-----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, FuBAC8/3OFPmAqcsDugdZUn70KNnSkV/WUyFwArVW278Z68BG73x45WFlgT/KBOs o8So7dKNEKH4HF+TMQE4nQ== 0001026018-08-000008.txt : 20080328 0001026018-08-000008.hdr.sgml : 20080328 20080328172017 ACCESSION NUMBER: 0001026018-08-000008 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20071231 FILED AS OF DATE: 20080328 DATE AS OF CHANGE: 20080328 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: 08720596 BUSINESS ADDRESS: STREET 1: 223 UNDERHILL BLVD CITY: SYOSSET STATE: NY ZIP: 11791 BUSINESS PHONE: 5167148200 MAIL ADDRESS: STREET 1: 223 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, 2007. 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.) 223 Underhill Blvd. Syosset, NY 11791 (Address of corporate offices) Registrant's telephone number, including area code: 516-714-8200 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Exchange Common Stock, $.001 par value NASDAQ/Capital Market System and Boston Stock Exchange Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES __ NO_X____ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. YES___NO__X____ Note-Checking the box will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections. 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. [] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes__NO_X_ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES________NO X___ Indicate by check mark whether the registrant is and is reporting utilizing the scaled disclosure standards of Regulation SK allowed to Smaller Reporting Company. YES_X__NO___ Synergy Brands Inc. revenues for its most recent fiscal year were $89,540,501. On March 28, 2008, the aggregate market value of the voting stock of Synergy Brands Inc., held by non-affiliates of the Registrant was approximately $6,900,000. 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 28, 2008 was 11,698,010. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for Registrant's 2007 Annual Meeting of Stockholders currently scheduled to be held June 2008 are incorporated by reference in Part III (for other documents incorporated by reference refer to Exhibit Index and Item 5 - Market for the Registrant's Common Stock and Related Shareholder Matters); also committee charters are included verbatim on the Company's website at www.sybr.com. 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 Item 1A "Risk Factors 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 principally operates through a wholly owned subsidiary, PHS Group Inc. ("PHS"), in the wholesale distribution of Groceries and Health and Beauty Aid (HBA) products and in the manufacturing and retail/wholesale distribution of proprietary baking mix products and spices and presently operates as well, through its wholly owned subsidiary, Gran Reserve Corporation, the business of wholesale and on-line distribution of premium cigars and accessories which business segment the Company expects and has contracted in principal to transfer to a non-affiliated investor familiar with the business operations of such segment (see Item 9B "Other Information" infra), and through such subsidiary, trading as Beautybuys.com, the Company also markets salon products and luxury goods. It principally focuses on the sale of nationally known brand name consumer products manufactured by major U.S. manufacturers and has also entered the grocery private label market in FY 2006 and proprietary baking mix and spice market in 2007. The consumer products significantly marketed and distributed are concentrated within the Grocery and Health & Beauty Aids (HBA) industries. The Company uses logistics based programs to optimize its distribution costs on both wholesale and retail levels and markets most of its tobacco and salon products through internet presentation and processing. The Company also owns 20% 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 should provide for material future capital appreciation. Synergy Brands does not manage PERX's day-to-day operations. For further information please visit the Company's corporate website at www.sybr.com. 1 PHS GROUP (GROCERY & HBA OPERATIONS). PHS Group distributes Grocery and HBA products, including proprietary baking mix products and spices, to retailers and wholesalers predominately located in the Northeastern United States. PHS is the largest subsidiary of the Company and largest operating segment of the Company , representing about 98% of the overall Company sales and 95% of gross profit. 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 and benefit the manufacturer as the direct supply source and in turn increase sales to its customers at optimized pricing through this unique strategy. PHS concentrates on what it perceives to be faster moving promotional items such as: Tide, Bounty, Nyquil, Pantene, Clorox bleach, Scott tissues, Marcal tissues,Duracell batteries, among many others, and uses promotions, logistics and distribution savings to streamline and reduce its sale prices and increase gross profit thereby. A second business segment within this sector was Proset Hair Systems (Proset) but Proset discontinued its operations in the 4th quarter of FY 2006. In the third quarter of 2006 PHS entered the private label grocery market specializing in the distribution of baking mixes and spices to national chains on a proprietary basis. PHS hopes to continue to develop private label programs for national accounts by creating proprietary baking mix products and spice planograms specifically designed for retail need. Through acquisition of baking mix manufacturing operations in Monroe, Michigan, the Company by way of its subsidiary, Quality Food Brands Inc., manufactures baking mix products for further sale under proprietary labeling programs for other customers of PHS and markets such products wholesale and retail through PHS Group Inc. In the latter half of 2007 the Company also established in China independent manufacturing operations in a co-packing arrangement for proprietary spices and in North Dakota for proprietary potato products, pasta salads and dried beans which have added to its product distribution menu. Income from sales of these proprietary products is anticipated to add considerably to the gross sales of the Company. The Company utilized the proprietary product line as a co-packing opportunity offered to PHS customers. The largest sector of this recently acquired and developed proprietary product production line is the Company's baking mix product operation centered in Monroe, Michigan. 2 GRAN RESERVE CORPORATION (PREMIUM CIGAR OPERATIONS) The Company's premium cigar operations are presently conducted through its wholly owned subsidiary Gran Reserve Corporation (GRC). The Company has authorized the sale of the Company's cigar operations, which transfer is probable in 2008. Although no formal commitments have yet been finalized, a contract in principal has been reached with a group of management and supervisory personnel associated with the GRC cigar operations but who otherwise have no official capacity with Synergy Brands Inc. or its subsidiaries. If such should transpire cigar regulation will no longer have any material impact on Company operations. Information is hereby presented on such operating segment as an ongoing venture as well as its historical contribution to Company business opportunities but its significance to the Company and the Company's focus on such segment have diminished and this and the increasing cost and exposure of the applicable regulatory framework under which the cigar business is operating have provided impetus for the Company to enter an arrangement for the transfer of such segment. GRC operates the following businesses (under the business names stated) o Cigars Around the World (CAW) sells premium cigars to restaurants, hotels, casinos, country clubs and many other leisure related destinations. This company was acquired in June, 2003. CAW also opened a retail store and lounge in Miami Lakes, Florida selling premium cigars and accessories in March 2006. o CigarGold.com sells premium cigars through the Internet directly to the consumer and through partnership online affiliations. o BeautyBuys.com sells salon hair care products directly to the consumer via the internet and through partnership online affiliations. THE COMPANY'S CORPORATE OFFICES ARE LOCATED AT 223 UNDERHILL BLVD., SYOSSET, NY 11791, AND ITS TELEPHONE NUMBER IS 516-714-8200. 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 required of 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. Information on the Company's website is not deemed to be incorporated by reference into this report except as otherwise specifically listed within this report. 3 B. PHS GROUP (Grocery & HBA Operations) PHS Group heading the principal business of the Company representing 98% of total revenues, is involved in the purchase of name brand grocery and Health and Beauty Aids (HBA) products and proprietary brands of limited baking mix and potato products, and spices which are manufactured through other subsidiaries of the Company and the further resale to traditional customers utilizing the logistics and networking advantages of electronic commerce and just in time distribution. PHS's core sales base remains the distribution of nationally branded consumer products in the grocery and HBA sectors and wholesale distribution of grocery items predominantly in the United States, Canada, and other international markets. Sales of Company manufactured proprietary food products has begun in 2007 and is expected to grow into a significant operating element of PHS Group as a co-packer for other customers of the Company. Reference is made to the financial statements, schedules, and notes to financials wherein more specific disclosure is presented regarding amounts of revenues derived from foreign sales as compared to domestic and separation between brand name and proprietary products. Product sales to Canada constitute what the Company believes to be the only material foreign sales. The Company also sells to Israel, Colombia, and the Dominican Republic but such sales in total constitute only approximately 2% of overall Company sales. All sales are done in U.S. Dollars. Distribution of brand name products is directed to major retailers and wholesalers from major U.S. and Canadian consumer product manufacturers and distributors. Proprietary products are manufactured for distribution through PHS by other subsidiaries of the Company. PHS has positioned itself as a distributor for 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 in brand name product distribution on what it perceives to be 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 1000 outlets in the northeastern quadrant of the United States and Canada. PHS utilizes leased trucks on an as needed basis with no formal long term lease in addition to consigning common carriers for overflow sales. In the third quarter of 2006 PHS entered the private label grocery market specializing in the acquisition and further distribution of baking mixes and spices and in the fourth quarter of 2007 that of potato products, pasta salads and dried beans, to national chains on a proprietary basis. PHS continues to develop these private label programs as co-packer for national accounts by creating proprietary product planograms specifically designed for retail need. On May 18, 2007 PHS through a controlling subsidiary acquired the assets of a baking mix manufacturing facility that was formerly operated under the entity Loretta Baking Mix Products (LBMP) for a combined cost of $10.4 million. The factors that were involved in the Company's decision to acquire the manufacturing facility consisted of many business factors including: (1) PHS has secured and established business with several national chains that have been generating substantial orders for PHS of products produced by LBMP and there for was no available replacement capability perceived by the Company for this business. Although PHS did not own the private label brands, the factory had the artwork, the packaging, the recipes, inventory assets, the configurations, governmental approvals, logistics, line design and many strategic capabilities that allowed PHS to have a turnkey solution and uninterrupted business. Restaurant Artwork, packaging and recipes were formulated and are owned by PHS customers for whom PHS acts as a co-packer. (2) Baking mix facilities have to be American Baking Association (ABA) approved. The ABA approval process and subsequent FDA approval are tedious and time consuming. The LBMP plant was already certified for all regulatory baking mix needs and has certifications and quality control at the optimum levels. This facility was already co-packing for PHS and the customers were satisfied with the quality of the product. 4 (3) PHS has started to develop proprietary brands under the County Fare, Country Value and Rich and Moist Labels. PHS has started the process of seeking customers that may not have their own private label brands, but are only selling baking mix national brands such as Duncan Hines. PHS has positioned the brands that it has developed as value brands that could provide higher margins to the retailer then national brands, but do not have the costs of development that a private label brand might otherwise have. The Company believes that its market capitalization suffers because there is no proprietary brand that it owns whereas presently the Company merely distributes. The Company believes that building brand value could enhance shareholder value. Gaining direct manufacturing capabilities with no delays or financial hardship is believed to be a valuable resource. (4) PHS started to develop a broker network, distributed presentations to several national chains, and hired sales support for co-packing expansion. Interruption of this progress would have reduced PHS future profits. This facility enabled operations to likely continue more seamlessly. Furthermore, controlling the facility will likely enable PHS to expand, bring new lines into activation, run more shifts and PHS strong credit should allow it to close deals with customers that were tenuous about the co-packing relationship as opposed to full PHS production and manufacturing control. (5) PHS plans on expanding the business in the existing facility. Since all process approvals that have been granted are for the use of this facility, any expansion would likely be modular and cost effective. The facility already has the regulatory certifications to operate a baking mix manufacturing plant and would therefore ease the process of future expansion. The anticipated expansion is being ascertained for existing PHS customers that PHS has been servicing for 12 months and expansion opportunities that PHS has been developing internally. (6) The information systems needed to support this operation already existed within the manufacturing process. The IT requirements as well as logistical requirements were already in place to support PHS customers. Customers have their own product mix that is customized to the line. A customer programs the manufacturing line. This integrated process is an important part of the manufacturing process, job order costing, quality control and motion time study that determines capacity. C. GRAN RESERVE CORPORATION (Cigar Sector). GRC owns multiple internet domains including Cigargold.com, cigarsaroundtheworld.com and affiliations. GRC focuses on sale of a mix of brand name and private label premium cigar items and cigar related accessories and markets them through these sites. GRC also manages the internet sales of Beautybuys.com which are less than 5% of overall online sales. GRC operations account for less than 2% of the Company's present consolidated revenues, and the diminished capacity of the cigar operations in the overall business plan for the Company and cost saving opportunity for the Company if GRC operated independent of the Company, as well as regulatory burdens perceived as increasing in the future for the Company if its present cigar operations are retained, the Company has sought and been able to locate a suitor for this business segment and is pursuing such opportunity and agreement in principal has been reached for transfer of such segment to a non-affiliated but familiar acquiree candidate. Provided such transaction prevails, the information included herewith regarding cigar operations shall be considered in material part to be historical in nature. There have been none and the Company does not intend to guarantee continued effective performance of this operating segment. GRC cigar operations include two businesses. This segment includes Cigars Around the World (CAW) and CigarGold. Through CAW the Company sells premium cigars to Hotels, Restaurants, Casinos, PGA Clubs and other leisure related destinations. CAW was founded by Bill Rancic, initial winner of the NBC show The Apprentice and his business was acquired by the Company with continued support from Mr. Rancic. Mr. Rancic serves on the Board of Directors of Synergy Brands. CAW sells, its cigars, in large part 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. Its displays range from counter top humidors to Walled Display units. CAW also organizes events such as cigar dinners and merchandising opportunities within its destinations. CigarGold (CG) is the Company's main present 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 name: www.CigarGold.com. 5 The Company through its websites also 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 cigar 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. 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. The second business area of this segment within the Company's B2C sector is sale directly to the consumer of salon products on-line through Beautybuys.com and other on-line partnership affiliations. This latter online unit operates at www.BeautyBuys.com. BeautyBuys.com sells salon hair products exclusively through Internet admissibility directly to the retail consumer. 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 manufacturers, wholesalers, and distributors with whom the Company has successfully acquainted itself or developed in house. Source of products the Company believes should stay stable. Sources and availability of raw materials may pose certain concerns, including pricing, but most ingredients in the Company's baking mix operations, as the Company's principal proprietary grocery product, principally flour, sugar, and edible oils, are readily available in house and from numerous outside sources. Prices for our raw materials are dependent on a number of factors including the weather, crop production, transportation and processing costs, government regulation and policies, worldwide market supply of, and demand for, such commodities and alternative demand for raw materials, such as the recent demand for corn for use in the production of ethanol. Although the Company believes that it has a capable purchasing function to obtain and allow for competitive pricing, the inherent volatility of commodity prices occasionally and potentially exposes the Company to fluctuating costs. The Company attempts to recover the majority of its commodity cost increases by operating efficiencies. 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. The Company believes it competes in its supply chain operation on the basis of product pricing, quality and assortment, scheduling capabilities regarding and reliability of deliveries, the range and quality of services provided, technological capabilities and location and logistics of distributor facilities and arrangements. In the Company's proprietary baking mix product sector, competition is based upon primarily product quality, pricing, customer service, and development of brand recognition and loyalty through promotional activities and information dissemination techniques. The Company acts as a co-packer in the proprietary product area and emphasis is placed on customer preferences and success dependent in great part on being able to recognize and service such preferences. Competition here is significantly related to existence of similar brand name products, and development of proprietary brand recognition in such market is accomplished through offering and maintenance primarily of competitive pricing and product quality. 6 E. MAJOR CUSTOMERS. During the year ended December 31, 2007, sales to two customers accounted for 13%, and 10% of the Company's total sales and in 2006 sales to three customers accounted for 21%, 16% and 12% of total sales. During such periods 1 supplier of product for the Company further retail/wholesale distribution contributed 59% of such supply. These major customers and suppliers relate to the grocery logistics business within the Company's PHS Group (grocery and HBA operation) 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 there from. 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 which charters and policies should also be accessible by link from the Company's website at www.sybr.com. Internet sites presently available regarding Company business and product sales are: PHSGroup.com BeautyBuys.com SynergyBrands.Com DealbyNet.com Perx.com (managed by Interline Travel & Tours) SYBR.com CIGARGOLD.com CigarsAroundtheWorld.com 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 its 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, the database management systems utilized by the Company are designed to allow management to 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 websites can be accessed 24 hours a day, seven days a week from anywhere that a visitor thereto has Internet access. The Company offers a large selection of products for sale on its relevant websites 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 in internet sales 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 stores provide 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. 7 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. The Company's proprietary internet technology and that independently developed as utilized by the Company does focus on and gives protection for customers and supplier privacy concerns. The Company also maintains a Virtual Private Network (VPN) and intranet system. This 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 usually peak at the end of 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. Sales of beauty care products and fragrances increase over traditional gift giving holidays. 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. Consumer propensity for baking products (and similarly for the ingredients therefor) is stronger in the Spring and Fall. H. SHIPPING AND HANDLING Products sold on a Business to Business 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 direct customer 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 95% of direct customer product inventory is in warehouse stock and 5% is purchased by the Company on an as needed "just in time" basis. The Company is dependent on common carriers and PHS utilizes leased trucks on an as needed basis with no formal long term lease. 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 cannot be passed to the customers on all occasions. Proprietary Banking Mix business operations are centered in Monroe, Michigan where the Company maintains manufacturing and warehousing facilities on a long term lease basis considered of sufficient capacity to fulfill projected needs. Use of Company owned facilities for both manufacture and storage saves on cost. 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" "Ditka" 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, Cigars Around The World and Cigar Kingdom. PHS is the dominant tradename utilized by the Company in its other business sectors. PHS also has exclusive distributorship rights in the Dominican Republic for "Fitti" diaper brand. The baking mix proprietary co-packing operation manufactures products under proprietary tradenames including, Country Value and County Fare, Rich n Moist, and Rich n Fluffy, and in the spice manufacture sector under Palm Spices and Gourmet Select. J. EMPLOYEES The Company and its subsidiaries taken together as of the date of this report employ and contract approximately 40 full time and part time non Union 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. Administration and operation of the baking mix manufacture and distribution operation centered in Monroe, Michigan employs an additional five (5) full time personnel. Additional part-time labor personnel are employed on an as needed basis. 