-----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, V7qqu6GbNymi3eeDahwYaHwzPZdSYDWaNu9r/xGvrB+konUwzVXAnDWrPV75w0Lg EK+iuHDLpTPIlpwptS+xYg== 0001026018-05-000022.txt : 20050331 0001026018-05-000022.hdr.sgml : 20050331 20050331154707 ACCESSION NUMBER: 0001026018-05-000022 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050331 DATE AS OF CHANGE: 20050331 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: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-19409 FILM NUMBER: 05720112 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 10-K 1 file001.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2004. 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: 1-800-373-7489 ext. 24 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-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer Yes__NO_X_ Synergy Brands Inc. revenues for its most recent fiscal year were $56,705,044. On March 30, 2005, the aggregate market value of the voting stock of Synergy Brands Inc., held by non-affiliates of the Registrant was approximately $5,013,000. 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, 2005 was 3,298,026. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for Registrant's 2004 Annual Meeting of Stockholders currently scheduled to be held June 2005 are incorporated by reference in Part III (for other documents incorporated by reference refer to Exhibit Index at page 44 and 45) PART I Other than historical and factual statements, the matters and items discussed in this report on Form 10-K 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 the wholesale distribution of Groceries and Health and Beauty Aid (HBA) products as well as wholesale and on-line distribution of premium cigars and salon products.. 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 uses logistics web based programs to optimize its distribution costs on both wholesale and retail levels. The company distributes and sells these products through wholly owned subsidiaries in two distinct manners, wholesale and on-line. The Company also owns 21.5% of the outstanding common stock of Interline Travel and Tours, Inc. (AKA: PERX.com). PERX provides cruise and resort hotel packages through a proprietary reservation system to airline employees and their retirees. PERX is believed to be the largest Company in this sector of the travel industry. Information on PERX can be found at www.perx.com. The Company believes that its capital investment in this unique travel company could provide for material future capital appreciation. Synergy Brands does not manage PERX's day-to-day operations. For further information please visit our corporate website at www.sybr.com. -1- 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 89% of the overall company sales. PHS's core sales base remains 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, and distributors 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 and NetCigar.com sells premium cigars through the Internet directly to the consumer. o BeautyBuys.com sells salon hair care products directly to the consumer via the internet. THE COMPANY'S CORPORATE OFFICES ARE LOCATED AT 1175 WALT WHITMAN ROAD MELVILLE NEW YORK 11747, AND ITS TELEPHONE NUMBER IS (800) 373-7489 ext.24. THE COMPANY MAINTAINS A CORPORATE WEBSITE AT WWW.SYBR.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 10Q and Year-end 10-K 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 consists of the distribution of nationally branded consumer products in the grocery and HBA sectors and wholesale distribution of grocery items predominantly in the United States and Ontario, Canada. Distribution of such products is directed to major retailers and wholesalers from major U.S. consumer product manufacturers and Canadian distribution. 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 and Ontario, Canada. 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 predominantly to wholesalers and distributors in the Northeastern part of the United States. Proset focuses on the sale of brand name salon hair care products. Proset purchases these goods in large quantities and thereby at a volume discount and in turn sells in bulk to regional wholesalers and distributors. Proset also sells directly to the consumer salon products on-line through beautybuys.com. The online unit operates at 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. C. CIGAR OPERATIONS. GRC manages multiple Internet domains that market directly to the retail consumer via standard and electronic commerce. GRC owns multiple domains including Cigargold.com. and Netcigar.com. GRC focuses on sale of a mix of Brand name and private label premium cigar items and cigar related accessories and markets them through multiple cigar domains including CigarGold.com and NetCigar.com. GRC operations include two businesses. This segment includes Cigars Around the World (CAW) and CigarGold/NetCigar. 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 was founded by Bill Rancic, winner of the NBC show The Apprentice. Mr. Rancic serves on the Board of Directors of Synergy Brands. 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. CAW also organizes events such as cigar dinners and merchandising opportunities within it destinations. 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 as well as private label and proprietary products. CigarGold operates under the domain names: www.CigarGold.com, www.NetCigar.com, and www.GoldCigar.com. -3- (i) CIGARGOLD.COM In 1999, the Company launched through its GRC subsidiary NetCigar.com Inc. ("NetCigar") a web site created for sale of premium cigar products. The Company developed another domain name in CigarGold.com (CGC) and the operations of NetCigar are now precessed under that name. Through CigarGold.com the Company offers information on a variety of cigars and cigar related products as well as content, including cigar news and events and editorials, and sale of 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. CGC, 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 CGC 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 CGC competes with many and varied sources for cigar products in a small but affluent market which is highly fragmented and which has to date a small on-line presence. 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 a small share 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 displays and maintains its own internet sales based website. The purchase price paid for such subsidiary was based on the EBTDA (Earnings Before Taxes, Depreciation and Amortization)of CAW going forward over a three-year period. -5- 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, 2004 and 2003, the Company purchased approximately 53% and 71% respectively of its products from one supplier. If the Company were unable to maintain this relationship it might have a material impact on future operations. 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, 2004, sales to two customers accounted for 21% and 18% of the Company's total sales and in 2003 sales to two customers accounted for 11% each of total sales. These major customers relate to the grocery logistics business within the Company's B2B sector. F. INFORMATION SYSTEMS AND WEBSITE TECHNOLOGY FOR INTERNET SALES. 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 including reference to and listing of various Company committee charters and disclosure policies. Internet sites presently available regarding Company business and product sales are: BeautyBuys.com NetCigar.com SynergyBrands.Com DealbyNet.com Perx.com (managed by Interline Travel & Tours) SYBR.com CIGARGOLD.com Goldcigar.com CigarsAroundtheWorld.com 6 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. 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. 7 The Company also maintains a Virtual Private Network (VPN) and Webex private network. The network allows for real time sales and order processing across to Company's regional offices 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 85% of B2C product inventory is in warehouse stock and 15% 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 utilized 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 controlled substance 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, GoldCigar, 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 50 full time and part time employees all of whom work in executive, administrative sales, marketing, data processing, 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 , New Jersey , and Florida (GRC), and sales offices in Pennsylvania, Illinois, Maine and Toronto 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 federal legislation 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 legislation 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. Legislation is also pending to curtail internet tobacco product sales in their entirely. Recently the US Bureau of Alcohol Tobacco Firearms and Explosives, the major credit card companies and State attorneys general reached agreement to dissallow use of credit cards for cigarette purchases over the internet across State lines and to take action against Internet Sellers that authorities identify as violating State and Federal laws regulating cigarette sales. New York was the first State to ban Internet cigarette sales totally. Further States may likely follow suit. Those bans are based both on tax evasion issues and underage purchasing concerns. 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 illnesses 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 aforementioned 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 and representative offices in New York, Pennsylvania, New Jersey, Maine, Illinois, Florida, and Ontario, Canada. 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 warehoused in Florida. The facilities operate under contractual warehousing agreements except in Florida and New York which facilities are leased. The Company also uses warehousing facilities on a spot contract basis as needed. 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 2004 no matters were submitted for shareholder approval. In September 2004 by written consent shareholders holding a majority of the votes approved a reduction in the authorized stock of the Company from 60,000,000 shares to 6,000,000 shares, and in February 2005 by similar shareholder vote the authorized stock was retroactively corrected to 15,000,000 shares as the status prior to the aforesaid reduction to 6,000,000 shares (further explained in Item 5 "Market for the Registrant's Common Stock and Related Stockholder matters" infra.) 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 - ------------- ------- ------- ------ March 31, 2003 3.05 2.47 2.47 June 30, 2003 3.44 2.45 2.67 September 30, 2003 4.49 2.99 3.61 December 31, 2003 4.20 3.40 3.90 March 31, 2004 5.69 3.75 3.96 June 30, 2004 4.72 2.75 2.89 September 30, 2004 3.22 2.13 2.30 December 31, 2004 7.25 1.66 3.35 On March 30, 2005, the Company had approximately 3200 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. The Company does pay a dividend on its preferred stock. Effective February 2005 the Company has decreased its authorized stock to 6,000,000 shares divided into 5,000,000 Common Stock $.001 par value, 100,000 shares of Class A Preferred Stock par value $.001 and 900,000 shares of Class B Preferred Stock, 500,000 shares of which are designated Series A Class B Preferred. Prior thereto the Company was authorized to issue 60,000,000 shares but such figure was retroactively reduced to 15,000,000 shares to correct the Company's inadvertent lack of reduction of its authorized stock when it reverse split its outstanding stock 1 for 4 in February 2003. 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 2004. 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. SELECTED FINANCIAL DATA The following selected financial data is derived from the Company's financial statements. This data should be read in conjunction with Item 7 Management's Discussion and Analysis of Financial Condition and Plan of Operations. SYNERGY BRANDS INC SELECTED FINANCIAL DATA 12/31/2004
YEAR ENDED DECEMBER 31, 2004 2003 2002 2001 2000 CONSOLIDATED STATEMENT OF OPERATIONS: NET SALES $56,705,044 $40,540,577 $31,540,675 $24,347,928 $20,665,018 COST OF SALES COST OF PRODUCT $51,907,840 $36,837,796 $29,241,384 $22,347,887 $19,391,844 SHIPPING AND HANDLING COSTS $900,205 $893,582 $600,994 $657,793 $332,845 $52,808,045 $37,731,378 $29,842,378 $23,005,680 $19,724,689 GROSS PROFIT $3,896,999 $2,809,199 $1,698,297 $1,342,248 $940,329 OPERATION EXPENSES ADVERTISING AND PROMOTIONAL $150,181 $91,634 $469,965 $1,501,267 $2,547,891 GENERAL AND ADMINISTRATIVE $3,605,433 $2,984,663 $3,196,270 $3,072,900 $4,419,753 DEPRECIATION AND AMORTIZATION $659,490 $692,698 $893,935 $1,004,553 $663,146 DEVELOPMENT COSTS $16,133 $632,696 $4,415,104 $3,768,995 $4,560,170 $5,594,853 $8,263,486 OPERATING LOSS -$518,105 -$959,796 -$2,861,873 -$4,252,605 -$7,323,157 OTHER INCOME(EXPENSE) INTEREST INCOME $4,610 $13,913 $26,695 $128,189 $66,183 OTHER INCOME(EXPENSE) -$46,983 $298,932 $514,860 $23,804 -$55,676 EQUITY IN EARNINGS OF INVESTEE $172,224 $92,424 $67,717 $1,583 INTEREST AND FINANCING EXPENSES -$1,553,521 -$690,038 -$211,279 -$154,745 -$178,964 DIVIDENDS ON PREFERRED STOCK OF SUBSIDARY -$24,500 -$24,500 -$1,423,670 -$284,769 $397,993 -$25,669 -$192,957 LOSS BEFORE INCOME TAXES -$1,941,775 -$1,244,565 -$2,463,880 -$4,278,274 -$7,516,114 MINORITY INTEREST IN LOSS $266,258 INCOME TAX EXPENSE $34,604 $32,658 $22,687 $21,865 $21,433 NET LOSS BEFORE DISCONTINUED OPERATIONS -$1,976,379 -$1,277,223 -$2,486,567 -$4,300,139 -$7,271,289 DISCONTINUED OPERATIONS LOSS ON DISCONTINUED OPERATIONS OF PCW, NET OF APPLICABLE BENEFIT OF $0 -$495,534 DIVIDEND-PREFERRED STOCK $156,375 $78,000 NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS -$2,132,754 -$1,355,223 -$2,486,567 -$4,300,139 -$7,766,823 BASIC AND DILUTED NET LOSS PER COMMON SHARE: -$0.97 -$0.82 -$1.91 -$4.15 -$9.74 WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 2,209,371 1,652,019 1,302,042 1,035,795 797,193 CONSOLIDATED BALANCE SHEET DATA: WORKING CAPITAL $3,064,266 $1,041,027 $51,542 $744,710 $1,455,851 TOTAL ASSETS $16,706,423 $10,992,645 $5,871,669 $8,398,310 $12,279,515 LONG TERM OBLIGATIONS $1,196,241 $788,162 $342,750 $801,814 $184,625 TOTAL SHAREHOLDERS' EQUITY $6,573,057 $2,943,832 $2,082,537 $3,027,029 $7,718,673
12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OFOPERATIONS 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 the wholesale and online distribution of Groceries and Health & Beauty Aid (HBA) as well as wholesale and online distribution of premium cigars and salon products through three business 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 uses logistics web based programs to optimize its distribution costs on both wholesale and retail levels. The Company also owns 21.5% of the outstanding common stock of Interline Travel and Tours, Inc. (AKA: PERX). PERX provides cruise and resort hotel packages through a proprietary reservation system to airline employees and their retirees. PERX is believed to be the largest Company in this sector of the travel industry. Information on PERX can be found at www.perx.com. The Company believes that its capital investment in this unique travel Company could provide for material future capital appreciation. Synergy Brands does not manage PERX's day-to day operations. Perx pre-tax profit has grown at a compounded sequential growth rate of 36% cumlative since 2002 to $1,069,000 in Fiscal Year 2004. SYBR's share under the equity method amounted to $172,224 for Fiscal Year 2004 after income taxes. SYBR and PERX have been exploring several opportunities to optimize the shareholder value of both Companies. 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 and Canada. PHS is the largest subsidiary of the Company and represents about 89% 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 and distributors, 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 and Netcigar.com sells premium cigars through the Internet directly to the consumer. o BeautyBuys.com sells salon hair care products directly to the consumer via the Internet. 13 CONSOLIDATED RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2004 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2003.
