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, 2006.
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/Small-Cap System
and Boston Stock Exchange
The purpose for this amendment is to include corrected Certifications
required by Exchange Act Rule 13a-14(a); no other changes have been made from
the original filing.
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. [X]
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___
Synergy Brands Inc. revenues for its most recent fiscal year were
$71,759,908.
On March 30, 2007, the aggregate market value of the voting stock of
Synergy Brands Inc., held by non-affiliates of the Registrant was approximately
$6,800,000. This determination of affiliate status is not necessarily a
conclusive determination for other purposes. The number of outstanding shares of
the Registrant's Common Stock as of March 30, 2007 was 7,908,292.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Registrant's 2006 Annual Meeting of
Stockholders currently scheduled to be held June 2007 are incorporated by
reference in Part III (for other documents incorporated by reference refer to
Exhibit Index at page and); also committee charters are included verbatim on the
Company's website at www.sybr.com and such information and historical
organization documentation on the Company are incorporated by referenced to the
source thereof, as more particularly set forth in such listing of Exhibits).
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 but operates as well through its wholly owned subsidiary, Gran Reserve
corporation, the business of wholesale and on-line distribution of premium
cigars and accessories, and through such subsidiary, trading as Beautybuys.com,
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.
The consumer products 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.
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.
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PHS GROUP (GROCERY & HBA OPERATIONS).
PHS Group distributes Grocery and HBA products to retailers and wholesalers
predominately located in the Northeastern United States. PHS is the largest
subsidiary of the Company and largest business segment of the Company's business
operations, representing about 97% of the overall Company sales and 88% 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 among many others, and uses promotions, logistics and
distribution savings to streamline and reduce its sale prices and increase gross
profit thereby. The second business segment within this sector was Proset Hair
Systems (Proset). 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 develop private label programs for national
accounts by creating proprietary baking mix products and spice planograms
specifically designed for retail need.
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)
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 regarding issuers that file
electronically with the SEC which website can be accessed at www.sec.gov. Filed
reports by the Company may be viewed at the SEC Edgar filing website to which
the Company's homepage website is directly linked. 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.
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B. PHS GROUP (Grocery & HBA Operations)
PHS Group heading the principal business of the Company representing 97% of
total revenues, is involved in the purchase of name brands grocery and Health
and Beauty Aids (HBA) products and their further resale to traditional customers
utilizing the logistics and networking advantages of electronic commerce and
just in time distribution. PHS's core sales base consists of the distribution of
nationally branded consumer products in the grocery and HBA sectors and
wholesale distribution of grocery items predominantly in the United States,
Canada, and other international markets. 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.Distribution of such products is directed to major
retailers and wholesalers from major U.S. and Canadian consumer product
manufacturers and distributors. PHS has positioned itself as a distributor for
major manufacturers as opposed to a full line wholesaler. A full line wholesaler
has the responsibility of servicing the entire need of a retail operation,
whereas a distributor caters to specific merchandising categories. As a result,
PHS is able to plan the needs of its customers directly from the source of
supply and in turn increase sales to its customers through this unique focus.
PHS concentrates on 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 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 distribution of baking mixes and spices to national chains
on a proprietary basis. PHS hopes to develop private label programs for national
accounts by creating proprietary baking mix products and spice planograms
specifically designed for retail need.
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 sties. GRC also manages the internet sales of
Beautybuys.com which are less than 5% of overall online sales.
GRC cigar operations include two businesses. This segment includes Cigars
Around the World (CAW) and CigarGold. Cigars Around the World (CAW) was acquired
in June of 2003. That Company sells premium cigars to Hotels, Restaurants,
Casinos, PGA Clubs and other leisure related destinations. CAW was founded by
Bill Rancic, initial winner of the NBC show The Apprentice. 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 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.
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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.
CG utilizes a computerized database management system that collects,
integrates and allows analysis of data concerning sales, order processing,
procurement, shipping, receiving, inventory and financial reporting. The system
is designed such that at any given time, Company executives can determine the
quantity of product stored by item, cost by item, aging and other
characteristics necessary for expeditious fulfillment and distribution. A
network system of the Company's office and warehousing facilities allows for
online assessment and transactional reporting capabilities. It is the Company's
policy that all consumer orders are shipped from the Company's warehouse within
3 days of order placement. GRC maintains an inventory on approximately 95% of
its product mix; the other 5% is purchased on a just-in-time basis. The
distribution facility has sufficient space to handle the Company's anticipated
growth in this area of product sales. After an order is shipped, customers can
view order tracking information through a customized profile for each customer.