8 The Company leases and staffs its warehouses in New York , New Jersey , Pennsylvania and Florida (GRC), 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. The Company also leases and staffs facilities approximating 110,000 square feet utilized in administering the Baking Mix manufacture and distributions operations. K. GOVERNMENT REGULATION 1. TOBACCO INDUSTRY REGULATION AND TOBACCO INDUSTRY LITIGATION There is and has been various tobacco industry regulation at federal, state and local Levels from which the cigar industry to date only been affected mainly only tangentially. There appears a recent trend toward increasing regulation of the tobacco industry, and the increase in popularity of cigars could lead to an increase in regulation of cigars. Because in part of the changing regulatory framework within which the Company's cigar marketing business operates, the Company has considered and has entered in principal an agreement to transfer out its cigar operations business and assets to a group of management and supervisory personnel associated with the GRC cigar operations but who otherwise have no official capacity with Synergy Brands Inc. or its subsidiaries. If such should transpire cigar regulation will no longer have any material impact on Company operations. The Company has in the past reported existence of cigar regulation in greater depth and reference is made thereto for expanded disclosure. The changing regulatory environment relevant to cigar production and marketing is emphasized in this report and historical reference is made to past disclosure on past tobacco regulation having present and/or potential future application to the cigar industry The Food and Drug Administration (the "FDA") has determined that nicotine is a drug and has asserted 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. In the Fall of 2004, the U.S. Senate considered legislation that would grant the FDA authority to regulate tobacco products. Among other things, the legislation called for the prohibition of free samples and self-service displays. The proposed legislation also limited certain advertising and labeling to a text only format and called for a ban on the sale or distribution of non-tobacco items that bear tobacco brand names, such as hats and t-shirts, and would have restricted sponsorship of events to corporate name only. In addition, the FDA was to be empowered to adopt rules regarding the manufacture, ingredient content, and pre-approval of tobacco products. The proposed legislation passed the US Senate, but failed to garner sufficient support in the House of Representatives and was not enacted into law. There remains uncertainty as to whether the U.S. Congress can gain passage of legislation in the future to permit the FDA to regulate tobacco as outlined above or to permit the FDA to regulate tobacco in a different manner. In 2004, Congress passed legislation to eliminate the federal price support system for tobacco farmers and, in its place, provided an estimated US $10.1 billion buy out of tobacco farmers over the next 10 years. The buy out will be funded by quarterly assessments on tobacco manufacturers. 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 has been an increased pressure on Congress to enact legislation that would ease State efforts in the collection of taxation on cigarette sales. Although cigar sales are not currently included in the recent regulatory initiatives there may be future action against cigar companies which could have material adverse effect on the Company's business. Recently the US Bureau of Alcohol Tobacco Firearms and Explosives, the major credit card companies and State attorneys general reached agreement to disallow 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. 9 States have legislation mandating, in varying degrees, the prohibition of smoking in public places. 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 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). A 2006 U.S. Surgeon General Report ("The Report") detailed the adverse physical impacts of second-hand smoke; thereby invalidating the contention that smoking in public is a "victimless crime." The Report has been a propelling factor in the expansion of anti-smoking legislation. 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 and is one of multiple business reasons underlying the Company's expected transfer out of its cigar business. 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. While the cigar industry has not been subject to health-related litigation to date similar to the various cases brought against and settled with the cigarette industry, 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 State Children's Health Insurance Program ("SCHIP") is a jointly financed program by the Federal and State governments designed at providing health insurance to the children of families from modest incomes. In 2007, Congress passed legislation expanding the SCHIP program. Funding for the SCHIP expansion was to be financed through an increase in the federal excise tax on tobacco products, whereby the cigar industry would bear the greatest increase of roughly 6,000%. On October 3, 2007, President Bush vetoed the bill. Congress' attempt to override the President's veto by the two-thirds majority failed, however the House of Representatives passed a similar bill, H.R. 3963, which was subsequently passed by the Senate on November 1, 2007. On December 12, 2007, President Bush vetoed the second bill as well on the grounds that it was essentially similar to earlier legislation. Thereafter President Bush signed legislation extending SCHIP to cover current enrollment levels through March 2009. Congress may attempt similar legislative efforts to expand SCHIP which would have significant financial impacts on the cigar industry. If such legislation is passed, with the increase of the excise tax on tobacco products, cigar prices would rise dramatically. This may potentially lead to decreased consumption of cigars and subsequent decline in revenues from cigar sales. 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. There are increased State efforts to change the classifications of cigars to increase tax revenues. At the end of 2006, the Alcohol and Tobacco Tax and Trade Bureau and the Department of Treasury have proposed rule changes to the classifications and labeling of cigars and cigarettes in an effort to reduce possible revenue losses due to misclassification. The rule changes attempt to clarify the classification criteria. Specifically, and as an example of use of revised classification, in January 2008 New York Governor Eliot Spitzer proposed changing the classification of little cigars to cigarettes, thereby increasing the tax on said goods. Increased taxation either directly or through reclassifications of tobacco products could have an adverse effect on sales as cigar consumption generally declines. 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. 10 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. As a provider of directly manufactured food items, the Company's operations are subject to stringent quality, labeling and traceability standards, including the Federal Food and Drug Act of 1906 and Bioterrorism Act of 2002, and rules and regulations governing trade practices, including advertising. Our food production operations and our delivery fleet are subject to various federal, state and local environmental laws and workplace regulations, including the federal Occupational Safety and Health Act of 1970, the federal Fair Labor Standards Act of 1938, the federal Clean Air Act of 1990, the federal Clean Water Act of 1972 and the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA. Future compliance with or violation of such laws or regulations, and future regulation by various federal, state and local government entities and agencies, which could become more stringent, may have a material adverse effect on our financial condition and results of operations. We could also be subject to litigation arising out of such governmental regulations that could have a material adverse effect on our financial condition and results of operations. We believe that our current legal and environmental compliance programs adequately address such concerns and that we are in substantial compliance with such applicable laws and regulations. From time to time the Company receives notices of violation relating to regulatory matters. When such notices are received, the Company works with the appropriate authorities to seek a resolution to the violations, which may include, adjustment to company operations or protocols, site remediation, or the acquisition or repair of related equipment and other facility improvements, if necessary. The Company believes its manufacturing and warehousing facilities to be regulatory compliant. 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. The Company is subject to the same foreign and domestic laws as other companies conducting business on and off the Internet. Today, there are still relatively few laws specifically directed towards online services. However, due to the increasing popularity and use of the Internet and online services, many laws relating to the Internet are being debated at various levels of government and it is possible that such laws and regulations will be adopted. These laws and regulations focus on issues such as user privacy, freedom or expression, pricing, fraud, content and quality of products and services, taxation, advertising, intellectual property rights, and information security. It is not clear how existing laws governing issues such as property ownership, copyrights and other intellectual property issues, taxation, libel and defamation, obscenity, and personal privacy apply to online businesses. The vast majority of these laws were adopted prior to the advent of the Internet and related technologies and, as a result, do not contemplate or address the unique issues of the Internet and related technologies. Those laws that do reference the Internet such as the U.S. Digital Millennium Copyright Act have begun to be interpreted by the courts and implemented but their applicability and scope remain somewhat uncertain. The application of indirect taxes (such as sales and use tax, value added tax, or VAT, goods and services tax, business tax, and gross receipt tax) to e-commerce business such as that operated by the Company is a complex and evolving issue. Many of the fundamental statutes and regulations that impose these taxes were established before the growth of the Internet and e-commerce. In many cases, it is not clear how existing statutes apply to the Internet or e-commerce. In addition, some jurisdictions have implemented or may implement laws specifically addressing the Internet or some aspect of e-commerce. The application of existing, new, or future laws could have adverse effects on the Company's business. Several proposals have been made at the U.S. state and local level that would impose additional taxes on the sale of goods and services through the Internet. These proposals, if adopted, could substantially impair the growth of e-commerce, and could diminish the Company's opportunity to derive financial benefit from its business activities. In December 2004, the U.S. Federal Government enacted legislation extending the moratorium on states and other local authorities imposing access or discriminatory taxes on the Internet through November 2007. On October 31, 2007, the Internet Tax Freedom Act Amendments Act of 2007 was enacted into law thereby amending the Internet Tax Freedom Act to extend the moratorium until November 1, 2014. 11 This moratorium does not prohibit federal, state, or local authorities from collecting taxes on the Company's income or from collecting taxes that are due under existing tax rules. In conjunction with the Streamlined Sales Tax Project, the U.S. Congress continues to consider overriding the Supreme Court's Quill decision, which limited the ability of state governments to require sellers outside of their own state to collect and remit sales taxes on goods purchased by in-state residents. An overturning of the Quill decision could harm the Company's business. For further discussion of other present and potential government regulation of the Internet see "Forward Looking Information and Cautionary Statements No.22 Government Regulation of the Internet and E-Commerce is Evolving and Unfavorable Changes Could Harm the Company's Business" infra. ITEM 1A: RISK FACTORS. 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 and/or to 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; Concentration of 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; Company proprietary and other distributed product brand recognition; Protection of Company's intellectual property and trade secrets; The Company's future operating results, its need for and availability of financing to sustain its operations and expand thereon; and the future value of its common stock; The anticipated size or and trends in the market segments in which the Company competes and the anticipated competition in those markets; Production and Inventory concerns; Potential government regulation; Interruption of production facilities operations; The Company's future capital requirements and its ability to satisfy its capital needs; Risk associated with cost increases in materials, ingredients, energy, and employee wages and benefits; Ability to obtain and maintain adequate terms with vendors and service providers; Risks associated with product price increases, including the risk that such actions will not effectively offset inflationary costs pressures and may adversely impact sales of products; The effectiveness of efforts to hedge exposure to price increases with respect to various ingredients and energy; Ability to attract, motivate and/or retain key executives and employees; Successful implementation of information technology improvements; The continuing effect of changes in consumers' eating habits and dietary guidelines 12 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. o The availability of capital on acceptable terms in light of the various factors discussed herein,; o The availability and cost of raw materials, packaging, fuels, and utilities, and the ability to recover these costs in the pricing of products, improved efficiencies and other strategies; o Actions of competitors, including pricing policies and promotional spending; o The effectiveness of advertising and marketing spending; o The effectiveness and adequacy of information and data processing systems; o Changes in general economic and business conditions; o Any inability to protect and maintain the value of intellectual property; o Changes in consumer tastes or eating habits; o Costs associated with environmental compliance and remediation; o Actions of governmental entities, including regulatory requirements; o Acceptance of new product offerings by consumers and our ability to expand existing brands; o Expenditures necessary to carry out cost-saving initiatives and savings derived from these initiatives; o Changes in our business strategies; o Business disruption from terrorist acts, our nation's response to such acts and acts of war; o Changes in general economic or business conditions nationally and in the Company's primary markets; o The availability of capital upon terms acceptable to the Company; o The availability and pricing or raw materials; o The level of demand for the Company's products; o The outcome of legal proceedings to which the Company is or may become a party; o The actions of competitors within the industry wherein the Company operates; o The success of business strategies implemented by the Company to meet future challenges; o The costs to upgrade and enhance existing facilities; o The costs to acquire (or lease) fit-out new facilities and relocate thereto; 13 o The costs and availability of capital to fund improvements or new facilities; o The retention of key employees; o The ability to develop and market in a timely and efficient manner new products which are accepted by consumers; and o Other factors. 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 and continued availability of logistics and financial support therefore. 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. If any of the Company's assumptions prove incorrect or should unanticipated circumstances arise, its actual results could differ materially from those anticipated by such forward-looking statements. The differences could be caused by a number of factors or combination of factors, including, but not limited to, those stated herein. Readers are strongly encouraged to consider these factors when evaluating any such forward-looking statements. These statements speak only as of the date of this report, and the Company disclaims any intention or obligation to update or revise any forward-looking statements to reflect new information, future events or developments or otherwise, except as required by law. All subsequent written and oral forward-looking statements attributable to the Company and persons acting on its behalf are qualified in their entirety by the cautionary statements contained in this section and elsewhere in this report. 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, HAS MATERIAL DEBT, AND HAS BEEN AND IS RELIANT UPON FINANCING TO EXTEND CREDIT TO ITS CUSTOMERS. 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. A large portion of the Company's historical losses are a direct result of fees and expenses associated with stock and/or other working capital financing. The Company believes that Financing costs must be reduced in order to improve operating results. Failure to reduce financing costs will likely inhibit the Company's growth. There is no assurance that further financing will not be needed for operating purposes, and where needed there can be no assurances of continued availability of financing at affordable levels of expense. The Company has made strides in the last several years to become less reliant on capital raising efforts, substituting debt financing at advantageous interest rate levels, thereby utilizing to a much greater extent working capital generated from increasingly positive business operations. 14 As of December 31, 2007, the Company had long-term indebtedness of approximately $12,000,000. Although the Company made debt principal reduction payments over the last several years, it may incur substantial additional debt in the future, and in any event a significant portion of the Company's future cash flow from operating activities is likely to remain dedicated to the payment of interest and the repayment of principal on its indebtedness. The Company's indebtedness could limit its ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions or other purposes in the future, as needed; to plan for, or react to, changes in technology and in its business and competition; and to react in the event of an economic downturn. There is no guarantee that the Company will be able to meet its debt service obligations. If the Company is unable to generate sufficient cash flow or obtain funds for required payments, or it we fail to comply with covenants in its indebtedness, the Company will be in default. In addition, the Company may not be able to refinance its indebtedness on terms acceptable to the Company, or at all. Due to the Company's historical losses, its evolving business model, and the unpredictability of its industries, the Company may not be able to accurately forecast its rate of continued growth. The Company bases its current and future expense levels and its investment plans on estimates of future net sales and rate of growth. Its expenses and investments are to a large extent fixed, and the Company may not be able to adjust its spending quickly enough if its net sales fall short of its expectations. The Company's revenue and operating profit growth depends on the continued growth of demand for the products offered by the Company or its sellers, and its business is affected by general economic and business conditions throughout the world. A softening of demand, whether caused by changes in consumer preferences or a weakening of the U.S. or global economies, may result in decreased revenue or growth. Terrorist attacks and armed hostilities create economic and consumer uncertainty that could adversely affect its revenue or growth. Such events could create delays in, and increase the cost of, product shipments, which may decrease demand. Revenue growth may not be sustainable and its company-wide percentage growth rate may decrease in the future. The Company's net sales and operating results will also fluctuate for many other reasons, including: - its ability to expand its network of purchasers and suppliers, and to enter into, maintain, renew, and amend on favorable terms its commercial agreements and strategic alliances; - its ability to acquire merchandise, manage inventory, and fulfill orders; - the introduction by the Company's current or future competitors of websites, products, services, price decreases, or improvements; - changes in usage of the Internet and e-commerce, including in non-U.S. markets; - timing, effectiveness, and costs of upgrades and developments in the Company's systems and infrastructure; - the effects of commercial agreements and strategic alliances and the Company's ability to successfully implement the underlying relationships and integrate them into its business; - the effects of acquisitions, and other business combinations and the Company's ability to successfully integrate them into its business; - the success of the Company's geographic and product line expansions; - technical difficulties, system downtime, or interruptions; - Variations in the mix of products and services the Company sells; 15 - Variations in the Company's level of merchandise and vendor returns; - disruptions in service by shipping carriers; - the extent to which the Company offers and provides additional benefits to its customers which reduce its gross or operating profits; - the extent the Company invests in technology and content, fulfillment, marketing and other expense categories; - the extent to which the Company provides for and pays taxes; and - an increase in the prices of fuel and gasoline, which are used in the transportation of packages, as well as an increase in the prices of other energy products, primarily natural gas and electricity, and commodities like paper and packing supplies, as well as raw materials used in preparatory product manufacture, all of which are used in the Company's operating facilities. 2. 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. 3. 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 claims from its own funds. Any such payment could have a material adverse impact on the Company. 16 4. 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 purchased, 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 or otherwise trucking services are curtailed because of any other case, the Company will likely incur higher freight costs due to the limited availability of trucks during any such period that transportation lanes are restricted. 5. 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 which reduces the gross profit and may increase inventory risk. The food industry is sensitive to a number of economic conditions such as: (i) food price deflation or inflation, (ii) softness in local and national economies, (iii) increases in commodity prices, (iv) the availability of favorable credit and trade terms, and (v) other economic conditions that may affect consumer buying habits. Any one or more of these economic conditions can affect the demand for products PHS distributes to its customers. The industries in which PHS competes in are extremely competitive. Both the wholesale grocery operation and supply chain services to businesses are subject to competitive practices that may affect: (i) the prices at which PHS is able to sell products to its service area, (ii) sales volume, (iii) the ability of our traditional food distribution customers to sell products PHS supplies, which may affect future orders, and (iv) ability to attract and retain customers. In addition, the nature and extent of consolidation in the food and traditional food distribution industries could affect the competitive position. PHS competes with larger distributors and retailers that have greater resources then the Company. 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. 17 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. The principal raw materials used in the Company's baking mix and other lesser directly manufactured food items operations, including flour, sugar, spices and edible oils, and the paper, films and plastics used to package its products, are subject to substantial price fluctuations, and some raw materials are at historically high prices. The prices for raw materials are influenced by a number of factors, including the weather, crop production, transportation and processing costs, government regulation and policies, worldwide market supply and demand an alternative demand for raw materials, such as the recent demand for corn for use in the production of ethanol. Commodity prices have historically been volatile and may continue to be volatile. Any substantial increase in the prices of raw materials may adversely affect the Company's financial condition, results of operations and cash flows. The Company relies on utilities to operate its business; its manufacturing plants and other facilities use natural gas, propane and electricity to operate. In addition, its distribution operations use gasoline and diesel fuel to deliver its products. For these reasons, substantial future increases in prices for, or shortages of, these fuels or electricity could adversely affect the Company's financial condition, results of operations and cash flows. 6. FURTHER CONSOLIDATION IN THE RETAIL FOOD INDUSTRY MAY ADVERSELY IMPACT PROFITABILITY As supermarket chains and grocery product manufacturers continue to consolidate and as mass merchants gain scale, the Company's larger customers may seek more favorable terms for their purchase of the Company's products, including increased spending on promotional programs, and availability of product for distribution may lessen if the Company has not established good business relationships with all participants in the consolidated ventures. 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. 