OPERATING OPERATING AND SEGMENTS CORPORATE SEGMENTS Y/E 12/31/2004 Revenue 56,705,044 39.87% 56,705,044 39.87% Gross Profit 3,896,999 38.72% 3,896,999 38.72% SG&A 3,092,087 17.04% 3,755,614 22.08% Operating Profit (loss) 442,190 202.03% (518,105) 46.02% Net loss (1,032,025) -26.22% (2,132,754) -57.37% Net loss per common share (0.47) (0.97) Depreciation and amortization 362,722 -39.62% 659,490 -4.79% Interest income (4,344) -68.53% (4,610) -66.87% Interest and financing expenses 1,444,020 109.50% 1,553,521 125.14% ----------- ----------- EBITDA 770,373 68.00% 75,647 456.23% =========== =========== EBITDA net income per share 0.35 0.03 Y/E 12/31/2003 Revenue 40,540,577 40,540,777 Gross Profit 2,809,199 2,809,199 SG&A 2,641,864 3,076,297 Operating Profit (loss) (433,395) (959,796) Net loss (817,658) (1,355,223) Net loss per common share (0.49) (0.82) Depreciation and amortization 600,730 692,698 Interest income (13,805) (13,913) Interest and financing expenses 689,286 690,038 ----------- ----------- EBITDA 458,553 13,600 =========== =========== EBITDA net income per share 0.28 0.01
Revenues increased by 40% to $56,705,044 for the year ended December 31, 2004, as compared to $40,540,577 for the year ended December 31, 2003. The largest percentage increase was in the Company's B2B operations. The Company's grocery operation continued to develop additional vendor relationships in the grocery and HBA businesses as well as materially expanded its sales in Canada. Gross profit increased by 39% to $3,896,999 for the year ended December 31, 2004 as compared to $2,809,199 for the year ended December 31, 2003. The increase in gross profit was in direct relationship to increased sales. Selling General and Administrative expenses (SGA) increased by 22% while revenues increased by 40% for the year ended December 31, 2004 as compared to the year ended December 31, 2003. The Company streamlined its operations by centralizing all administrative functions at its corporate offices, reduced staff in its Proset operation through outsourcing, and increasing sales focus on wholesale distribution as opposed to retail store sales. The largest subsidiary of the Company, PHS Group, increased its SGA expenses by 41% to $1,870,312 for the year ended December 31, 2004 as compared to $1,323,887 for the year ended December 31, 2003. The increase in SGA for PHS group was caused by a 46% increase in revenues. PHS incurs variable expenses in connection with selling costs such as sales commission, drivers, warehousing and administrative personnel as well as its promotional expenses. As revenues rise sales commissions and certain operating expenses resulting from sales increase commensurately. The net loss for the Company was $2,132,754 for the year ended December 31, 2004 as compared to a net loss of $1,355,223 for the year ended December 31, 2003. In the first quarter of 2003, the company realized a one time gain of $282,750 in connection with the extinguishment of online advertising payables in 2003. The Company also had the benefit of an allowance paid in the second quarter of 2003 totaling $415,000 that will be paid over the course of subsequent period. Other material factors that affected the Company's costs were increased financing costs resulting from increased borrowings. The increase was attributable to the development of the Company's wholesaling operation as well as materially higher financing costs. Financing costs jumped by 125% to $1,553,521 for the year ended December 31, 2004. Corporate expenses such as legal, accounting, and regulatory costs as well as depreciation 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 the year ended December 31, 2004 totaled $663,527, which include legal, accounting and regulatory expenses as compared to $434,443 for the year ended December 31, 2003. 14 Earnings before interest, taxes, depreciation and amortization (EBITDA) improved to a profit of $75,647 for the year ended December 31, 2004 as compared to a profit of $13,600 for the year ended December 31, 2003. The improvement is attributable to an increase in revenues. However, financing costs increased by 125% to $1,553,521. 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 68% to a profit of $770,373 for the year ended December 31, 2004 as compared to a profit of $458,553 for the year ended December 31,2003. Earnings before interest, depreciation, amortization (EBITDA) is a financial measurement used by distribution related companies that function in the wholesaling of manufactured goods. EBITDA is relevant to the Company's businesses due to the fact that traditional valuations for measuring the values of enterprises such as ours are usually based on EBITDA multiples. EBITDA is not recognized as a GAAP measurement of earnings and should not be relied upon as such. In order to fully understand the Company's results a discussion of the Company's segments and their respective results follow; 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 89% 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. 15 PHS SEGMENT INFORMATION OF OPERATING BUSINESSES PHS Group CHANGE Year ended December 31, 2004 Revenue 50,728,560 46.02% Gross Profit 2,805,747 45.57% SG&A 1,870,312 41.27% Operating Profit (loss) 928,934 180.88% Net loss (167,951) -110.30% Depreciation and amortization 6,501 -97.62% Interest income (4,344) -68.53% Interest and financing expenses 1,168,607 159.76% EBITDA 1,002,813 59.42% Year ended December 31, 2003 Revenue 34,740,999 Gross Profit 1,927,416 SG&A 1,323,887 Operating Profit (loss) 330,717 Net loss (79,864) Depreciation and amortization 272,812 Interest income (13,805) Interest and financing expenses 449,876 EBITDA 629,019 PHS increased its revenues by 46.0% to $50.7 million for year ended December 31, 2004 as compared to $34.7 million for the year ended December 31, 2003. 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. PHS increased its gross profit by increasing Direct Store Delivery sales as well as focusing on promotional merchandise offered by its vendors. The overall gross profit percentage remained consistent at 5.5%. 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. EBITDA increased to $1,002,813 for the year ended December 31, 2004 as compared to $629,019 for the year ended December 31, 2003. 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 117% of EBITDA and the single highest of the Company's overall expenditures. 16 PROSET SEGMENT INFORMATION OF OPERATING BUSINESSES Salon Year ended December 31, 2004 products CHANGE Revenue 3,923,823 6.88% Gross Profit 588,154 70.82% SG&A 282,747 -34.20% Operatimg Profit(loss) 94,487 131.65% Net loss (219,204) 56.35% Depreciation and amortization 210,920 -1.07% Interest and financing expenses 232,913 16.52% EBITDA 224,629 352.20% Year ended December 31, 2003 Revenue 3,671,106 Gross Profit 344,305 SG&A 429,684 Operatimg Profit(loss) (298,577) Net Profit(loss) (502,158) Depreciation and amortization 213,198 Interest and financing expenses 199,892 EBITDA (89,068) Proset revenues increased by 6.9% for the year ended December 31, 2004 as compared to the year ended December 31, 2003. Proset has transitioned its business model from retail services to wholesale distribution. Gross profit has increased by 71% to $588,154 for the year ended December 31, 2004 as compared to $344,305 for the year ended December 31, 2003. At the same time SG&A dropped by 34% to $282,747 for year ended December 31, 2004. As a result of this transition, the Company's customer base has expanded to include smaller distributors that purchase salon products in higher quantities, which in turn optimizes the gross profit. 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 distributors and resellers in order to keep a supply chain for its customer base. EBITDA improved from a loss of $89,068 for the year ended December 31, 2003 to a profit at $224,629 for the year ended December 31, 2004. This improvement was caused by an increase in revenues, a reduction in labor cost, warehousing expenses and a reduction in freight expenses. Financing costs are also an important factor in the operation of Proset. Financing costs increased by 17% to $232,913. Wholesalers are provided better credit terms then retailers since they need to maintain greater inventories. In order to improve the profitability of Proset, management believes that financing costs need to reduced. 17 B2C SEGMENT INFORMATION OF OPERATING BUSINESSES B2C CHANGE Year ended December 31, 2004 Revenue 2,052,661 -3.56% Gross Profit 503,098 -6.40% SG&A 939,028 5.71% Operatimg Profit(loss) (581,231) 24.85% Net loss (644,870) -173.67% Depreciation and amortization 145,301 26.66% Interest and financing expenses 42,500 7.55% EBITDA (457,069) -461.52% Year ended December 31, 2003 Revenue 2,128,472 Gross Profit 537,478 SG&A 888,293 Operatimg Profit(loss) (465,535) Net Profit(loss) (235,636) Depreciation and amortization 114,720 Interest and financing expenses 39,518 EBITDA (81,398) 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 for the year ended December 31, 2004 were $2,052,661 as compared to $2,128,472 for the year ended December 31, 2003. CAW on a current operating basis represents approximately 64% of B2C revenues for the year ended December 31, 2004. Gross profit for year ended December 31, 2004 was $503,098 as compared to $537,478 for the year ended December 31, 2003. EBITDA decreased by 462% for the same period. The table above provides comparative details for the Company's B2C operation. 18 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 SEGMENTS CORPORATE SEGMENTS Y/E 12/31/2003 Revenue 40,540,577 28.53% 40,540,577 28.53% Gross Profit 2,809,199 65.41% 2,809,199 65.41% SG&A 2,641,864 13.11% 3,076,297 -16.09% Net loss (817,658) 28.43% (1,355,223) 48.64% Net loss per common share (0.49) 44.32% (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 458,553 650.28% 13,600 100.96% ========== ========== EBITDA net income per share 0.28 533.70% .01 100.92% Y/E 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 (0.06) (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. 19 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 $1,355,223 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 $434,433, which include legal, accounting and regulatory expenses. 20 Earnings before interest taxes, depreciation and amortization (EBITDA) improved from a loss of $1,408,048 to a profit of $13,600 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. 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 21 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. PROSET SEGMENT INFORMATION OF OPERATING BUSINESSES Salon products CHANGE Year ended December 31, 2003 Revenue 3,671,106 44.69% Gross Profit 344,305 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) 22 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. 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. 23 LIQUIDITY AND CAPITAL RESOURCES The Company's predominant need for working capital is to finance its Receivables and Inventory levels. In order to finance its requirements the Company has relied on secured debt financings, trade financing, equity based financing as well as its cash flow from operations. 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 COD to 30 days. One vendor to the Company represents over 53% of the Company's purchases. Loss of this vendor would have a material adverse effect on the Company's operations. Liquidity and Capital Resources Year ended 2004 2003 Working Capital $3,064,266 $ 1,041,027 194.35% Assets $ 16,706,423 $ 10,992,645 51.98% Liabilities $ 10,133,366 $ 8,048,813 25.90% Equity $6,573,057 $ 2,943,832 123.28% Line of Credit Facility $4,976,610 $ 4,013,680 23.99% Receivable turnover (days) 47 34 Inventory Turnover (days) 12 20 Tangible Assets $ 14,890,182 $ 9,304,092 60.04% 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 $8.5 million for accounts receivable, purchase orders, and inventory based upon a borrowing base formula. The term of the agreement is for one year and allows for renewals. As of December 31, 2004 the Company's borrowing under its agreement were $4.9 million an increase of 24% as compared to 2003. In November of 2003, 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 expired in May 2004, at which time the cash deposit and reserves were released. 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. 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 2004. 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. 24 As the Company's operations have grown the Company has been able to raise additional capital predominately through its shareholders and institutional placements. 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, a 21.5% investee. In December 2004, the Company sold accounts receivable attributable to a selected customer base to West Coast Supplies Inc. for $2,200,000. This promissory note, which is secured by the accounts receivable, requires monthly payments of principle and interest at 4% for seven years, beginning in January 2005. As a condition for the sale, the Company is obligated to issue West Coast 50,000 shares of common stock, which will vest through April 1, 2006. In the event the value of the shares is less than $200,000 at April 1, 2006, the Company will be obligated to pay the difference in cash or additional shares. The Company does not anticipate selling selected products to this customer base in the future. Sales of selected products to this customer base approximated $3,180,000 in 2004. Proset further intends to service the salon hair care needs of BeautyBuys.com and PHS Retail based accounts. The Company beleives that this transaction should have a positive effect on working capital for its Proset operation and should reduce the dependence of asset based financing for this operation. In November 2004, the Board of Directors approved a Private Placement in which 17 units were offered, with each unit consisting of 10,000 shares of unregistered Class B, Series A preferred Stock and 15,000 shares of unregistered restricted Common Stock at a purchase price of $100,000 per unit. In November 2004, the Company sold 17 units and received aggregate proceeds of $1,700,000. On March 1, 2004, the Company received $490,000 pursuant to the issuance of three secured promissory notes from certain shareholders of ITT, a 21.5% 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 28, 2006. In 2004, certain shareholders of ITT converted $613,646 of debt into 153,156 shares of common stock. Also, in 2004, the Company converted $1,621,000 outstanding debt of IIG into 435,182 shares of common stock. On April 2, 2004, the Company completed a financing with Laurus Master Funds ("Laurus"). The financing consisted of a $1.5 million secured convertible debenture that converts into common stock under certain conditions at $5.00 per share and matures on April 2, 2007. The debenture provides for monthly payments of $50,000, plus interest, commencing October 1, 2004. In addition, Laurus was issued 100,000 warrants exercisable at $5.00 per share. The Company's common stock quoted market price at date of closing was $4.15 per share. The debenture has a three-year term with a coupon rate of prime (5.25% at December 31, 2004) plus 3%. The Company has filed an S-3 registration statement, which has been granted effectiveness to register the common stock underlying the debenture and warrant. In 2004, the Company converted $500,000 of this outstanding debt into 100,000 shares of common stock. The Company repaid $100,000 of this debt in 2004. On January 25, 2005 the Company completed a financing with Laurus Master Funds ("Laurus"). The financing consisted of a $500,000 secured convertible debenture that converts into common stock under certain conditions at $3.50 per share or matures January 25, 2008. The debenture provides for monthly payments of $16,666.67 plus interest, commencing August 1, 2005. In addition, Laurus was issued 33,333 warrants exercisable at $3.50 per share. The Company's common stock quoted market price at the date of closing was $2.52 per share. The debenture has a three-year term with a coupon rate of prime plus 3%. 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, 2004 totaled approximately $3.1 million a increase of 2.0 million from 2003. 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. 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 12 days, its receivables average 47 days of collections the turn is computed on ending balances. Management believes that continued cost containment, improved financial and operating controls, and a focused sales and marketing effort should provide sufficient cash flow from operations in the near term. Achievement of these goals, however, will be dependent upon the Company's attainment of increased revenues, improved operating costs, reduced financing cost 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. 