As customers use the CG web site, they provide CG with information about
their buying preferences and habits. CG then can use this information to develop
personalized communications and deliver useful information, special offers and
new product announcements to its customers. In addition, CG uses e-mail to alert
customers to important developments and merchandising initiatives.
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CG competes with many and varied sources for cigar products in a small but
affluent market which is highly fragmented and which has to date a small on-line
presence. No single traditional retailer to the Company's knowledge competes
against the Company in all of its product lines and there is an array of
developed e-commerce cigar sites. The largest competitor, JR Cigars has
developed an e-commerce web site for its product sales as an adjunct to their
traditional brick and mortar retail stores and catalogue sales.
Traditional pre-internet cigar sales appear to have evolved through the
following four categories of retailing, which together remain the main source of
cigar marketing:
1. Mom and Pop brick and mortar tobacco shops that typically average 2500
square feet and generate average annual volume of approximately $250,000
per store.
2. Chain and franchise brick and mortar tobacco shops that average 12,000
to 15,000 square feet and generate approximately $1,000,000 in annual
volume per store.
3. Catalog and mail order vendors that do monthly mailings to as many as
500,000 customers (in some instances as few as 25,000 customers), which is
the portion of the market that the Company believes should be the easiest
to convert to ecommerce purchases, and
4. Drug stores and mass market retailers representing a small share of the
market.
The Company believes that the following are principal competitive
advantages present in its operations and product presentation: brand
recognition, selection, convenience, price, web site performance and
accessibility, customer service, quality of information provided and reliability
and speed of order shipment, acute knowledge of cigar brands, quality of
products, stable source of supply, editorial contribution regarding cigar news
and one on one online customer interaction. Greater than fifty percent of
NetCigar customers are repeat customers on a daily basis.
Many of the Company's off-line and online competitors have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing and other resources than CG. Traditional
store-based retailers also enable customers to see and feel products in a manner
that is not possible over the Internet. Traditional store-based retailers can
also sell products to address immediate needs, which the Company and other
online sites may not be able to do.
In FY 2007 the Company desires to and will likely continue implementation
of plans to expand on its online partnerships for all its product offerings and
expand CAW retail store operations.
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 directly to the
retail consumer.
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D. COMPETITION
The Company is smaller in comparison to many of its competitors in the
marketing of grocery and health and beauty care products and cigars. Access to
product remains important but the Company is confident of the continued
availability of product from manufactures, wholesalers, and distributors with
whom the Company has successfully acquainted itself or developed in house.
Source of supplies the Company believes should stay stable. Most of the
Company's suppliers are regulated under fair trade and pricing regulations. As a
result the Company can remain competitive as long as it purchases products at
prescribed volume and credit limitation set by the suppliers.
E. MAJOR CUSTOMERS.
During the year ended December 31, 2006, sales to three customers accounted
for 21%, 16% and 12% of the Company's total sales and in 2005 sales to three
customers accounted for 12%, 11% and 10% of total sales. These major customers
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:
BeautyBuys.com
SynergyBrands.Com
DealbyNet.com
Perx.com (managed by Interline Travel & Tours)
SYBR.com
CIGARGOLD.com
CigarsAroundtheWorld.com
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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 shopped 24 hours a day, seven days a week
from anywhere that a consumer has Internet access. The Company offers a large
selection of products and in addition provides various levels of selected
product content, buying guides and other tools designed to help consumers make
educated purchasing decisions. Additionally, shopping list and e-mail reminders
are designed to make it easier for customers to regularly purchase their
preferred products.
The Company's marketing efforts are aimed at flexibility of presentation to
attract new and repeat customers and give ease of access to product availability
and information. The Company's online store provides flexibility to change
featured products or promotions without having to alter the physical layout of a
store. The Company is also able to dynamically adjust its product mix in
response to changing customer demand, new seasons or holidays and special
promotions.
The Company has the ability to offer products to individual customers based
on their brand preferences. The Company also cross-sells its departments to
promote impulse buying by customers.
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.
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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 and presently Proset 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.