18 8. POSSIBLE LOSS OF NASDAQ CAPITAL MARKET LISTING. Synergy's qualification for trading on the NASDAQ system is presently and has in the past been questioned, the focus being on the market quotes for the Company's stock, the current bid price presently being and having for a time in the past been reduced below the applicable 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 had fallen below minimum applicable NASDAQ continued listing standard of $2,500,000. NASDAQ has established, and the Commission has approved, certain maintenance requirements to 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 had been below $1.00 in the past and the Common Stock has remained on the NASDAQ Capital Market System because Synergy had complied with alternative criteria which are now eliminated under the new and revised NASDAQ 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 System and thereafter trading would likely be reported in the NASDAQ's OTC Bulletin Board or in the "pink sheets." The Company is presently and has in the recent past been under warning from NASDAQ to better conform by evidencing and maintaining a bid price at or better than $1 or chance being delisted. (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 Capital Market 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 might 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. The Company is hopeful of experiencing and maintaining its bid price in conformity with applicable NASDAQ listing standards as instructed by NASDAQ administration. The Company has also 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. 19 9. RISKS OF BUSINESS DEVELOPMENT-INTERNET MARKETING -THE COMPANY DEPENDS ON CONTINUED USE OF THE INTERNET AND GROWTH OF THE ONLINE PRODUCT PURCHASE MARKET. Because still the lines of product and product distribution established for the Company regarding its e-commerce marketing 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 through use of the Internet. These expenses must either be paid out of the proceeds of future equity offerings or out of generated revenues and Company profits and will likely be a drain on Company capital if revenues and revenue collection do not keep pace with Company expenses. There can be no assurance as to the continued availability of funds from revenues or from any other sources. The Company's future potential revenues and profits from product sales over the Internet as well as use of the Internet to arrange products sales in generaldepend to a great extent 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. As a result, acceptance and use continue to develop, and a sufficiently broad base of consumers have adopted, and continue to use, the Internet and other online services as a medium of commerce but there can be no assurance of continued use at the levels anticipated by the Company to sustain its internet business segments. 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. 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, the Company believes that these market participants must accept and use the novel ways of conducting business and exchanging information as is provided by the internet. 20 The Internet is still relatively new and rapidly changing technology and 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 and/or that the Company may be able to keep pace therewith. 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 or sustain as a viable commercial marketplace, the Company will have to adapt its business model to any resulting new environment, which could adversely affect its results of operations and financial condition. 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 continuously develop, change and implement as and where necessary an appropriate marketing strategy for its various 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 in the operating segments of the Company highly dependent on Internet sales. 21 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). 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 near future but the Company does have outstanding preferred stock upon which dividends are paid currently. 13. POTENTIAL LIABILITY FOR CONTENT ON THE COMPANY'S WEB SITE. Because the Company posts product information and other content on its Web sites, the Company faces potential liability for negligence, copyright, patent, trademark, defamation, indecency and other claims based on the nature and content of the materials that the Company posts. Such claims have been brought, and sometimes successfully pressed, against other Internet content distributors. In addition, the Company could be exposed to liability with respect to the unauthorized duplication of content or unauthorized use of other parties' proprietary technology or infiltration into the Company's system by unauthorized personnel. The Company is not aware of any present claim of such nature or any current basis therefore but because of the nature of the product marketing techniques utilized by the Company with application of the internet, likelihood of claims of such nature arising in the future cannot be predicted. 22 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. 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 current revised Rule 144 a person (or persons whose shares are aggregated) who has satisfied a six month holding period may if they are an affiliate, under certain circumstances and processes, 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 and non-affiliates have no such limitations, but under both scenarios the Company must be current in their reporting. Rule 144 also permits, the sale of shares by a person who is not an affiliate of the Company and who has satisfied a one year holding period without any limitations. The majority of holders of the shares of the outstanding common stock of the Company deemed "restricted securities" have already satisfied at least their six month 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. 16. 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 maintain and re sell to current customers and to increase its number of customers in the future. 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 internet 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 that aspect of its business. 17. 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 and its various tradenames and trademarks. In the baking mix operations, as an example, proprietary manufacturing is accomplished for products under the Country Value, County Fare, Rich n Fluffy and Rich n Moist tradename brands; and in the spice manufacturing sector recognized tradenames are Palm Spices and Gourmet Select. 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 so as to effectively compete and gain acceptance of products under other more highly recognized tradenames and trademarks. 18. 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. 23 19. 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. 20. 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 21. 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. 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. 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. 22. 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. 23. GOVERNMENT REGULATION OF THE INTERNET AND E-COMMERCE IS EVOLVING AND UNFAVORABLE CHANGES COULD HARM THE COMPANY'S BUSINESS The Company is subject to general business regulations and laws, as well as regulations and laws specifically governing the Internet and e-commerce. Such existing and future laws and regulations may impede the growth of the Internet or other online services. These regulations and laws may cover taxation, user privacy, data protection, pricing, content, copyrights, distribution, electronic contracts and other communications, consumer protection, the provision of online payment services, broadband residential Internet access, and the characteristics and quality of products and services. It is not clear how existing laws governing issues such as property ownership, sales and other taxes, libel, and personal privacy apply to the Internet and e-commerce. Unfavorable resolution of these issues may harm the Company's business. 25 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. 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. 26 24. 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 notes that there is currently Congressional legislation pending, the Permanent Internet Tax Freedom Act of 2007, which is intended to amend the Internet Tax Freedom Act of 1998, thereby placing a permanent moratorium on multiple and discriminatory taxes on electronic commerce and Internet access taxes. Said amendment is currently being considered by the Committee on the Judiciary and the Committee on Commerce, Science, and Transportation in the U.S. House of Representatives and Senate, respectively. Currently, decisions of the U.S. Supreme Court restrict the imposition of obligations to collect state and local sales and use taxes with respect to sales made over the Internet. However, a number of States, as well as the U.S. Congress, have been considering various initiatives that could limit or supersede the Supreme Court's position regarding sales and use taxes on Internet sales. If any of these initiatives addressed the Supreme Court's constitutional concerns and resulted in a reversal of its current position, the Company could be required to collect sales and use taxes. The imposition by State and local governments of various taxes upon Internet commerce could create administrative burdens for the Company and could decrease its future sales. 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 increase enforcement of the federal Jenkins Act, which requires persons whom engage in the sale of cigarettes and smokeless tobacco in interstate commerce to report said sale to the buyer's state tobacco tax administrator. A 2003 U.S. Government Accounting Office report found that a significant number of Internet cigarette vendors fail to comply with the Jenkins Act. Although the Jenkins Act and subsequent bills have sought the increased collection of state cigarette taxes, cigars remain outside the scope of the regulation. However, the Company cannot predict the ultimate content, timing or effect of any additional regulation of tobacco products by any federal, state, or local or regulatory body, and there can be no assurance that any such legislation or regulation would not have material adverse effect on the Company's business. 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. 27 25. 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. 26. 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. 28 27. OUR VENDOR RELATIONSHIPS SUBJECT US TO A NUMBER OF RISKS Although we continue to increase the number of vendors that supply products to us and only two vendors account for 10% or more of our inventory purchases, we have significant vendors that are important to our sourcing and co-packing and labeling on proprietary products. We do not have long-term contracts or arrangements with most of our vendors to guarantee the availability of merchandise and channeling of product distribution, particular payment terms, or the extension of credit limits. If the Company's current vendors were to stop selling merchandise to us or assisting in product distribution channeling on acceptable terms, the Company may not be able to acquire merchandise or channel product from other vendors and customer sources in a timely and efficient manner and on acceptable terms. 28. CHANGE IN TOP CUSTOMERS/SUPPLIERS SELLING/BUYING PATTERNS MAY ADVERSELY AFFECT THE COMPANY'S SALES AND PROFITS The Company's top 2 customers represent 23% of its 2007 total sales, and top 3 customers 49% of its 2006 total sales. The Company's largest supplier, Proctor and Gamble, represents 59% of its product distribution availability in 2007 and 2006. If any of the top customers change their buying patterns with the Company and/or top suppliers limit product supply, the Company's sales and profits could be adversely affected. 29. LOSS OF FACILITIES COULD ADVERSELY AFFECT THE COMPANY'S FINANCIAL AND OPERATIONAL RESULTS The Company has one principal production facility for its baking mix operations, which facility is a four story manufacturing plant in Monroe, Michigan where the Company's signature baking mix products are exclusively manufactured. The loss of such production facility could have material adverse impact on the Company's operations, financial condition and results of operations. 30. TERMS OF INDEBTEDNESS IMPOSE SIGNIFICANT RESTRICTIONS ON OUR BUSINESS The Company's Credit and Debt Instruments Agreements, ("Agreements") contain various covenants that limit the Company's ability to, among other things, incur or become liable for additional indebtedness; create or suffer to exist certain liens; enter into business combinations or asset sale transactions; make restricted payments, including dividends over a specified amount; and make investments. These restrictions could limit the Company's ability to obtain future financing, sell assets, make acquisitions or needed capital expenditures, withstand a future downturn in its business or the economy in general, conduct operations or otherwise take advantage of business opportunities that may arise. 31. THREATS OR POTENTIAL THREATS TO SECURITY OR FOOD SAFETY MAY ADVERSELY AFFECT OUR BUSINESS Wartime activities, threats or acts of terror, data theft, information espionage, or other criminal activity directed at the grocery or drug store industry, the transportation industry, or computer or communications systems, including security measures implemented in recognition of actual or potential threats, could increase security costs, adversely affect the Company's operations, or impact consumer behavior and spending and customer orders. Other events that give rise to actual or potential food contamination, drug contamination, or food-borne illness could have an adverse effect on the Company's operating results. 32. 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: - actual or anticipated variations in the Company's quarterly operating results and expected future results; - changes in, or failure to meet, financial estimates by securities analysts; - unscheduled system downtime; - additions or departures of key personnel; - announcements of technological innovations or new services by the Company or its competitors; - initiation of or developments in litigation affecting the Company; 29 - conditions or trends in the Internet and online commerce industries; - changes in the market valuations of other Internet, online commerce, or technology companies; - developments in regulation; - announcements by the Company or its competitors of significant acquisitions, strategic partnerships, joint ventures, new product of capital commitments; - unanticipated economic or political events; - sales of the Company's common stock or other securities in the open market; and - other events or factors, including those described in the "Risk Factors", section and others that may be beyond the Company's control. - 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. 30 33. INTERNATIONAL BUSINESS RISKS. The Company deals with Companies not located in the United States. Although almost all business activity is conducted in United States Dollars, the Company may be subject to currency risks and may be subject to international risks that are not under the jurisdiction of U.S. Laws. In 2007 the Company had transactions with Companies located in Canada, China, Dominican Republic, Colombia, Italy and Israel. ITEM 2: DESCRIPTION OF PROPERTY The Company's corporate offices and administrative headquarters are located in Syosset, New York. The Company maintains satellite and representative offices in New York, Pennsylvania, New Jersey, Illinois, and Florida. Warehousing facilities utilized by the Company are located in New Jersey, New York and Florida. The Grocery inventory is warehoused in New York, Salon products are warehoused in New Jersey, and cigars are 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. The Company also leases space for manufacturing and warehousing regarding its baking mix operation in Michigan (USA) of approximately 110,000 square feet. 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 2007 no matters were submitted for shareholder approval. 31 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's common stock trades on NASDAQ Capital Market under the Symbol "SYBR", and on the Boston Stock Exchange under the Symbol "SYB". The high and low sales prices in the NASDAQ Capital 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, 2006 1.97 1.22 1.38 June 30, 2006 1.45 1.00 1.12 September 30, 2006 1.17 .93 1.04 December 31, 2006 1.35 .81 .93 March 31, 2007 1.07 .66 .83 June 30, 2007 1.07 .72 .84 September 30, 2007 1.34 .80 1.04 December 31, 2007 1.29 .80 .89 On March 28, 2008, the Company had approximately 3000 shareholders of record. The Company has never paid any dividends on its Common Stock and does not presently intend to pay any dividends on the Common Stock in the foreseeable future. The Company does pay a dividend on its preferred stock. There are no unexercised stock options outstanding. The Company is presently and in the past has been under warning from NASDAQ administration to achieve and maintain a bid price for its Common Stock above $1 or chance being delisted (see further explanations at Risk Factor 8 "Possible Loss of NASDAQ Capital Market Listing," supra; reference is also made to the report of the Company on Form 8K regarding the present NASDAQ warning filed by the Company on January 28, 2008 which report is incorporated herein by reference). The Company has authorized stock of 15,000,000 shares divided into 14,000,000 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. The Company has had approved by its Board of Directors and Shareholders an increase in its total authorized stock (without further change in designation beyond common stock and without any amendment in the amount authorized in each present designation) to 26 million shares which increase, although authorized, has not as of the date of this report been effectuated. 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 2006. 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. 32 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION OVERVIEW Synergy Brands Inc. is a holding company that principally operates through a wholly owned subsidiary, PHS Group Inc. ("PHS") in the wholesale distribution of nationally known brands, proprietary private label groceries, general merchandise, and Health and Beauty Aid (HBA) products. It principally focuses on the sale of nationally known brand name consumer products manufactured by major U.S. manufacturers and has begun focusing on the manufacturing and distribution of certain grocery private label products including baking mixes, spices and packaged meals. Information can be found at www.phsgroup.com. The Company also owns a small wholly owned subsidiary representing less then 2% of the Company's revenues, Gran Reserve Corporation (GRC), that principally operates in the wholesale, retail and online sales of Premium hand made cigars and accessories The Company has authorized the sale of GRC and plans to focus on its expanding grocery operations. Further information can be found at www.cigargold.com. The Company also owns 20% of a travel company called Interline Vacations (PERX). Information can be found at www.perx.com. For further information please visit the Company's corporate website at www.sybr.com. PHS GROUP (GROCERY & HBA OPERATIONS) PHS Group distributes Grocery and HBA products to retailers and wholesalers predominately in the United States. PHS is the largest business segment of the Company's business operations, representing about 98% of the overall Company sales and 95% of gross profit. 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 better plan for the needs of its specific customers and at the same time benefits the manufacturer as the direct supply source and in turn, increase sales to its customers at optimized pricing through this unique strategy. PHS concentrates on what it perceives to be faster moving promotional items such as: Tide, Bounty, Duracell, Folgers, Crest, Clorox bleach, Scott tissues, Marcal tissues among many others, and uses promotions, logistics and distribution savings to streamline and reduce its sale prices and increase gross profit thereby. In the third quarter of 2006, PHS entered the private label grocery market specializing in the distribution of baking mixes and spices to grocery and drug chains as well as wholesalers and distributors on a proprietary basis. PHS hopes to develop private label programs for national accounts by creating proprietary baking mix products and spice plan-o-grams specifically designed for particular retail needs. PHS further hopes to expand its grocery distribution business by complementing the distribution of its promotional grocery and HBA items with higher margin secondary items that would blend a higher margin into PHS operations. On May 18, 2007, PHS acquired the assets of a baking mix manufacturing facility through a wholly owned subsidiary that was known as Loretta Baking Mix Products (LBMP) for a combined cost of $10.4 million. Factors that were involved in PHS and Synergy decision to acquire LBMP manufacturing facility consisted of the following: o PHS has secured and established business with several national chains that have been generating substantial orders for PHS of products produced by LBMP and there was no immediate replacement capability perceived by the Company for this business. Although PHS did not own the private label brands, the factory had the artwork, the packaging, the recipes, (inventory assets) the configurations, governmental approvals, logistics, line design and many strategic capabilities that allowed PHS to have a turnkey solution and uninterrupted business. The artwork, packaging and recipes were formulated and are owned by PHS customers. 33 o Baking mix facilities have to be American Baking Association (ABA) approved. The ABA approval process and subsequent FDA approval are tedious and time consuming. The LBMP plant was already certified for all regulatory baking mix needs and has certifications and quality control at the optimum levels. This facility was already co-packing for PHS and the customers were satisfied with the quality of the product. o PHS has started to develop proprietary brands under the County Fare, Country Value and Rich and Moist Labels. PHS has started the process of seeking customers that may not have their own private label brands, but are only selling baking mix national brands such as Duncan Hines. PHS has positioned the brands that it has developed as value brands that could provide higher margins to the retailer then national brands, but do not have the costs of development that a private label brand might otherwise have. Synergy Brands believes that its market capitalization suffers because there is no proprietary brand that Synergy Brands owns whereas presently the Company merely distributes. Synergy believes that building brand value may enhance shareholder value. Gaining direct manufacturing capabilities with no delays or financial hardship is believed to be valuable. o PHS started to develop a broker network, distributed presentations to several national chains, and hired sales support for co-packing expansion. Interruption of this progress would have reduced PHS future profits. This facility enabled operations to likely continue more flawlessly. Furthermore, controlling the facility will likely enables PHS to expand, bring new lines into activation, run more shifts and PHS strong credit should allow it to close deals with customers that were tenuous about the co-packing relationship as opposed to full PHS production and manufacturing control. o PHS plans to expand the business in the existing facility. Since all process approvals that have been granted are for the use of this facility, any expansion would likely be modular and cost effective. The facility already has the regulatory certifications to operate a baking mix manufacturing plant and would therefore ease the process of future expansion. The anticipated expansion is being ascertained for existing PHS customers that PHS has been servicing for 12 months and expansion opportunities that PHS has been developing internally. o The information systems needed to support this operation already existed within the manufacturing process. The IT requirements as well as logistical requirements were already in place to support PHS customers. Customers have their own product mix that is customized to the line. The customer's formula programs the manufacturing line. This integrated process is an important part of the manufacturing process, job order costing, quality control and motion time study that determines capacity. GRAN RESERVE CORPORATION (PREMIUM CIGAR OPERATIONS) The Company's premium cigar operations are conducted through its wholly owned subsidiary Gran Reserve Corporation (GRC). GRC operates the following businesses (under the business names stated). Cigars Around the World (CAW) sells premium cigars to restaurants, hotels, casinos, country clubs and many other leisure related destinations. This company was acquired in June 2003. CAW opened a retail store and lounge in Miami Lakes, Florida selling premium cigars and accessories in March 2006 as well as established and furthered a web site related to its operations, www.cigarsaroundtheworld.com. CigarGold.com sells premium cigars through the Internet directly to the consumer and through partnership online affiliations. GRC, under the tradename BeautyBuys.com, sells salon hair care products directly to the consumer via the Internet and through partnership online affiliations. 34 CONSOLIDATED RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2007 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2006.
