 Unamortized intangible assets Trade names 90,400 Total $ 1,524,256 Amortization expense for the Company over the next five years is estimated to be approximately $222,000 per year. 11. 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. To the extent impairment has occurred, the carrying amount of the asset would be written down to an amount to reflect the fair value of the asset. 12. Revenue Recognition The Company recognizes revenue upon shipment of goods when title and risk of loss passes to the customer. 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, including outbound and inbound shipping costs. 13. Advertising The Company expenses advertising and promotional costs as incurred. Advertising and promotional expenses were approximately $91,000 and $470,000 for the years ended December 31, 2003 and 2002. F-15 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2003 and 2002 NOTE B (continued) 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 carry forwards 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 September 30, 2002, the Company's Board of Directors authorized a 1-for-4 reverse split of its common stock. Share and 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. Incremental shares from assumed exercises of stock options and warrants of 596,650 and 586,759 for the years ended December 31, 2003 and 2002, respectively, have been excluded from the calculation of diluted loss per share since their effect would be antidilutive. 17. Stock-Based Compensation Plans At December 31, 2003, the Company has two stock-based employee compensation plans, which are described more fully in Note M. The Company accounts for stock-based compensation to employees and directors using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations ("APB No. 25") and has adopted the disclosure provisions of SFAS No. 148. Under APB No. 25, when the exercise price of the Company's employee or director stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. F-16 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2003 and 2002 NOTE B (continued) The following table illustrates the effect on net income (loss) and earnings (loss) per share had the Company applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation. Year ended December 31, 2003 2002 Net loss, as reported $(1,277,223) $(2,486,567) Add: Total stock-based employee compensation expense included - in reported net loss 49,825 Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards - (601,250) Pro forma net loss $(1,277,223) $(3,037,992) Loss per share Basic and diluted - as reported $ (0.82) $ (1.91) Basic and diluted - pro forma $(0.82) $(2.33) Pro forma compensation expense may not be indicative of pro forma expense in future years. For purposes of estimating the fair value of each option on the date of grant, the Company utilized the Black-Scholes option pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. F-17 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2003 and 2002 NOTE B (continued) The weighted-average option fair values and the assumptions used to estimate these values are as follows: 2002 Dividend yield 0% Expected volatility 114% Risk-free rate of return 4.0% Expected life 3 years Weighted-average option fair value $2.79 No stock options were granted during the year ended December 31, 2003. 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 In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN No. 46") "Consolidation of Variable Interest Entities." In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. A variable interest entity often holds financial assets, including loans for receivables, real estate or other property. A variable interest entity may be essentially passive or it may engage in activities on behalf of another company. Until now, a company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN No. 46 changes that by requiring a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. FIN No. 46's consolidation requirements apply immediately to variable interest entities created or acquired after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after December 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. In December 2003, the FASB issued FASB Interpretation No. 46R, "consolidation of Variable Interest Entities an interpretation of ARB 51 (revised F-18 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2003 and 2002 NOTE B (continued) December 2003)" ("FIN 46R"), which includes significant amendments to the previously issued FIN 46. Among other provisions, FIN 46R includes revised transition dates based on the nature as well as the creation date of the variable interest entity. The Company is now required to adopt the provisions of FIN 46R no later than the end of the first reporting period that ends after March 15, 2004. The adoption of these pronouncements has not and is not expected to have a material impact on the Company's consolidated financial condition or results of operations taken as whole. In April 2003, the FASB issued SFAS No. 149 ("SFAS No. 149"), "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 except for the provisions that were cleared by the FASB in prior pronouncements. The adoption of SFAS No. 149 has not had a material impact on the Company's financial position and results of operations. In May 2003, the FASB issued SFAS No. 150 ("SFAS No. 150"), "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. In accordance with the standard, financial instruments that embody obligations for the issuer are required to be classified as liabilities. This Statement shall be effective for financial instruments entered into or modified after May 31, 2003 and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003. The Company adoption of SFAS No. 150 has not had a material impact on its financial position and results of operations. In December 2003, the Securities and Exchange Commission ("SEC") issued Staff Accountant Bulletin No. 104, "Revenue recognition" ("SAB No.104"), which codifies, revises and rescinds certain sections on SAB No. 101, "Revenue Recognition" in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The changes noted in SAB No. 104 did not have a material effect on the Company's financial position or results of operations. F-19 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2003 and 2002 NOTE C - ACQUISITION On June 1, 2003, the Company acquired the common stock of Ranley Group, Inc. (d.b.a. Cigars Around the World ("CAW") of Chicago, Illinois). CAW is a leading supplier of premium hand made cigar to some of some of the most prestigious hotels, restaurants, casinos and golf clubs in the United States. The purchase price for the common stock acquired was $425,000. Additional consideration of up to $450,000, to be paid through the issuance of Class B, Series A Preferred stock, cash or common stock is payable on various dates through May 2006, based upon the achievement of certain targeted operating results of CAW predominately based upon multiplying Earnings before depreciation amortization and taxes (EBTDA) by six times. In December 2003, 25,000 shares of common stock have been issued valued at $100,000 for the purpose of the satisfying the anticipated consideration due the seller by March 31, 2004, based upon the operating results of CAW through December 31, 2003. In the event that CAW experiences an EBTDA loss for the last quarter of initial measurement period of 2004 an adjustment will be made to future consideration issued. The acquisition of CAW has been accounted for as a purchase pursuant to SFAS No. 141, " Business Combinations." The operations of CAW have been included in the Company's statement of operations since the acquisition date. The following table summarizes the assets and liabilities acquired from CAW based upon the Company's allocation of the $425,000 purchase price. Cash $ 11,000 Accounts Receivable 374,000 Other Assets 9,000 Customer List 361,000 Goodwill 64,000 Accounts Payable (331,000) Other Current Liabilities (35,000) Other Long-Term Liabilities (28,000) $ 425,000 Customer lists are being amortized over a six year estimated useful life from the date of acquisition. The primary reason for the acquisition of CAW and the main factor that contributed to a purchase price in excess of the net assets acquired is that CAW is expected to positively impact the Company's results of operations, in that CAW is expected to have limited selling, general and administrative expenses, as such business is a strategic addition to the Company's current internet operations. CAW distribution will be handled at Synergy's current cigar distribution facilities in Florida. The Company's cigar operations are conducted through Gran Reserve Corporation ("GRC"), which is wholly owned by the Company. Summarized below are the unaudited pro forma results of operations of operations of the Company as if CAW had been acquired at the beginning of the years presented: F-20 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2003 and 2002 NOTE C (continued) Year Ended December 31, 2003 2002 Net sales $41,066,000 $32,935,000 Net loss per common shareholder (1,342,000) (2,477,000) Net loss per common share: Basic $(0.81) $(1.90) Diluted $(0.81) $(1.90) The pro forma financial information presented above for the year ended December 31, 2003 and 2002 are not necessarily indicative of either the results of operations that would have occurred had the acquisition taken place at the beginning of the periods presented or of future operating results of the combined companies. NOTE D - FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of cash and cash equivalents, 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 notes receivable and notes payable approximate their fair values. F-21 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2003 and 2002 NOTE E - MARKETABLE SECURITIES The cost, gross unrealized gains, gross unrealized losses and fair market value for marketable securities by major security type at December 31, 2003 are as follows:
Gross Gross Fair unrealized unrealized market Cost gains losses value Available-for-sale securities Equity securities $41,930 $4,105 $ - $46,035
Proceeds from the sale of available-for-sale securities and the resulting net realized gains included in the determination of net loss for the years ended December 31, 2003 and 2002 are as follows: 2003 2002 Available-for-sale securities Proceeds $460,060 $2,635,571 Gross realized gains 27,713 66,414 Gross realized losses (16,885) (137,651) NOTE F - INVENTORY Inventory as of December 31, 2003 consisted of the following: Grocery, health and beauty products $1,845,308 Tobacco finished goods 318,808 $2,164,116 NOTE G - PROPERTY AND EQUIPMENT Property and equipment as of December 31, 2003 consisted of the following: Office equipment $ 204,610 Furniture and fixtures 231,266 Leasehold improvements 411,673 847,549 Less accumulated depreciation and amortization (468,325) $ 379,224 F-22 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2003 and 2002 NOTE G (continued) Depreciation and amortization expense on property and equipment for the years ended December 31, 2003 and 2002 was approximately $123,000 and $118,000, respectively. NOTE H - OTHER ASSETS Other assets consist of the following at December 31, 2003: Investment (a) $164,604 Website development costs, net of accumulated 5,375 amortization of $924,104 Other 16,078 $186,057 (a) In December 2001, the Company made an investment in Interline Travel and Tour. Inc. ("ITT") for approximately 20% of the outstanding common stock of an investee ITT provides cruise and resort hotel packages through a proprietary reservation system to airline employees and their retirees. 