Cigar product sales also increase during holiday periods and summer months,
as well as around special sporting events. In particular sales are stronger
before Father's Day, the summer golf season and the Christmas holiday season.
H. SHIPPING AND HANDLING
Products sold on a Business to Business 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 truck leases but also has acquired a fleet of trucks leased and
operated directly by the Company. Although the Company can call upon any of
several hundred common carriers to distribute its products, from time to time
the trucking industry is subject to strikes or work stoppages which could have a
material adverse effect on the Company's operations if alternative modes of
shipping are not then available. Additionally, the trucking industry is subject
to various natural disasters which can close transportation lanes in any given
region of the country. To the extent common carriers utilized by the Company are
prevented from or delayed in utilizing transportation lanes, the Company may
incur higher freight costs due to the limited availability of trucks during any
such period that transportation lanes are restricted. Trucking expenses are
regulated by the cost of fuel and destination lanes. Increasing fuel prices can
cause an increase in shipping rates. The Company attempts to pass along these
charges through a fuel surcharge. This charge cannot be passed to the customers
on all occasions.
I. TRADEMARKS, LICENSES AND PATENTS
The Company has obtained rights to various trademarks and tradenames, and
domain names in its internet business. The Company has obtained a wholesale
controlled substance license through the Drug Enforcement Agency (DEA). The
Company has domestic rights to the "Suarez Gran Reserva", "Breton Legend",
"Breton Vintage", "Anduleros", "Don Otilio","Alminante" "Nativo" "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.
J. EMPLOYEES
The Company and its subsidiaries in the aggregate 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.
The Company leases and staffs its warehouses in New York , New Jersey ,
Pennsylvania and Florida (GRC), and a sales office in Illinois, 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.
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K. GOVERNMENT REGULATION
1. TOBACCO INDUSTRY REGULATION AND TOBACCO INDUSTRY LITIGATION
The tobacco industry is subject to regulation at federal, state and local
levels. Federal law has required states, in order to receive full funding for
federal substance abuse block grants and other federal assistance , to establish
a minimum age of 18 years for the sale of tobacco products, together with an
appropriate enforcement program. The recent trend is toward increasing
regulation of the tobacco industry, and the increase in popularity of cigars
could lead to an increase in regulation of cigars.
The Food and Drug Administration (the "FDA") has determined that nicotine
is a drug and 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.
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In addition, as of January 2007, twenty-two states have legislation
mandating, in varying degrees, the prohibition of smoking in certain 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. Numerous proposals also have been
considered at the state and local level restricting smoking in certain public
areas, regulating point of sale placement and promotion and requiring warning
labels.
Consideration at both the federal and state level also has been given to
consequences of tobacco on others that are not presently smoking (so-called
"second-hand" smoke). 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.
Increased cigar consumption and the publicity that such increase has
received may increase the risk of additional regulation. There can be no
assurance as to the ultimate content, timing, or effect of any additional
regulation of tobacco products by any federal, state, local or regulatory body,
and there can be no assurance that any such legislation or regulation would not
have a material adverse effect on the Company's business.
Litigation against the cigarette industry has historically been brought by
individual cigarette smokers. The United States Supreme Court has ruled that
federal legislation relating to cigarette labeling requirements preempts claims
based on failure to warn consumers about the health hazards of cigarette
smoking, but does not preempt claims based on express warranty,
misrepresentation, fraud, or conspiracy.
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Current tobacco litigation generally falls within one of three categories:
class actions, individual actions or actions brought by individual States
generally to recover Medicaid costs allegedly attributable to tobacco-related
illnesses. Related litigation complaints allege a broad range of injuries
resulting from the use of tobacco products or exposure to tobacco smoke and seek
various remedies, including compensatory and, in some cases, punitive damages
together with certain types of equitable relief such as the establishment of
medical monitoring funds and restitution. The major tobacco companies are and
have been vigorously pursuing defense to and otherwise the termination of these
actions.
The tobacco industry has negotiated settlements totaling more than $240
billion with the States seeking reimbursement for expenditures by state-funded
medical programs for treatment of tobacco related illnesses and in addition
within such settlements have agreed to end all outdoor advertising and severely
restrict other traditional marketing practices such as a ban on promoting
tobacco products in media events and productions, to prohibit on brand name
tobacco sponsorship of team sports and sport facilities and further agreed to
fund a national research foundation as well as to prohibit advertising,
promotions and marketing that target youth; and to give access by tobacco
companies to the public of related litigation documentation; and strictly
curtails traditional lobbying activities on behalf of the tobacco industry.