25 The following table presents the Company's expected cash requirements for Contractual obligations outstanding as of December 31, 2004. Payments Due By Period Contractual Obligations Less Than 1-3 4-5 After 5 1 Year Years Years Years Total Line-Of-Credit $4,976,610 $4,976,610 Notes Payable $ 384,021 $1,196,241 $1,580,262 Operating Leases $ 35,092 $1,054,110 $684,122 $521,430 $2,294,754 Total Contractual Cash Obligations $5,395,723 $2,250,351 $684,122 $521,430 $8,851,626 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. 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 10 - 60 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, 2004, the Company has established a full valuation allowance. 26 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 December 2004, the FASB issued SFAS No. 123(R), "Accounting for Stock-Based Compensation" ("SFAS No. 123(R)"). SFAS No. 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. This statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123(R) requires that the fair value of such equity instruments be recognized as an expense in the historical financial statements as services are performed. Prior to SFAS No. 123(R), only certain pro forma disclosures of fair value were required. The provisions of this statement are effective as of the beginning of the first interim reporting period that begins after June 15, 2005. The Company adoption of SFAS No.123(R) is not expected to have a material impact on the Company's financial position or results of operations. 27 In November 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 151 "Inventory Costs." This statement amends Accounting Research Bulletin No. 43, Chapter 4, "Inventory Pricing" and removes the "so abnormal" criterion that under certain circumstances could have led to the capitalization of these items. SFAS No. 151 requires that idle facility expense, excess spoilage, double freight and re-handling costs be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal." SFAS 151 also requires that allocation of fixed production overhead expenses to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this statement shall be effective for all fiscal years beginning after June 15, 2005. The Company adoption of SFAS No.151 is not expected to have a material impact on the Company's financial position or results of operations. On December 16, 2004, the FASB issued SFAS No. 153, "Exchange of Non-monetary Assets", an amendment of Accounting Principles Board ("APB") Opinion No. 29, which differed from the International Accounting Standards Board's ("IASB") method of accounting for exchanges of similar productive assets. Statement No. 153 replaces the exception from fair value measurement in APB No. 29, with a general exception from fair value measurement for exchanges of non-monetary assets that do not have commercial substance. The statement is to be applied prospectively and is effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company adoption of SFAS No.153 is not expected to have a material impact on the Company's financial position or result 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. 28 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-K, 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-K 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 other 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. 29 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 few years 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. 30 8. POSSIBLE LOSS OF NASDAQ SMALL CAP LISTING. Synergy's qualification for trading on the NASDAQ Small Cap system has in the 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 in the past that stockholders' equity has fallen below minimum NASDAQ continued listing standard of $2,500,000. NASDAQ has established, and the Commission has approved, certain maintenance requirements which the Company must adhere to remain listed, 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", including what the Company believes to be stringent disclosure rules very different from NASDAQ trading practice procedures. 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. 31 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. There has also been recent cooperation between federal and State authorities to curtail internet sales of tobacco products because of tax issues as well as underage purchase questions. 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). 32 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. 33 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 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. 34 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. 35 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. 36 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. 37 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 legislation and/or have proposed legislation that limits or 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 continue to 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 the Company's 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. Internet regulation which has met with the most successful challenges is that which touches upon Free Speech. 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. Subsequent attempts at such legislation such as the Child Online Protection Act passed in 1998 have met with similar and successful constitutional attack. 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 and Child Online Protection 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. Foreign regulation of internet use has not met with the success of constitutional and other judicial scrutiny that US regulation has been limited by. As an Internet Company, it is also 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. 38 The Company is not aware of any recent related legislation other than that specifically referenced herein which may affect the manner in which the Company utilizes the internet in its business 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. 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 and internet access tax prohibitions though November 1, 2007), prohibits the imposition of new or discriminatory taxes on electronic commerce by United States federal and state taxing authorities except for taxes caused by nexus of the Seller of the goods in the State. Sales to customers in such States may be taxable, but to date no such taxes have ever been collected by the Company. The Company is not aware of any further extensions of this legislation but understands that more permanent application of the aforesaid Internet Tax Freedom Act is currently being discussed in the federal legislature and further extension has been recommended by the Advisory Commission on Electronic Commerce established by US Congress to further review application of the statute. The status of the prohibition is uncertain and States have attempted to impose sales and use tax, often successfully mainly based upon the nexus of the retailer with the State imposing the tax on customers in that State. 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 mails 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. 39 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 8. FINANCIAL STATEMENTS The following financial statements of the Company are contained in this Report on the pages indicated: INDEX TO FINANCIAL STATEMENTS Page Reports of Independent Registered Public Accounting Firms F-2-F-3 Consolidated Balance Sheets as of December 31, 2004 and 2003 F-4-F-5 Consolidated Statements of Operations for the Years Ended December 31, 2004, 2003 and 2002 F-6 Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Loss for the Years Ended December 31, 2004, 2003 and 2002 F-7-F-10 Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002 F-11-F-12 Notes to Consolidated Financial Statements F-13-F-38 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NONE 40 PART III The information required by items 10-13 are omitted pursuant to general instruction G(3) to Form 10K including executive compensation and auditor fee information . The Company has included this information in its proxy statement expected to be mailed to shareholders and filed with the Commission on or before April 30, 2005. The annual meeting is scheduled to be in June 2005. Such Proxy Statement is expected to be filed with the Commission by April 30, 2005 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 a policy for comment and complaint on compliance with applicable conduct codes ("whistleblower policy") 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 and a Compensation Committee to assist in establishing executive compensation. Copies of the Company's Code of Ethics, whistleblower policy, Nominating Committee and Compensation Committee Charters may be found disclosed in the aforesaid Proxy Statement to be confirmed at the relevant shareholders meeting and included by reference thereto on the Company's Internet home page website. 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 has adopted an Audit Committee Charter providing expanded authority of such committee and the independent nature and identity 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. The Company's disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in its reports filed under the Exchange Act, such as this Form 10-K, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. The Company's disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to management to allow timely decisions regarding required disclosure. The Company's internal controls are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of its financial statements in conformity with GAAP. 41 The Company's management, including its principal executive officer and the principal financial officer, does not expect that the Company's disclosure controls and procedures and its internal control processes will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected. The Company monitors its disclosure controls and procedures and internal controls and makes modifications as necessary; the Company's intent in this regard is that the disclosure controls and procedures and the internal controls will be maintained as dynamic systems that change (including with improvements and corrections) as conditions warrant. ITEM 15. EXHIBITS, LIST AND REPORTS ON FORM 8-K 1. (a) Exhibits: See Index to Exhibits 2. Reports on Form 8-K On November 4, 2004 the Company filed an 8K Report disclosing certain unregistered sales of equity securities made in a 4(2) exempt offering of units consisting of preferred stock and Common Stock resulting in gross proceeds to the Company of $1,500,000 and disclosure of the press release made by the Company relating thereto, and on November 19, 2004 the Company filed an 8K Report disclosing further sales of securities from the earlier disclosed placement to the extent of at an additional $200,000 to make the total gross proceeds received to $1,700,000 and including disclosure of the relevant press release made. On November 15, 2004 the Company disclosed and filed as an exhibit thereto its press release commenting on its third quarter 2004 financial results. Such were the only 8K reports filed during the fourth quarter of 2004. 3. Financial Statement Schedules None 42 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, 2005 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, 2005 by /s/ Mitchell Gerstein ---------------------------------- Mitchell Gerstein Chief Financial Officer Signed: March 30, 2005 by /s/ Joel Sebastian ----------------------------------- Joel Sebastian, Director Signed: March 30, 2005 by /s/ Lloyd Miller ----------------------------------- Lloyd Miller, Director Signed: March 30, 2005 by /s/ Dominic Marsicovetere ----------------------------------- Dominic Marsicovetere, Director Signed: March 30, 2005 by /s/ William Rancic ----------------------------------- William Rancic, Director Signed: March 30, 2005 by /s/ Frank A. Bellis Jr. ----------------------------------- Frank A. Bellis, Director Signed: March 30, 2005 by /s/ Randall J. Perry ----------------------------------- Randall J. Perry, Director 43 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Synergy Brands, Inc. We have audited the accompanying consolidated balance sheet of Synergy Brands, Inc. as of December 31, 2004 and the related consolidated statements of operations, stockholders' equity and comprehensive loss and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Synergy Brands, Inc. as of December 31, 2004 and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. HOLTZ RUBENSTEIN REMINICK LLP Melville, New York March 17, 2005 F-2 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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 standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We beleive 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 THRONTON LLP - ---------------------- GRANT THORNTON LLP New York, New York March 5, 2004 F-3 Synergy Brands, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS December 31, 2004 and 2003 ASSETS
CURRENT ASSETS 2004 2003 ---------- --------- Cash and cash equivalents $ 945,806 $ 777,522 Cash collateral security deposit - 500,000 Marketable securities - 46,035 Accounts receivable trade, less allowance for doubtful accounts of $ 127,481 and $127,481 7,227,489 3,630,007 Other receivables 1,264,242 674,519 Notes receivable 314,285 - Inventory 1,826,274 2,164,116 Prepaid assets and other current assets 423,295 509,479 ---------- --------- Total Current Assets 12,001,391 8,301,678 PROPERTY AND EQUIPMENT, NET 366,510 379,224 OTHER ASSETS 632,466 186,057 NOTES RECEIVABLE 1,889,815 437,133 INTANGIBLE ASSETS, net of accumulated amortization of $2,003,048 and $1,780,736 1,301,944 1,524,256 GOODWILL 514,297 164,297 ---------- --------- TOTAL ASSETS $ 16,706,423 $ 10,992,645 ========== =========
The accompanying notes are an integral part of this statement. F-4 Synergy Brands, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (Continued) December 31, 2004 and 2003 LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES 2004 2003 ----------- ----------- Lines of credit $ 4,976,610 $ 4,013,680 Notes payable - current 384,021 - Accounts payable 3,482,456 3,108,695 Related party note payable 56,972 100,800 Accrued expenses 37,066 37,476 ----------- ----------- Total Current Liabilities 8,937,125 7,260,651 NOTES PAYABLE 1,196,241 788,162 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 100 100 Class B preferred stock - $.001 par value; 900,000 shares authorized, none issued - - Class B Series A Preferred stock-$.001 per value; 500,000 shares authorized; 330,000 and 160,000 shares issued and outstanding; liquidation preference of $10.00 per share 330 160 Common stock - $.001 par value; 5,000,000 shares authorized; 3,263,992 and 1,919,359 shares issued 3,264 1,919 Additional paid-in capital 43,134,165 37,748,004 Deficit (36,349,706) (34,373,327) Unearned Compensation (201,756) (426,252) Accumulated other comprehensive loss (8,340) (1,772) ----------- ----------- 6,578,057 2,948,832 Less treasury stock, at cost, 1,000 shares (5,000) (5,000) ----------- ----------- Total Stockholders' Equity 6,573,057 2,943,832 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 16,706,423 $10,992,645 =========== ===========
The accompanying notes are an integral part of this statement. F-5 Synergy Brands, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 31,
2004 2003 2002 ------------ ----------- ----------- Net sales $ 56,705,044 $40,540,577 $31,540,675 ------------ ----------- ----------- Cost of sales Cost of product 51,907,840 36,837,796 29,241,384 Shipping and handling costs 900,205 893,582 600,994 ------------ ----------- ----------- 52,808,045 37,731,378 29,842,378 ------------ ----------- ----------- Gross profit 3,896,999 2,809,199 1,698,297 Operating expenses Advertising and promotional 150,181 91,634 469,965 General and administrative 3,605,433 2,984,663 3,196,270 Depreciation and amortization 659,490 692,698 893,935 ------------ ----------- ----------- 4,415,104 3,768,995 4,560,170 ------------ ----------- ----------- Operating loss (518,105) (959,796) (2,861,873) Other income (expense) Interest income 4,610 13,913 26,695 Other income (expense) (46,983) 298,932 514,860 Equity in earnings of investee 172,224 92,424 67,717 Interest and financing expenses (1,553,521) (690,038) (211,279) ------------ ----------- ----------- (1,423,670) (284,769) 397,993 ------------ ----------- ----------- Loss before income taxes (1,941,775) (1,244,565) (2,463,880) Income tax expense 34,604 32,658 22,687 ------------ ----------- ----------- Net loss (1,976,379) (1,277,223) (2,486,567) Dividend-Preferred Stock (156,375) (78,000) - ------------ ----------- ----------- Net loss attributable to common stockholders $ (2,132,754) $ (1,355,223) $ (2,486,567) ============ =========== =========== Basic and diluted net loss per common share: $(0.97) $(0.82) $(1.91) ============ =========== =========== Weighted-average shares used in the computation of loss per common share: Basic and diluted 2,209,371 1,652,019 1,302,042 ============ =========== ===========