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. During the year ended December 31, 2002, the Company sold the 288,000 shares of nonvoting redeemable preferred stock for aggregate proceeds of $230,400. The Company recorded a loss of $57,600 in conjunction with this sale. The Company recorded equity in the net earnings of investee of $92,424 and $67,717 during the years ended December 31, 2003 and December 31, 2002, respectively. F-23 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2003 and 2002 NOTE H (continued) Summarized financial information of this investee as of December 31, 2003 and for the years ended December 31, 2003 and 2002 is as follows: Financial position: 2003 2002 Current assets $1,511,000 $1,545,000 Property and equipment 147,000 207,000 Other assets 306,000 345,000 Total assets $1,964,000 $2,097,000 Current liabilities $ 972,000 $ 737,000 Long-term debt 82,000 524,000 Other long-term liabilities 9,000 3,000 Total liabilities $1,063,000 $1,264,000 Results of operations: 2003 2002 Revenues $ 9,602,000 $ 8,167,000 Operating expenses (8,906,000) (7,637,000) Other income 54,000 44,000 Income before income taxes 750,000 574,000 Income tax expense (268,000) (210,000) Net income $ 482,000 $ 364,000 F-24 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2003 and 2002 NOTE I - NOTES RECEIVABLE Through December 31, 2003, the Company provided $429,600 in financing to a significant customer who is a distributor of the Company's products in Canada and is expanding its distribution channel. The promissory note, which is secured by accounts receivable and inventory, bears interest at 4%. The principal balance is due on December 31, 2005. Sales to this customer aggregated $4,649,000 in 2003 and $986,000 in 2002. Accounts receivable from this customer aggregates $801,000 at December 31, 2003. NOTE J - LINE OF CREDIT AGREEMENT, NOTES PAYABLE AND NOTE PAYABLE TO STOCKHOLDER In 2002, the Company entered into a promissory note with a lender that provide for borrowings of $60,000 which, bore interest at a rate of 9% per annum and was due on December 31, 2004. On March 31, 2003 the Company entered into a modification agreement with the lender pursuant to which the Company exchanged the note for 15,300 shares of common stock valued at $40,000 and $20,000 in cash. In 2002, two of the Company's subsidiaries entered into two revolving loan and security agreements with the same financial institution (the "Lender'). The lines of credit, as amended in July 2003, under the loans allow for the borrowing of up to $7,000,000 based on the sum of 85% of the net face amount of eligible accounts receivable, as defined, plus the lesser of (1) $2,750,000 or (2) eligible inventory and eligible goods in transit, as defined. The terms of the agreements are for one year and provide for automatic renewals unless written consent by either the Company or the Lender is provided within 60 days of the renewal date. Interest accrues on outstanding borrowings at the greater of (i) 8% per annum in excess of the prime rate or (ii) 17% per annum. The minimum interest to be paid for any year under the line of credit is $320,000. At December 31, 2003, the interest rate on outstanding borrowings was 17%. Outstanding borrowings are collateralized by a continuing security interest in all of the subsidiaries' accounts receivable, chattel paper, inventory, equipment, instruments, investment property, documents and general intangibles. 525,000 shares of the Company's common stock have also been pledged as collateral on the outstanding borrowings. The Company has guaranteed these loans on an unsecured basis. In November 2003, the Company secured a $2 million stand by letter of credit (LC) for the purpose of increasing its line of credit to $3.5 million with a major vendor. The LC was secured by a $500,000 cash deposit as well as certain reserves modified under the loan and security agreement with IIG. The LC expires in May 2004, at which time the cash deposit and reserves will be released. In the event that the Company requires an extension of this facility, the modification to the loan and security agreement will remain in effect. F-25 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2003 and 2002 NOTE J (continued) On February 5, 2003, the Company received $500,000 pursuant to the issuance of two secured promissory notes from certain shareholders of ITT, a 20% investee. Borrowings under the notes bear interest at a rate of 12%. The Company is not required to repay any principal until the maturity date of the notes, February 4, 2005. 25,000 restricted shares of the Company's common stock were also issued as part of the financing. The relative estimated fair value of the common stock that was issued of $56,000 was recorded as debt discount and will be amortized over the life of the notes payable. Amortization expense recorded in 2003 was approximately $26,000. As security for the notes, the Company pledged as collateral its investment in the common stock of ITT. On July 1, 2003, the Company received $350,000 pursuant to the issuance of three secured promissory notes from certain shareholders of ITT, a 20% investee. Borrowings under the notes bear interest at a rate of 12%. The Company is not required to repay any principal until the maturity date of the notes, June 30, 2005. 17,500 restricted shares of the Company's common stock were also issued as part of the financing. The relative estimated fair value of the common stock that was issued of $42,000 was recorded as debt discount and will be amortized over the life of the notes payable. Amortization recorded in 2003 was approximately $10,000. As security for the notes, the Company pledged as collateral its investment in the common stock of ITT. NOTE K - 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 were entitled to receive cumulative dividends at the rate of $14 per share before any dividends on the common stock are paid. The Company's portion of the dividends have 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 were convertible only at the option of PCW at $120 per share. In May 2002, the shareholders of PCW authorized a dissolution of PCW as PCW had discontinued its operations during the year ended December 31, 2000. Upon the dissolution of PCW, there were no assets available for distribution. As a result, the Company recorded a gain of $215,250, which is included as a component of other income (expense) in the 2002 accompanying consolidated statement of operations, or $.17 per share on the dissolution of PCW, related to cumulative dividends payable of $110,250 and capital contributed by the minority shareholders of $105,000. F-26 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2003 and 2002 NOTE L - 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; liquidation of $10.50 per share and before common stock and redemption at option of Company at $10.50 per share. In January 2003, the Company designated 100,000 shares of Class B Preferred stock, par value $.001 per share to be designated as Class B, Series A Preferred Stock and in June 2003, the Company increased the authorized Class B, Series A preferred stock to 500,000 shares. The holders of Class B, Series A Preferred Stock have no voting rights with respect to general corporate matters. The holders of Class B, Series A Preferred Stock are entitled to receive dividends at the annual rate of $.90 per share per annum. The Company may, as its option, at any time in whole, or from time to time in part, out of earned funds, capital and surplus of the Corporation, redeem the Class B, Series A Preferred Stock on any date set by the Board of Directors, at $10.00 per share plus, in each case, an amount equal to all dividends of Class B, Series A Preferred Stock accrued and unpaid thereon, pro rata to the date of redemption. If, however, as to each share of Class B, Series A Preferred Stock outstanding, if not redeemed by the Company within 2 years of the issuance of such shares, the Company will be obligated to issue to the then holder of record of such outstanding Class B, Series A Preferred Stock, half a share of the Company's unissued restricted Common Stock per share of Class B, Series A Preferred Stock for each year that said share is not redeemed. No more that 19.9% of the Company's stock can be issued in connection with stock dividend payments against the Class B, Series A preferred stock. In November 1999, Synergy entered into a stock purchase agreement with Sinclair Broadcasting Group ("SBG") whereby SBG purchased 110,000 shares of Synergy's restricted $.001 par value common stock for $4,400,000. The purchase price consisted of $1,400,000 in 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. At December 31, 2001, Synergy issued outstanding warrants to SBG to purchase 25,000 shares of common stock at $14.00 per share. The warrants become exercisable when the shares are registered and expire in December 2010. On September 30, 2002, the Company exchanged in full its outstanding note payable and accrued interest of $656,773 through a revision agreement with SBG for the termination of $794,990 of its outstanding unused advertising credits with Sinclair. In addition, the Company issued 75,000 shares of stock and 31,250 warrants exercisable at $5.00 to Sinclair in conjunction with this transaction. The Company recorded a charge to earnings of $290,218 as the fair market value of the consideration given exceeded the unused advertising credits. F-27 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2003 and 2002 NOTE L (continued) In January 2002, the Company issued 25,000 shares of common stock and forgave $113,129 in shareholder indebtedness to the Company in exchange for the cancellation of 61,222 outstanding cashless warrants. A charge to operations of $213,129 was recorded in connection with this transaction. In January 2003, the Board of Directors of the Company approved a private placement of securities ("2003 Private Placement") in which 100,000 units were offered, with each unit consisting of one share of unregistered Class B, Series A Preferred Stock and one share of unregistered restricted common stock, at a purchase price of $10.00 per unit. In February 2003, the Company sold 60,000 units and received aggregate proceeds of $600,000 as a result of the 2003 Private Placement. In June 2003, the Board of Directors approved a second Private Placement in which 100,000 shares were offered, with each unit consisting of one share of unregistered Class B, Series A preferred Stock and one share of unregistered restricted Common Stock at a purchase price of $10.00 per unit. In June and July 2003, the Company sold 10,000 and 90,000, units and received aggregate proceeds of $100,000 and $900,000 respectively. In connection with the January and June private placements, the Company incurred $90,000 in legal fees which are netted against the proceeds. In July 2003, the Company issued 150,000 shares of common stock in connection with an agreement for consulting services for the three year period ending June 30, 2006. The Company recorded $403,500 as unearned compensation and recorded compensation expense of $67,248 during 2003. During the years ended December 31, 2003 and 2002, the Company repurchased 47,866 and 21,329 shares of treasury stock for an aggregate amount of $122,779 and $75,752, respectively. The Company sold 54,366 shares of its treasury stock during the year ended December 31, 2003, for aggregate proceeds of $261,321. F-28 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2003 and 2002 NOTE L (continued) For the year ending December 31, 2003, the Company issued 65,938 shares of common stock as compensation for services under existing agreements and recorded a charge to operations of $93,125 and unearned compensation of $90,000. The Company also issued options to purchase 75,000 shares of its common stock at a exercise price of $4.00 per share, with a fair value of $7,500, to a principal at a major customer in Canada and issued 30,000 shares of common stock to an unrelated third party for $47,200. For the year ended December 31, 2003, the Company received proceeds of $111,500 from the exercise of stock options to purchase 62,500 shares of the Company's common stock. The following is a summary of transactions involving warrants to purchase common stock for the years ended December 31, 2003 and 2002. Weighted- Number average of shares exercise price Outstanding at January 1, 2002 281,250 $ 12.27 Granted 31,250 5.00 Cancelled/forfeited (85,000) (19.41) Outstanding at December 31, 2002 227,500 8.60 Cancelled/forfeited (17,500) (35.00) Outstanding at December 31, 2003 210,000 $ 6.40 The following table summarizes information concerning currently outstanding and exercisable stock purchase warrants: Warrants outstanding Warrants 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 2003 life (years) price 2003 price $5.00 173,750 2.84 $ 5.00 173,750 $ 5.00 $10.00 - $12.00 31,250 1.97 10.40 31,250 10.40 30.00 - 40.00 5000 1.33 30.00 5000 30.00 210,000 2.67 $ 6.40 210,000 $ 6.40