The federal government has sued the tobacco industry seeking reimbursement
for billions of dollars spent by government held programs to treat
smoking-related illnesses. This type litigation could have a material adverse
affect on the profitability of tobacco and tobacco related products.
While the cigar industry has not been subject to similar health-related
litigation to date, there can be no assurance that there will not be an increase
in health-related litigation in the future against cigar manufacturers or
distributors. The costs to the Company and/or other suppliers of cigar products
marketed by the Company of defending prolonged litigation and settlement or
successful prosecution of any health-related litigation could have a material
adverse effect on the Company's business and results of operations.
Cigars long have been subject to federal, state and local excise taxes, and
such taxes frequently have been increased or proposed to be increased, in some
cases significantly, to fund various legislative initiatives. The federal excise
tax rate on large cigars (weighing more than three pounds per thousand cigars)
is a material component of the manufacturer's selling price.
The Company believes that the enactment of significantly increased excise
taxes could have a material adverse effect on the business of the Company. The
Company is unable to predict the likelihood of the passage or the enactment of
future increases in tobacco excise taxes as they relate to cigars.
Tobacco products also are subject to certain state and local taxes. An
example is the passage of the Proposition 10 referendum in California, an act
used to fund early childhood development programs, children's health and
development concerns at the state level. The majority of states now impose
excise taxes on cigars. In certain of the states without tobacco taxes proposals
are pending to add such taxes. State cigar excise taxes are not necessarily
subject to caps similar to the federal excise tax. 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. From time to time, the imposition of state and local taxes has had
some impact on sales regionally. The enactment of new state excise taxes and the
increase in existing state excise taxes are likely to have an adverse effect on
regional sales as cigar consumption generally declines.
2. OTHER GOVERNMENT REGULATION.
The United States Food and Drug Administration through the United States
Food, Drug and Cosmetic Act and the Fair Packaging and Labeling Act and other
various rules and regulations regulate, among other things, the purity and
packaging of HBA products and fragrances and cosmetic products and various
aspects of the manufacture and packaging of other grocery items sold by the
Company. Similar statutes are in effect in various states. Manufacturers and
distributors of such products are also subject to the jurisdiction of the
Federal Trade Commission with respect to such matters as advertising content and
other trade practices. To the Company's knowledge, it only deals with
manufacturers and manufactured products in a manner which complies with such
regulations and who periodically submit their products to independent
laboratories for testing. However, the failure by the Company's manufacturer or
supplier contacts to comply with applicable government regulations could result
in product recalls or lack of product availability that could adversely affect
the Company's relationships with its customers. In addition, the extent of
potentially adverse government regulations which might arise from future
legislation or administrative action cannot be predicted.
11
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.
Current legislation before Congress, the Permanent Internet Tax Freedom Act of
2007, proposes to permanently extend the moratorium on discriminatory taxes for
Internet purchases. 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.
12
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 or the Company's future financial performance and include, but are
not limited to, statements concerning:
The anticipated benefits and risks of the Company's key strategic
partnerships, business relationships and acquisitions;
The Company's ability to attract and retain customers;
The anticipated benefits and risks associated with the Company's
business strategy, including those relating to its distribution and
fulfillment strategy and its current and future product and service
offerings;
The Company's future operating results, 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;
Potential government regulation; and
The Company's future capital requirements and its ability to satisfy
its capital needs.
Furthermore, in some cases, you can identify forward-looking statements by
terminology such as may, will, could, should, expect, plan, intend, anticipate,
believe, estimate, predict, potential or continue, the negative of such terms or
other comparable terminology. These statements are only predictions. Actual
events or results may differ materially. Factors that could cause such
differences include, but are not limited to, those identified herein and other
risks included from time to time in the Company's other Securities and Exchange
Commission ("SEC") reports and press releases, copies of which are available
from the Company upon request.
Although the Company believes that the expectations reflected in the
forward-looking statements are reasonable, it cannot guarantee future results,
levels of activity, performance or achievements 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.
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. Although the Company has narrowed its losses, it still continues to
report operating deficits as opposed to profits. A large portion of the
Company's historical losses are a direct result of fees and expenses 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.