The accompanying notes are an integral part of these statements F-6 Synergy Brands, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS Years ended December 31, 2004, 2003 and 2002
Class A Class B - Series A ----------------- -------------------- preferred stock Preferred stock Common stock ----------------- -------------------- ------------------- Shares Amount Shares Amount Shares Amount ------ ------- ------- ------- ------- ------- Balance at January 1, 2002 100,000 $100 1,237,621 $1,238 Common stock and options issued in connection with compensation Plan 85,500 85 Intrinsic value of stock options issued in connection with compensation plan Issuance of restricted stock 1,250 1 Purchase of treasury stock Sale of treasury stock Retirement of treasury stock Extinguishment of notes receivable 25,000 25 Extinguishment of advertising and in-kind services receivable from stockholder 18,750 19 Change in unrealized gain on marketable securities Cumulative translation adjustments Net loss -------- ------ ------- ---- --------- ------ Comprehensive loss Balance at December 31, 2002 100,000 $ 100 -- -- 1,368,121 $1,368 ======== ====== ======= ==== ========= ====== Common stock and options issued in connection with compensation plan 93,438 93 Common stock issued 30,000 30 Net proceeds from issuance of common stock in Connection with private placement 160,000 160 160,000 160 Issuance of common stock in satisfaction of note 15,300 15 Issuance of restricted stock in Connection with notes payable 42,500 43 Issuance of common stock for services 185,000 185 Issuance of common stock in connection with CAW acquisition 25,000 25 Purchase of Treasury stock Sale of treasury stock Preferred stock dividend Consulting expense Change in unrealized gain on Marketable securities Cumulative translation adjustments Net loss -------- ------ ------- ---- --------- ------ Comprehensive loss Balance at December 31, 2003 100,000 $100 160,000 $160 1,919,359 $1,919 ======== ====== ======= ==== ========= ======
F-7 Synergy Brands, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS Years ended December 31, 2004, 2003 and 2002 CONTINUED
Accumulated Additional other Stockholders' paid-in comprehensive Treasury Unearned notes capital Deficit income (loss) stock Compensation receivable ----------- ------------- ------------- ---------- ----------- ---------- Balance at January 1, 2002 $34,795,297 $(30,609,537) $ 1,685 $(251,135) $(115,629) Common stock and options issued in connection with compensation Plan 301,360 (2,500) Intrinsic value of stock options issued in connection with compensation plan 49,825 Issuance of restricted stock 4,199 Purchase of treasury stock (75,752) Sale of treasury stock (24,451) 130,948 Retirement of treasury stock (167,500) 167,500 Extinguishment of notes receivable 99,975 113,129 Extinguishment of advertising and in-kind services receivable from stockholder 151,981 Change in unrealized gain on marketable securities (1,583) Cumulative translation adjustment (176) Net loss (2,486,567) ----------- ------------- ------- ---------- -------- ---------- Comprehensive loss Balance at December 31, 2002 $35,210,686 $(33,096,104) $ (74) $ (28,439) -- $ (5,000) =========== ============= ======= =========== ======== ========= Common stock and options issued in connection with compensation plan 212,133 5000 Common stock issued 47,170 Net proceeds from issuance of common stock in Connection with private placement 1,509,680 Issuance of common stock in satisfaction of note payable 39,985 Issuance of restricted stock in Connection with notes payable 97,957 Issuance of common stock for services 493,315 (493,500) Issuance of common stock in connection with CAW acquistion 99,975 Purchase of Treasury stock (122,779) Sale of treasury stock 115,103 146,218 Preferred stock dividend (78,000) Consulting expense 67,248 Change in unrealized gain on Marketable securities 4,003 Cumulative translation adjustments (5,701) Net loss (1,277,223) ----------- ------------- ------- ---------- -------- ---------- Comprehensive loss Balance at December 31, 2003 $37,748,004 $(34,373,327) $(1,772) $(5,000) $(426,252) -- ============ ============= ======= ========== ======== ==========
F-7 Synergy Brands, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS (continued) Years ended December 31, 2004, 2003 and 2002 Class A Class B - Series A ---------------- ------------------- preferred stock Preferred stock Common stock ---------------- ------------------- ------------------ Shares Amount Shares Amount Shares Amount ------- -------- -------- ------- ------- ------- Amortization of unearned compensation Common stock returned and retired (61,500) (61) Common stock issued 100,000 100 Net proceeds from issuance of common stock in Connection with private placement 170,000 170 255,000 255 placement Issuance of common stock for note conversions 688,338 688 Exercise of stock options 110,000 110 Issuance of common stock 58,195 58 for services Issuance of common stock in connection with CAW acquisitions 175,000 175 Issuance of common stock along 19,600 20 with debt Option Expense Preferred stock dividend Consulting expense Change in unrealized gain on Marketable securities Cumulative translation adjustments Net loss -------- ----- ------- ------ ---------- ------ Comprehensive loss Balance at December 31, 2004 100,000 $100 330,000 $330 3,263,992 3,264 ======== ===== ====== ====== ========== =======
F-8 Synergy Brands, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS (continued) Years ended December 31, 2004, 2003 and 2002 CONTINUED
Accumulated Additional other Stockholders' paid-in comprehensive Treasury Unearned notes capital Deficit income (loss) stock Compensation receivable ----------- ------------- ------------- ---------- ----------- ---------- Amortization of unearned compensation 224,496 Common stock returned and retired 61 Common stock issued 470,685 Net proceeds from issuance of common stock in Connection with private placement 1,454,575 placement Issuance of common stock for note conversions 2,733,957 Exercise of stock options 102,140 Issuance of common stock for services 190,563 Issuance of common stock in connection with CAW acquisitions 524,825 Issuance of common stock along 74,980 with debt Option Expense 30,750 Preferred stock dividend (156,375) Consulting expense (40,000) Change in unrealized gain on Marketable securities (4,105) Cumulative translation (2,463) adjustments Net loss (1,976,379) ----------- ------------- ------------- ---------- ----------- ---------- Comprehensive loss Balance at December 31, 2004 $43,134,165 $(36,349,706) $(8,340) $(5,000) $(201,756) -- =========== ============= ============= ========== =========== ==========
F-8 Synergy Brands, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued) Years ended December 31, 2004, 2003 and 2002
Stockholder's advertising and in-kind Total services stockholder's Comprehensive receivable equity loss --------------- ------------- ------------- Balance at January 1, 2002 $ (794,990) $ 3,027,029 Common stock and options issued in connection with compensation Plan 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) Sale of treasury stock 106,497 Retirement of treasury stock - Extinguishment of notes receivable 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) Cumulative translation adjustments (176) (176) Net loss (2,486,567) (2,486,567) --------------- ------------- ------------- Comprehensive loss $(2,488,326) =========== Balance at December 31, 2002 $ - $ 2,082,537 ============== ============ Common stock and options issued in connection with compensation Plan 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 Issuance of common stock in connection with CAW acquistion 100,000 Purchase of treasury stock (122,779) Sale of treasury stock 261,321 Preferred Stock Dividend (78,000) Consulting expense 67,248 Change in unrealized gain on Marketable securities 4,003 4,003 Cumulative translation adjustments (5,701) (5,701) Net loss (1,277,223) (1,277,223) --------------- ------------- ------------- Comprehensive loss ($1,278,921) ============ Balance at December 31, 2003 $2,943,832 =============== ===============
The accompanying notes are an integral point of this statement F-9 Synergy Brands, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued) Years ended December 31, 2004, 2003 and 2002
Stockholder's advertising and in-kind Total services stockholder's Comprehensive receivable equity loss ------------- ------------- ------------- Amortization of unearned compensation 224,496 Common stock returned and retired - Common stock issued 470,785 Net proceeds from issuance of common stock in connection with private placement 1,455,000 Issuance of common stock for note 2,734,645 conversions Exercise of stock options 102,250 Issuance of common stock for services 190,621 Issuance of common stock in connection with CAW acquisition 525,000 Issuance of common stock along with debt 75,000 Option Expense 30,750 Preferred stock dividend (156,375) Consulting expense (40,000) Change in unrealized gain on Marketable securities (4,105) $ (4,105) Cumulative translation adjustments (2,463) (2,463) Net loss (1,976,379) (1,976,379) ------------- ------------- ------------- Comprehensive loss ($1,982,947) ============== Balance at December 31, 2004 $ 6,573,057 ===========
The accompanying notes are an integral point of this statement F-10 Synergy Brands, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31,
2004 2003 2002 ------------ ------------- ------------- Cash flows from operating activities Net loss $(1,976,379) $ (1,277,223) $ (2,486,567) Adjustments to reconcile net loss to net cash used in operating activities Loss on sale of accounts receivable 79,134 - - Depreciation and amortization 659,490 625,450 893,935 (Recovery of)/Provision for doubtful accounts - (35,090) 112,351 Amortization of financing cost 90,746 82,142 - Loss (gain) on sale of marketable securities 15,793 (10,828) 71,237 Loss on sale of preferred stock of investee - 57,600 Equity in earnings of investee (172,224) (92,424) (67,717) Loss on forgiveness of stockholder's note - - 213,129 receivable Loss on forgiveness of advertising receivable - - 290,217 from a stockholder 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 30,750 67,248 49,825 Operating expenses paid with common stock and warrants 154,620 100,725 303,145 Changes in operating assets and liabilities Net (increase) decrease in Accounts receivable and other receivables (6,466,339) (2,095,518) (1,440,824) Inventory 337,842 (1,089,208) 265,263 Prepaid expenses, related party note receivable and other assets (66,011) (122,354) 26,050 Net increase (decrease) in Accounts payable, related party note payable, 329,523 1,231,455 (605,182) accrued expenses and other current liabilities Other liabilities - - 282,750 ------------ ------------- ------------- Net cash used in operating activites (6,983,055) (2,898,375) (2,836,602) ------------ ------------- ------------- Cash flows from investing activities Payment of security deposit (35,848) - - Purchase of business, net of cash acquired - (414,000) - Purchase of marketable securities (168,377) (488,868) (979,379) Proceeds from sale of marketable securities 194,515 460,060 2,635,571 Purchase of property and equipment (112,058) (28,638) (14,342) Payment of collateral security deposit - (500,000) - Refund of collateral security deposit 500,000 - 658,542 Proceeds from sale of preferred stock of investee - - 230,400 Purchase of customer lists - - (250,000) Payments received on notes receivable 433,033 2,267 - Issuance of notes receivable, net loss - (329,000) (110,400) ------------ ------------- ------------- Net cash provided by (used in) investing activities 811,265 (1,298,179) 2,170,392 ------------ ------------- -------------
F-11 Synergy Brands, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) Years ended December 31,
2004 2003 2002 ------------ ------------ ----------- Cash flows from financing activities Borrowings under line of credit 35,608,070 $19,432,524 $10,486,724 Repayments under line of credit (33,024,140) (17,172,964) (9,130,942) Increase in deferred financing cost - (18,750) - Proceeds from the issuance of notes payable 1,990,000 850,000 722,778 Repayments of notes payable (100,000) (20,000) (662,778) Due from broker - - (1,216,733) Proceeds from issuance of common stock 462,732 47,200 - Net proceeds from the issuance of common and preferred stock in a private placement 1,460,000 1,510,000 - Proceeds from the exercise of stock purchase options 102,250 111,500 - 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 (156,375) (78,000) - ------------ ------------ ----------- Net cash provided by financing activities 6,342,537 4,805,052 229,794 ------------ ------------ ----------- Foreign currency translation (2,463) (5,700) (176) ------------ ------------ ----------- Net Increase (Decrease) In Cash 168,284 602,798 (436,592) ------------ ------------ ----------- Cash and cash equivalents, beginning of year 777,522 174,724 611,316 ------------ ------------ ----------- Cash and cash equivalents, end of year $ 945,806 $ 777,522 $ 174,724 ------------ ------------ ----------- Supplemental disclosures of cash flow information: Cash paid during the year for Interest $ 1,317,151 $ 590,126 $ 164,000 ============ ============ =========== Income taxes paid $ 34,604 $ 32,658 23,000 ============ ============ =========== Supplemental disclosures of non-cash, investing and financing activities: Common stock issued for acquisition $ 244,068 $ 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 $ - $ 493,500 $ - ============ ============ =========== services Common stock issued for note conversions $ 2,734,646 $ - $ - ============ ============ ===========
The accompanying notes are an integral part of these statements F-12 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004, 2003 and 2002 NOTE A - DESCRIPTION OF THE BUSINESS 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. 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 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. F-13 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2004, 2003 and 2002 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, 2004, all marketable securities held by the Company have been sold. At December 31, 2003 , 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. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management of the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expense during the reporting period. The most significant estimates relate to reserves for accounts receivable, inventories, and deferred tax assets, and valuation of long-lived assets. Actual results could differ from those estimates. 5. 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 10 - 60 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 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. F-14 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2004, 2003 and 2002 NOTE B (continued) Accounts receivable trade, net consist of the following components at December 31, 2004 and 2003
2004 2003 ------------ ---------- Accounts receivable - business to business $ 7,218,366 $3,635,741 Accounts receivable - business to consumer 136,604 121,747 ------------ ---------- Total 7,354,970 3,757,488 Less allowance for doubtful accounts (127,481) (127,481) ------------ ---------- $ 7,227,489 $3,630,007 ============ ==========