F-29 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2003 and 2002 NOTE M - STOCK OPTION PLANS 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. The Plan terminates with respect to the granting of common stock and options in 2004. Since the inception of the Plan, Synergy has issued 1,138,838 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 or at an amount equal to the service provider's invoice amount. During the years ended December 31, 2003 and 2002, the Company issued 65,938 and 85,500 shares of its common stock, respectively, to various service providers and has recorded a charge to earnings of $93,125 and $298,945, respectively, pursuant to the provisions of the Plan. Under the Plan, Synergy has granted options to selected employees and professional service providers. The maximum term of options granted under the Plan is ten years. During the year ended December 31, 2002, the Company recorded a charge to operations of $49,825, which represented the intrinsic value of stock options granted to employees and directors in January 2002. There was no charge to operation for the year ended December 31, 2003. The following is a summary of such stock option transactions for the years ended December 31, 2003 and 2002 in accordance with the Plan and other restricted stock option agreements: Weighted- Number average of shares exercise price Outstanding at January 1, 2002 140,809 $ 32.12 Cancelled/forfeited (13,175) (34.66) Granted 356,625 2.81 Outstanding at December 31, 2002 484,259 10.46 Granted 85,000 3.53 Cancelled/forfeited (25,109) (9.08) Exercised (62,500) 1.84 Outstanding at December 31, 2003 481,650 $ 10.42 Available for grant December 31, 2003 7,261,162 December 31, 2002 7,457,291 F-30 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2003 and 2002 NOTE M (continued) 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 2003 life (years) price 2003 price $ 1.00 - $ 4.00 376,125 .99 $ 3.68 376,125 $ 3.68 18.00 - 20.00 29,000 .65 18.34 29,000 18.34 25.00 - 35.60 36,275 .69 27.36 36,275 27.36 40.00 - 50.00 8,500 .99 42.94 8,500 42.94 60.00 - 70.00 31,750 .62 61.57 31,750 61.57 481,650 .92 $10.86 481,650 $10.86
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 84,000 shares available for grant at December 31, 2003. NOTE N - 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, 2003 and 2002 aggregated approximately $55,000 and $134,000 respectively. At December 31, 2002, there was an account receivable amount receivable from the entity that is owned by the Company's Chairman and Chief Executive Officer aggregating $44,750. In the first quarter of 2003 the receivable was repaid. At December 31, 2003 $100,800 is payable to the Company's Chairman and Chief Executive Officer for short-term advances made to the Company. F-31 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2003 and 2002 NOTE O - OTHER INCOME (EXPENSE) Other income (expense) is comprised of the following:
2003 2002 Gain on settlements of liabilities due to vendors $282,750 $592,689 (Note R-3) Gain on dissolution of subsidiary (Note K) - 215,250 Loss on forgiveness of notes receivable from a shareholder (Note L) - (113,129) Gain (loss) on sales of marketable securities (Note E) 10,828 (71,237) Loss on sale of preferred stock of an investee (Note H) - (57,600) Other 5,354 (51,113) $298,932 $514,860
NOTE P - INCOME TAXES At December 31, 2003, the Company had a net operating loss carry forward of approximately $30,423,000, which, if not utilized, will begin expiring in 2011. Utilization of these losses may be limited if the Company undergoes an ownership change pursuant to Internal Revenue Code Section 382. The components of the deferred tax asset at December 31, 2003 were approximately as follows: Net operating loss carryforwards $ 10,344,000 Fixed assets and intangibles 273,000 Allowance for doubtful accounts 43,000 Inventory 62,000 Capital losses 51,000 Other (52,000) Valuation allowance (10,721,000) $ - Income taxes expense for the years ended December 31, 2003 and 2002 consisted of the following: 2003 2002 State and local $32,658 $22,687 F-32 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2003 and 2002 NOTE P (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, 2003 and 2002 are as follows: 2003 2002 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 .9 .9 .9 % .9 % NOTE Q - RETIREMENT PLAN On January 1, 2002, the Company established the Synergy Brands, Inc. 401(k) Profit Sharing Plan (the "Plan") covering employees 21 years of age and older who have completed six months of continuous service. The Plan is a defined contribution plan which provides for voluntary employee contributions and discretionary employer contributions. Employees become fully vested in employer contributions after three years. The Company's discretionary matching and profit-sharing contributions to the Plan were $13,252 and $18,846 for the years ended December 31, 2003 and 2002, respectively. F-33 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2003 and 2002 NOTE R - COMMITMENTS AND CONTINGENCIES 1. Lease Commitments The Company leases office and warehouse space under operating leases expiring at various dates through June 2008. The Company is also leasing vehicles under operating leases expiring in 2004. Future minimum lease payments under noncancelable operating leases as of December 31, 2003 were as follows: Year ending December 31, 2004 $173,042 2005 123,691 2006 96,688 2007 101,364 2008 52,014 $546,799 Rent expense under operating leases for the years ended December 31, 2003 and 2002 was approximately $112,000 and $130,000, respectively. 2. 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. 3. Other Liabilities Since 1999, the Company has disputed services performed by two vendors. In December 31, 2002, the Company and one vendor executed a settlement and release agreement. Pursuant to the terms of the settlement and release agreement, the Company was relieved of its obligation to pay for the service that it had disputed. The Company recorded a gain of $592,689 as a result of the release by the vendor. During the first quarter of 2003, the Company has entered into a settlement and release agreement in which the Company paid $13,000 to a vendor and the Company has been released of its liability to that vendor. The Company has recorded a gain of $155,750 as a result of this release during the first quarter of 2003. In March 2003, the Company and another vendor executed a settlement and release agreement. Pursuant to the terms of the settlement and release agreement, the Company was relieved of its obligation to pay for the services that was disputed. The Company recorded a gain of $127,000 as a result of the release by this vendor. These gains were recorded as a component of other income (expense) in the consolidated statements of operations. F-34 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2003 and 2002 NOTE S - 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. Management evaluates the various segments of the Company based on the types of products being distributed which were, as of December 31, 2003 and 2002, as shown below:
Proset PHS Group B2C Corporate Total Year ended December 31, 2003 Revenue $3,671,106 $34,740,999 $2,128,472 - $40,540,577 Net loss (502,158) (79,864) (235,636) (537,565) (1,355,223) Depreciation and amortization 213,198 272,812 114,720 91,968 692,698 Interest income - 13,805 - 108 13,913 Other income (expense) (1,488) 25,490 271,603 3,327 298,932 Equity in earnings of investee - - - 92,424 92,424 Interest and financing expenses 199,892 449,876 39,518 752 690,038 Identifiable assets 2,874,102 6,236,552 1,253,920 628,071 10,992,645 Additions to long-lived assets 2,220 818 386,302 - 389,340 Investment in affiliate - - - 164,604 164,604 Year ended December 31, 2002 Revenue $2,537,216 $27,745,818 $ 1,257,641 - $31,540,675 Net loss (833,712) (293,088) (15,711) (1,344,056) (2,486,567) Depreciation and amortization 468,842 272,667 127,764 24,662 893,935 Interest income - $3,024 - 23,671 26,695 Other income (expense) (6,407) (18,056) 579,482 (40,159) 514,860 Equity in earnings of investee - - - 67,717 67,717 Interest and financing expenses 60,336 94,582 38,013 18,348 211,279 Identifiable assets 2,193,471 2,477,292 711,531 489,375 5,871,669 Additions to long-lived assets - 2,150 10,964 251,228 264,342 Investment in affiliate - - - 72,180 72,180
F-35 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2003 and 2002 NOTE S (continued) All of the Company's identifiable assets and results of operations are located in the United States and Canada. Geographic data, as of and for the years ended December 31, 2003 and 2002, is as follows: 2003 2002 Revenue United States $34,076,666 $30,555,151 Canada 6,463,911 985,524 $40,540,577 $31,540,675 Accounts receivable United States $1,822,677 $ 1,256,041 Canada 1,934,811 776,628 $3,757,488 $ 2,032,669 Identifiable assets United States $10,818,667 $ 5,824,230 Canada 173,978 47,439 $10,992,645 $ 5,871,669 F-36 EXHIBIT INDEX
Exhibit No. Description Page - ----------- ----------- ---- 3.1 Certificate of Incorporation and amendments thereto (1) -- 3.2 By-Laws (2) -- 4 Preferred Stock, Common Stock, and Options and Warrants defining rights of security holders (3) EX-3.1 10.3 Synergy Brands Inc. 1994 Services and Consulting Compensation Plan, as amended (4) 14 Code of Ethics EX-14 21 Listing of Company Subsidiaries EX-21 31.1 Certification Pursuant to 18 U.S.C. Section 1350. As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by the Chief Executive Officer. EX-31.1 31.2 Certification Pursuant to 18 U.S.C. Section 1350. As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by the Chief Financial Officer. EX-31.2 99.1 Listing of Company Intellectual Properties EX-99.1 99.2 Nominating Committee Charter EX-99.2
(1) Only a copy of the Restated Certificate of Incorporation filed November 10, 2003 and the clarification amendment to the Certificate of Incorporation filed March 2004 are 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 amendment to the Certificate of Incorporation filed April 1, 2001 is incorporated by reference to the exhibits filed to the Form 10-KSB of the Company filed March 2002. The amendment to the Certificate of Incorpoartion filed February 11, 2003 and the Certificate of Designation regarding Prefered Stock filed March 13, 2003 are incorporated by reference to the 10KSB filed for the Company for the year ended 12/31/02. 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 -38- (3) Description of rights of Preferred Stock are included in the Restated Certificate of Incorporation filed November 10, 2003 clarificaiton amendment to the Certificate of Incorporation filed March , 2004 included herewith as exhibits and in the Certificate of Designation filed 3/13/03 incorporated by reference to the 10KSB filed for the Company for the year ended 12/31/03, and in the Certificate of Designation regarding Preferred Stock, as amende, 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 which latter documents are incorporated by reference herein. 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 outstanding warrants is included by reference to the inclusion thereof as an exhibit to the Company's 10KSB report filed March 2002 which documents are incorporated by reference herein. Also incorporated by reference to the 10KSB filed for the Company for the year ended 12/31/04 is the Option Agreement dated September 30, 2002 entered by the Company with Sinclair Broadcasting Group Inc. as part consideration for modification of all earlier agreements between said parties, including extinguishment of Debt which Option Agreement along with all equity holdings in the Company held by Sinclair Broadcasting was subsequently purchased by and assigned to the largest shareholder of the Company to which assignment the Company consented. (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 39 EX-3.1 3 file002.txt RESTATED CERTIFICATE OF INCORPORATION OF SYNERGY BRANDS INC. We, the undersigned Mair Faibish and Mitchell Gerstein being respectively the Chief Executive Officer and the Secretary of Synergy Brands Inc., a corporation organized and existing under the laws of the State of Delaware, do hereby certify as follows: 1. The name of the Corporation is Synergy Brands Inc. 2. The original Certificate of Incorporation was filed in the office of the Secretary of State of Delaware on September 26, 1988 with the original name of the Corporation stated thereon as Delta Ventures Inc. which later changed its name to Krantor Corporation by amendment filed October 21, 1991. 3. This Restated Certificate of Incorporation restates and integrates and further amends the provisions of the Original Certificate of Incorporation by inclusion of Article TENTH which eliminates the Corporation being governed by Delaware General Corporation Law Section 203 AND Article FOURTH regarding liquidation preferences applying to all their capital stock of the Corporation in relation to that applied to the Class A Preferred Stock, such latter addition being more of a clarification regarding application of such other provisions. 