13
THE COMPANY HAS SIGNIFICANT INDEBTEDNESS
As of December 31, 2006, the Company had long-term indebtedness of $2.0
million. Although the Company made debt principal reduction payments over the
last three 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;
- Variations in the Company's level of merchandise and vendor returns;
- disruptions in service by shipping carriers;
- the extent to which the Company offers free shipping, continues to reduce
product prices worldwide, 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, all of which are used in the Company's
operating facilities.
14
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.
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.
15
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.
6. 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.
7. POSSIBLE LOSS OF NASDAQ SMALL CAP 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 Small
Cap 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 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 Small Cap System, the Common Stock would become subject to the rules
adopted by the Commission regulating broker-dealer practices in connection with
transactions in "penny stocks", including what the Company believes to be
stringent disclosure rules very different from NASDAQ trading practice
procedures. These disclosure requirements may have the effect of reducing the
level of trading activity in the secondary market for a stock that becomes
subject to the penny stock rules. If the Common Stock became subject to the
penny stock rules, many broker-dealers 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 an increase in its bid price in
conformity with applicable NASDAQ listing standards within the time limitations
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.
16
8. 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. 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 substantially depend 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.
17
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 would materially adversely affect its results
of operations and financial condition.
9. 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.
18
10.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).
11. NO DIVIDENDS LIKELY.
No dividends have been paid on the Common Stock since inception, nor, by
reason of its current financial status and its contemplated financial
requirements, does Synergy contemplate or anticipate paying any dividends upon
its Common Stock in the foreseeable future but the Company does have outstanding
preferred stock upon which dividends are paid current.
12. 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.
19
13. 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.
14. POTENTIAL FUTURE SALES OF COMPANY STOCK.
The majority of the shares of common stock of the Company outstanding are
"restricted securities" as that term is defined in Rule 144 promulgated under
the Securities Act of 1933. In general under Rule 144 a person (or persons whose
shares are aggregated) who has satisfied a one year holding period may, under
certain circumstances, sell within any three month period a number of shares
which does not exceed the greater of 1% of the then outstanding shares of common
stock or the average weekly trading volume during the four calendar weeks prior
to such sale. Rule 144 also permits, under certain circumstances, the sale of
shares by a person who is not an affiliate of the Company and who has satisfied
a two year holding period without, any quantity limitation. The majority of
holders of the shares of the outstanding common stock of the Company deemed
"restricted securities" have already satisfied at least their one year holding
period or will do so with the next fiscal year, and such stock is either
presently or within the next fiscal year will become eligible for sale in the
public market (subject to volume limitations of Rule 144 when applicable). The
Company is unable to predict the effect that sales of its common stock under
Rule 144, or otherwise, may have on the then prevailing market price of the
common stock. However, the Company believes that the sales of such stock under
Rule 144 may have a depressive effect upon the market.
15. 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.
16. THE COMPANY'S BUSINESS MAY SUFFER IF IT IS NOT ABLE TO PROTECT
IMPORTANT INTELLECTUAL PROPERTY.
The Company's ability to compete effectively against other companies in its
industry will depend, in part, on its ability to protect its proprietary
technology and systems designs relating to its technologies. The Company does
not know whether it has been or will be completely successful in doing so.
Further, its competitors may independently develop or patent technologies that
are substantially equivalent or superior to those of the Company so as to
effectively compete.
17. THE COMPANY MAY NOT BE ABLE TO MAINTAIN THE CONFIDENTIALITY OF ITS
PROPRIETARY KNOWLEDGE.
The Company relies, in part, on contractual provisions to protect its trade
secrets and proprietary knowledge. These agreements may be breached, and the
Company may not have adequate remedies for any breach. Its trade secrets may
also be known without breach of such agreements or may be independently
discovered by competitors. Its inability to maintain the proprietary nature of
its technology could harm its business, results of operations and financial
condition by adversely affecting its ability to compete.
20
18. 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.
19. 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.
21
20. 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.
21. 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.
22. 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.
22
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.
23
23. 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.
24. 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.
24
25. 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.
26. 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. We do not have
long-term contracts or arrangements with most of our vendors to guarantee the
availability of merchandise, particular payment terms, or the extension of
credit limits. If our current vendors were to stop selling merchandise to us on
acceptable terms, we may not be able to acquire merchandise from other suppliers
in a timely and efficient manner and on acceptable terms.