Changes in the Company's allowance for doubtful accounts during the years ended December 31, 2004 and 2003 are as follows: 2004 2003 ----------- ---------- Beginning balance $ 127,481 $ 162,571 Provision for (reduction in) doubtful accounts - (35,090) ----------- ---------- Ending balance $ 127,481 $127,481 =========== ========== 6. 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, 2004 and 2003 totaled $756,150 and $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. During the year ended December 31, 2004, sales to two customers accounted for 21% and 18% of total sales, respectively. Four customers accounted for 26%, 26%, 22% and 11%, respectively of accounts receivable at December 31, 2004. 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, 2004, 2003 and 2002, the Company purchased approximately 53 %, 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. F-15 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2004, 2003 and 2002 NOTE B (continued) 7. 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. 8. 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. 9. 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. 10. Vendor Allowances In November 2002, the Emerging Issues Task Force ("EITF") reached a consensus on the application of EITF No. 02-16 "Accounting by a Customer" (including a reseller) for Certain Consideration Received from a Vendor. EITF No.02-16 addresses how a reseller of vendor products should account for cash consideration recorded from a vendor. The Company adopted EITF No. 02-16 and recognizes vendor allowances, at the date goods are purchased and recorded under fixed and determined arrangements. The Company receives allowances and credits from suppliers for volume incentives, promotional allowances and, to a lesser extent, new product introductions which are typically based on contractual arrangements covering a period of one year or less. Volume incentives and promotional allowances earned based on quantities purchased and new product allowances are recognized as a reduction to the cost of purchased inventory and recognized when the related inventory is sold. Promotional allowances that are based on the sell-through of products are recognized as a reduction of cost of sales when the products are sold for which the promotional allowances are given. For the years ended December 31, 2004 and 2003, the Company recognized approximately $913,000 and $318,000 in vendor allowances arising from arrangements with a major supplier that met the criteria for being fixed and determinable. Vendor allowances from manufacturers, included in other receivables in the accompanying consolidated balance sheet aggregated $1,246,697 and $674,519 at December 31, 2004 and 2003. F-16 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2004, 2003 and 2002 NOTE B (continued) 11. Intangible Assets and Goodwill 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 an eleven (11) year estimated useful life from the date of acquisition. (see Note C) Goodwill is the excess of cost of an acquired entity over the amounts assigned to assets and liabilities assumed in business combination. Effective January 1, 2002, with the adoption of SFAS No.142 "Goodwill and other Intangible Assets", Goodwill is not amortized. Prior to the adoption of Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible Assets," these intangible assets other than Goodwill were amortized over their estimated useful life of five years. As a result of the adoption of SFAS No. 142 in 2002, 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 2004 and 2003, the amortization expense recorded for the years was $222,312 and $192,354. At December 31, 2004 and 2003, intangible assets are comprised of the following: Amortized intangible assets 2004 2003 ------------ ------------ Customer lists $ 3,214,592 $ 3,114,629 Less accumulated amortization (2,003,048) (1,680,773) ------------ ------------ 1,211,544 1,433,856 Unamortized intangible assets Trade names 90,400 90,400 ------------ ------------ Total $ 1,301,944 $ 1,524,256 ============ ============ Amortization expense for the Company over the next five years is estimated to be approximately $222,000 per year. F-17 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2004, 2003 and 2002 NOTE B (continued) 12. 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. 13. 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, and other allowances. Cost of sales consists primarily of costs of products sold to customers, including outbound and inbound shipping costs. 14. Advertising The Company expenses advertising and promotional costs as incurred. Advertising and promotional expenses were approximately $ 150,000, $91,000 and $470,000 for the years ended December 31, 2004, 2003 and 2002. 15. 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. 16. 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. 17. 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 F-18 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2004, 2003 and 2002 NOTE B (continued) exercises of stock options and warrants of 681,650, 596,650 and 586,759 for the years ended December 31, 2004, 2003 and 2002, respectively, have been excluded from the calculation of diluted loss per share since their effect would be antidilutive. 18. Stock-Based Compensation Plans At December 31, 2004, 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. 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, 2004 2003 2002 ------------ ----------- ----------- $(1,976,379) $(1,277,223) $(2,486,567) Net loss, as reported 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 $(1,976,379) $(1,277,223) $(3,037,992) ------------ ----------- ----------- Loss per share Basic and diluted - as reported $(0.97) $(0.82) $(1.91) ------------ ----------- ----------- Basic and diluted - pro forma $(0.97) $(0.82) $(2.33) ------------ ----------- -----------
F-19 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2004, 2003 and 2002 NOTE B (continued) 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. 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, 2004 and 2003. 19. 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. F-20 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2004, 2003 and 2002 NOTE B (CONTINUED) 20. RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the FASB issued SFAS No. 123(R), "Accounting for Stock-Based Compensation" ("SFAS No. 123(R)"). SFAS No. 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. This statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123(R) requires that the fair value of such equity instruments be recognized as an expense in the historical financial statements as services are performed. Prior to SFAS No. 123(R), only certain pro forma disclosures of fair value were required. The provisions of this statement are effective as of the beginning of the first interim reporting period that begins after June 15, 2005. The Company adoption of SFAS No.123(R) is not expected to have a material impact on the Company's financial position or results of operations. In November 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 151 "Inventory Costs." This statement amends Accounting Research Bulletin No. 43, Chapter 4, "Inventory Pricing" and removes the "so abnormal" criterion that under certain circumstances could have led to the capitalization of these items. SFAS No. 151 requires that idle facility expense, excess spoilage, double freight and re-handling costs be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal." SFAS 151 also requires that allocation of fixed production overhead expenses to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this statement shall be effective for all fiscal years beginning after June 15, 2005. The Company adoption of SFAS No.151 is not expected to have a material impact on the Company's financial position or results of operations. On December 16, 2004, the FASB issued SFAS No. 153, "Exchange of Non-monetary Assets", an amendment of Accounting Principles Board ("APB") Opinion No. 29, which differed from the International Accounting Standards Board's ("IASB") method of accounting for exchanges of similar productive assets. Statement No. 153 replaces the exception from fair value measurement in APB No. 29, with a general exception from fair value measurement for exchanges of non-monetary assets that do not have commercial substance. The statement is to be applied prospectively and is effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company adoption of SFAS No.153 is not expected to have a material impact on the Company's financial position or result of operations. F-21 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2004, 2003 and 2002 NOTE C - ACQUISTION 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 cigars to some of the most prestigious hotels, restaurants, casinos and golf clubs in the United States. The initial 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 based upon the achievement of certain targeted operating results of CAW. In December 2003, 25,000 shares of common stock were issued valued at $100,000, the quoted market price, and recorded as additional Goodwill for the purpose of satisfying the anticipated consideration due the seller by March 31, 2004, based upon the operating results of CAW through December 31, 2003. In February 2004, the Company issued an additional 25,000 shares in anticipation of satisfying the initial annual EBTDA requirements. These shares were valued at $100,000, the quoted market price, and recorded as additional Goodwill. In June 2004, the Company issued an additional 150,000 shares, of which 88,235 shares were used in anticipation of satisfying the CAW acquisition and 61,765 shares were issued for future shares. The shares were valued at $425,000, and recorded as additional Goodwill of $250,000, and prepaid compensation of $175,000. 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 initial allocation of the aggregate purchase price of $425,000, including contingent consideration. 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 =========== The intangible assets acquired consist principally of customer lists, which are being amortized over an eleven year estimated useful life from the date of acquisition, and Goodwill. 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 is being 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. F-22 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2004, 2003 and 2002 NOTE C (continued) Summarized below are the unaudited pro forma results of operations of the Company as if CAW had been acquired at the beginning of the years presented: 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-23 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2004, 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:
2003 ----------------------------------------------------- Gross Gross Fair unrealized unrealized market Cost gains losses value --------- ----------- ---------- --------- Available-for-sale securities Equity securities $41,930 $4,105 - $46,035
There were no securities available for sale at December 31, 2004. 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, 2004, 2003 and 2002 are as follows: 2004 2003 2002 Available-for-sale securities Proceeds $194,515 $460,060 $2,635,571 Gross realized gains 19,973 27,713 66,414 Gross realized losses (35,766) (16,885) (137,651) NOTE F - INVENTORY Inventory as of December 31, 2004 and 2003 consisted of the following: 2004 2003 ----------- ---------- Grocery, health and beauty products $1,375,165 $1,845,308 Tobacco finished goods 451,109 318,808 $1,826,274 $2,164,116 ----------- ---------- F-24 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2004, 2003 and 2002 NOTE G - PROPERTY AND EQUIPMENT Property and equipment as of December 31, 2004 and 2003 consisted of the following:
2004 2003 ---------- --------- Office equipment $204,610 $ 204,610 Furniture and fixtures 231,265 231,266 Leasehold improvements 523,731 411,673 ---------- --------- 959,606 847,549 Less accumulated depreciation and amortization (593,096) (468,325) ---------- --------- $ 366,510 $ 379,224 ---------- ---------
Depreciation and amortization expense on property and equipment for the years ended December 31, 2004, 2003 and 2002 was approximately $125,000, $123,000 and $118,000, respectively. NOTE H - OTHER ASSETS Other assets consist of the following at December 31, 2004 and 2003: 2004 2003 --------- --------- Investment (a) $336,828 $164,604 CAW purchase agreement; net of accumulated amortization of $29,163 145,837 - Website development costs, net of accumulated amortization of $929,479 and $924,104 - 5,375 Deferred financing net of accumulated amortization of $32,625 97,875 - Other 51,926 16,078 --------- --------- $ 632,466 $ 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. At December 31, 2004, the Companies investment in ITT is approximately 21.5% of the outstanding common stock. 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 $172,224, $92,424 and $67,717 during the years ended December 31, 2004, December 31, 2003 and F-25 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2004, 2003 and 2002 NOTE H (continued) 2002, respectively. At December 31, 2004, the Company's investment exceeded its shares of the underlying net assets of ITT by $65,000. The excess is attributable to the goodwill of IIT. Summarized unaudited financial information of this investee as of December 31, 2004, 2003 and 2002 and for the years ended is as follows::
Financial position: 2004 2003 2002 ------------ ---------- ---------- Current assets $ 2,020,000 $1,511,000 $1,545,000 Property and equipment 290,000 147,000 207,000 Other assets 267,000 306,000 345,000 ------------ ---------- ---------- Total assets $ 2,577,000 $1,964,000 $2,097,000 ============ ========== ========== Current liabilities $ 1,322,000 $ 972,000 $ 737,000 Long-term debt - 82,000 524,000 Other long-term liabilities 4,000 9,000 3,000 ------------ ---------- ---------- Total liabilities $ 1,326,000 $1,063,000 $1,264,000 ============ ========== ========== Results of operations: 2004 2003 2002 ------------ ---------- ---------- Revenues $10,883,000 $ 9,602,000 $ 8,167,000 Total expenses (9,934,000) (8,906,000) (7,637,000) Other income 111,000 54,000 44,000 ------------ ---------- ---------- Income before income taxes 1,069,000 750,000 574,000 Income tax expense (359,000) (268,000) (210,000) ------------ ---------- ---------- Net income $ 701,000 $ 482,000 $ 364,000 ============ ========== ==========
F-26 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2004, 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 principle balance of $429,600 was paid March 31, 2004. In December 2004, the Company sold accounts receivable attributable to a selected customer base to West Coast Supplies, Inc. for $2,200,000. This promissory note, which is secured by the accounts receivable, requires monthly payments of principle and interest at 4% for seven years, beginning in January 2005. As a condition for the sale, the Company is obligated to issue West Coast 50,000 shares of common stock, which will vest through April 1, 2006. In the event the value of the shares is less than $200,000 at April 1, 2006, the Company will be obligated to pay the difference in cash or additional shares. The Company does not anticipate selling selected products to this customer base in the future. Sales of selected products to this customer base approximated $3,180,000 in 2004. The Company recorded a loss of $79,134 related to the sale of the accounts receivable to West Cost Supplies, Inc. 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 September 2004, under the loans allow for the borrowing of up to $8,500,000 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. As amended, the agreements extend through May 31, 2005. 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, 2004, 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. 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 the Lender. The LC expired in May 2004, at which time the cash deposit and reserves were released. 525,000 shares of the Company's common stock have also been pledged as collateral on the outstanding borrowings. In 2004, the lender converted $1,621,000 of outstanding debt into 435,182 shares of common stock (see Note L). F-27 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2004, 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 21.5% 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, 2006 as amended. 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 these notes payable. In 2004, the Company converted $263,646 of this outstanding debt into 66,756 shares of common stock (see note L). Amortization expense recorded in 2004 and 2003 was approximately $28,000 and $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 21.5% 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. In 2004, the Company converted all of this outstanding debt into 86,400 shares of common stock (see Note L). Amortization recorded in 2004 and 2003 was approximately $31,000 and $10,000. 1. On March 1, 2004, the Company received $490,000 pursuant to the issuance of three secured promissory notes from certain shareholders of ITT, a 21.5% 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 28, 2006. 