4. The text of the Certificate of Incorporation, as restated and integrated and as further amended hereby, is restated to read as herein set forth in full: FIRST: The name of the corporation (hereinafter called the "Corporation") is SYNERGY BRANDS INC. SECOND: The address, including street, number, city, and county, of the registered office of the corporation in the State of Delaware is 2711 Centerville Road, City of Wilmington, County of New Castle; and the name of the registered agent of the corporation in the State of Delaware at such address is Corporation Service Company. THIRD: The nature of the business and the purposes to be conducted and promoted by the corporation, which shall be in addition to the authority of the corporation to conduct any lawful business, to promote any lawful purpose, and to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware, are as follows: To purchase, receive, take by grant, gift, devise, bequest, or otherwise, lease, or otherwise acquire, own, hold, improve, employ, use, and otherwise deal in and with real or personal property, or any interest therein, wherever situated, and to sell, convey, lease, exchange, transfer, or otherwise dispose of, or mortgage or pledge, all or any of its property and assets, or any interest therein, wherever situated To carry on a general mercantile, industrial, investing, and trading business in all its branches; to devise, invent, manufacture, fabricate, assemble, install, service, maintain, alter, buy, sell, import, export, license as licensor or licensee, lease as lessor or lessee, distribute, job, enter into, negotiate, execute, acquire, and assign contracts in respect of, acquire, receive, grant, and assign licensing arrangements, options, franchises, and other rights in respect of, and generally deal in and with, at wholesale and retail, as principal, and as sales, business, special, or general agent, representative, broker, factor, merchant, distributor, jobber, advisor, and in any other lawful capacity, goods, wares, merchandise, commodities, and unimproved, improved, finished, processed, and other real, personal, and mixed property of any and all kinds, together with the components, resultants, and by-products thereof. To engage generally in the real estate business as principal, agent, broker, and in any lawful capacity, and generally to take, lease, purchase, or otherwise acquire, and to own, use, hold, sell, convey, exchange, lease, mortgage, work, clear, improve, develop, divide, and otherwise handle, manage, operate, deal in, and dispose of real estate, real property, lands, multiple-dwelling structures, houses, buildings, and other works, and any interest or right therein; to take, lease, purchase, or otherwise acquire, and to own, use, hold, sell, convey, exchange, hire, lease, pledge, mortgage, and otherwise handle, and deal in and dispose of, as principal, agent, broker, and in any lawful capacity, such personal property, chattels, chattels real, rights, easements, privileges, choses in action, notes, bonds, mortgages, and securities as may lawfully be acquired, held, or disposed of; and to acquire, purchase, sell, assign, transfer, dispose of, and generally deal in and with as principal, agent, broker, and in any lawful capacity, mortgages and other interests in real, personal, and mixed properties; to carry on a general construction, contracting, building, and realty management business as principal, agent, representative, contractor, subcontractor, and in any other lawful capacity. To apply for, register, obtain, purchase, lease, take licenses in respect of or otherwise acquire, and to hold, own, use, operate, develop, enjoy, turn to account, grant licenses and immunities in respect of, manufacture under and to introduce, sell, assign, mortgage, pledge, or otherwise dispose of, and, in any manner deal with and contract with reference to: (a) inventions, devices, formulae, processes, and any improvements and modifications thereof; (b) letters patent, patent rights, patented processes, copyrights, designs, and similar rights, trade-marks, trade names, trade symbols, and other indications of origin and ownership granted by or recognized under the laws of the United states of America, the District of Columbia, any state or subdivision thereof, and any commonwealth, territory, possession, dependency, colony, agency or instrumentality of the United States of America and of any foreign country, and all rights connected therewith or appertaining thereunto; (c) franchises, licenses, grants, and concessions. To guarantee, purchase, take, receive, subscribe for, and otherwise acquire, own, hold, use, and otherwise employ, sell, lease, exchange, transfer, and otherwise dispose of, mortgage, lend, pledge, and otherwise deal in and with, securities (which term, for the purpose of this Article THIRD, includes, without limitation of the generality thereof, any shares of stock, bonds, debentures, notes, mortgages, other obligations, and any certificates, receipts, or other instruments representing rights to receive, purchase, or subscribe for the same, or representing any other rights or interests therein or in any property or assets) of any persons, domestic and foreign firms, associations, and corporations, and of any government or agency or instrumentality thereof; to make payment therefor in any lawful manner; and, while owner of any such securities, to exercise any and all rights, powers, and privileges in respect thereof, including the right to vote. To make, enter into, perform, and carry out contracts of every kind and description with any person, firm, association, corporation, or government or agency or instrumentality thereof. To acquire by purchase, exchange, or otherwise, all, or any part of, or any interest in, the properties, assets, business, and good will of any one or more persons, firms, associations, or corporations heretofore or hereafter engaged in any business for which a corporation may now or hereafter be organized under the laws of the state of Delaware; to pay for the same in cash, property, or its own or other securities; to hold, operate, reorganize, liquidate, sell, or in any manner dispose of the whole or any part thereof; and in connection therewith, to assume or guarantee performance of any liabilities, obligations, or contracts of such persons, firms, associations, or corporations, and to conduct the whole or any part of any business thus acquired. To lend money in furtherance of its corporate purposes and to invest and reinvest its funds from time to time to such extent, to such persons, firms, associations, corporations, governments or agencies or instrumentalities thereof, and on such terms and on such security, if any, as the Board of Directors of the corporation may determine. To make contracts of guaranty and suretyship of all kinds and endorse or guarantee the payment of principal, interest, or dividends upon, and to guarantee the performance of sinking fund or other obligations of, any securities, and to guarantee in any way permitted by law the performance of any of the contracts or other undertakings in which the corporation may otherwise be or become interested, of any person, firm, association, corporation, government or agency or instrumentality thereof, or of any other combination, organization, or entity whatsoever. To borrow money without limit as to amount and at such rates of interest as it may determine; from time to time to issue and sell its own securities, including its shares of stock, notes, bonds, debentures, and other obligations, in such amounts, on such terms and conditions, for such purposes and for such prices, now or hereafter permitted by the laws of the state of Delaware and by this certificate of incorporation, as the Board of Directors of the corporation may determine; and to secure any of its obligations by mortgage, pledge, or other encumbrance of all or any of its property, franchises, and income. To be a promoter or manager of other corporations of any type or kind; and to participate with others in any corporation, partnership, limited partnership, joint venture, or other association of any kind, or in any transaction, undertaking, or arrangement which the corporation would have power to conduct by itself, whether or not such participation involves sharing or delegation of control with or to others. To draw, make, accept, endorse, discount, execute, and issue promissory notes, drafts, bills of exchange, warrants, bonds, debentures, and other negotiable or transferable instruments and evidences of indebtedness whether secured by mortgage or otherwise, as well as to secure the same by mortgage or otherwise, so far as may be permitted by the laws of the state of Delaware. To purchase, receive, take, reacquire, or otherwise acquire, own and hold, sell, lend, exchange, reissue, transfer, or otherwise dispose of, pledge, use, cancel, and otherwise deal in and with its own shares and its other securities from time to time to such an extent and in such manner and upon such terms as the Board of Directors of the corporation shall determine; provided that the corporation shall not use its funds or property for the purchase of its own shares of capital stock when its capital is impaired or when such use would cause any impairment of its capital, except to the extent permitted by law. To organize, as an incorporator, or cause to be organized under the laws of the state of Delaware, or of any other state of the United States of America, or of the District of Columbia, or of any commonwealth, territory, dependency, colony, possession, agency, or instrumentality of the United States of America, or of any foreign country, a corporation or corporations for the purpose of conducting and promoting any business or purpose for which corporations may be organized, and to dissolve, wind up, liquidate, merge, or consolidate any such corporation or corporations or to cause the same to be dissolved, wound up, liquidated, merged, or consolidated. To conduct its business, promote its purposes, and carry on its operations in any and all of its branches and maintain offices both within and without the state of Delaware, in any and all states of the United States of America, in the District of Columbia, and in any or all commonwealths, territories, dependencies, colonies, possessions, agencies, or instrumentalities of the United States of America and of foreign governments. To promote and exercise all or any part of the foregoing purposes and powers in any and all parts of the world, and to conduct its business in all or any of its branches as principal, agent, broker, factor, contractor, and in any other lawful capacity, either alone or through or in conjunction with any corporations, associations, partnerships, firms, trustees, syndicates, individuals, organizations, and other entities in any part of the world, and, in conducting its business and promoting any of its purposes, to maintain offices, branches, and agencies in any part of the world, to make and perform any contracts and to do any acts and things, and to carryon any business, and to exercise any powers and privileges suitable, convenient, or proper for the conduct, promotion, and attainment of any of the business and purposes herein specified or which at any time may be incidental thereto or may appear conducive to or expedient for the accomplishment of any of such business and purposes and which might be engaged in or carried on by a corporation incorporated or organized under the General Corporation Law of the state Delaware, and to have and exercise all of the powers conferred by the laws of the state of Delaware upon corporations incorporated or organized under the General Corporation Law of the state of Delaware. The foregoing provisions of this Article THIRD shall be construed both as purposes and powers and each as an independent purpose and power. The foregoing enumeration of specific purposes and powers shall not be held to limit or restrict in any manner the purposes and powers of the corporation, and the purposes and powers herein specified shall, except when otherwise provided in this Article THIRD, be in no wise limited or restricted by reference to, or inference from, the terms of any provision of this or any other Article of this certificate of incorporation; provided, that the corporation shall not conduct any business, promote any purpose, or exercise any power or privilege within or without the state of Delaware which, under the laws thereof, the corporation may not lawfully conduct, promote, or exercise. FOURTH: The total number of shares of stock which the corporation shall have authority to issue is sixty million (60,000,000). The 60,000,000 authorized shares shall be divided into 49,900,000 common shares, par value $.001 per share, 100,000 Class A Preferred Stock, par value $.001 per share and 10,000,000 Class B Preferred Stock, par value $.001 per share. The number of voting and other powers, preferences and relative, participating, optional or other rights and the qualifications, limitations and restrictions of the designated Class A Preferred Stock, par value $.001 per share of the Corporation are as follows unless and until such provisions shall be changed by further resolution of this corporation's Board of Directors as to any stock of the class remaining authorized but unissued: Class A Preferred Stock 1. Designation and Amount. There shall be a series of Preferred Stock designated as "Class A Preferred Stock" and the number of shares constituting such series of Class A Preferred Stock shall be 100,000. 