OPERATING OPERATING AND SEGMENTS CORPORATE SEGMENTS Y/E 12/31/2007 Revenue $89,540,501 24.78% $ 89,540,501 24.78% Gross Profit 8,833,419 78.12% 8,833,419 78.12% SG&A 4,327,546 49.40% 5,858,185 36.64% Operating Profit 3,293,750 73.89% 1,755,019 311.19% Net Profit (loss) from continuing operations attributable to common shareholders 1,740,677 271.60% (315,309) -81.14% Per share continuing operations 0.19 (0.04) Net loss from discontinued operations (114,997) -91.54% Per share discontinued operations (0.01) Net profit (loss) attributable to common shareholders (430,306) -85.81% Net profit (loss) per common share (0.05) Interest and financing expense 1,546,969 10.20% 2,184,141 6.50% Y/E 12/31/2006 Revenue $71,759,908 $ 71,759,908 Gross Profit 4,959,245 4,959,245 SG&A 2,896,658 4,287,344 Operating Profit 1,894,202 426,816 Net Profit (loss) from continuing operations attributable to common shareholders 468,424 (1,671,968) Per share continuing operations 0.09 (0.33) Net loss from discontinued operations (1,359,464) Per share discontinued operations (0.27) Net loss attributable to common shareholders (3,031,432) Net loss per common share (0.60) Interest and financing expense 1,403,739 2,050,856
Synergy Brands Synergy Brands is a holding Company that operates through wholly owned segments. In order to fully understand the results of operations, each segment is analyzed respectively. Revenues increased by 25% to $89,540,501 for the year ended December 31, 2007, as compared to $71,759,908 for the year ended December 31, 2006. The increase in sales was predominately from the sale of PHS private label products and an increase in the Company's PHS wholesale distribution operations. The Company has been able to diversify its product selection in both national brand and private label to achieve better operating margins. The Company was able to grow revenue by 25% and gross profit increased by 78%. The Company attained an operating profit of $1,755,019 for the year ended December 31, 2007 as compared to a $426,816 operating profit for the year ended December 31, 2006. Selling General and Administrative expenses (SGA) increased by 37% to $5,858,185 for the year ended December 31, 2007 as compared to $4,287,344 for the year ended December 31, 2006. The increase in SG&A by 37% resulted from increases in certain variable costs that correlate to increases in revenue. SG&A expense for PHS Group increased by 68% to $3,623,994 for the year ended December 31, 2007 as compared to $2,161,320 for the year ended December 31, 2006. 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. Overall SGA costs were 6.5% in 2007 as compared to 6% of Revenues in 2006 while gross profit increased materially for the same period. The net loss attributable to Common Stockholders of the Company was $430,306 for the year ended December 31, 2007 as compared to a loss of $3,031,432 for the year ended December 31, 2006. Synergy Brands earned an operating profit of $3,293,750 from as compared to an operating profit of $1,894,202 for the same period last year. Corporate expenses for the year ended December 31, 2007 totaled $1,530,639, which include legal, accounting, corporate employees, and regulatory expenses as compared to $1,390,686 for the year ended December 31, 2006. Management believes that its corporate expenses may increase because 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. 35 Below is a summary of the results of operation by segment: PHS Group: (Grocery and HBA operations) Synergy's Grocery and HBA business known as PHS Group improved its operation through the expansion of its direct store delivery (DSD) and private label wholesale and distribution operations. Sales for this segment for the year improved by 26% to $87.9 million and operating profit increased by 100% to $4,391,213. PHS represented 98% of the Company's overall revenues and provides most of the cash flow for corporate regulatory expenses. PHS plans to continue attempting to build its DSD operations, expand its private label programs, and increase its national sales. GRAN RESERVE CORPORATION (Cigar operations) Gran Reserve segment operations headed by GRC consist of subcategories www.CigarGold.com, www.CigarsAroundtheWorld.com, www.BeautyBuys.com, and the retail store operation in Miami Lakes, Florida as well as online partnership programs such as www.Overstock.com and www.Google.com. The principal operation was relocated in March 2006 to a 6,000 square foot facility in Miami Lakes, Florida, which handles order flow for the operation as well as retail operations. Sales for this segment for the year ended December 31, 2007 decreased by 16% while operating loss increased by 262% to $1,097,463. The Company has authorized the sale of GRC in FY 2008. Corporate Expenses: The Company's allocation to corporate expenses increased by 10% to $1,530,639 for the year ended December 31, 2007 as compared to $1,390,686 for the year ended December 31, 2006. Corporate expenses represent 26% of overall operating expense of the Company. Operating expenses for all operations including corporate expenses totaled $5.9 million for the year ended December 31, 2007. Corporate expenses reflected the charges needed to operate the public corporation, Synergy Brands Inc. These included all the regulatory costs, board fees, governance fees, legal and accounting expenses and employees that oversee the operations of the Company's assets. Below is a detailed review of the Company's performance. In order to fully understand the Company's results a discussion of the Company's segments and their respective results follow; PHS GROUP (Grocery and HBA operations) PHS Group distributes Grocery and HBA products to retailers and wholesalers predominately located in the Northeastern United States as well as in Canada. PHS constitutes the largest segment of the Company's operations from a financial prospective, representing about 98% 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, 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, which in turn is designed to increase sales to its customers through this unique focus. PHS concentrates on what it perceives to be the fastest moving consumer product items and uses promotional savings to streamline and reduce their sale prices. PHS focuses on approximately 1,000 products manufactured by the top Grocery and HBA Companies in the United States and as a result, the Company believes that they have a competitive advantage in comparison to the traditional wholesaler, which may concentrate on over 10,000 different items. 36 PHS SEGMENT INFORMATION OF OPERATING BUSINESSES PHS Group CHANGE YEAR ENDED DECEMBER 31, 2007 Revenue 87,933,523 25.91% Gross Profit 8,368,974 91.47% SG&A 3,623,994 67.68% Operating Profit 4,391,213 99.82% Net Profit 2,838,318 264.06% Interest and financing expenses 1,546,969 10.20% YEAR ENDED DECEMBER 31, 2006 Revenue 69,840,886 Gross Profit 4,370,869 SG&A 2,161,320 Operating Profit 2,197,620 Net Profit 779,634 Interest and financing expenses 1,403,739 PHS increased its revenues by 26% to $87.9 million for the year ended December 31, 2007 as compared to $69.8 million for the year ended December 31, 2006. The increase in PHS business is attributable to the utilization of additional vendors, development of a private label grocery program designed to sell proprietary products, more specifically in the baking mix and spice market, to national chains in the United States and Canada, and organic growth in sales to its customers in the Northeastern section of the United States. PHS increased its gross profit by increasing Direct Store Delivery sales, developing a private label market to national chains, as well as focusing on promotional merchandise offered by its vendors. The overall gross profit percentage increased from 6.3% to 9.5%. PHS has been able to maintain its sales and customer base while increasing gross profit by 91%. This has been achieved through its wholesale operations by generating incremental retail sales as opposed to lower margin wholesale revenues. Additionally, PHS has taken advantage of promotional rebates, which further enables its cost of foods to be reduced. PHS plans to continue this approach, but it does rely on manufacturer promotions to achieve its targeted results. Any material changes in manufacturer promotional rebate policies may have an adverse effect on PHS's cost of goods. Continuing the development of private label grocery products produced for the benefit of PHS customers is another objective currently being developed and executed by PHS as well as designing brand labels controlled by PHS. Net profit was $2,838,318 for the year ended December 31, 2007 as compared to a profit of $779,639 for the year ended December 31, 2006. The increased net profit resulted from a higher gross profit realized by PHS through the sale of higher margin items and items with increased promotional allowances. 37 GRAN RESERVE SEGMENT GRC CHANGE YEAR ENDED DECEMBER 31, 2007 Revenue $1,606,978 -16.26% Gross Profit 464,445 -21.06% SG&A 703,552 -4.32% Operating loss (1,097,463) 261.70% Net loss (1,097,641) 252.70% YEAR ENDED DECEMBER 31, 2006 Revenue 1,919,022 Gross Profit 588,376 SG&A 735,338 Operating loss (303,418) Net loss (311,210) Revenues in the Company's cigar operation decreased by 16% for the year ended December 31,2007 to $1,606,978 as compared to $1,919,022 for the year ended December 31, 2006. CAW on a current operating basis represents approximately 45% of cigar revenues for the year ended December 31, 2007. Gross profit for the year ended December 31, 2007 decreased by 21% to $464,445 as compared to $588,376 for the year ended December 31, 2006. Gran Reserve recorded an impairment loss of $742,678 for the year ended December 31, 2007. DISCONTINUED OPERATIONS The Company discontinued Proset's operation in the fourth quarter of 2006 and such discontinuance is reflected in the financial statements hereinafter provided. The prior Proset segment of the Company's business has never been considered a significant component thereof. After review of the relevant components required for measuring the importance of and particulars of the Proset segment, the Company determined that the lessened value of the Company of Proset's revenues did not warrant continuing its operations because such revenues (because of the cost factor) had not become sufficient to sustain the costs of its operations. Proset has not been able to acquire and sell salon hair care products at costs needed to market those products profitably. In addition, Proset's inventory could not be replenished at appropriate levels to accommodate customers' needs as determined by the Company. Proset has continued to operate at a loss and management believed that there was little likelihood of establishing a plan to make such segment profitable. Management further believes that the expansion of its profitable grocery operations will provide for vertical growth that may require additional capital that would be better invested in PHS operations rather then Proset operations. The table below summarizes the historical financial operations of Proset for the periods being discussed. Year Ended Year Ended December 31, 2007 December 31, 2006 ----------------- ------------------ Net Sales $9,856 $1,222,834 Cost of sales Cost of product 55,133 1,260,694 Shipping and handling costs 13,616 144,772 ----------------- ------------------ 68,749 1,405,466 Gross Profit (loss) -58,893 -182,632 Operating expenses: Advertising and promotion - 1,046 General and administrative 56,104 594,008 Depreciation and amortization - 157,650 Asset impairment charge - 359,353 ----------------- ------------------ 56,104 1,112,057 Operating loss -114,997 -1,294,689 Other Income (expenses): Other income (expenses) - -1,024 Interest and financing expenses - -62,765 ----------------- ------------------ - -63,789 Net loss before income taxes -114,997 -1,358,478 Income tax expense 986 ----------------- ------------------ Net loss from discontinued operations ($114,997) ($1,359,464) ================= ================== 38 LIQUIDITY AND CAPITAL RESOURCES
Year ended 2007 2006 Working Capital $ 6,262,577 $ 9,285,585 Assets 31,440,090 20,867,796 Liabilities 22,419,884 15,207,546 Equity 9,020,206 5,660,250 Line of Credit Facility - 5,836,928 Receivable turnover (days) 17 57 Inventory Turnover (days) 15 7 Net cash provided by (used in) operating activies 349,736 (4,324,635) Net cash provided by investing activites (203,784) 420,590 Net cash (used in) provided by financing activites (289,070) 4,293,432
The Company's working capital decreased by $3.0 million in FY 2007 to $6.3 million due to a combination of several factors including amortization of debt and the purchase of the baking mix plant. Liquidity for the Company predominately involves the need to finance accounts receivables, inventory, and fixed costs. The cash flow realized from the Company's gross profit has been sufficient to cover the Company's operating expenses. However, the Company relies on debt and equity financing in order to support the interest that it pays in support of financing its receivables and inventory. The Company historically has not been able to date to completely support its financing costs solely from operations and has relied on equity and debt financing to bridge the gap. However, in FY 2007, the Company has been able to support its operation from its operating profit. The Company improved its cash flow from operating activities by $4.7 million. The Company generated a net loss attributable to Common Shareholders of approximately $430,000 for the year ended December 31, 2007. Financing costs totaled $2,184,141 and non-cash charges totaled approximately $1,664,000 for the year. Reductions in certain financing expenses through equity conversions and debt repayments through operating or capital transactions have been and should continue to be beneficial to the Company's performance. Although the Company was able to fund its operations from internal cash flow, it still requires inventory and receivable financing for growth as well as cash flow to support debt amortization. The capital resources that were available to the Company as of December 31, 2007 consisted of $12.0 million in long-term notes, $4.2 million in short term notes, and $3.65 million of non-redeemable preferred stock. The Company's objectives are to reduce its debt through the cash flow from operation, dispositions of assets, as well as refinancing its current obligations with lower rates. In 2007, the Company refinanced its $6 million dollar senior line of credit with a $8.0 million 10 year term facility and materially reduced its interest rate to 11.75%. Management would also consider conversions of debt to equity depending on market conditions. The Company's liquidity relies in material part on the turnover of it inventory and accounts receivable. The Company turns its receivables on average every 17 days and the Company has turned its overall inventory on average approximately every 15 days. The Company believes that its collection procedures and procurement policies are consistent with industry standards. However, 24% of the Company's assets consist of trade receivables and inventory. The Company must maintain a strict policy on insuring collections of receivables and adequate procurement based upon customer demands to optimize its profit. The Company's sales are reliant in significant part on extending credit that ranges from 10 to 60 days. As a result, the Company must have financing facilities that will continue to allow the Company to procure inventory and extend accounts receivable credits. The Company has strict credit policies and reviews. However, credit extensions may pose material financial risks to the Company. In addition, the Company relies on performance incentives from its manufacturers that are based upon sales. Provided the Company maintains its performance standards with the manufacturers with whom it contracts for procurement of goods, its estimates of incentives that are due should remain accurate. However, if the manufacturers change their policies or the Company does not meet the manufacturer's standards, incentives may be reduced and may cause a material financial problem for the company. 39 Management believes that continued cost containment, improved financial and operating controls, long term debt reduction, and a focused sales and marketing effort should provide sufficient cash flow from operations in the near term and the Company is working toward reliance on such financial sources and attributes to cover its cash flow requirements. However, achievement of these goals will likely continue to 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 likely continue to be subject to financial, economic and other factors likely to be beyond its control, and there can be no assurance that the Company's goals will be achieved. In the interim while such goals are being pursued, achievement of positive cash flow has been and may be reliant on equity and debt financing, including the Company's exchange of notes payable for common shares and its issuance of further common and preferred stock in private placements and the Company is hopeful that the market will continue to recognize the Company's stature so that such financing method will continue to be available in the future because, at least in the near future, the Company is likely to continue to use such financing opportunities to maintain adequate cash flow. Expected interest payments on notes payable for the period ended December 31, are as follows: 12/31/08 12/31/09 12/31/10 12/31/11 12/31/12 Total $1,157,000 $879,000 $756,000 $621,000 $19,000 $3,432,000 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 may be 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. 40 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 quarterly 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, 2007, the Company has established a full valuation allowance. VALUATION OF LONG-LIVED ASSETS. The Company reviews its long-lived assets periodically to determine potential impairment by comparing the carrying value of the assets with expected net cash flows expected to be provided by the operating activities of the business or related products. Should the sum of the expected future net cash flows be less than the carrying value, the Company would determine whether an impairment loss should be recognized. An impairment loss would be measured by comparing the amount by which the carrying value exceeds the fair value of the Asset. Long-lived assets and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. Impairment is measured by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from use of the assets and their ultimate disposition. To the extent impairment has occurred, the carrying amount of the asset would be written down to an amount to reflect the fair value of the asset. RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARD BOARD ("FASB"). In February 2006, FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments An Amendment of FASB No. 133 and 140. The purpose of SFAS statement No. 155 is to simplify the accounting for certain hybrid financial instruments by permitting fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. SFAS No. 155 also eliminates the restriction on passive derivative instruments that a qualifying special-purpose entity may hold. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of any entity's first fiscal year beginning after September 15, 2006. The adoption of this standard on January 1, 2007 did not have a material effect on our consolidated financial statements. In July 2006, the FASB issued FASB Interpretation 48, "Accounting for Uncertainty in Income Taxes " ("FIN 48") and in May, 2007, issued FASB Staff Position FIN 48-1. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes." This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides a guidance on derecognition, classification interest and penalties, accounting in interim periods, disclosure and transition. The adoption of FIN 48 did not have a material impact on our consolidated financial statements. For our Company, this interpretation was effective beginning January 1, 2007. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS No. 157 defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. SFAS No. 157 requires companies to disclose the fair value of their financial instruments according to a fair value hierarchy as defined in the standard. Additionally, companies are required to provide enhanced disclosure regarding financial instruments in one of the categories (level 3), including a reconciliation of the beginning and ending balances separately for each major category of assets and liabilities. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We believe that the adoption of SFAS No. 157 will not have a material impact on our consolidated financial statements. 41 In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities including an amendment of SFAS 115" (SFAS No. 159). The new statement allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item's fair value in subsequent reporting periods must be recognized in current earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the potential impact of SFAS No. 159 on our financial position and results of operations. In December 2007, the FASB issued Statements No. 141 (R), "Business Combinations", and No. 160, "Noncontrolling Interests in Consolidated Financial Statements." Effective for fiscal years beginning after December 15, 2008, these statements revise and converge internally the accounting for business combinations and the reporting of noncontrolling interests in consolidated financial statements. The adoption of these statements is not expected to have a material impact on the Company's financial statements. SEASONALITY Sales by PHS Group usually peak at the end of the 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 products costs may increase sales. Sales of HBA products increase over traditional gift giving holidays such as Christmas, Mother's Day, Father's Day, and Valentine's Day. Baking goods increase in beginning of spring and fall. Cigar product sales also increase during holiday periods and summer months as well as around special sporting events. INFLATION The Company believes that inflation, under certain circumstances, could be beneficial to the Company's major business, PHS Group. When inflationary pressures drive product costs up, the Company's customers sometimes purchase greater quantities of product to expand their inventories to protect against further pricing increases. This enables the Company to sell greater quantities of products that are sensitive to inflationary pressures. However, inflationary pressures frequently increase interest rates. Since the Company is dependent on financing, any increase in interest rates will increase the Company's credit costs, thereby reducing its profits. However, inflation increases prices which maybe a natural hedge to an increase in interest, commodity prices such as corn, wheat and sugar in the Company's consumer business. This may cause a decline in sales that would result in a reduced operating profit. 42 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 Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets as of December 31, 2007 and 2006 F-3- F-4 Consolidated Statements of Operations for the Years Ended December 31, 2007 and 2006 F-5 Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Loss for the Years Ended December 31, 2007 and 2006 F-6 - F-7 Consolidated Statements of Cash Flows for the Years Ended December 31, 2007 and 2006 F8-F9 Notes to Consolidated Financial Statements F-10 - F-32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NONE ITEM 9A. CONTROLS AND PROCEDURES Under the Supervision of the Company's Chief Executive Officer and Chief Financial Officer, the Company has as of December 31, 2007, the end of the period covered by this Annual Report on Form 10K evaluated the effectiveness of the design and operation of the disclosure controls and procedures (as defined in Rule 13a-15(e)under the Exchange Act) of the Company and concluded as of such valuation date same to be effective to ensure that material information relating to the Company, including its consolidated subsidiaries and required to be disclosed in reports the Company files or submits under the Exchange Act, 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 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. Management's Annual Report on Internal Control Over Financial Reporting The financial statements, financial analyses and all other information included in this Annual Report on Form 10-K were prepared by the Company's management, which is responsible for establishing and maintaining adequate internal control over financial reporting. 43 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. The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company's internal control over financial reporting includes those policies and procedures that: i. Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; ii. Provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and iii. Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition and use or disposition of the Company's assets that could have a material effect on the financial statements. There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal controls can provide only reasonable assurances with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal controls may vary over time. Management assessed the design and effectiveness of the Company's internal control over financial reporting as of December 31, 2007. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Based on management's assessment using this framework, it believes that, as of December 31, 2007, the Company's internal control over financial reporting is effective. 44 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. This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING During the fiscal quarter ended December 31, 2007, there has been no change in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. ITEM 9B OTHER INFORMATION. In the latter half of 2007 the Company began manufacture and distribution of a broad line of spice products under proprietary labels under a co-packing arrangement. The Company leases facilities for such production and storage in Qingdao, China located in the Shandong province. Such facility is utilized to consolidate the commodity requirements of the production cycle, which include raw materials, packaging and distribution, under high quality controls. Customer orders are filled and shipped directly from the facility. The Company has also expanded its Syosset, New York and Monroe, Michigan facilities as further storage and distribution centers for such products. The Company in latter half of 2007 has also entered into a co-packing arrangement in North Dakota (USA) with an experienced operator for the production for distribution by the Company of boxed pasta dinners, potato products and dried beans under proprietary labeling. These additional proprietary products are expected to add to the revenue level of the PHS operating segment of the Company. The Company has located an opportunity to sell its cigar operations, presently conducted under the GRC business segment, and its Board of Directors have authorized a proposed contract for such transaction under which certain of the management contingent of the Company's Miami Lakes, Florida cigar emporium and its cigar warehousing facilities have in principal agreed to purchase the GRC segment for a total purchase price of $400,000, $350,000 of which would involve Seller financing. The assets of the GRC cigar operations being purchased consist of approximately $400,000 in product inventory and $75,000 in Accounts Receivable. Accounts Payable are approximately $150,000 resulting in net value (without considering goodwill) of approximately $350,000. The GRC operating segment is working at a significant loss to the consolidated financial status of the Company and Management of the Company believes such segment has become an insignificant, non-strategic asset, rendering far less than the 10% benchmark for 'significance' regarding assets and revenues of the segment as compared to the total for the Company. The Company also believes the Tobacco industry is more likely in the future to increase including the cigar trade as an integral part thereof for regulatory purposes, and that the cigar industry is entering a phase of uncertain taxation and moratoriums. The Company would rather transfer the GRC segment as an operating unit so as preserve its business cohesion and historic values, and to allow the opportunity for effective continuance, and in recognition of the likelihood that liquidation value would be materially less than value to be derived from an organized sale. The transfer agreement is still being considered by all relevant parties. 45 PART III The information required by items 10-14 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, 2007. The annual meeting is scheduled to be in June 2008. Such Proxy Statement is expected to be filed with the Commission by April 30, 2008 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. 46 ITEM 15. EXHIBITS, and FINANCIAL STATEMENT SCHEDULES (a) financial statements-see Item 8 (b) Exhibits: 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 and other Instruments defining rights of security holders, including indentures (3) EX-4 10 Synergy Brands Inc. 1994 Services and Consulting Compensation Plan, as amended (4) 14 Code of Ethics EX-14 EX-14.1 Audit Committee Charter (5) EX-14.1 EX-14.2 Nominating Committee Charter (5) EX-14.2 EX-14.3 Whistleblower Policy (5) EX-14.3 EX-14.4 Nominating Committee Charter (5) EX-14.4 21 Listing of Company Subsidiaries EX-21 23.1 Consent of Independent Registered Public Accounting Firm EX-23.1 32.1 Certification Pursuant to 18 U.S.C. Section 1350. As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by the Chief Executive Officer. EX-32.1 32.2 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-32.2 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 by incorporation by reference to the 10K/A report filed for the Company for the year ended 12/31/04. 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 47 (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 by reference to the similar exhibit in the Company's Form 10-K/A for the fiscal year ended December 31, 2004. In January 2007 the Company entered into a Securities Purchase Agreement with Lloyd Miller, III and affiliated entity thereof under which terms the Company obligated itself to a borrowing of $6.5 million and agreed to issue 1,075,000 shares of its Common Stock and in April 2007 such same parties entered into an amendment to such financial arrangement the designed purpose being to arrange an increase in the amount of such borrowing to $8 million, such extension not having any equity component, which financial arrangements were disclosed in an 8K filing made by the Company on January 22, 2007 and again on April 5, 2007 and such filings are incorporated by reference hereafter for further description of the subject transactions. Effective May 18, 2007 Quality Food Brands Inc. a controlled subsidiary of the Company purchased a baking mix operation in Michigan out of foreclosure and financed such acquisition from the foreclosing lender, Laurus Master Funds Ltd. through issuance by said purchaser of a 9% secured term note in the principal amount of $4,750,000 which transaction was made the subject of an 8K filing made by the Company on May 23, 2007 which filing is also incorporated herein be reference. One half of such latter financing was satisfied by and assigned to an affiliated entity of Lloyd Miller III in August 2007. Information and particulars on other long term debt instruments outstanding shall be supplied if and as requested by the Commission as allowed by applicable regulation as on none of such debt instruments on an individual basis does the total amount of securities authorized thereunder exceed 10% of the Company's total assets. Such instruments include approximately $1,270,000 debt remaining as currently owed to Laurus Master Fund, Ltd. arising from Secured Convertible Term Note dated March 13, 2006 and $250,000 in total long term debt to one non-affiliated party by Secured Promissory Note 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 (5) These charters and policies are available in full text on the Company's website and such information is incorporated herein by reference therefrom. (c) Financial Statement Schedules None 48 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Synergy Brands Inc. by /s/ Mair Faibish -------------------------------- Mair Faibish Chairman of the Board Dated: March 28, 2008 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 Dated: March 28, 2008 by /s/ Mitchell Gerstein ---------------------------------- Mitchell Gerstein Chief Financial Officer Dated: March 28, 2008 by /s/ Joel Sebastian ----------------------------------- Joel Sebastian, Director Dated: March 28, 2008 by /s/ Lloyd Miller ----------------------------------- Lloyd Miller, Director Dated: March 28, 2008 by /s/ William Rancic ----------------------------------- William Rancic, Director Dated: March 28, 2008 by /s/ Frank A. Bellis Jr. ----------------------------------- Frank A. Bellis, Director Dated: March 28, 2008 by /s/ Randall J. Perry ----------------------------------- Randall J. Perry, Director 49 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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: (a) designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision 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) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and (d) disclosed in this annual report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (a) all significant deficiencies and material weaknesses we find in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 28, 2008 /s/ Mair Faibish - ---------------- Mair Faibish Chief Executive Officer 50 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-15 (e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: (a) designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision 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) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and (d) disclosed in this annual report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (a) all significant deficiencies and material weaknesses we find in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information ; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 28, 2008 /s/ Mitchell Gerstein - --------------------- Mitchell Gerstein Chief Financial Officer 51 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Synergy Brands, Inc. We have audited the accompanying consolidated balance sheets of Synergy Brands, Inc., as of December 31, 2007 and 2006 and the related consolidated statements of operations, stockholders' equity and cash flows for the two years 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 audits. We conducted our audits in accordance with the 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 audit 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 option on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosure 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 believe that our audits 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, 2007 and 2006 and the results of its operations and its cash flows for the two years then ended in conformity with accounting principles generally accepted in the United States of America. /s/ HOLTZ RUBENSTEIN REMINICK LLP Melville, New York March 26, 2008 F2 CONSOLIDATED BALANCE SHEETS December 31, 2007 and 2006 ASSETS
CURRENT ASSETS 2007 2006 ----------- ---------- Cash and cash equivalents $ 501,752 $ 644,870 Accounts receivable trade, less allowance for doubtful accounts of $127,481 and $127,481 4,000,805 11,165,980 Other receivables 5,038,607 2,453,705 Notes receivable - current 356,909 344,699 Inventory 3,525,635 1,289,221 Prepaid assets and other current assets 3,231,673 669,908 Assets of discontinued operations - 127,182 ----------- ---------- Total Current Assets 16,655,381 16,695,565 PROPERTY AND EQUIPMENT, NET 10,180,261 252,950 OTHER ASSETS 2,999,188 909,454 NOTES RECEIVABLE 1,605,260 2,207,233 INTANGIBLE ASSETS, net of accumulated amortization of $449,142 and $389,226. - 288,297 GOODWILL - 514,297 ----------- ---------- TOTAL ASSETS $ 31,440,090 $ 20,867,796 =========== ==========
The accompanying notes are an integral part of these statements. F3 Synergy Brands, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (Continued) December 31, 2007 and 2006 LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES 2007 2006 ---------- ---------- Notes payable - current $4,199,348 $4,196,757 Accounts payable 5,720,504 2,194,114 Accrued expenses 35,176 151,037 Deferred income 437,776 755,503 Liabilities of Discontinued operations - 112,569 ---------- ---------- Total Current Liabilities 10,392,804 7,409,980 NOTES PAYABLE, net of discount of $ 587,105 and $313,749, respectively 12,027,080 1,960,638 LINES OF CREDIT - 5,836,928 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Class A preferred stock - $.001 par value; 100,000 shares authorized; 93,213 and 93,213 shares issued and outstanding; liquidation preference of $10.50 per share 93 93 Class B preferred stock - $.001 par value; 150,000 shares authorized, none issued - - Class B Series A Preferred stock-$.001 par value; 500,000 shares authorized; 285,000 and 285,000 shares issued and outstanding; liquidation preference of $10.00 per share 285 285 Class B Series B Preferred stock-$.001 par value, 250,000 shares authorized; 80,000 shares issued and outstanding; liquidation preference of $10.00 per share 80 80 Common stock - $.001 par value; 14,000,000 shares authorized; 11,328,764 and 6,484,275 shares issued 11,329 6,484 Additional paid-in capital 50,712,481 47,252,064 Deficit (41,690,722) (41,585,416) Accumulated other comprehensive loss (8,340) (8,340) ---------- ---------- 9,025,206 5,665,250 Less treasury stock, at cost, 1,000 shares (5,000) (5,000) ---------- ---------- Total Stockholders' Equity 9,020,206 5,660,250 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $31,440,090 $20,867,796 ========== ==========
The accompanying notes are an integral part of these statements. F4 Synergy Brands, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 31,
2007 2006 ----------- ------------ Net sales $89,540,501 $71,759,908 Cost of sales Cost of product 79,468,861 65,631,282 Shipping and handling costs 1,238,221 1,169,381 ----------- ------------ 80,707,082 66,800,663 ----------- ------------ Gross profit 8,833,419 4,959,245 Operating expenses Advertising and promotional 201,562 234,582 General and administrative 5,656,623 4,052,762 Depreciation and amortization 477,537 245,085 Asset impairment charge 742,678 - ----------- ------------ 7,078,400 4,532,429 ----------- ------------ Operating Profit 1,755,019 426,816 Other income (expense) Interest income 150,305 147,533 Other income (expense) (851) (22,039) Equity in earnings of investee 342,683 227,054 Interest and financing expenses (2,184,141) (2,050,856) ----------- ------------ (1,692,004) (1,698,308) ----------- ------------ Profit (loss) from continuing operations before income taxes 63,015 (1,271,492) Income tax expense 53,324 43,976 ----------- ------------ Profit (loss) from continuing operations 9,691 (1,315,468) ----------- ------------ Discontinued operations Loss from operations of discontinued component (114,997) (1,358,478) Income tax expense - 986 ----------- ------------ Loss from discontinued operations (114,997) (1,359,464) ----------- ------------ Net loss (105,306) (2,674,932) Dividend - Preferred Stock (325,000) (356,500) ----------- ------------ Net loss attributable to common stockholders $(430,306) $ (3,031,432) =========== ============ Basic and diluted net loss per common share from continuing operations: $ (0.04) $ (0.33) Basic and diluted net loss per common share from discontinued operations: $ (0.01) $ (0.27) ----------- ------------ Basic and diluted net loss per share: $ (0.05) $ (0.60) =========== ============ Weighted average shares used in the compution of loss per common shares: Basic and diluted 8,973,842 5,080,323 =========== ============
The accompanying notes are an integral part of these statements. F5 Synergy Brands, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