19,600 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 $75,000 was recorded as debt discount and will be amortized over the life of the notes payable. As security for the notes, the Company pledged as collateral its investment in the common stock of ITT (see Note H). Amortization recorded in 2004 was approximately $31,000. 2. On April 2, 2004, the Company completed a financing with Laurus Master Funds ("Laurus"). The financing consisted of a $1.5 million secured convertible debenture that converts into common stock under certain conditions at $5.00 per share and matures on April 2, 2007. The debenture provides for monthly payments of $50,000, plus interest, commencing October 1, 2004. In addition, Laurus was issued warrants to purchase up to 100,000 shares of common stock at an exercise price of $5.00 per share. The Company's common stock quoted market price at the date of closing was $4.15 per share. The debenture has a three-year term with a coupon rate of prime (5.25% at December 31, 2004) plus 3%. The Company has filed an S-3 registration statement, which has been granted effectiveness to register the common stock underlying the debenture and warrant. In 2004, the Company converted $500,000 of this outstanding debt into 100,000 shares of common stock. The Company repaid $100,000 of this debt in 2004. Aggregate maturities of notes payable at December 31, 2004 are as follows: Year Ending December 31, 2005 $ 384,021 2006 $ 1,046,241 2007 $ 150,000 Total $1,580,262 On January 25, 2005, the Company completed a financing with Laurus Master Funds ("Laurus"). The financing consisted of a $500,000 secured convertible debenture that converts into common stock under certain conditions at $3.50 per share and matures on January 25, 2008. The financing provides Laurus with registration rights for common shares it is issued under conversion. The debenture provides for monthly payments of $16,666.67 plus interest, commencing August 1, 2005. In addition, Laurus was issued 33,333 warrants exercisable at $ 3.50 per share. The Company's common stock quoted market price at the date of closing was $2.52 per share. The debenture has a three-year term with a coupon rate of prime plus 3%. F-28 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2004, 2003 and 2002 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. 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. 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. 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 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. The Company issued 30,000 common shares to Class B Series A Preferred shareholders in January 2005. 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. F-29 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2004, 2003 and 2002 NOTE L (continued) 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 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 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 for during 2003 and $134,496 for 2004. In November 2004, the Board of Directors approved a Private Placement in which 17 units were offered, with each unit consisting of 10,000 shares of unregistered Class B, Series A preferred Stock and 15,000 shares of unregistered restricted Common Stock at a purchase price of $100,000 per unit. In November 2004, the Company sold 17 units and received aggregate proceeds of $1,700,000. Also in November 2004, the Company exchanged $245,000 compensation due to William Rancic for two units of Class B Series A Preferred stock at $100,000 per unit. In 2004, certain shareholders of ITT converted $613,646 of debt into 153,156 shares of common stock. In 2004, Laurus Master Funds converted $500,000 of debt into 100,000 shares of common stock. Also, in 2004, the Company converted $1,621,000 outstanding debt of IIG into 435,182 shares of common stock (see Note J). 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. For the years ended December 31, 2004 and 2003, the Company issued 58,195 and 65,938 shares of common stock as compensation for past and future service and recorded a charge to operations of $150,621 and $93,125 and unearned compensation of $90,000 in 2003. In 2003 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, 2004 and 2003, the Company received proceeds of $102,250 and $111,500 from the exercise of stock options to purchase 110,000 and 62,500 shares of the Company's common stock. In connection with such options of which 15,000 were modified, in 2004 the Company recorded compensation expense and a credit to additional paid-in capital of $30,750. The following is a summary of transactions involving warrants to purchase common stock for the years ended December 31, 2004, 2003 and 2002. F-30 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2004, 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 ---------------- Granted 100,000 5.00 -------------- Outstanding at December 31, 2004 310,000 $ 5.95 ============== ----------------
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 2004 life (years) price 2004 price ----------------- -------------- -------------- ---------- --------------- -------- $5.00 273,750 3.45 $ 5.00 173,750 $ 5.00 10.00 - $12.00 31,250 .97 10.40 31,250 10.40 30.00 - 40.00 5,000 .33 30.00 5,000 30.00 -------------- -------------- ---------- --------------- -------- 310,000 3.15 $ 5.95 310,000 $ 5.95 ============== ============== ========== =============== =========
Shares issuable under outstanding options, warrants, and convertible securities at December 31, 2004 approximated 1,028,660. F-31 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2004, 2003 and 2002 NOTE M - STOCK COMPENSATION 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 2009 Since the inception of the Plan, Synergy has issued 1,181,033 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, 2004, 2003 and 2002, the Company issued 42,195, 65,938 and 85,500 shares of its common stock, respectively, to various service providers and has recorded a charge to earnings of $150,621, $93,125 and $298,945. 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 were no options issued during the years ended December 31, 2004 and 2003. The following is a summary of such stock option transactions for the years ended December 31, 2004, 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 Exercised (110,000) (3.68) ------------- -------------- Outstanding at December 31, 2004 371,650 $ 13.10 ============= ============== Shares available for grant December 31, 2004 7,218,967 ============= December 31, 2003 7,261,162 ============= December 31, 2002 7,457,291 ============= F-32 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2004, 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 2004 life (years) price 2004 price ------------------ ----------------- -------------- ----------- -------------- ---------- $ 1.00 - $ 4.00 266,125 .12 $ 3.85 266,125 $ 3.85 18.00 - 20.00 29,000 .35 18.34 29,000 18.34 25.00 - 35.60 36,275 .31 27.36 36,275 27.36 40.00 - 50.00 8,500 .01 42.94 8,500 42.94 60.00 - 70.00 31,750 .38 61.57 31,750 61.57 ================= ============== =========== ============== ========== 371,650 .18 $ 13.10 371,650 $ 13.10 ================= ============== =========== ============== ==========
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, 2004 and 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 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, 2004 and 2003, $56,972 and $100,800 is payable to the Company's Chairman and Chief Executive Officer for short-term advances made to the Company. F-33 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2004, 2003 and 2002 NOTE O - OTHER INCOME (EXPENSE) Other income (expense) is comprised of the following:
2004 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) (15,793) 10,828 (71,237) Loss on sale of preferred stock of an investee (Note H) - - (57,600) Other 47,944 5,354 (51,113) Loss on sale of accounts receivable (79,134) - - ----------- --------- -------- $ (46,983) $298,932 $514,860 =========== ========= ========
NOTE P - INCOME TAXES At December 31, 2004, the Company had a net operating loss carry forward of approximately $32,042,000 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, 2004 were approximately as follows: Net operating loss carryforwards 10,894,000 Fixed assets and intangibles 1,000 Allowance for doubtful accounts 43,000 Inventory 42,000 Capital losses 56,000 Other (74,000) Valuation allowance (10,962,000) ------------ $ - ============ Income taxes expense for the years ended December 31, 2004, 2003 and 2002 consisted of the following: 2004 2003 2002 -------- ------- -------- State and local $ 34,604 $32,658 $22,687 ======== ======= ======== F-34 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2004, 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, 2004, 2003 and 2002 are as follows:
2004 2003 2002 ------ ------- ------ Federal income tax expense at statutory rate (34)% (34)% (34)% Increase (decrease) resulting from Increase in valuation allowance 34 34 34 State and local income taxes, net of Federal benefit .9 .9 .9 ------ ------- ------ .9 % .9 % .9 % ====== ======= ======
NOTE Q - QUARTERLY FINANCIAL RESULTS (UNAUDITED) Quarterly financial results for the years ended December 31, 2004 and 2003 are as follows:
THREE MONTHS ENDED 3/31/2004 6/30/2004 9/30/2004 12/31/2004 TOTAL SALES $13,307,183 $12,860,329 $13,759,995 $16,777,537 $56,705,044 GROSS PROFIT $ 817,524 $ 698,205 $ 1,299,230 $ 1,082,040 $ 3,896,999 INCOME(LOSS) BEFORE EXTRAORDINARY ITEMS $ (457,974) $ (700,008) $ (170,230) $ (804,542) $ 2,132,754) NET INCOME(LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDER $ (457,974) $ (700,008) $ (170,230) $ (804,542) $(2,132,754) BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.23) $ (0.34) $ (0.08) $ (0.32) $ (0.97) THREE MONTHS ENDED 3/31/03 6/30/03 9/30/03 12/31/03 TOTAL SALES $ 9,079,644 $ 8,755,226 $10,278,027 $12,427,680 $ 40,540,577 GROSS PROFIT $ 509,778 $ 914,334 $ 619,625 $ 765,462 $ 2,809,199 INCOME(LOSS) BEFORE EXTRADORDINARY ITEMS $ (132,818) $ (97,551) $ (627,923) $ (496,931) $ (1,355,223) NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDER $ (132,818) $ (97,551) $ (627,923) $ (496,931) $ (1,355,223) BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.09) $ (0.07) $ (0.34) $ (0.32) $ (0.82)
NOTE R - 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 $19,838, $13,252 and $18,846 for the years ended December 31, 2004, 2003 and 2002, respectively. F-35 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2004, 2003 and 2002 NOTE S - COMMITMENTS AND CONTINGENCIES 1. Lease Commitments The Company leases office and warehouse space under operating leases expiring at various dates through June 2011. The Company is also leasing vehicles under operating leases expiring in 2004. Future minimum lease payments under noncancelable operating leases as of December 31, 2004 were as follows: Year ending December 31, 2005 $ 384,609 2006 358,444 2007 346,148 2008 341,158 2009 342,964 ----------- $1,773,323 =========== Rent expense under operating leases for the years ended December 31, 2004, 2003 and 2002 was approximately $190,000, $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-36 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2004, 2003 and 2002 NOTE T - 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, 2004 2003 and 2002, as shown below:
Proset PHS Group B2C Corporate Total Year ended December 31, 2004 Revenue $3,923,823 $50,728,560 $2,052,661 - $56,705,044 Net loss attributable to common stockholder (219,204) (167,951) (644,870) (1,100,729) (2,132,754) Depreciation and amortization 210,920 6,501 145,301 296,768 659,490 Interest income - 4,344 - 266 4,610 Other income (expense) (80,778) 71,586 (21,139) (16,652) (46,983) Equity in earnings of investee - - - 172,224 172,224 Interest and financing expenses 232,913 1,168,607 42,500 109,501 1,553,521 Identifiable assets 2,117,631 9,160,367 1,732,066 3,590,427 16,600,491 Additions to long-lived assets - 85,980 175,000 29,078 290,058 Investment in affiliate - - - 336,829 336,829 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 attributable to common stockholder (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 attributable to common (833,712) (293,088) (15,711) (1,344,056) (2,486,567) stockholder 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-37 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2004, 2003 and 2002 NOTE T (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, 2004, 2003 and 2002, is as follows: 2004 2003 2002 ------------ ------------ ----------- Revenue United States $30,774,482 $34,076,666 $30,555,151 Canada 25,930,562 6,463,911 985,524 ------------ ------------ ----------- $56,705,044 $40,540,577 $31,540,675 ============ ============ =========== Accounts receivable United States $ 1,144,373 $1,822,677 $ 1,256,041 Canada 6,210,597 1,934,811 776,628 ------------ ------------ ----------- $ 7,354,970 $3,757,488 $ 2,032,669 ============ ============ =========== Identifiable assets United States $16,706,423 $10,818,667 $ 5,824,230 Canada - 173,978 47,439 ------------ ------------ ----------- $16,706,423 $10,992,645 $ 5,871,669 ============ ============ =========== F-38 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-4 10.3 Synergy Brands Inc. 1994 Services and Consulting Compensation Plan, as amended (4) 21 Listing of Company Subsidiaries EX-21 32 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-32 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-32.1 99 Listing of Company Intellectual Properties EX-99
(1) A copy of the Amendment to the Certificate of Incorporation dated September 14, 2004 and Certificates of Correction (3) filed February 25, 2005 are included as exhibits. 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 incorporated by reference to the 10KSB filed for the Company for the year ended 12/31/03. 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 Incorporation filed February 11, 2003 and the Certificate of Designation regarding Preferred 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 44 (3) Description of rights of Preferred Stock are included in the Restated Certificate of Incorporation filed November 10, 2003 and Clarification Amendment to the Certificate of Incorporation filed March , 2004 and in the Certificate of Designation filed 3/13/03 all incorporated by reference herein (See footnote (1)), and in the Certificate of Designation regarding Preferred Stock, as amended, and included as exhibit to the Form 10K/A of the Company filed 9/3/98 as well as the amendment to the certificate of incorporation filed in July 2000 and included as an exhibit to the Form 10KSB/A of the Company filed 8/9/01 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 herein as an exhibit. Information and particulars on long term debt instruments outstanding shall be supplied if and as requested by the Commission as allowed by applicable regulation as none of such debt on an individual basis exceeds 10% of the Company's current assets. Such instruments include $900,000 debt currently owed to Laurus Master Fund, Ltd. arising from Secured Convertible Term Note dated April 2, 2004, and $490,000 in total long term debt to three non-affiliated parties by Secured Promissory Notes dated March 1, 2004. (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, as amended 45 EX-3.I 2 file002.txt CERTIFICATE OF AMENDMENT to CERTIFICATE OF INCORPORATION of SYNERGY BRANDS INC. Synergy Brands Inc. a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware. DOES HEREBY CERTIFY: FIRST: by consent of the Board of Directors of Synergy Brands Inc. resolutions were duly adopted setting forth a proposed amendment of the Certificate of Incorporation of said corporation, declaring said amendment to be advisable. The resolution setting forth the proposed amendment is as follows: RESOLVED: that this corporation shall and is hereby authorized to amend its Certificate of Incorporation to decrease the amount of authorized stock available to be issued by this corporation from 60,000,000 shares of stock to 6,000,000 shares of stock divided into 5,000,000 shares of Common Stock, 100,000 shares of Class A Preferred Stock and 900,000 shares of Class B Preferred Stock of which Class B Preferred Stock 500,000 shares shall continue to be designated Series A Class B Preferred, the designations, relative rights, preferences, and other terms of such securities not to change (except for the amount of authorized shares thereof) from that in existence at the date hereof, the intended purpose of such amendment being to allow a more manageable tax structure for this Corporation. The Certificate of Incorporation of this corporation shall be amended by: 1. Changing the first Paragraph of Article FOURTH therein, first sentence therein to read as follows. "The total number of shares of stock which the corporation shall have authority to issue is six million (6,000,000)." 