2. Par Value. The par value of each share of Class A Preferred Stock shall be $.001. 3. Rank. All shares of Class A Preferred Stock shall rank prior, both as to payment of dividends and as to distributions of assets upon liquidation, dissolut1on or winding up of the Corporation. whether voluntary or involuntary, to all of the Corporation's now or hereafter issued common stock, par value $.001 per share (the "Common Stock"). 4. Dividends. Class A Preferred Stock shall not be entitled to any dividends beyond those given to common stock. 5. Liquidation Preference. In the event of a liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of Class A Preferred Stock shall be entitled to receive out of the assets of the Corporation, whether such assets are stated capital or surplus of any nature, an amount equal to the dividends accumulated thereon to the date of final distribution to such holders whether or not declared, without interest, and a sum equal to $10.50 per share, before any payment shall be made or any assets distributed to the holders of Common Stock. All of the remaining net assets shall belong to and be distributed among the holders of the Common Stock and/or any other class or series of the Corporation's capital stock as may be provided in the corporation's Certificate of Incorporation and applicable law realizing thereof an applying whatever other priorities are therein provided. Neither a consolidation or merger of the Corporation with another corporation nor a sale or transfer of all or part of the Corporation's assets for cash, securities or other property will be considered a liquidation, dissolution or winding up of the Corporation. 6. Redemption at Option of the Corporation. The Corporation may, at its option, at any time redeem in whole, or from time to time in part, out of the earned funds of the Corporation, the Class A Preferred Stock on any date set by the Board of Directors, at $10.50 per share plus, in each case, an amount in cash equal to all dividends on the Class A Preferred Stock accrued and unpaid thereon whether or not declared, pro rata to the date fixed for redemption (such sum being hereinafter referred to as the "Redemption Price"). In case of the redemption of less than all of the then outstanding Class A Preferred Stock, the Corporation shall designate by lot, or in such other manner as the Board of Directors may determine, the shares to be redeemed or shall effect such redemption pro rata. Notwithstanding the foregoing, the Corporation shall not redeem less than all of the Class A Preferred Stock at any time outstanding until all dividends accrued and in arrears upon all Class A Preferred Stock then outstanding shall have been paid for all past dividend periods. Not less than thirty (30) days prior to the redemption date, notice by first class mail, postage prepaid, shall be given to the holders of record of the Class A Preferred Stock to be redeemed. addressed to such stockholder at their last addresses as shown on the books of the Corporation. Each such notice of redemption shall specify the date fixed for redemption, the Redemption Price, the place or places of payment, that payment will be made upon presentation and surrender of the shares of Class A Preferred Stock and that on and after the redemption date, dividends will cease to accumulate on such shares. Any notice which is mailed as herein provided shall be conclusively presumed to have been duly given, whether or not the holder of the Class A Preferred Stock receives such notice and failure to give such notice by mail, or any defect in such notice, to the holders of any shares designated for redemption shall not affect the validity of the proceedings for the redemption of any other shares of Class A Preferred Stock. On or after the date fixed for redemption as stated in such notice, each holder of the shares called for redemption shall surrender the certificate evidencing such shares to the Corporation at the place designated in such notice and shall thereupon be entitled to receive payment of the Redemption Price. If less than all the shares represented by any such surrendered certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. If, on the date fixed for redemption, funds necessary for the redemption shall be available therefor and shall have been irrevocably deposited or set aside, then, notwithstanding that the certificates evidencing any shares so called for redemption shall not have been surrendered, the dividends with respect to the shares so called shall cease to accrue after the date fixed for redemption, the shares shall no longer be deemed outstanding, the holders thereof shall cease to be stockholders, and all rights whatsoever with respect to the shares so called for redemption (except the right of the holders to receive the Redemption Price without interest upon surrender of their certificates therefor) shall terminate. The shares of Class A Preferred Stock shall not be subject to the operation of any purchase, retirement or sinking fund. 7. Conversion. The shares of Class A Preferred Stock shall not be convertible at the option of the holder thereof. 8. Voting Rights. a. General. Each holder of Class A Preferred Stock will have thirteen (13) votes on all matters for which the holders of Common Stock may vote for every one (1) share of Class A Preferred Stock held. b. Class Voting Rights. In addition to voting rights provided above, so long as the Class A Preferred Stock is outstanding, the Corporation shall not, without the affirmative vote or consent of the holders of at least one half (1/2) of all outstanding Class A Preferred Stock voting separately as a class, (i) amend, alter or repeal (by merger or otherwise) any provision of the Certificate of Incorporation or the By-laws of the Corporation, as amended, so as adversely to affect the relative rights, preferences, qualifications, limitations or restrictions of the Class A Preferred Stock, (ii) authorize or issue any additional class or ser1es of preferred stock or any security convertible into preferred stock, or (iii) effect any reclassification or additional issuance of the Class A Preferred Stock. 9. Outstanding Shares. For purposes of this Certificate of Designation, all shares of Class A Preferred Stock shall be deemed outstanding except (i) from the date fixed for redemption pursuant to Section 6 hereof, all shares of Class A Preferred Stock that have been so called for redemption under Section 6 hereof; and (ii) from the date of registration of transfer, all shares of Class A Preferred Stock held of record by the Corporation. 10. Partial Payments. Upon an optional redemption by the Corporation, if at any time the Corporation does not pay amounts sufficient to redeem all Class A Preferred Stock, then such funds which are paid shall be applied to redeem such Class A Preferred Stock as the Corporation may designate by lot. 11. Preemptive Rights. The Class A Preferred Stock is not entitled to any preemptive or subscription rights in respect of any securities of the Corporation. 12. Severability of Provisions. Whenever possible, each provision hereof shall be interpreted in a manner as to be effective and valid under applicable law, but if any provision hereof is held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating or otherwise adversely affecting the remaining provisions hereof. If a court of competent jurisdiction should determine that a provision hereof would be valid or enforceable if a period of time were extended or shortened or a particular percentage were increased or decreased, then such court may make such change as shall be necessary to render the provision in question effective and valid under applicable law. Class B Preferred Stock 10,000,000 shares of the stock authorized to be issued by this corporation as Class B Preferred Stock shall have the following provisions applicable there to, unless and until such provisions shall be changed by further resolution of this corporation's Board of Directors as to any stock of the class remaining authorized but unissued: The Class B Preferred Stock shall be issued in one or more series. The Board of Directors is hereby expressly authorized to issue the shares of Preferred Stock in such series and to fix from time to time before issuance the number of shares to be included in any series and the designation, relative rights, preferences and limitations of all shares of such series. The authority of the Board of Directors with respect to each series shall include, without limitation thereto, the determination of any or all of the following and the shares of each series may vary from the shares of any other series in the following respects: a. The number of shares constituting such series and the designation thereof to distinguish the shares of such series from the shares of all other series; b. The annual dividend rate on the shares of that series and whether such dividends shall be cumulative and, if cumulative, the date from which dividends shall accumulate; c. The redemption price or prices for the particular series, if redeemable, and the terms and conditions of such redemption; d. The preference, if any, of shares of such series in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation; e. The voting rights, if any, in addition to the voting rights prescribed by law and the terms of exercise of such voting rights; f. The right, if any, of shares of such series to be converted into shares of any other series or class and the terms and conditions of such conversion; and g. Any other relative rights, preferences and limitations of that series. Pursuant to the authority conferred on the Board of Directors of this Corporation by the Certificate of Incorporation, the number of voting and other powers, preferences and relative, participating, optional or other rights and the qualifications, limitations and restrictions of 100,000 shares of the previously designated Class B Preferred stock. par value $.001 per share of the Corporation now to be designated Series A of Class B Preferred Stock are as follows: Series A of Class B Preferred Stock 1. Designation and Amount. There shall be a series of Class B Preferred Stock designated as "Series A of Class B Preferred Stock" and the number of shares constituting such series of Class B Preferred Stock shall be 100,000. 2. Par Value. The par value of each such share of Series A of Class B Preferred Stock shall be $.001. 3.Rank.All shares of Series A of Class B Preferred Stock shall rank prior, both as to payment of dividends and as to distributions of assets upon liquidation. dissolution or winding up of the Corporation, whether voluntary or involuntary, to all of the Corporation's now or hereafter issued Class A Preferred Stock $.001 par value ("Class A Preferred Stock") and its common stock. par value $.001 per share (the "Common Stock"). 4. Dividends. The holders of Series A of Class B Preferred Stock shall be entitled to receive, out of the net profits of the Corporation, dividends at the annual rate of $.90 per share per annum payable monthly by the 15th day of the month and accruing until paid starting and assessed beginning the first full month following issuance. The amount of dividends payable shall be computed on the basis of a 360 day year of twelve 30 day months. The Common Stock is entitled to all remaining profits which the Board of Directors may determine to distribute to the holders of Common Stock as dividends, Class A Preferred Stock not being entitled to any dividends but only liquidation preferences where applicable, subject to any future designations regarding the remainder of the unissued Class B Preferred Stock. No dividends or other distributions, other than dividends payable solely in shares of Common Stock of the Corporation ranking junior as to dividends and as to liquidation rights to the Series A of Class B Preferred Stock shall be declared, paid or set apart for payment on any shares of Common Stock and/or Class A Preferred Stock of the Corporation ranking junior as to dividends to Series A of Class B Preferred Stock unless and until all accrued and unpaid dividends of Series A of Class B Preferred Stock shall have been paid and/or set apart for payment. Any reference to "distribution" contained in this Section 4 shall not be deemed to include any distribution made in connection with any liquidation, dissolution or winding up of the Corporation whether voluntary or involuntary. 