Class A Class B - Series A Class B - Series B Preferred stock Preferred stock Preferred stock Common stock Shares Amount Shares Amount Shares Amount Shares Amount -------- -------- --------- -------- ------- ------- --------- ------- Balance at January 1, 2006 100,000 $100 330,000 $330 80,000 $80 4,457,530 $4,458 Amortization of unearned compensation Common stock issued 454,300 454 Redemption of preferred stock for shares of common stock (7,000) (7) (45,000) (45) 785,925 786 Issuance of common stock for note conversion 635,610 635 Issuance of common stock for Services 150,910 151 Preferred stock dividend Issuance of stock warrants Net loss -------- -------- --------- -------- ------- ------- --------- ------- Balance at December 31, 2006 93,000 93 285,000 285 80,000 80 6,484,275 6,484 Common stock issued 1,819,664 1,820 Issuance of common stock for note conversion 917,039 917 Issuance of common stock for Services 801,647 802 Preferred stock dividend Issuance of common stock for warrant conversion 231,139 231 Issuance of common stock for loan inducement 1,075,000 1,075 Net loss -------- -------- --------- -------- ------- ------- --------- ------- Balance at December 31,2007 93,000 $93 285,000 $285 80,000 $80 11,328,764 $11,329 -------- -------- --------- -------- ------- ------- --------- -------
Years ended December 31, 2007 and 2006 F6 Synergy Brands, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS (continued)
Accumulated Additional other paid in Comprehensive Treasury Unearned capital Deficit income (loss) stock Compensation ------------- ------------- ------------- ------------- -------------- Balance at January 1, 2006 $ 45,918,817 ($38,910,484) $ (8,340) $ (5,000) $ (67,260) Amortization of unearned compensation 67,260 Common stock issued 537,619 Redemption of preferred stock for shares of common stock (734) Issuance of common stock for note conversion 600,565 Issuance of common stock for Services 190,297 Preferred stock dividend (356,500) Issuance of stock warrants 362,000 Net loss (2,674,932) ------------- ------------- ------------- ------------- -------------- Balance at December 31, 2006 47,252,064 (41,585,416) (8,340) (5,000) Common stock issued 1,386,040 Issuance of common stock for note conversion 513,497 Issuance of common stock for Services 773,351 Preferred stock dividend (325,000) Issuance of common stock for 135,354 warrant conversion Issuance of common stock for loan inducement 977,175 Net loss (105,306) ------------- ------------- ------------- ------------- -------------- Balance at December 31, 2007 $50,712,481 $(41,690,722) $(8,340) $(5,000) ------------- ------------- ------------- ------------- --------------
F6 (continued) Synergy Brands, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued) Years ended December 31, 2007 and 2006 Balance at January 1, 2006 $6,932,701 Amortization of unearned compensation 67,260 Common stock issued 538,073 Redemption of preferred stock for shares of common stock - Issuance of common stock for note conversions 601,200 Issuance of common stock for services 190,448 Preferred stock dividend (356,500) Issuance of stock warrants 362,000 Net loss (2,674,932) ----------- Balance at December 31, 2006 5,660,250 Common stock issued 1,387,860 Issuance of common stock for note conversions 514,414 Issuance of common stock for services 774,153 Preferred stock dividend (325,000) Issuance of common stock for warrant conversion 135,585 Issuance of common stock for loan inducement 978,250 Net Loss (105,306) ----------- Balance at December 31, 2007 $9,020,206 =========== The accompanying notes are an integral part of these statements F7 Synergy Brands, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31,
2007 2006 ------------ ------------- Cash flows from operating activities Net loss $ (105,306) $ (2,674,932) Adjustments to reconcile net loss to net cash provided by (used in) operating activities Depreciation and amortization 477,537 245,085 Amortization of financing cost 152,199 38,059 Asset impairment charge 742,678 - Equity in earnings of investee (342,683) (227,054) Operating expenses paid with common stock and warrants 439,667 180,549 Changes in operating assets and liabilities (Increase) decrease in Accounts receivable and other receivables (1,738,530) (4,410,740) Inventory (1,447,034) (107,998) Prepaid expenses, related party note receivable and other assets (1,654,346) 71,278 Increase (decrease) in Accounts payable, related party note payable, accrued expenses and other current liabilities 4,130,938 661,647 Deferred income and other liabilities (285,977) 727,821 Net assets of discontinued operations (19,407) 1,171,650 ------------ ------------- Net cash provided by (used in) operating activities 349,736 (4,324,635) ------------ ------------- Cash flows from investing activities Payment of security deposit (15,604) - Purchase of property and equipment (756,743) (35,684) Payments received on notes receivable 623,713 453,469 Issuance of notes receivable (33,950) (25,995) Investee dividend received 28,800 28,800 Investment in investee (50,000) - ------------ ------------- Net cash (used in) provided by investing activities (203,784) 420,590 ------------ -------------
F8 Synergy Brands, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) Years ended December 31,
2007 2006 ----------- ------------ Cash flows from financing activities Borrowings under line of credit 375,751 33,593,364 Repayments under line of credit (6,025,679) (31,458,478) Increase in deferred financing cost - (67,750) Proceeds from the issuance of notes payable 10,455,000 6,391,319 Repayments of notes payable (4,800,464) (3,777,165) Proceeds from issuance of common stock 31,322 288,173 Payment of dividends (325,000) (356,500) Net assets of discontinued operations - (319,531) ----------- ------------ Net cash (used in) provided by financing activities (289,070) 4,293,432 ----------- ------------ Net (Decrease) Increase In Cash (143,118) 389,387 ----------- ------------ Cash and cash equivalents, beginning of year 644,870 255,483 ----------- ------------ Cash and cash equivalents, end of year $501,752 $ 644,870 =========== ============ Supplemental disclosures of cash flow information: Cash paid during the year for Interest $1,378,582 $1,219,870 =========== ============ Income taxes paid $ 53,324 $ 44,962 =========== ============ Supplemental disclosures of non-cash, investing and financing activities: Common stock issued for note conversions $ 709,998 $ 661,200 =========== ============ Common stock issued for financing cost $ 978,250 $ - =========== ============
In May 2007, the Company acquired property and equipment valued at $9,559,000 and inventory valued at $841,000. Consideration consisted of the issuance of $4,750,000 note and the offset of accounts receivable of $6,318,000 and accounts payable of $668,000. The accompanying notes are an integral part of these statements. F9 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2007 and 2006 NOTE A - DESCRIPTION OF THE BUSINESS Synergy Brands Inc. is a holding company that principally operates through a wholly owned subsidiary, PHS Group Inc. ("PHS") in the wholesale distribution of nationally known brands, proprietary private label groceries, general merchandise, and Health and Beauty Aid (HBA) products. It principally focuses on the sale of nationally known brand name consumer products manufactured by major U.S. manufacturers and has begun focusing on the manufacturing and distribution of certain grocery private label products including baking mixes, spices and packaged meals. The Company also owns a small wholly owned subsidiary representing less then 2% of the Company's revenues, Gran Reserve Corporation (GRC), that principally operates in the wholesale, retail and online sales of Premium hand made cigars and accessories. The Company also owns 20% of a travel company call Interline vacations (PERX). Synergy was incorporated on September 26, 1988 in the State of Delware. 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 and its wholly-owned subsidiaries (collectively, the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation. The equity method of accounting is used for investments in 50% or less owned companies over which the Company has the ability to exercise significant influence. 2. Cash and Cash Equivalents The Company considers all highly liquid investments with an initial maturity of three months or less to be cash equivalents. F10 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Years ended December 31, 2007 and 2006 3. 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. 4. Accounts Receivable Trade The Company's accounts receivable trade are due from businesses engaged in the distribution of grocery, health and beauty products as well as from consumers who purchase health and beauty products and premium handmade cigars either direct or from the Company's Web sites. Credit is extended based on evaluation of a customers' financial condition and, generally, collateral is not required. Accounts receivable are due within 10 - 90 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. F11 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Years ended December 31, 2007 and 2006 NOTE B (continued) Accounts receivable trade, net consist of the following components at December 31, 2007and 2006: 2007 2006 ----------- ------------ Accounts receivable - PHS Group $4,057,363 $11,154,841 Accounts receivable - Cigars 70,923 138,620 ----------- ------------ Total 4,128,286 11,293,461 Less allowance for doubtful accounts (127,481) (127,481) ----------- ------------ $4,000,805 $11,165,980 =========== ============ Changes in the Company's allowance for doubtful accounts during the years ended December 31, 2007 and 2006 are as follows: 2007 2006 Beginning balance 127,481 $ 127,481 Provision for (reduction in) doubtful account - - ---------- ---------- Ending balance $127,481 $127,481 =========== ========== 5. Business and Credit Concentrations Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, 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, 2007 and 2006 totaled approximately $340,000 and $600,000, respectively. During the year ended December 31, 2007, sales to two customers accounted for 13% and 10% of total sales, respectively. Two customers accounted for 19% and 13%, respectively of accounts receivable at December 31, 2007. These concentrations relate to the Company's PHS Group segment. During the year ended December 31, 2006, sales to three customers accounted for 21%, 16% and 12% of total sales. Three customers accounted for 27%, 23%, and 10%, respectively of accounts receivable at December 31, 2006. These concentrations relate to the Company's PHS Group segment. During the years ended December 31, 2007 and 2006, the Company purchased approximately 59% and 40%, 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. F12 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Years ended December 31, 2007 and 2006 NOTE B (continued) 6. Inventory Inventory is stated at the lower of cost or market. The Company uses the first-in, first-out ("FIFO") cost method of valuing its inventory. 7. Property and Equipment Property and equipment are stated at cost. Depreciation of property and equipment is computed using the straight-line method over the asset's estimated useful lives, ranging from 3 to 10 years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the lease term. Maintenance and repairs of a routine nature are charged to operations as incurred. Betterments and major renewals that substantially extend the useful life of an existing asset are capitalized and depreciated over the asset's estimated useful life. 8. Vendor Allowances The Company 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, 2007 and 2006, the Company recognized approximately $7,760,940 and $2,272,273 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 $5,038,607 and $2,453,705 at December 31, 2007 and 2006. F13 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Years ended December 31, 2007 and 2006 NOTE B (continued) 9. Intangible Assets and Goodwill Intangible assets include the "Gran Reserve" trade names and customer lists, acquired in November 1999 and certain customer lists, the rights to the use of the trade name. In 2007 and 2006, the amortization expense recorded for each of the years was $59,916. 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", that have an indefinite life are not amortized. In the fourth quarter of 2007, in connection with a contemplated disposal of the net assets of GRC, the Company identified impairment losses for both intangible assets and goodwill based upon estimated future cash flows. These losses, approximately $228,000 and $514,000, respectively, are reflected in the accompanying consolidated statement of operations as an "Asset Impairment Charge". At December 31, 2007 and 2006, intangible assets are comprised of the following: Amortized intangible assets 2007 2006 Customer lists $677,523 $ 677,523 Less accumulated amortization and impairment (677,523) (389,226) --------- --------- Total $ - $288,297 ========== ========= F14 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Years ended December 31, 2007 and 2006 NOTE B (continued) 10. Long-lived Assets Long-lived assets and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. Impairment is measured by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from use of the assets and their ultimate disposition. 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 (see Note B No 9). 11. 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. Payments received from customers prior to shipment of goods are recorded as deferred revenue. At December 31, 2007, $342,526 was received by the Company for goods to be shipped in January 2008 and at December 31, 2006 $628,503 was received by the Company for goods to be shipped in January 2007. In addition, at December 31, 2007 and December 31, 2006 the balance for deferred revenue was $95,250 and $127,000 (see Note F). 12. Advertising The Company expenses advertising and promotional costs as incurred. 13. 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. 14. Basic and Diluted Net Loss Per Share Basic and diluted loss per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding during each year. Incremental shares from assumed F15 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Years ended December 31, 2007 and 2006 NOTE B (continued) exercises of stock options, warrant and convertible debt and equity securities of 1,036,844 and 995,749 for the year ended December 31, 2007 and 2006 respectively, have been excluded from the calculation of diluted loss per share since their effect would be antidilutive. 15. Stock-Based Compensation Plans At December 31, 2007, the Company has two stock-based employee compensation plans, which are described more fully in Note K. Effective January 1, 2006, the provisions of SFAS No. 123(R) were implemented to account for stock-base compensation. Under APB No. 25, when the exercise price of the Company's employee or director stock options equaled the market price of the underlying stock on the date of grant, no compensation expense was recognized. These options were cancelled in January 2006. There were no stock options granted in 2007 and 2006. 16. 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. Proset segment of business has been eliminated from the segment reporting (see Note P). 17. Comprehensive income (loss) Other comprehensive income refers to revenues, expenses, gains and losses that under generally accepted accounting principles in the United States of America are included in comprehensive income but are exluded from net income as these amounts are recorded directly as an adjustment to stockholders' equity. Comprehensive income (loss) was equivalent to net income (loss) for all periods presented. F16 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Years ended December 31, 2007 and 2006 NOTE B (CONTINUED) 18. Recent Accounting Pronouncements In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS No. 157 defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. SFAS No. 157 requires companies to disclose the fair value of their financial instruments according to a fair value hierarchy as defined in the standard. Additionally, companies are required to provide enhanced disclosure regarding financial instruments in one of the categories (level 3), including a reconciliation of the beginning and ending balances separately for each major category of assets and liabilities. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We believe that the adotion of SFAS No. 157 will not have a material impact on our consolidated financial statements. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities including an amendment of SFAS 115" (SFAS No. 159). The new statement allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item's fair value in subsequent reporting periods must be recognized in current earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the potential impact of SFAS No. 159 on our financial position and results of operations. In December 2007, the FASB issued Statements No. 141 (R), "Business Combinations", and No. 160, "Noncontrolling Interests in Consolidated Financial Statements." Effective for fiscal years beginning after December 15, 2008, these statements revise and converge internally the accounting for business combinations and the reporting of noncontrolling interests in consolidated financial statements. The adoption of these statements is not expected to have a material impact on the Company's financial statements. F17 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Years ended December 31, 2007 and 2006 NOTE C - 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. NOTE D - INVENTORY Inventory as of December 31, 2007 and 2006 consisted of the following:
2007 2006 Grocery, general merchandise and health and beauty products $2,664,633 $ 802,090 Premium Cigar finished goods 416,556 487,131 Raw materials 444,446 - ---------- ---------- $3,525,635 $1,289,221 ========== ==========
The allowance for slow moving and obsolete inventory approximated $35,000 and $35,000 at December 31, 2007 and 2006, respectively. NOTE E - PROPERTY AND EQUIPMENT Property and equipment as of December 31, 2007 and 2006 consisted of the following: 2007 2006 Machine and euipment $891,965 $205,742 Furniture and fixtures 92,899 84,196 Leasehold improvements 10,043,370 422,538 ------------ --------- 11,028,234 712,476 Less accumulated depreciation and amortization (847,973) (459,526) ------------ --------- $10,180,261 $252,950 ============ ========= Depreciation and amortization expense on property and equipment for the years ended December 31, 2007 and 2006 was approximately $389,000 and $60,000, respectively. F18 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Years ended December 31, 2007 and 2006 NOTE F - OTHER ASSETS Other assets consist of the following at December 31, 2007 and 2006:
2007 2006 Investment (a) $939,177 $562,593 Investment in warrants (b) 114,300 127,000 CAW purchase agreement; net of accumulated amortization of $175,000 and $145,827 Deferred financing net of accumulated - 29,173 amortization of $514,643 and $204,660 (c) 984,856 121,591 Prepaid costs and security deposit net of accumulated amortization of $17,846 (d) 876,154 - Other 84,701 69,097 ---------- ---------- $ 2,999,188 $ 909,454 ============ ==========