2. Changing the paragraph in article numbered FOURTH which now reads. "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" so that, as amended, said paragraph shall be and read as follows: "The 6,000,000 authorized shares shall be divided into 5,000,000 common shares, par value $.001 per share, 100,000 Class A Preferred Stock, par value $.001 per share and 900,000 Class B Preferred Stock, par value $.001 per share." 3. Changing the subsection in Article Fourth captioned as Class B Preferred Stock to reduce the designation of the number of shares therein included from 10,000,000 to 900,000 and the amount of shares authorized thereof being designated Series A Class B Preferred to remain at 500,000 shares. RESOLVED: that the consent of shareholders of this corporation be requested to adopt the above resolutions, where necessary in accord with the General Corporation Law of the State of Delaware. SECOND: That said amendment was duly adopted in accordance with the provision of Section 242 of the General Corporation of Law of the State of Delaware (the "GCL"), by written consent of a majority of the votes represented by outstanding stock entitled to vote thereon with written notice to all remaining applicable shareholders in compliance with Section 228 of the GCL. THIRD: That the capital of said corporation shall not be reduced under or by reason of said amendment. IN WITNESS OF, said corporation has caused this certificate to be signed by Mair Faibish, its CEO, and Mitchell Gerstein, its secretary, this day of September, 2004. By: - ------------------------ Mair Faibish, CEO By: - ---------------------------- Mitchell Gerstein, Secretary EX-3.1 3 file003.txt SYNERGY BRANDS INC. STATE OF DELAWARE CERTIFICATE OF CORRECTION Synergy Brands Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware. DOES HEREBY CERTIFY: 1. The name of the corporation is Synergy Brands Inc. 2. That a Certificate of Amendment to Certificate of Incorporation was filed by the Secretary of State of Delaware on February 11, 2003 and that said Certificate requires correction as permitted by Section 103 of the General Corporation Law of the State of Delaware. 3. The inaccuracy or defect of said Certificate to be corrected is as follows: The Amendment correctly stated the reverse split of the outstanding stock of the corporation 1 share for each 4 shares outstanding but neglected to also disclose and implement a similar 1 for 4 reverse split of the amount of stock the corporation is authorized to issue 4. Article FOURTH of the Certificate is corrected to read as follows: Add (iii) The amount of shares the corporation is authorized to issue is also reverse split one for four resulting in the corporation being authorized to issue 15,000,000 shares of stock divided into 14,000,000 common shares, par value $.001 per share, 100,000 shares of Class A Preferred stock, par value $.001 per share, and 900,000 shares of Class B Preferred Stock, par value $.001 per share. IN WITNESS WHEREOF, said Corporation has caused this certificate to be signed by Mair Faibish, an Authorized Officer, this day of January, A.D. 2005. By: - ------------------------------- Name: Mair Faibish Title: Chief Executive Officer EX-3.1 4 file004.txt SYNERGY BRANDS INC. STATE OF DELAWARE CERTIFICATE OF CORRECTION Synergy Brands Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware. DOES HEREBY CERTIFY: 1. The name of the corporation is Synergy Brands Inc. 2. That a Restated Certificate of Incorporation was filed by the Secretary of State of Delaware on November 10, 2003 and that said Certificate requires correction as permitted by Section 103 of the General Corporation Law of the State of Delaware. 3. The inaccuracy or defect of said Certificate to be corrected is as follows: Article Fourth incorrectly listed the number of shares the corporation shall have authority to issue as sixty million (60,000,000) and such divided into 49,900,000 common shares and 10,000,000 Class B Preferred Stock (along with 100,000 shares of Class A Preferred Stock) when in fact the corporation should have had as of the date of the filing of such document 15,000,000 shares of stock divided into 14,000,000 common shares and 900,000 Class B Preferred Shares (along with 100,000 shares of Class A Preferred Shares) 4. Article FOURTH of the Certificate is corrected to read as follows: The 15,000,000 authorized shares shall be divided into 14,000,000 common shares, par value $.001 per share, 100,000 shares of Class A Preferred Stock, par value $.001 per share, and 900,000 shares of 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 1,000,000 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. IN WITNESS WHEREOF, said Corporation has caused this certificate to be signed by Mair Faibish, an Authorized Officer, this day of January, A.D. 2005. By: - --------------------------------------- Name: Mair Faibish Title: Chief Executive Officer EX-3.1 5 file005.txt SYNERGY BRANDS INC. STATE OF DELAWARE CERTIFICATE OF CORRECTION Synergy Brands Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware. DOES HEREBY CERTIFY: 1. The name of the corporation is Synergy Brands Inc. 2. That a Certificate of Amendment to Certificate of Incorporation was filed by the Secretary of State of Delaware on September 14, 2004 and that said Certificate requires correction as permitted by Section 103 of the General Corporation Law of the State of Delaware. 3. The inaccuracy or defect of said Certificate to be corrected is as follows: The Amendment remains unchanged as to the number of shares of stock the corporation is authorized to issue and into what amounts as between common stock, Class A Preferred Stock and Class B Preferred Stock such authorized shares are divided but the reference to the status of the corporation's authorized stock prior to this amendment lowering the number of shares was incorrectly stated. Otherwise the referenced amendment reducing the number of shares the corporation has authority to issue to 6,000,000 shares divided into 5,000,000 shares of common stock, par value $.001, 100,000 stares of Class A Preferred Stock, par value $.001 per share and 900,000 shares of Class B Preferred Stock par value $.001 per share of which Class B Preferred Stock 500,000 shares are designated as Series A Class A Preferred, with preferences, rights and limitations as previously filed has been and is hereby confirmed. 4. Article FIRST of the Certificate is corrected to read as follows: (i) Amend the second paragraph therein to read as follows: RESOLVED: that this corporation shall and is hereby authorized to amend its Certificate of Incorporation to decrease the amount of authorized stock available to be issued by this corporation from 15,000,000 shares of stock to 6,000,000 shares of stock divided into 5,000,000 shares of Common Stock, 100,000 shares of Class A Preferred Stock and 900,000 shares of Class B Preferred Stock of which Class B Preferred Stock 500,000 shares shall continue to be designated Series A Class B Preferred, the designations, relative rights, preferences, and other terms of such securities not to change (except for the amount of authorized shares thereof) from that in existence at the date hereof, the intended purpose of such amendment being to allow a more manageable tax structure for this Corporation. (ii) Amend reference to prior Article FOURTH in sub paragraph 2 to read as follows: 2. Changing the paragraph in article numbered FOURTH which now reads. "The 15,000,000 authorized shares shall be divided into 14,000,000 common shares, par value $.001 per share, 100,000 Class A Preferred Stock, par value $.001 per share and 900,000 Class B Preferred Stock par value $.001 per share" (iii) eliminate sub paragraph 3 as now unnecessary IN WITNESS WHEREOF, said Corporation has caused this certificate to be signed by Mair Faibish, an Authorized Officer, this day of January, A.D. 2005. By: - --------------------------- Name: Mair Faibish Title: Chief Executive Officer EX-4 6 file006.txt THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO SYNERGY BRANDS INC. THAT SUCH REGISTRATION IS NOT REQUIRED. Right to Purchase up to 33,333 Shares of Common Stock of Synergy Brands Inc. (subject to adjustment as provided herein) COMMON STOCK PURCHASE WARRANT No. Issue Date: January 25, 2005 -------------- SYNERGY BRANDS INC., a corporation organized under the laws of the State of Delaware ("Synergy"), hereby certifies that, for value received, LAURUS MASTER FUND, LTD., or assigns (the "Holder"), is entitled, subject to the terms set forth below, to purchase from the Company (as defined herein) from and after the Issue Date of this Warrant and at any time or from time to time before 5:00 p.m., New York time, through the close of business January 25, 2012 (the "Expiration Date"), up to 33,333 (subject to adjustment as provided herein) fully paid and nonassessable shares of Common Stock (as hereinafter defined), $.001 par value per share, at the applicable Exercise Price per share (as defined below). The number and character of such shares of Common Stock and the applicable Exercise Price per share are subject to adjustment as provided herein. As used herein the following terms, unless the context otherwise requires, have the following respective meanings: (a) The term "Company" shall include Synergy and any corporation which shall succeed, or assume the obligations of, Synergy hereunder. (b) The term "Common Stock" includes (i) the Company's Common Stock, par value $.001 per share; and (ii) any other securities into which or for which any of the securities described in (i) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise. (c) The term "Other Securities" refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the holder of the Warrant at any time shall be entitled to receive, or shall have received, on the exercise of the Warrant, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Section 4 or otherwise. (d) The "Exercise Price" applicable under this Warrant shall be $3.50 per share. 1. EXERCISE OF WARRANT. 1.1 NUMBER OF SHARES ISSUABLE UPON EXERCISE. From and after the date hereof through and including the Expiration Date, the Holder shall be entitled to receive, upon exercise of this Warrant in whole or in part, by delivery of an original or fax copy of an exercise notice in the form attached hereto as Exhibit A (the "Exercise Notice"), shares of Common Stock of the Company, subject to adjustment pursuant to Section 4. 1.2 FAIR MARKET VALUE. For purposes hereof, the "Fair Market Value" of a share of Common Stock as of a particular date (the "Determination Date") shall mean: (a) If the Company's Common Stock is traded on the American Stock Exchange or another national exchange or is quoted on the National or SmallCap Market of The Nasdaq Stock Market, Inc.("Nasdaq"), then the closing or last sale price, respectively, reported for the last business day immediately preceding the Determination Date. (b) If the Company's Common Stock is not traded on the American Stock Exchange or another national exchange or on the Nasdaq but is traded on the NASD OTC Bulletin Board, then the mean of the average of the closing bid and asked prices reported for the last business day immediately preceding the Determination Date. (c) Except as provided in clause (d) below, if the Company's Common Stock is not publicly traded, then as the Holder and the Company agree or in the absence of agreement by arbitration in accordance with the rules then in effect of the American Arbitration Association, before a single arbitrator to be chosen from a panel of persons qualified by education and training to pass on the matter to be decided. (d) If the Determination Date is the date of a liquidation, dissolution or winding up, or any event deemed to be a liquidation, dissolution or winding up pursuant to the Company's charter, then all amounts to be payable per share to holders of the Common Stock pursuant to the charter in the event of such liquidation, dissolution or winding up, plus all other amounts to be payable per share in respect of the Common Stock in liquidation under the charter, assuming for the purposes of this clause (d) that all of the shares of Common Stock then issuable upon exercise of the Warrant are outstanding at the Determination Date. 1.3 COMPANY ACKNOWLEDGMENT. The Company will, at the time of the exercise of the Warrant, upon the request of the holder hereof acknowledge in writing its continuing obligation to afford to such holder any rights to which such holder shall continue to be entitled after such exercise in accordance with the provisions of this Warrant. If the holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford to such holder any such rights. 1.4 Trustee for Warrant Holders. In the event that a bank or trust company shall have been appointed as trustee for the holders of the Warrant pursuant to Subsection 3.2, such bank or trust company shall have all the powers and duties of a warrant agent (as hereinafter described) and shall accept, in its own name for the account of the Company or such successor person as may be entitled thereto, all amounts otherwise payable to the Company or such successor, as the case may be, on exercise of this Warrant pursuant to this Section 1. 2. PROCEDURE FOR EXERCISE. 2.1 DELIVERY OF STOCK CERTIFICATES, ETC., ON EXERCISE. The Company agrees that the shares of Common Stock purchased upon exercise of this Warrant shall be deemed to be issued to the Holder as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such shares in accordance herewith. As soon as practicable after the exercise of this Warrant in full or in part, and in any event within three (3) business days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the Holder, or as such Holder (upon payment by such Holder of any applicable transfer taxes) may direct in compliance with applicable securities laws, a certificate or certificates for the number of duly and validly issued, fully paid and nonassessable shares of Common Stock (or Other Securities) to which such Holder shall be entitled on such exercise, plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash equal to such fraction multiplied by the then Fair Market Value of one full share, together with any other stock or other securities and property (including cash, where applicable) to which such Holder is entitled upon such exercise pursuant to Section 1 or otherwise. 2.2 EXERCISE. Payment may be made either (i) in cash or by certified or official bank check payable to the order of the Company equal to the applicable aggregate Exercise Price, (ii) by delivery of the Warrant, or shares of Common Stock and/or Common Stock receivable upon exercise of the Warrant in accordance with Section (b) below, or (iii) by a combination of any of the foregoing methods, for the number of Common Shares specified in such Exercise Notice (as such exercise number shall be adjusted to reflect any adjustment in the total number of shares of Common Stock issuable to the Holder per the terms of this Warrant) and the Holder shall thereupon be entitled to receive the number of duly authorized, validly issued, fully-paid and non-assessable shares of Common Stock (or Other Securities) determined as provided herein. Notwithstanding any provisions herein to the contrary, if the Fair Market Value of one share of Common Stock is greater than the Exercise Price (at the date of calculation as set forth below), in lieu of exercising this Warrant for cash, the Holder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being exercised) by surrender of this Warrant at the principal office of the Company together with the properly endorsed Exercise Notice in which event the Company shall issue to the Holder a number of shares of Common Stock computed using the following formula: X=Y (A-B) ------- A Where X = the number of shares of Common Stock to be issued to the Holder Y = the number of shares of Common Stock purchasable under the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being exercised (at the date of such calculation) A = the Fair Market Value of one share of the Company's Common Stock (at the date of such calculation) B = Exercise Price (as adjusted to the date of such calculation) 3. EFFECT OF REORGANIZATION, ETC.; ADJUSTMENT OF EXERCISE PRICE. 