5. Liquidation Preference. In the event of a liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of Series A of Class B Preferred Stock shall be entitled to receive out of the assets of the Corporation, whether such assets are stated capital or surplus of any nature, an amount equal to the dividends accumulated thereon to the date of final distribution to such holders which have not prior thereto been paid without interest, and a sum equal to $10.00 per share, before any payment shall be made or any assets distributed to the holders of Class A Preferred Stock and/or Common Stock, or any other class or series of the Corporation's capital stock. All of the remaining net assets shall belong to and be distributed among the holders of the Class A Preferred Stock and/or Common Stock in proportion to rights designated for each, subject to any future designations regarding the remainder of the unissued Class B Preferred Stock. Neither a consolidation or merger of the Corporation with another corporation nor a sale or transfer of all or part of the Corporation's assets for cash, securities or other property will be considered a liquidation, dissolution or winding up of. the Corporation. 6. Redemption at Option of the Corporation. The Corporation may, at its option, at any time redeem in whole, or from time to time in part, out of the earned funds of the Corporation, the Series A of Class B Preferred Stock on any date set by the Board of Directors, at $10.00 per share plus, in each case, an amount in cash equal to all dividends on the Series A of Class B Preferred Stock accrued and unpaid thereon, pro rata to the date fixed for redemption (such sum being hereinafter referred to as the "Redemption Price"). In case of the redemption of less than all of the then outstanding Series A of Class B Preferred Stock, the Corporation shall designate by lot, or in such other manner as the Board of Directors may determine, the shares to be redeemed or shall effect such redemption pro rata. Notwithstanding the foregoing, the Corporation shall not redeem less than all of the Series A of Class B Preferred Stock at any time outstanding until all dividends accrued and in arrears upon all Series A of Class B Preferred Stock then outstanding shall have been paid for all past dividend periods. Not less than thirty (30) days prior to the redemption date notice by first class mail, postage prepaid, shall be given to the holders of record of the Series A of Class B Preferred Stock to be redeemed, addressed to such stockholders at their last addresses as shown on the books of the Corporation. Each such notice of redemption shall specify the date fixed for redemption, the Redemption Price, the place or p1aces of payment, that payment will be made upon presentation and surrender of the shares of the Series A of Class B Preferred Stock and that on and after the redemption date, dividends will cease to accumu1ate on such shares. Any notice which is mailed as herein provided shall be conclusively presumed to have been duly given, whether or not the holder of the Series A of Class B Preferred Stock receives such notice; and failure to give such notice by mail, or any defect in such notice, to the holders of any shares designated for redemption shall not affect the validity of the proceedings for the redemption of any other shares of the Series A of Class B Preferred stock. On or after the date fixed for redemption as stated in such notice, each holder of the shares called for redemption shall surrender the certificate evidencing such shares to the Corporation at the place designated in such notice and shall thereupon be entitled to receive payment of the Redemption Price. If less than all the shares represented by any such surrendered certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. If, on the date fixed for redemption, funds necessary for the redemption shall be available therefor and shall have been irrevocably deposited or set aside, then, notwithstanding that the certificates evidencing any shares so called for redemption shall not have been surrendered, the dividends with respect to the shares so called shall cease to accrue after the date fixed for redemption, the shares shall no longer be deemed outstanding, the holders thereof shall cease to be stockholders, and all rights whatsoever with respect to the shares so called for redemption (except the right of the holders to receive the Redemption Price without interest upon surrender of their certificates therefor) shall terminate. The shares of Series A of Class B Preferred Stock shall not be subject to the operation of any purchase, retirement or sinking fund. 7. Conversion. The shares of Series A of Class B Preferred Stock shall not be convertible at the option of the holder thereof. 8. Voting Rights. a. General. The shares of Series A of Class B Preferred Stock shall not have any voting rights regarding any corporation business except that solely and directly affecting the existence and rights and obligations of such Series A of Class B Preferred Stock. b. Class Voting Rights. In addition to voting rights provided above, so long as the Series A of Class B Preferred Stock is outstanding, the Corporation shall not, without the affirmative vote or consent of the holders of at least one half (1/2) of all outstanding Series A of Class B Preferred Stock voting separately as a class, amend, alter or repeal (by merger or otherwise) any provision of the Certificate of Incorporation or the By-Laws of the Corporation, as amended, so as adversely to affect the relative rights. preferences, qualifications, limitations or restrictions of the Series A of Class B Preferred Stock. 9. Outstanding Shares. For purposes of this Certificate of Designation, all shares of the Series A of Class B Preferred Stock issued shall be deemed outstanding except (i) from the date fixed for redemption pursuant to Section 6 hereof, all shares of Series A of Class B Preferred Stock that have been so called for redemption under Section 6 hereof; and (ii) from the date of registration of transfer, all shares of the Series A of Class B Preferred Stock held of record by the Corporation. 10. Partial Payments. Upon an optional redemption by the Corporation, if at any time the Corporation does not pay amounts sufficient to redeem all Series A of Class B Preferred Stock, then such funds which are paid shall be applied to redeem such Series A of Class B Preferred Stock as the Corporation may designate by lot. 11. Preemptive Rights. The Series A of Class B Preferred Stock is not entitled to any preemptive or subscription rights in respect of any securities of the Corporation. 12. Severability of Provisions. Whenever possible, each provision hereof shall be interpreted in a manner as to be effective and valid under applicable law, but if any provision hereof is held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating or otherwise adversely affecting the remaining provisions hereof. If a court of competent jurisdiction should determine that a provision hereof would be val1d or enforceable if a period of time were extended or shortened or a particular percentage were increased or decreased, then such court may make such change as shall be necessary to render the provision in question effective and valid under applicable jaw. To the extent not otherwise designated and until issued the shares of stock may be issued from time to time in one or more classes or one or more series within any class thereof, in any manner permitted by law, as determined from time to time by the board of directors, and stated in the resolution or resolutions providing for the issuance of such shares adopted by the board of directors pursuant to authority hereby vested in it, each class or series to be appropriately designated, prior to the issuance of any shares thereof, by some distinguishing letter, number, designation or title. All shares of stock in such classes or series may be issued for such consideration and have such voting powers, full or limited, or no voting powers, and shall have such designations preferences and relative, participating, optional, or other special rights, and qualifications, limitations or restrictions thereof, permitted by law, as shall be stated and expressed in the resolution or resolutions, providing for the issuance of such shares adopted by the board of directors pursuant to authority hereby vested in it. The number of shares of stock of any class or series within any class, so set forth in such resolution or resolutions may be increased (but not above the total number of authorized shares of the class) or decreased (but not below the number of shares thereof then outstanding) by further resolution or resolutions adopted by the board of directors pursuant to authority hereby vested in it. FIFTH: The corporation is to have perpetual existence. SIXTH: Whenever a compromise or arrangement is proposed between this corporation and its creditors or any class of them and/or between this corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this corporation under Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this corporation under Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this corporation, as the case may be, and also on this corporation. SEVENTH: For the management of the business and for the conduct of the affairs of the corporation, and in further definition, limitation, and regulation of the powers of the corporation and of its directors and of its stockholders or any class thereof, as the case may be, it is further provided: 1. The management of the business and the conduct of the affairs of the corporation shall be vested in its Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed by, or in the manner provided in, the Bylaws. The phrase "whole Board" and the phrase "total number of directors" shall be deemed to have the same meaning, to wit, the total number of directors which the corporation would have if there were no vacancies. No election of directors need be by written ballot. 2. After the original or other Bylaws of the corporation have been adopted, amended, or repealed, as the case may be, in accordance with the provisions of Section 109 of the General Corporation Law of the state of Delaware, and, after the corporation has received any payment for any of its stock, the power to adopt, amend, or repeal the Bylaws of the corporation may be exercised by the Board of Directors of the corporation; provided, however, that any provision for the classification of directors of the corporation for staggered terms pursuant to the provisions of subsection (d) of Section 141 of the General Corporation Law of the State of Delaware shall be set forth in an initial Bylaw or in a Bylaw adopted by the stockholders entitled to vote of the corporation unless provisions for such classification shall be set forth in this certificate of incorporation. 