(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, 2007 and 2006, the Company's investment in ITT is approximately 20% 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 recorded equity in the net earnings of investee of $342,683 and $227,054 during the years ended December 31, 2007 and 2006, respectively. The Company's investment in ITT serves as collateral for outstanding notes payable with aggregate outstanding balance approximately $1,385,000 at December 31, 2007. Summarized audited financial information of this investee as of December 31, 2007 and 2006 and for the years then ended is as follows: Financial position: 2007 2006 ----------- ------------ Current assets $6,697,000 $5,334,000 Property and equipment 502,000 666,000 Other assets 5,548,000 5,728,000 ----------- ------------ Total assets $12,747,000 $11,728,000 =========== ============ Current liabilities $5,845,000 $5,127,000 Long-term debt 2,768,000 4,139,000 ----------- ------------ Total liabilities $8,613,000 $9,266,000 =========== ============= Results of operations: 2007 2006 ----------- ------------ Revenues $36,356,000 $32,464,000 Total expenses (34,340,000) (30,993,000) Other income 421,000 322,000 ----------- ------------ Income before income taxes 2,437,000 1,793,000 Income tax expense (764,000) (632,000) ----------- ------------ Net income $1,673,000 $ 1,161,000 =========== ============ (b) In October, 2005 SYBR.com Inc., a wholly owned subsidiary of the Company, invested $1 million in a Private Placement of Senior Subordinated Debentures issued by ITT. The investment consists of a five year 8% Note (ITT Note), and 200,000 warrants exercisable into 200,000 common shares of ITT stock at $5.00 per share (ITT Warrants). The Company financed this investment with a $1 million fully recourse note with a major Shareholder under the same terms and conditions as the ITT Note and assigned to such shareholder the ITT Warrants. As consideration for the financing, the Company has retained the benefit to be derived from 100,000 of the warrants received from ITT (see Note I) of the deferred income. In relation to the ITT warrants, Company has recorded deferred income of $127,000 in 2006. In 2007 the Company recognized $31,750 of the deferred income. (c) Valuation of stock in connection with secured 2007 debt and equity financing (see Note I). (d) Valuation of stock in connection of LBMP asset acquisition (see Note G). F19 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Years ended December 31, 2007 and 2006 NOTE G - ASSET ACQUISITION On May 18, 2007, Quality Food Brands ("QFB") a wholly owned a subsidiary of PHS Group., leased a baking mix facility, and acquired associated assets through a foreclosure sale contracted by a secured lender (the "Seller"). The aggregate purchase price approximated $10,400,000. The Lender financed the purchase through the issuance by QFB of a 9% secured term note in the principal amount of $4,750,000 that matures on May 18, 2012, with principal payment beginning December 1, 2007. In addition, net accounts receivable due from the seller approximating $6,300,000 and accounts payable due to the seller were offset as a component of the purchase price. Further, the lender received a warrant to acquire up to 30% of QFB's common stock. The allocation of the assets acquired (see table below) provide QFB with a facility to produce baking mix products to supply existing customers of PHS. Inventory $ 841,000 Property, equipment and leasehold $ 9,559,000 ------------ Total $10,400,000 ============ F20 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Years ended December 31, 2007 and 2006 NOTE H - NOTES RECEIVABLE In December 2004, the Company sold accounts receivable attributable to West Coast Supplies, Inc. for $2,200,000. This promissory note, which is secured by the accounts receivable, requires monthly payments of principal and interest at 4% for seven years, beginning in January 2005. As a condition for the sale, the Company issued 150,000 shares of common stock to the note holder. The value of the shares ($200,000) was treated as a reduction of sales price. The balance of the Note Receivable at December 31, 2007 was $1,335,641. In October, 2005 SYBR.com Inc., a wholly owned subsidiary of the Company, invested $1 million in a Private Placement of Senior Subordinated Debentures issued by ITT. The investment consists of a five year 8% Note (ITT Note), and 200,000 warrants exercisable into 200,000 common shares of ITT stock at $5.00 per share (ITT Warrants). The Company financed this investment with a $1 million fully recourse note with a major Shareholder /Director under the same terms and conditions as the ITT Note and assigned to such shareholder the ITT Warrants. As consideration for the financing, the Company has retained the benefit to be derived from 100,000 of the warrants received from ITT (see Note I). In relation to the ITT warrants, Company has recorded deferred income of $127,000. On September 29, 2006, $142,857 was paid by ITT to reduce the loan balance. As of December 31, 2006 the outstanding loan balance was $857,143. As part of the Company's agreement, the Company paid $142,857 on the note payable. In 2007, the Company received payments from ITT of $285,714. As of December 31, the outstanding loan balance was $571,429. As part of the Company's agreement, the Company paid $285,714 in 2007 on the note payable. The outstanding balance of the notes payable at December 31, 2007 was $571,429. In 2007, the Company exercised warrants to acquire 10,000 additional shares of ITT at a cost of $50,000. In addition, the Company recognized $31,750 of deferred income in 2007 in connection with the amortization of deferred revenue attributable to the warrants received. NOTE I - NOTES PAYABLE The Company financed a series of secured notes with IIG (lender) since 2002. At December 31, 2006 the outstanding balance was $5,836,928. The Company's largest shareholder has refinanced these notes during 2007. On March 1, 2004, the Company received $490,000 pursuant to the issuance of three secured promissory notes from certain shareholders of ITT, a 20% investee. Borrowings under the notes bear interest at a rate of 12%. The notes were extended and the Company is not required to repay any principal until the maturity date of the notes, February 28, 2008. The maturity has been extended to December 31, 2008. At December 31, 2007 the outstanding balance was $250,000. F21 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Years ended December 31, 2007 and 2006 NOTE I (continued) 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 has been repaid as of December 31, 2007. On January 25, 2005, the Company completed a second financing with Laurus. The financing consisted of a $500,000 secured convertible debenture that has been repaid as of December 31, 2007. In January 2005, the Company entered into a promissory note with major regional bank for $1,000,000, which was increased to $1,500,000 in September 2007. Borrowing under the note bears interest at prime (6.75% at December 31, 2007). This note was extended and the Company is not required to repay any principal until the maturity date of the note, June 1, 2008. As security for the note, a pledge agreement was entered by a certain Shareholder of ITT. Borrowings at December 31, 2007 were $377,850. The Company has a $1,000,000 standby letter of credit expiring June 1, 2008 with this Lender. On April 6, 2005, the Company received $500,000 pursuant to the issuance of three secured promissory notes from certain shareholders of ITT, a 20% investee. Borrowings under the notes bear interest at a rate of 9%. The Company is not required to repay any principal until the maturity date of the notes, April 5, 2007. The maturity has been extended to April 5, 2008. On May 5, 2005, the Company received $100,000 pursuant to the issuance of one secured promissory note from a certain stockholder of ITT, a 20% investee. Borrowings under the note bear interest at a rate of 9%. The Company is not required to repay any principal until the maturity date of the note, May 4, 2007. The maturity date has been extended to April 5, 2008. On June 21, 2005, the Company completed a third financing with Laurus. The financing consisted of a $500,000 secured convertible debenture that has been repaid as of December 31, 2007. In October 2005, SYBR.com Inc., a wholly owned subsidiary of the Company, received $1 million, pursuant to the issuance of one senior secured promissory note from a certain stockholder and director. Borrowings under the note bearing interest at 8%, and the note is due October 7, 2010. The Company has secured this borrowing with a $1 million wholly recourse note from ITT (see Note H). The balance at December 31, 2007 was $571,429. On March 14, 2006, the Company closed a $1.75 million junior secured three year loan with Laurus bearing a fixed interest rate of 10%. Payments are being made at a rate of $32,000 per month since October 1, 2006. The lender was issued a warrant to acquire 270,000 shares of the Company's common stock valued at $362,000. The relative fair value of the warrant of $362,000 is being charged to operations as additional interest over the term of the loan. The Company repaid $96,000 of this debt in 2006 and $384,000 in 2007. At December 31, 2007 the outstanding balance, net of discount was $1,124,155. F22 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Years ended December 31, 2007 and 2006 NOTE I (continued) In the fourth quarter of 2006, the Company secured $1,800,000 from shareholders of short term financing that matured in the first quarter of 2007, and was paid in April 2007. In July 2007, the Company secured $1,500,000 from shareholders of short term financing bearing interest at 8% that matures in the third quarter of 2008. The balance of the notes at December 31, 2007 net of discount approximated $1,605,000. On April 15, 2007, Synergy Brands Inc. completed a $8.0 million secured financing with a major shareholder and a director, for its main operating subsidiary PHS Group Inc. The financing consisted of long term notes to be amortized over a 5 year period with a balloon payment of $4,000,000 in January 2012 at an interest rate of 11.75%. This financing retired all of the Company's debt with IIG. The agreement further involved a security purchase agreement, under which there was issued 1,075,000 common shares of Synergy Brands issued to this shareholder as a financing cost and all warrants beneficially owned by this shareholder were retired. The Company repaid $643,361 of this debt at December 31, 2007. At December 31, 2007, the outstanding balance was approximately $7,356,639. The Company financed an asset acquisition through the issuance by QFB of two 9% secured loans aggregating $4,750,000 that mature on May 18, 2012, with principle payments beginning December 1, 2007. In addition, the Company issued 480,000 shares valued at $393,600. The relative fare value of these shares is being charged to operations as additional interest over the term of the loan. Total repayments in 2007 were $15,000. The balance of the notes net of discount approximated $4,341,400 at December 31, 2007. Principal repayments of notes payable at December 31, 2007 are as follows: Year Ending December 31, 2008 $ 4,282,000 2009 1,939,000 2010 1,198,000 2011 1,794,000 2012 7,601,000 --------------- 16,814,000 Discounts (585,572) --------------- Total $ 16,226,428 =============== NOTE J - STOCKHOLDERS' EQUITY The Company has 100,000 authorized and outstanding shares of Class A preferred stock with a par value of $.001; 13-to-1 voting rights; liquidation right of $10.50 per share before common stock and redemption at option of Company at $10.50 per share. In November 2006, 6,787 shares of the outstanding Class A preferred stock were exchanged into 75,009 common shares. 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 March 2007 and March 2006 in compliance with the subscription agreements dated February 26, 2003 and 50,000 common shares to Class B Series A Preferred Shareholder in July 2007 and July 2006, in compliance with the subscription agreements dated July 2, 2003. No more than 19.9% of the Company's stock can be issued in connection with stock dividend payments against the Class B, Series A Preferred Stock. In November 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. Synergy Brands, Inc. and Subsidiaries F23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Years ended December 31, 2007 and 2006 NOTE J (continued) The Company issued 112,500 shares to Class B Series A Preferred shareholders in November 2006 in compliance with the subscription agreement dated November 1, 2004. In November 2006, 45,000 Class B, Series A Preferred stock was redeemed into 473,416 shares of common stock. In March 2005, the Company designated 250,000 shares of Class B Preferred Stock, par value $.001 per share to be designated as Class B, Series B Preferred Stock. On July 22, 2005, the Company completed an $800,000 private placement of Preferred Stock and Common Stock consisting of 80,000 shares of Series B Class B Preferred Stock and 88,000 shares of restricted Common Stock. The holders of Class B Series B Preferred Stock have no voting rights with respect to general corporate matters. The holders of Class B Series B Preferred Stock are entitled to receive dividends at the annual rate of $.80 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 of the Corporation, redeem the Class B, Series B 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 B Preferred Stock accrued and unpaid thereon, pro rata to the date of redemption. If however, as to each share of Class B, Series B 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 B Preferred Stock, half a share of the Company's unissued restricted Common Stock per share of Class B, Series B Preferred Stock for each year that said share is not redeemed within limits as provided under applicable law. For the year ended December 31, 2007 and 2006, the Company issued 4,842,489 and 2,026,745 shares of common stock in connection with financing, the sale of securities, conversions of debt to equity, services, other expenses, and dividends in connection with Class B Preferred Stock valued at $3,460,419 and $1,333,247. Detail of the issuances are listed in the consolidated statements of changes in stockholders' equity in page F-6. Effective January 2006, the Company cancelled options to acquire 300,000 shares of common stock held by employees. There are no options outstanding with employees at December 31, 2007 and 2006. The following is a summary of transactions involving warrants to purchase common stock for the years ended December 31, 2007and 2006. Weighted- Number average of shares exercise price Outstanding at January 1, 2006 280,416 $ 4.38 Granted 270,000 0.0010 Cancelled/Forfeited (82,500) (6.52) ----------- ------------- Outstanding at December 31, 2006 467,916 $ 1.47 Granted - - Exercised (249,822) (0.0010) Cancelled/Forfeited (31,250) $ (5.50) ----------- ------------- Outstanding at December 31, 2007 186,844 $ 2.85 =========== ============= F24 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Years ended December 31, 2007 and 2006 NOTE J (continued) 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 2007 life (years) price 2007 price ------------------ ---------------- --------------- ----------- -------------- ----------- $0.00-$0.99 20,178 4.25 $0.0010 20,178 $0.0010 $1.00-$4.00 166,666 5.16 $3.20 166,666 $3.20 ---------- --------- -------- ------------- ---------- 186,844 4.70 $2.85 186,844 $2.85 ============ ======= ======== ============= ===========
NOTE K - STOCK COMPENSATION PLANS In 1994, Synergy adopted the 1994 Services and Consulting Compensation Plan (the "Plan"). Under the Plan, as amended, 8,500,000 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 2,632,374 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. 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. There were no options issued during the years ended December 31, 2007 and 2006. In the first quarter of 2008, the Company approved the issuance of 678,500 shares under the plan. The following is a summary of such stock option transactions for the years ended December 31, 2007 and 2006 in accordance with the Plan and other restricted stock option agreements: Weighted- Number average of shares exercise price ------------ ---------------- Outstanding at January 1, 2006 300,000 $ 2.07 Cancelled/Forfeited (300,000) (2.07) ------------ ---------------- Outstanding at December 31, 2006 Granted - - Cancelled/Forfeited - - ------------ ---------------- Outstanding at December 31, 2007 - - ------------ ---------------- Shares available for grant December 31, 2007 8,472,380 =========== December 31, 2006 7,270,913 =========== F25 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Years ended December 31, 2007 and 2006 NOTE K (continued) 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, 2007 and 2006. NOTE L - TRANSACTIONS WITH RELATED PARTIES Two of the Company's directors were members of the board of directors of a significant customer of the Company. These individuals terminated their board membership in the customer in 2006. NOTE M - INCOME TAXES At December 31, 2007, the Company had a net operating loss carry forward of approximately $34,500,000 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, 2007 and 2006 were approximately as follows: 2007 2006 Net operating loss carry forwards $ 11,739,000 $ 11,628,000 Allowance for doubtful accounts 171,000 166,000 Inventory 141,000 126,000 Capital losses 56,000 56,000 Other (316,000) (200,000) Fixed Assets and Intangibles 736,000 484,000 Valuation allowance (12,527,000) (12,260,000) ------------ ------------- $ - $ - ------------ ------------- The valuation allowance increased by approximately $ 267,000 in 2007. F26 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Years ended December 31, 2007 and 2006 NOTE M (continued) Income taxes expense for the years ended December 31, 2007 and 2006 including amounts attributable to discontinued operations consisted, of the following: 2007 2006 State and local $53,324 $44,962 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, 2007 and 2006 are as follows: 2007 2006 Federal income tax expense at statutory rate (34)% (34)% Increase (decrease) resulting from Decrease in valuation allowance 34 34 State and local income taxes, net of Federal benefit .9 .9 ---- ---- .9 % .9 % ==== ===== F27 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Years ended December 31, 2007 and 2006 NOTE N - RETIREMENT PLAN On January 1, 2002, the Company established the Synergy Brands, Inc. 401(k) Plan (the "Plan") covering employees 21 years of age and older who have completed six months of continuous service. For the year ended 2007 and 2006 the Company match was $38,958 and $28,627. NOTE O - COMMITMENTS AND CONTINGENCIES 1. Lease Commitments The Company and its subsidiaries lease office and warehouse space under operating leases expiring at various dates through March 2027. The Company is also leasing vehicles under operating leases. Future minimum lease payments under noncancelable operating leases as of December 31, 2007 were as follows: Year ending December 31, 2008 $ 934,339 2009 945,289 2010 958,878 2011 796,728 2012 628,878 thereafter 7,309,158 $11,573,270 Rent expense under operating leases for the years ended December 31, 2007 and 2006 was approximately $653,000 and $382,000, 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. NASDAQ Listing On January 29, 2008, the Company announced that it had received notice from NASDAQ Stock Market dated January 25, 2008, that for 30 consecutive days the bid price of the Registrant's common stock had closed below the minimum $1.00 per share requirement for listing. The Registrant has been provided until July 23, 2008 to regain compliance. F28 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Years ended December 31, 2007 and 2006 NOTE P - 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, 2007 and 2006, as shown below the segment information does not include the discontinued segment of Proset:
PHS Group GRC Corporate Total ------------ ------------- ----------- ----------- Year ended December 31, 2007 Revenue $87,933,523 $1,606,978 - $89,540,501 Income (loss) from continuing operations attributable to common stockholder 2,838,318 (1,097,641) (2,055,986) (315,309) Depreciation and amortization 353,767 115,678 8,092 477,537 Asset impairment charge - 742,678 - 742,678 Interest income - - 150,305 150,305 Other income (expense) (673) (178) - (851) Equity in earnings of investee - - 342,683 342,683 Interest and financing expenses 1,546,969 - 637,172 2,184,141 Identifiable assets 26,607,086 591,878 4,241,126 31,440,090 Additions to long-lived assets 10,312,869 2,889 - 10,315,758 Investment in affiliate - - 939,177 939,177 PHS Group GRC Corporate Total ------------ ------------- ----------- ----------- Year ended December 31, 2006 Revenue $69,840,886 $1,919,022 - $71,759,908 Income (loss) from continuing operations attributable to common stockholder 779,634 (311,210) (2,140,392) (1,671,968) Depreciation and amortization 11,929 156,456 76,700 245,085 Interest income - - 147,533 147,533 Other income (expense) (14,247) (7,792) - (22,039) Equity in earnings of investee - - 227,054 227,054 Interest and financing expenses 1,403,739 - 647,117 2,050,856 Identifiable assets - continuing operations 15,609,833 1,594,373 3,536,408 20,740,614 Additions to long-lived assets 35,684 - - 35,684 Investment in affiliate - - 562,593 562,593