3.1 REORGANIZATION, CONSOLIDATION, MERGER, ETC. In case at any time or from time to time, the Company shall (a) effect a reorganization, (b) consolidate with or merge into any other person, or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then, in each such case, as a condition to the consummation of such a transaction, proper and adequate provision shall be made by the Company whereby the Holder of this Warrant, on the exercise hereof as provided in Section 1 at any time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall receive, in lieu of the Common Stock (or Other Securities) issuable on such exercise prior to such consummation or such effective date, the stock and other securities and property (including cash) to which such Holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if such Holder had so exercised this Warrant, immediately prior thereto, all subject to further adjustment thereafter as provided in Section 4. 3.2 DISSOLUTION. In the event of any dissolution of the Company following the transfer of all or substantially all of its properties or assets, the Company, concurrently with any distributions made to holders of its Common Stock, shall at its expense deliver or cause to be delivered to the Holder the stock and other securities and property (including cash, where applicable) receivable by the Holder of the Warrant pursuant to Section 3.1, or, if the Holder shall so instruct the Company, to a bank or trust company specified by the Holder and having its principal office in New York, NY as trustee for the Holder of the Warrant (the "Trustee"). 3.3 CONTINUATION OF TERMS. Upon any reorganization, consolidation, merger or transfer (and any dissolution following any transfer) referred to in this Section 3, this Warrant shall continue in full force and effect and the terms hereof shall be applicable to the shares of stock and other securities and property receivable on the exercise of this Warrant after the consummation of such reorganization, consolidation or merger or the effective date of dissolution following any such transfer, as the case may be, and shall be binding upon the issuer of any such stock or other securities, including, in the case of any such transfer, the person acquiring all or substantially all of the properties or assets of the Company, whether or not such person shall have expressly assumed the terms of this Warrant as provided in Section 4. In the event this Warrant does not continue in full force and effect after the consummation of the transactions described in this Section 3, then the Company's securities and property (including cash, where applicable) receivable by the Holders of the Warrant will be delivered to Holder or the Trustee as contemplated by Section 3.2. 4. EXTRAORDINARY EVENTS REGARDING COMMON STOCK. In the event that the Company shall (a) issue additional shares of the Common Stock as a dividend or other distribution on outstanding Common Stock, (b) subdivide its outstanding shares of Common Stock, or (c) combine its outstanding shares of the Common Stock into a smaller number of shares of the Common Stock, then, in each such event, the Exercise Price shall, simultaneously with the happening of such event, be adjusted by multiplying the then Exercise Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event, and the product so obtained shall thereafter be the Exercise Price then in effect. The Exercise Price, as so adjusted, shall be readjusted in the same manner upon the happening of any successive event or events described herein in this Section 4. The number of shares of Common Stock that the holder of this Warrant shall thereafter, on the exercise hereof as provided in Section 1, be entitled to receive shall be increased or decreased as the case may be to a number determined by multiplying the number of shares of Common Stock that would otherwise (but for the provisions of this Section 4) be issuable on such exercise by a fraction of which (a) the numerator is the Exercise Price that would otherwise (but for the provisions of this Section 4) be in effect, and (b) the denominator is the Exercise Price in effect on the date of such exercise. 5. CERTIFICATE AS TO ADJUSTMENTS. In each case of any adjustment or readjustment in the shares of Common Stock (or Other Securities) issuable on the exercise of the Warrant, the Company at its expense will promptly cause its Chief Financial Officer or other appropriate designee to compute such adjustment or readjustment in accordance with the terms of the Warrant and prepare a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (a) the consideration received or receivable by the Company for any additional shares of Common Stock (or Other Securities) issued or sold or deemed to have been issued or sold, (b) the number of shares of Common Stock (or Other Securities) outstanding or deemed to be outstanding, and (c) the Exercise Price and the number of shares of Common Stock to be received upon exercise of this Warrant, in effect immediately prior to such adjustment or readjustment and as adjusted or readjusted as provided in this Warrant. The Company will forthwith mail a copy of each such certificate to the holder of the Warrant and any Warrant agent of the Company (appointed pursuant to Section 11 hereof). 6. RESERVATION OF STOCK, ETC., ISSUABLE ON EXERCISE OF WARRANT. The Company will at all times reserve from its authorized but unissued shares and keep available, solely for issuance and delivery on the exercise of the Warrant, shares of Common Stock (or Other Securities) from time to time issuable on the exercise of the Warrant. 7. ASSIGNMENT; EXCHANGE OF WARRANT. Subject to compliance with applicable securities laws, this Warrant, and the rights evidenced hereby, may be transferred by any registered holder hereof (a "Transferor") in whole or in part. On the surrender for exchange of this Warrant, with the Transferor's endorsement in the form of Exhibit B attached hereto (the "Transferor Endorsement Form") and together with evidence reasonably satisfactory to the Company demonstrating compliance with applicable securities laws, which shall include, without limitation, the provision of a legal opinion from the Transferor's counsel (at the Company's expense) that such transfer is exempt from the registration requirements of applicable securities laws, and payment by the Transferor of any applicable transfer taxes) will issue and deliver to or on the order of the Transferor thereof a new Warrant of like tenor, in the name of the Transferor and/or the transferee(s) specified in such Transferor Endorsement Form (each a "Transferee"), calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant so surrendered by the Transferor. 8. REPLACEMENT OF WARRANT. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of this Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 9. REGISTRATION RIGHTS. The Holder of this Warrant has been granted certain registration rights by the Company. These registration rights are set forth in a Registration Rights Agreement entered into by the Company and Purchaser dated as of even date of this Warrant. 10. MAXIMUM EXERCISE. The Holder shall not be entitled to exercise this Warrant on an exercise date, in connection with that number of shares of Common Stock which would be in excess of the sum of (i) the number of shares of Common Stock beneficially owned by the Holder and its affiliates on an exercise date, and (ii) the number of shares of Common Stock issuable upon the exercise of this Warrant with respect to which the determination of this proviso is being made on an exercise date, which would result in beneficial ownership by the Holder and its affiliates of more than 4.99% of the outstanding shares of Common Stock of the Company on such date. For the purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13d-3 thereunder. Notwithstanding the foregoing, the restriction described in this paragraph may be revoked upon 75 days prior notice from the Holder to the Company and is automatically null and void upon an Event of Default under the Note. Notwithstanding anything contained herein to the contrary, the number of shares of Common Stock issuable by the Company and acquirable by the Holder at a price below $2.48 per share pursuant to the terms of this Warrant, the Note made by the Company to the Holder dated the date hereof (as amended, modified or supplemented from time to time, the "Note"), the Purchase Agreement (as defined in the Note) or any Related Agreement (as defined in the Purchase Agreement), shall not exceed an aggregate of 436,012 shares of the Company's Common Stock (subject to appropriate adjustment for stock splits, stock dividends, or other similar recapitalizations affecting the Common Stock) (the "Maximum Common Stock Issuance"), unless the issuance of shares hereunder in excess of the Maximum Common Stock Issuance shall first be approved by the Company's shareholders. If at any point in time and from time to time the number of shares of Common Stock issued pursuant to the terms of this Warrant, the Note, the Purchase Agreement or any Related Agreement, together with the number of shares of Common Stock that would then be issuable by the Company to the Holder in the event of a conversion or exercise pursuant to the terms of this Warrant, the Note, the Purchase Agreement or any Related Agreement, would exceed the Maximum Common Stock Issuance but for this paragraph, the Company shall promptly call a shareholders meeting to solicit shareholder approval for the issuance of the shares of Common Stock hereunder in excess of the Maximum Common Stock Issuance. 11. WARRANT AGENT. The Company may, by written notice to the each Holder of the Warrant, appoint an agent for the purpose of issuing Common Stock (or Other Securities) on the exercise of this Warrant pursuant to Section 1, exchanging this Warrant pursuant to Section 7, and replacing this Warrant pursuant to Section 8, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent. 12. TRANSFER ON THE COMPANY'S BOOKS. Until this Warrant is transferred on the books of the Company, the Company may treat the registered holder hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. 13. NOTICES, ETC. All notices and other communications from the Company to the Holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by such Holder or, until any such Holder furnishes to the Company an address, then to, and at the address of, the last Holder of this Warrant who has so furnished an address to the Company. 14. MISCELLANEOUS. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant shall be governed by and construed in accordance with the laws of State of New York without regard to principles of conflicts of laws. Any action brought concerning the transactions contemplated by this Warrant shall be brought only in the state courts of New York or in the federal courts located in the state of New York; provided, however, that the Holder may choose to waive this provision and bring an action outside the state of New York. The individuals executing this Warrant on behalf of the Company agree to submit to the jurisdiction of such courts and waive trial by jury. The prevailing party shall be entitled to recover from the other party its reasonable attorney's fees and costs. In the event that any provision of this Warrant is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of this Warrant. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. The invalidity or unenforceability of any provision hereof shall in no way affect the validity, enforceability or meaning of any other provision. The Company acknowledges that legal counsel participated in the preparation of this Warrant and, therefore, stipulates that the rule of construction that ambiguities are to be resolved against the drafting party shall not be applied in the interpretation of this Warrant to favor any party against the other party. [BALANCE OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGE FOLLOWS.] IN WITNESS WHEREOF, the Company has executed this Warrant as of the date first written above. SYNERGY BRANDS INC. WITNESS: By: - ------------------ ---------------------- ---------------------- Name: ---------------------- ---------------------- Title: ---------------------- A-1 EXHIBIT A FORM OF SUBSCRIPTION (To Be Signed Only On Exercise Of Warrant) TO: Synergy Brands Inc. Attention: Chief Financial Officer The undersigned, pursuant to the provisions set forth in the attached Warrant (No._____ ), hereby irrevocably elects to purchase (check applicable box): _______________ ________ shares of the Common Stock covered by such Warrant; or _______________ the maximum number of shares of Common Stock covered by such Warrant pursuant to the cashless exercise procedure set forth in Section 2. The undersigned herewith makes payment of the full Exercise Price for such shares at the price per share provided for in such Warrant, which is $___________. Such payment takes the form of (check applicable box or boxes): _____________ $__________ in lawful money of the United States; and/or _____________ the cancellation of such portion of the attached Warrant as is exercisable for a total of _______ shares of Common Stock (using a Fair Market Value of $_______ per share for purposes of this calculation); and/or ____________ the cancellation of such number of shares of Common Stock as is necessary, in accordance with the formula set forth in Section 2.2, to exercise this Warrant with respect to the maximum number of shares of Common Stock purchasable pursuant to the cashless exercise procedure set forth in Section 2. The undersigned requests that the certificates for such shares be issued in the name of, and delivered to _____________________ whose address is ___________________________________________________________________________. The undersigned represents and warrants that all offers and sales by the undersigned of the securities issuable upon exercise of the within Warrant shall be made pursuant to registration of the Common Stock under the Securities Act of 1933, as amended (the "Securities Act") or pursuant to an exemption from registration under the Securities Act. Dated: ----------------- ------------------------------------------ (Signature must conform to name of holder as specified on the face of the Warrant) Address: ------------------------------------------ ------------------------------------------ A1 B-1 EXHIBIT B FORM OF TRANSFEROR ENDORSEMENT (To Be Signed Only On Transfer Of Warrant) For value received, the undersigned hereby sells, assigns, and transfers unto the person(s) named below under the heading "Transferees" the right represented by the within the Warrant to purchase the percentage and number of shares of Common Stock of Synergy Brands Inc., a Delaware corporation (together with any successor or other entity that assumes the obligations thereof, the "Company") into which the within the Warrant relates specified under the headings "Percentage Transferred" and "Number Transferred," respectively, opposite the name(s) of such person(s) and appoints each such person Attorney to transfer its respective right on the books of the Company with full power of substitution in the premises. Percentage Number Transferees Address Transferred Transferred - ------------------ ------------------- ---------------- ---------------- - ------------------ ------------------- ---------------- ---------------- - ------------------ ------------------- ---------------- ---------------- - ------------------ ------------------- ---------------- ---------------- Dated: ----------------- ------------------------------------------ (Signature must conform to name of holder as specified on the face of the Warrant) Address: ------------------------------------------ ------------------------------------------ SIGNED IN THE PRESENCE OF: ------------------------------------------ ------------------------------------------ (Name) ACCEPTED AND AGREED: [TRANSFEREE] - ------------------- (Name) B1 EX-21 7 file007.txt Exhibit 21 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.) Yes Distributors (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-32 8 file008.txt Certification I, Mair Faibish, certify that: 1. I have reviewed this annual report on Form 10-K 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, 2005 /s/ Mair Faibish - ---------------- Mair Faibish Chief Executive Officer EX-32 EX-32.1 9 file009.txt Certification I, Mitchell Gerstein, certify that: 1. I have reviewed this annual report on Form 10-K 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, 2005 /s/ Mitchell Gerstein - --------------------- Mitchell Gerstein Chief Financial Officer EX-32.1 EX-99 10 file010.txt Intellectual Property The trade names "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 -----END PRIVACY-ENHANCED MESSAGE-----