3. Whenever the corporation shall be authorized to issue only one class of stock, each outstanding share shall entitle the holder thereof to notice of, and the right to vote at, any meeting of stockholders. Whenever the corporation shall be authorized to issue more than one class of stock, no outstanding share of any class of stock which is denied voting power under the provisions of the certificate of incorporation shall entitle the holder thereof to the right to vote at any meeting of stockholders except as the provisions of paragraph (2) of subsection (b) of Section 242 of the General Corporation Law of the State of Delaware shall otherwise require; provided, that no share of any such class which is otherwise denied voting power shall entitle the holder thereof to vote upon the increase or decrease in the number of authorized shares of said class. EIGHTH: The personal liability of the directors of the corporation is hereby eliminated to the fullest extent permitted by paragraph (7) of subsection (b) of Section 102 of the General Corporation Law of the State of Delaware, as the same may be amended and supplemented. NINETH: The corporation shall, to the fullest extent permitted by Section 145 of the General Corporation Law of the state of Delaware, as the same may be amended and supplemented, indemnify any and all persons whom it shall have power to indemnify under said section from and against any and all of the expenses, liabilities, or other matters referred to in or covered by said section, and the indemnification provided for herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any Bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person. TENTH: As provided in Section 203 (b)(3) of the General Corporation Law of the State of Delaware, and in accord therewith the corporation elects not to be governed by such Section 203 effective as and when allowed as provided in such Section 203. ELEVENTH: From time to time any of the provisions of this certificate of incorporation may be amended, altered, or repealed, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted in the manner and at the time prescribed by said laws, and all rights at any time conferred upon the stockholders of the corporation by this certificate of incorporation are granted subject to the provisions of this Article ELEVENTH. The Restated and Amended Certificate of Incorporation was duly adopted in accordance with the provisions of Sections 242 and 245 of the General Corporation Law of the State of Delaware (the "GCL") by affirmative vote of a majority of the votes represented by outstanding stock entitled to vote thereon, given in accordance with the provisions of Section 228 of the GCL with respect to which action written notice has been given as provided in Section 228 of the GCL. In Witness Of said Corporation has caused this certificate to be signed by Mair Faibish, its Chief Executive Officer and by Mitchell Gerstein, its Secretary this day of , 2003. Synergy Brands Inc. By____________________ Mair Faibish, CEO By____________________ Mitchell Gerstein Secretary EX-3.1 EX-4 4 file003.txt AMENDMENT TO CERTIFICATE OF DESIGNATION PREFERENCES RIGHTS AND LIMITATIONS OF CLASS B PREFERRED STOCK, SERIES A OF SYNERGY BRANDS INC. AS PROVIDED IN THE RESTATED CERTIFICATE OF INCORPORATION SYNERGY BRANDS INC., a corporation incorporated, organized and existing under the laws of the State of Delaware (the "Corporation"). does hereby certify that pursuant to the authority conferred on the Board of Directors of the Corporation by the Certificate of Incorporation, as amended, of the Corporation and in accordance with Sections 141 and 151 of the General Corporation Law of the State of Delaware, the Board of Directors of the Corporation adopted the following resolution increasing the available securities and confirming the preferences, rights and limitations of this Corporation's authorized and issued Series A Class B preferred stock which authority was conferred upon the Board of Directors with shareholder approval upon initial establishment of such preferred stock in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware (the "GCL") by affirmative vote of a majority of the votes represented by outstanding stock entitled to vote thereon, given in accordance with the provisions of Section 228 of the GCL with respect to which action written notice has been given as provided in Section 228 of the GCL: RESOLVED, that pursuant to authority conferred on the Board of Directors of this Corporation, it is hereby confirmed that the number of shares authorized to be issued of the previously designated Series A Class B Preferred Stock par value $.001 per share of this Corporation are increased to 500,000 shares and that dividends which the holders are entitled to receive regarding any and all of such shares outstanding is hereby further confirmed to be based upon and paid form the capital surplus of this Corporation, both of which matters have been previously authorized by the Board of Directors of this Corporation but changes in the relevant incorporation documents have not been reflected in the Restated Certificate of Incorporation filed for this Corporation on November 10, 2003 and the record is to be clarified by this authorized amendment and actions taken by this Corporation previous hereto relying upon such amended provisions are hereby ratified. IN WITNESS WHEREOF, SYNERGY BRANDS INC., has caused this Certificate to be signed on its behalf by Mair Faibish, its Chief Executive Officer this 25th day of March 2004. SYNERGY BRANDS INC. By_____________________ Mair Faibish, CEO EX-4 EX-14 5 file004.txt SYNERGY BRANDS INC. CODE OF ETHICS MISSION STATEMENT: The following code is designed to create a guide to what Synergy Brands Inc., believes are business practices which if followed will create an ethical working environment which will deter wrongdoing and promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; full, fair, accurate, timely, and understandable disclosure as is required and/or otherwise deemed proper by management of this company in reports and documents that a registrant files with, or submits to, the Securities and Exchange Commission and other government agencies and in other public communications made by this Company; and compliance with applicable governmental laws, rules and regulations; which also includes as an integral part thereof the prompt internal reporting of violations of this code to an appropriate person or persons identified in the code; and accountability for adherence to the code. In furtherance thereof adherence to the following general guidelines to and policy of Synergy Brands Inc. is mandated for all employees, officers, directors and consultants and should be reviewed and examined in relation to all other persons with whom personnel of this Company may come in contact in furtherance of the interests of this Company. It is important to remember that a strong value system based on integrity and accountability has always been at the core of this Company's existence and this Company has always stressed ethical standards of business without a formal declaration as to the particulars of such standards, this Company being always hopeful that these general ethical standards were understood by and to be the required conduct for all with whom this Company associates. This document outlines this Company's legal requirements regarding the ethics of our operations and provides guidance for understanding and adhering to our business values but is not to be considered the complete description of what is considered by this Company as ethical behavior. Ethics is a concept that this Company wants to translate into practice. Fair treatment, kind regard, courtesy and respect, use of good business judgement, and altruism are only a sample of ethical behavior we promote. The guidelines set forth herein provide concepts which this Company desires its employees, affiliates and other Company personnel to reflect in their practice. Ethical behavior is important in its own right. However, it is also good for our business because it fosters one of our greatest assets-customer, client and investor trust. So take the time to read these Guidelines. Embrace them. And continue to live by the code of ethical conduct that has served our company so well. 1. INTRODUCTION. In this Company the Chief Executive Officer and senior executives are chiefly responsible for setting standards of business ethics and overseeing compliance with these standards. It is the individual responsibility of each and every employee of this company to comply with these standards. 2. COMMUNICATIONS CHANNELS. If any of this Company's associated personnel know of or suspect an unlawful or unethical situation, they should promptly contact the corporate secretary or any member of this Company's Audit Committee and/or Governance and Nominating Committee which contact information should be set forth in this Company's annual report and proxy statement. E-mail address at ( ) or as may otherwise be established by Company management shall be provided for focus on claims and inquiries regarding this Company's ethics. Appropriate person(s) at this Company's corporate level shall promptly review any report of unlawful or unethical conduct. 3. PERSONAL CONDUCT. This Company's reputation for integrity and business ethics should never be taken for granted. To maintain that reputation, this Company's personnel must follow all of this Company's Business Conduct Guidelines and exercise good judgment in their decisions and actions. If Company management finds that a persons' conduct on or off the job adversely affects their performance, that of other employees, or this Company's legitimate business interests, that person will be subject to disciplinary measures, including dismissal. 4. GENERAL CONCEPTS. All persons acting under and within authority and on behalf of this Company shall: o Act with honesty and integrity, avoiding actual or apparent conflicts of interest in their personal and professional relationships. o Where authorized to provide information regarding this Company to provide such information only as is accurate, complete, objective, fair, relevant, timely and understandable, including information in all filings with and other submissions to the U.S. Securities and Exchange Commission and other applicable government sources. o Comply with rules and regulations of federal, state, provincial and local governments, and other appropriate private and public regulatory agencies. o Act in good faith, responsibly, with due care, competence and diligence, without misrepresenting material facts or allowing one's independent judgment to be subordinated. o Respect the confidentiality of and not disclose information acquired in the course of one's work which might be considered confidential except when authorized or otherwise legally obligated to so disclose. o Confidential information acquired in the course of one's work shall not be used for personal advantage. o Share knowledge and maintain professional skills important and relevant to the needs of this Company and the needs of the person sharing the information related thereto. o Proactively promote and be an example of ethical behavior as a responsible partner among peers, in the work environment and the community understanding that one's conduct in such environment is reflective on this Company for whom such person works. 5. NO SPECULATIVE OR INSIDER TRADING. Federal law and Company policy prohibits officers, directors and employees, directly or indirectly through their families or others, from purchasing or selling this Company's stock because of and while in the possession of material, non-public information concerning this Company. This same prohibition applies to trading in the stock of other publicly held companies on the basis of material, non-public information. Material, non-public information is any information that could reasonably be expected to affect the price of a stock. If an officer, director, or employee is considering buying or selling a stock because of inside information they possess, they should assume that such information is material. It is also important for the officer, director or employee to keep in mind that if any trade they make becomes the subject of an investigation by the government, the trade will be viewed after the fact with the benefit of hindsight. Consequently, officers, directors, and employees should always carefully consider how their trades would look from this perspective. Two simple rules can protect in this area: (1) Don't use non-public information for personal gain. (2) Don't pass along such information to someone else who has no need to know. 6. BE TIMELY AND ACCURATE IN ALL PUBLIC REPORTS. As a public company, this Company must be fair and accurate in all reports filed with the United States Securities and Exchange Commission. This Company's officers and directors are responsible for ensuring that all reports are filed in a timely manner and that they fairly present the financial condition and operating results of this Company. Securities laws are vigorously enforced. Violations may result in sever penalties including forced sales of parts of the business and significant fines against this Company. There may also be sanctions against individual officers, directors, or employees for violations including substantial fines and/or prison sentences. The Chief Executive Officer and Chief Financial Officer shall certify to the accuracy of reports filed with the SEC in accordance with the Sarbanes-Oxley Act of 2002. Officers and Directors who knowingly or willingly make false certifications may be subject to criminal penalties or sanctions including fines and imprisonment. 7. AVOID CONFLICTS OF INTEREST. This Company's officers, directors and employees have an obligation to give their complete loyalty to the best interest of this Company. They should avoid any action that may involve, or may appear to involve a conflict of interest with this Company. Officers, directors and employees should not have any financial or other business relationships with suppliers, customers or competitors that might impair, or even appear to impair, the independence of any judgement they may need to make on behalf of this Company. Officers, Directors and employees are under a continuing obligation to disclose any situation that presents the possibility of a conflict or disparity of interest between the officer, director or employee and this Company. Disclosure of any potential conflict is the key to remaining in full compliance with this policy. 