The Company's premium cigar operations are presently conducted through its wholly owned subsidiary Gran Reserve Corp. (GRC). In the first quarter of 2008, management authorized the sale of the Company's cigar operations, which transfer is probable in 2008. Although no formal commitments have yet been finalized, a contract in principal has been reached with a group of management and supervisory personnel associated with GRC cigar operations, but who otherwise have no official capacity with Synergy Brands Inc. or its subsidiaries. F29 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Years ended December 31, 2007 and 2006 NOTE P (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, 2007 and 2006, is as follows:
2007 2006 ------------- -------------- Revenue United States $67,169,090 $ 49,041,460 Canada 22,371,411 22,718,448 ------------- -------------- $89,540,501 $71,759,908 ============= ============== Accounts receivable United States 3,410,535 $6,005,782 Canada 590,270 5,160,198 ------------- -------------- $4,000,805 $11,165,980 ============= ============== Identifiable assets of continuing operations United States $31,440,090 $20,740,614 Canada - - ------------- -------------- $31,440,090 $20,740,614 ------------- --------------
NOTE Q - Discontinued Operations In December 2006, the Company instituted a plan to discontinue the Pro-Set segment. Accordingly, the operating results of Pro-set segment for each of the three years ended December 31, 2007 has been presented as "(Loss) income from discontinued operations, net of income taxes". Net assets and liabilities to be disposed of or liquidated, at their book value, have been separately classified in the accompanying balance sheets at December 31, 2007 and December 31, 2006. The Company recorded impairment loss of (i) $359,353 during the year ended December 31, 2006, in connection with the write-down of the assets that were to be disposed of. During the year ended December 31, 2006, the Company recorded a loss of $58,305 in connection with the write-down of fixed assets. Also in 2006, $485,000 was recorded as additional reserves of accounts receivables, other receivables, and inventory. Due to operating losses, there was no income tax benefit from the write-down and disposal of these assets. F30 Synergy Brands, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Years ended December 31, 2007 and 2006 NOTE Q (continued) Summarized financial information of the Pro-Set segment as discontinued operations for each of the two years ended as follows: Year ended Year ended Dec.31, 2007 Dec.31, 2006 ------------- -------------- Net Sales $9,856 $ 1,222,834 Cost of sales Cost of product 55,133 1,260,694 Shipping and handling costs 13,616 144,772 ------------- -------------- 68,749 1,405,466 Gross Profit (loss) (58,893) (182,632) Operating expenses: Advertising and promotion - 1,046 General and administrative 56,104 594,008 Depreciation and amortization - 157,650 Asset impairment charge - 359,353 ------------- -------------- - 1,112,057 Operating loss (114,997) (1,294,689) Other Income (expenses): Other income (expenses) - (1,024) Interest and financing expenses - (62,765) ------------- -------------- - (63,789) Net (loss) before income taxes (114,997) (1,358,478) ------------- -------------- Income tax expense - 986 ------------- -------------- Net (loss) from discontinued operations $ (114,997) $ (1,359,464) ------------- -------------- F31 Synergy Brands, Inc. and Subsidiaries CONSOLIDATED FINANCIAL STATEMENTS (continued) Years ended December 31, 2007 and 2006 NOTE Q (continued) Dec.31, 2007 Dec.31, 2006 ASSETS: CURRET ASSETS: CASH AND CASH EQUIVALENTS $ - $ 1,782 ACCOUNTS RECEIVABLE TRADE - 44,632 OTHER RECEIVABLES - 28,563 INVENTORY - 52,205 PREPAID ASSETS AND OTHER CURRENT ASSETS - - PROPERTY AND EQUIPMENT, NET - - INTANGIBLE ASSETS,NET OF ACCUMULATED AMORITIZATION OF $ 2,627,469 - - --------- ----------- TOTAL ASSETS - $ 127,182 ========= =========== LIABILITIES: NOTES PAYABLE - - ACCOUNTS PAYABLE - 112,569 --------- ----------- TOTAL LIABILITIES $ - $ 112,569 ========= =========== F32 EX-14 2 file002.txt Exhibit 14 SYNERGY BRANDS INC. CODE OF ETHICS MISSION STATEMENT: The following code is designed to create a guide to what Synergy Brands Inc., believes are business practices which if followed will create an ethical working environment , which will deter wrongdoing and promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; full, fair, accurate, timely, and understandable disclosure as is required and/or otherwise deemed proper by management of this company in reports and documents that a registrant files with, or submits to, the Securities and Exchange Commission and other government agencies and in other public communications made by this Company; and compliance with applicable governmental laws, rules and regulations; which also includes as an integral part thereof the prompt internal reporting of violations of this code to an appropriate person or persons identified in the code; and accountability for adherence to the code. In furtherance thereof adherence to the following general guidelines to and policy of Synergy Brands Inc. is mandated for all employees, officers, directors and consultants and should be reviewed and examined in relation to all other persons with whom personnel of this Company may come in contact in furtherance of the interests of this Company. It is important to remember that a strong value system based on integrity and accountability has always been at the core of this Company's existence and this Company has always stressed ethical standards of business without a formal declaration as to the particulars of such standards, this Company being always hopeful that these general ethical standards were understood by and to be the required conduct for all with whom this Company associates. This document outlines this Company's legal requirements regarding the ethics of our operations and provides guidance for understanding and adhering to our business values but is not to be considered the complete description of what is considered by this Company as ethical behavior. Ethics is a concept that this Company wants to translate into practice. Fair treatment, kind regard, courtesy and respect, use of good business judgment, and altruism are only a sample of ethical behavior we promote. The guidelines set forth herein provide concepts which this Company desires its employees, affiliates and other Company personnel to reflect in their practice. Ethical behavior is important in its own right. However, it is also good for our business because it fosters one of our greatest assets-customer, client and investor trust. So take the time to read these Guidelines. Embrace them. And continue to live by the code of ethical conduct that has served our company so well. 1. INTRODUCTION. In this Company the Chief Executive Officer and senior executives are chiefly responsible for setting standards of business ethics and overseeing compliance with these standards. It is the individual responsibility of each and every employee of this company to comply with these standards. 2. COMMUNICATIONS CHANNELS. If any of this Company's associated personnel know of or suspect an unlawful or unethical situation, they should promptly contact the corporate secretary or any member of this Company's Audit Committee and/or Governance and Nominating Committee which contact information should be set forth in this Company's annual report and proxy statement. E-mail address at ( ) or as may otherwise be established by Company management shall be provided for focus on claims and inquiries regarding this Company's ethics. Appropriate person(s) at this Company's corporate level shall promptly review any report of unlawful or unethical conduct. 3. PERSONAL CONDUCT. This Company's reputation for integrity and business ethics should never be taken for granted. To maintain that reputation, this Company's personnel must follow all of this Company's Business Conduct Guidelines and exercise good judgment in their decisions and actions. If Company management finds that a persons' conduct on or off the job adversely affects their performance, that of other employees, or this Company's legitimate business interests, that person will be subject to disciplinary measures, including dismissal. 4. GENERAL CONCEPTS. All persons acting under and within authority and on behalf of this Company shall: o Act with honesty and integrity, avoiding actual or apparent conflicts of interest in their personal and professional relationships. o Where authorized to provide information regarding this Company to provide such information only as is accurate, complete, objective, fair, relevant, timely and understandable, including information in all filings with and other submissions to the U.S. Securities and Exchange Commission and other applicable government sources. o Comply with rules and regulations of federal, state, provincial and local governments, and other appropriate private and public regulatory agencies. o Act in good faith, responsibly, with due care, competence and diligence, without misrepresenting material facts or allowing one's independent judgment to be subordinated. o Respect the confidentiality of and not disclose information acquired in the course of one's work which might be considered confidential except when authorized or otherwise legally obligated to so disclose. o Confidential information acquired in the course of one's work shall not be used for personal advantage. o Share knowledge and maintain professional skills important and relevant to the needs of this Company and the needs of the person sharing the information related thereto. o Proactively promote and be an example of ethical behavior as a responsible partner among peers, in the work environment and the community understanding that one's conduct in such environment is reflective on this Company for whom such person works. 5. NO SPECULATIVE OR INSIDER TRADING. Federal law and Company policy prohibits officers, directors and employees, directly or indirectly through their families or others, from purchasing or selling this Company's stock because of and while in the possession of material, non-public information concerning this Company. This same prohibition applies to trading in the stock of other publicly held companies on the basis of material, non-public information. Material, non-public information is any information that could reasonably be expected to affect the price of a stock. If an officer, director, or employee is considering buying or selling a stock because of inside information they possess, they should assume that such information is material. It is also important for the officer, director or employee to keep in mind that if any trade they make becomes the subject of an investigation by the government, the trade will be viewed after the fact with the benefit of hindsight. Consequently, officers, directors, and employees should always carefully consider how their trades would look from this perspective. Two simple rules can protect in this area: (1) Don't use non-public information for personal gain. (2) Don't pass along such information to someone else who has no need to know. 6. BE TIMELY AND ACCURATE IN ALL PUBLIC REPORTS. As a public company, this Company must be fair and accurate in all reports filed with the United States Securities and Exchange Commission. This Company's officers and directors are responsible for ensuring that all reports are filed in a timely manner and that they fairly present the financial condition and operating results of this Company. Securities laws are vigorously enforced. Violations may result in sever penalties including forced sales of parts of the business and significant fines against this Company. There may also be sanctions against individual officers, directors, or employees for violations including substantial fines and/or prison sentences. The Chief Executive Officer and Chief Financial Officer shall certify to the accuracy of reports filed with the SEC in accordance with the Sarbanes-Oxley Act of 2002. Officers and Directors who knowingly or willingly make false certifications may be subject to criminal penalties or sanctions including fines and imprisonment. 7. AVOID CONFLICTS OF INTEREST. This Company's officers, directors and employees have an obligation to give their complete loyalty to the best interest of this Company. They should avoid any action that may involve, or may appear to involve a conflict of interest with this Company. Officers, directors and employees should not have any financial or other business relationships with suppliers, customers or competitors that might impair, or even appear to impair, the independence of any judgment they may need to make on behalf of this Company. Officers, Directors and employees are under a continuing obligation to disclose any situation that presents the possibility of a conflict or disparity of interest between the officer, director or employee and this Company. Disclosure of any potential conflict is the key to remaining in full compliance with this policy. 8. COMPETE ETHICALLY AND FAIRLY FOR BUSINESS OPPORTUNITIES. All of this Company's personnel must comply with the laws and regulations that pertain to the acquisition of any business opportunity. This Company shall compete fairly and ethically for all business opportunities. In circumstances where there is reason to believe that the release or receipt of non-public information is unauthorized, do not attempt to obtain and do not accept such information from any source. Company personnel involved in Company transactions must be certain that all statements, communications, and representations made regarding this Company are accurate and truthful. 9. MAINTAIN THE INTEGRITY OF CONSULTANTS, AGENTS, AND REPRESENTATIVES. Business integrity is a key standard for those who represent this Company. Agents, representatives, and consultants must certify their willingness to comply with our policies and procedures and must never circumvent our values and principles. 10. PROTECT PROPRIETARY INFORMATION. Proprietary Company information may not be disclosed to anyone without proper authorization. Keep proprietary documents protected and secure. In the course of normal business activities, associates, customers and competitors may sometimes divulge information that is proprietary to their business. Respect these confidences. 11. RESPONSIBLE USE OF COMPANY ASSETS. Achieve responsible use, control, and stewardship over all assets and resources of this Company that are employed by or entrusted to the recipients of such property for the benefit of this Company. 12. AVOID UNDUE INTERFERENCE. Company Personnel shall not and shall not attempt to unduly or fraudulently influence, coerce, manipulate, or mislead any authorized audit or interfere with any auditor engaged in the performance of an internal or independent audit of this Company's financial statements or accounting books and records nor apply such conduct to the application to this Company of any other relevant regulations. 13. BOARD COMMITTEES. The Board of Directors shall establish an Audit Committee empowered to enforce this Code of Ethics. The Audit Committee shall report to the Board of Directors at least once a year regarding the effectiveness of this Company's Code of Ethics, its disclosure controls and reporting procedures, and its general business conduct. 14. COMPLIANCE MEASURES. This Company shall consistently enforce its Code of Ethics and Business Conduct through appropriate means of discipline. Violations of the Code shall be promptly reported to the Audit Committee. Pursuant to procedures adopted by it, the Audit Committee shall determine whether violations of the Code have occurred and, if so, shall determine the disciplinary measure to be taken against any employee or agent who has so violated the Code. Disciplinary measures, may be invoked at the discretion of the Audit Committee, and may include, but are not limited to, counseling, oral or written reprimands, warnings, probation or suspension without pay, demotions, reductions in salary, termination of employment and restitution. Persons subject to disciplinary measures shall include, in addition to the violator, others involved in the wrongdoing, including but not limited to, persons who fail to use reasonable care to detect violations, persons who if requested to divulge information withhold material information regarding a violation, and supervisors who approve or condone the violations or attempt to retaliate against employees or agents for reporting violations or violators. EX-14 EX-21 3 file003.txt Exhibit 21 List of Subsidiaries Corporation State of Incorporation Status - ----------- ------------- ------ Island Wholesale Grocers Inc. New York wholly owned inactive, in process of dissolution PHS Group Inc. Pennsylvania active wholly owned by SYBR.com Inc. d.b.a. Dealbynet.com (NY), PHS Private Label Group (NY), Pro Set Distributors (NY), SYBR.com (NY), Grocers Supply (NY), Quality Food Brands (NY), Household Supplies (NY), BeautyBuys.com (NY), Wholesale Cash and Carry (NY), Cash and Carry (NY) PHS Group Inc. New Jersey active wholly owned by SYBR.Com Inc. SYBR.Com Inc. New Jersey active wholly owned by Synergy Brands Inc. Net Cigar.Com Inc. New York inactive wholly owned by SYBR.Com Inc., in process of dissolution Net Cigar.Com Inc. Florida inactive wholly owned by SYBR.com Inc., In process of dissolution Dealbynet.com Inc. New York active wholly owned by PHS Group Inc. (PA) Gran Reserve Corporation Florida active wholly owned by Synergy Brands Inc. d.b.a. BeautyBuys.com (FL), CigarsAroundtheWorld.com (FL), Cigar Kingdom (FL), CigarGold.com (FL), NetCigar.com (FL), Pro Set Distributors (FL) Quality Food Brands Inc. Nevada active wholly owned by PHS Group Inc. (PA) and Synergy Brands Inc. EX-21 EX-23.1 4 file004.txt Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We have issued our report dated March 28, 2008 accompanying the consolidated financial statements of Synergy Brands, Inc. and subsidiaries appearing in the 2007 Annual Report on Form 10-K for the year ended December 31, 2007, which is incorporated by reference in the Registration Statement No. 333-126539 on Form S-3/A. We consent to the incorporation by reference in the Registration Statement of the aforementioned report and to the use of our name as it appears under the caption "Experts". /s/ Holtz Rubenstein Reminick LLP Holtz Rubenstein Reminick LLP Melville, New York March 28, 2008 EX-32.1 5 file005.txt Exhibit 32.1 CERTIFICATION OF ANNUAL REPORT -------------------------------- I, Mair Faibish, Chief Executive Officer of Synergy Brands, Inc. ("the Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: 1. The Annual Report on Form 10-K of the Company for the period ended December 31, 2007 ("the Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 28, 2008 /s/ Mair Faibish -------------------- Mair Faibish Chief Executive Officer EX-32.2 6 file006.txt Exhibit 32.2 CERTIFICATION OF ANNUAL REPORT -------------------------------- I, Mitchell Gerstein, Chief Financial Officer of Synergy Brands, Inc. ("the Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: 1. The Annual Report on Form 10-K of the Company for the period ended December 31, 2007 ("the Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 28, 2008 /s/ Mitchell Gerstein ---------------------- Mitchell Gerstein Chief Financial Officer EX-99 7 file007.txt Exhibit 99 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 TRADENAMES/TRADEMARKS: Suarez Gran Reserve Breton Legend Breton Corojo Vintage Nativos Corojo 2000 Andulleros Alimerante MikeDitka Don Otilio Country Value Country Fair Palm Spices Gourmet Select Rich n Moist Rich n Fluffy THE COMPANY OR ITS SUBSIDIARIES OWN THE FOLLOWING DOMAIN NAMES: 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 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-----