8. COMPETE ETHICALLY AND FAIRLY FOR BUSINESS OPPORTUNITIES. All of this Company's personnel must comply with the laws and regulations that pertain to the acquisition of any business opportunity. This Company shall compete fairly and ethically for all business opportunities. In circumstances where there is reason to believe that the release or receipt of non-public information is unauthorized, do not attempt to obtain and do not accept such information from any source. Company personnel involved in Company transactions must be certain that all statements, communications, and representations made regarding this Company are accurate and truthful. 9. MAINTAIN THE INTERGRITY OF CONSULTANTS, AGENTS, AND REPRESENTATIVES. Business integrity is a key standard for those who represent this Company. Agents, representatives, and consultants must certify their willingness to comply with our policies and procedures and must never circumvent our values and principles. 10. PROTECT PROPRIETARY INFORMATION. Proprietary Company information may not be disclosed to anyone without proper authorization. Keep proprietary documents protected and secure. In the course of normal business activities, associates, customers and competitors may sometimes divulge information that is proprietary to their business. Respect these confidences. 11. RESPONSIBLE USE OF COMPANY ASSETS. Achieve responsible use, control, and stewardship over all assets and resources of this Company that are employed by or entrusted to the recipients of such property for the benefit of this Company. 12. AVOID UNDUE INTERFERNCE. Company Personnel shall not and shall not attempt to unduly or fraudulently influence, coerce, manipulate, or mislead any authorized audit or interfere with any auditor engaged in the performance of an internal or independent audit of this Company's financial statements or accounting books and records nor apply such conduct to the application to this Company of any other relevant regulations. 13. BOARD COMMITTEES. The Board of Directors shall establish an Audit Committee empowered to enforce this Code of Ethics. The Audit Committee shall report to the Board of Directors at least once a year regarding the effectiveness of this Company's Code of Ethics, its disclosure controls and reporting procedures, and its general business conduct. 14. COMPLIANCE MEASURES. This Company shall consistently enforce its Code of Ethics and Business Conduct through appropriate means of discipline. Violations of the Code shall be promptly reported to the Audit Committee. Pursuant to procedures adopted by it, the Audit Committee shall determine whether violations of the Code have occurred and, if so, shall determine the disciplinary measure to be taken against any employee or agent who has so violated the Code. Disciplinary measures, may be invoked at the discretion of the Audit Committee, and may include, but are not limited to, counseling, oral or written reprimands, warnings, probation or suspension without pay, demotions, reductions in salary, termination of employment and restitution. Persons subject to disciplinary measures shall include, in addition to the violator, others involved in the wrongdoing, including but not limited to, persons who fail to use reasonable care to detect violations, persons who if requested to divulge information withhold material information regarding a violation, and supervisors who approve or condone the violations or attempt to retaliate against employees or agents for reporting violations or violators. EX-14 EX-21 6 file005.txt List of Subsidiaries Corporation State of Incorporation Status - ----------- ------------- ------ Island Wholesale Grocers Inc. New York wholly owned inactive, in process of dissolution Premium Cigar Wrappers Inc. New York active majority owned Synergy Brands Distribution Inc. New York wholly owned inactive, in process of dissolution PHS Group Inc. Pennsylvania active wholly owned by SYBR.com Inc. d.b.a. Pro Set Distributors (NY), BeautyBuys.com (NY) Wholesale Cash and Carry(NY) and Cash and Carry (NY) SYBR.Com Inc. New Jersey active wholly owned by Synergy Brands Inc. d.b.a. BeautyBuys.com Inc. (NJ) Net Cigar.Com Inc. New York inactive wholly owned by SYBR.Com Inc.,in process of dissolution Net Cigar.Com Inc. Florida active wholly owned by Gran Reserve Corporation BeautyBuys.com Inc. New Jersey inactive wholly owned by SYBR.com Inc., merger pending into BeautyBuys.com (Fla.) Dealbynet.com Inc. New York active wholly owned by PHS Group Inc. Supply Chain Technologies Inc. New York inactive wholly owned by SYBR.com Inc., in process of dissolution Gran Reserve Corporation Florida active wholly owned by SYBR.com Inc. d.b.a. CigarGold (Fla.) CigarKingdom (Fla.) NetCigar (Fla.) Pro Set Distributors (Fla.) and Cirgars Around the World (Fla.) BeautyBuys.com Florida active wholly owned by Gran Reserve Corporation Cigar Kingdom Corporation Florida active wholly owned by Gran Reserve Corporation The Ranley Group Inc. aka Cigars Around the World Illinois active wholly owned by Gran Reserve Corporation EX-21 EX-31.1 7 file006.txt CERTIFICATION OF ANNUAL REPORT -------------------------------- I, Mair Faibish, Chief Executive Officer of Synergy Brands, Inc. ("the Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: 1. The Annual Report on Form 10-KSB of the Company for the period ended December 31, 2003 ("the Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 30, 2004 /s/ Mair Faibish -------------------- Mair Faibish Chief Executive Officer EX-31-1 EX-31.2 8 file007.txt CERTIFICATION OF ANNUAL REPORT -------------------------------- I, Mitchell Gerstein, Chief Financial Officer of Synergy Brands, Inc. ("the Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: 1. The Annual Report on Form 10-KSB of the Company for the period ended December 31, 2003 ("the Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 30, 2004 /s/ Mitchell Gerstein ---------------------- Mitchell Gerstein Chief Financial Officer EX-31.2 EX-99.1 9 file008.txt EXHIBIT Intellectual Property The tradenames "BeautyBuys", "NetCigar", and "Cigargold.com" 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 Nativos Corojo 2000 Andulleros Alimerante MikeDitka 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** CIGARGOLD.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-99.1 EX-99.2 10 file009.txt SYNERGY BRANDS INC. Governance and Nominating Committee Charter Role The Governance and Nominating Committee's role is to determine the slate of director nominees for election to the Company's Board of Directors, to identify and recommend candidates to fill vacancies occurring between annual shareholder meetings, and to review, evaluate and recommend changes to the Company's Corporate Governance Guidelines. Membership The membership of the Committee shall consist of at least two directors, each of whom is to be free of any relationship that, in the opinion of the Board, would interfere with his or her exercise of independent judgment. Applicable laws and regulations will be followed in evaluating a member's independence. The Board appoints the chairperson. Operations The Committee shall meet at least once a year. Additional meetings may occur as the Committee or its chair deems advisable. The Committee shall cause to be kept adequate minutes of all its proceedings, and shall report its actions to the next meeting of the Board Committee members shall be furnished with copies of the minutes of each meeting and any action taken by unanimous consent. The Governance and Nominating Committee is governed by the same rules regarding meetings (including meetings by conference telephone or similar communications equipment), action without meetings, notice, waiver of notice, and quorum and voting requirements as are applicable to the Board. The Committee is authorized and empowered to adopt its own rules of procedure not inconsistent with (a) any provision of this Charter, (b) any provision of the Bylaws of the Corporation, or (c) the laws of the state of Delaware. Authority The Committee shall have the resources and authority necessary to discharge its duties and responsibilities, including the authority to retain outside counsel or other experts or consultants, as it deems appropriate. Any communications between the Committee and legal counsel in the course of obtaining legal advice shall be considered privileged communications of the Company and the Committee will take all necessary steps to preserve the privileged nature of those communications. Responsibilities Subject to the provisions of the Corporate Governance Guidelines, the principal responsibilities and functions of the Governance and Nominating Committee are as follows: Annually evaluate and report to the Board on the performance and effectiveness of the Board to facilitate the directors fulfilling their responsibilities in a manner that serves the interests of this Company's shareholders. Annually present to the Board a list of individuals recommended for nomination for election to the Board at the annual meeting of shareholders. Before recommending an incumbent, replacement or additional director, review his or her qualifications, including capability, availability to serve, conflicts of interest, and other relevant factors. Assist in identifying, interviewing and recruiting candidates for the Board. Annually review the composition of each committee and present recommendations for committee memberships to the Board as needed. Periodically review the compensation paid to non-employee directors for annual retainers (including Board and committee Chairs) and meeting fees, if any, and make recommendations to the Board for any adjustments. No member of the Committee will act to fix his or her own compensation except for uniform compensation to directors for their services as such. Review and make recommendations about changes to the charter of the Governance and Nominating Committee and any changes to this Company's Code of Ethics. The committee shall monitor, oversee and review compliance with the Corporate Governance Guidelines, Code of Ethics and any other applicable operating policies of the Company; provided, however, that monitoring or compliance with provisions of the Code of Ethics that relate to accounting disclosures and regulations of the SEC or NASDAQ or misrepresentations of or omissions from financial statements or related financial information shall be referred to the Company's Audit Committee for action. The Committee shall serve as the initial reviewing council for allegations of violations of the Code of Ethics or requests for waivers of the provisions of the Code of Ethics by an executive officer or director of the Company; provided, however, that the initial review of allegations of violations of or request for waiver of the provisions of the Code of Ethics that relate to accounting disclosures and regulations of the SEC or NASDAQ, or misrepresentations of or omissions for financial statements or related financial information shall be referred to the Company's Audit Committee for action. The Committee shall make recommendations to the Board about responses to communications with regulatory authorities and agencies arising out of inquiries and/or investigations relating to the Code of Ethics and applicable state and federal laws, to the extent the Committee deems necessary or appropriate. Issues relating to inquiries or investigations regarding the quality of financial reports filed by the Company with the SEC or otherwise distributed to the public shall be referred to the Audit Committee for action. Review and make recommendations, if necessary, about changes to the charters of other Board committees after consultation with the respective committee chairs. Review the Chief Executive Officer's performance and performance of other executive officers of this Company. COMMITTEE ACCESS, RESOURCES AND RELIANCE 1. In carrying out its responsibilities, the Committee shall have access to all the Company's books, records, directors, officers and employees. 2. The Committee shall have the authority to consult with the Company's counsel. It shall also have the authority to employ any other counsel of its selection, at the Company's expense, should the Committee deem it desirable and appropriate to do so. 3. The Committee, and each member of the Committee, in his or her capacities as such, shall be entitled to rely, in good faith, on information, opinions, reports, or statements, or other information prepared or presented to them by (i) officers and other employees of the Company, whom such member believes to be reliable and competent in the matters presented and (ii) counsel, public accountants or other persons as to matters which the member believes to be within the professional competence of such person. EX-99.2 -----END PRIVACY-ENHANCED MESSAGE-----