27. 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;
- 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.
25
28. 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. The Company has significant assets outside the
United States and therefore may be subject to international risks that are not
under the jurisdiction of U.S. Laws. In 2006 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, 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.
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 2006 no matters were submitted for shareholder
approval.
26
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock trades on NASDAQ Small Cap Market under the
Symbol "SYBR", and on the Boston Stock Exchange under the Symbol "SYB". The high
and low sales prices in the NASDAQ Small Cap Market for the Company's Common
Stock, as reported by the NASDAQ for each of the quarters of the Company's two
most recent fiscal years are as follows:
COMMON STOCK
Quarter Ended High Low Close
- ------------- ------- ------- ------
March 31, 2005 3.71 2.08 2.39
June 30, 2005 2.95 1.62 2.10
September 30, 2005 2.85 1.85 2.07
December 31, 2005 2.66 1.68 1.85
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
On March 30, 2007, the Company had approximately 3200 shareholders of
record.
The Company has never paid any dividends on its Common Stock and does not
presently intend to pay any dividends on the Common Stock in the foreseeable
future. The Company does pay a dividend on its preferred stock. There are no
unexercised stock options outstanding.
The Company is under present 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 7 "Possible Loss of NASDAQ Small Cap
Listing," supra).
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.
27
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.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data is derived from the Company's
financial statements. This data should be read in conjunction with Item 7
Management's Discussion and Analysis of Financial Condition and Plan of
Operations.
SYNERGY BRANDS INC
SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
2006 2005 2004 2003 2002
CONSOLIDATED STATEMENT OF OPERATIONS:
NET SALES $71,759,908 $63,350,182 $52,781,221 $36,869,471 $29,003,459
COST OF SALES
COST OF PRODUCT $65,631,282 $58,403,752 $48,701,653 $33,707,053 $27,181,698
SHIPPING AND HANDLING COSTS $1,169,381 $940,316 $770,723 $697,524 $438,754
$66,800,663 $59,344,068 $49,472,376 $34,404,577 $27,620,452
GROSS PROFIT $4,959,245 $4,006,114 $3,308,845 $2,464,894 $1,383,007
OPERATION EXPENSES
ADVERTISING AND PROMOTIONAL $234,582 $62,255 $150,181 $91,634 $464,638
GENERAL AND ADMINISTRATIVE $4,052,762 $3,701,271 $3,322,686 $2,554,979 $2,588,520
DEPRECIATION AND AMORTIZATION $245,085 $314,545 $448,570 $479,500 $425,093
$4,532,429 $4,078,071 $3,921,437 $3,126,113 $3,478,251
OPERATING PROFIT(LOSS) $426,816 -$71,957 -$612,592 -$661,219 -$2,095,244
OTHER INCOME(EXPENSE)
INTEREST INCOME $147,533 $102,644 $4,610 $13,913 $26,695
OTHER INCOME(EXPENSE) -$22,039 -$20,469 $33,795 $300,420 $521,267
EQUITY IN EARNINGS OF INVESTEE $227,054 $56,311 $172,224 $92,424 $67,717
INTEREST AND FINANCING EXPENSES -$2,050,856 -$1,513,406 -$1,320,608 -$490,146 -$150,943
-$1,698,308 -$1,374,920 -$1,109,979 -$83,389 $464,736
LOSS BEFORE INCOME TAXES -$1,271,492 -$1,446,877 -$1,722,571 -$744,608 -$1,630,508
INCOME TAX EXPENSE $43,976 $82,325 $34,604 $30,457 $22,347
LOSS FROM CONTINUING OPERATIONS -$1,315,468 -$1,529,202 -$1,757,175 -$775,065 -$1,652,855
LOSS FROM DISCONTINUED OPERATIONS -$1,358,478 -$1,029,043 -$219,204 -$499,957 -$833,372
INCOME TAX EXPENSE $986 $2,533 $2,201 $340
LOSS FROM DISCONTINUED OPERATIONS -$1,359,464 -$1,031,576 -$219,204 -$502,158 -$833,712
NET LOSS -$2,674,932 -$2,560,778 -$1,976,379 -$1,277,223 -$2,486,567
DIVIDEND-PREFERRED STOCK $356,500 $317,333 $156,375 $78,000
NET LOSS ATTRIBUTABLE
TO COMMON STOCKHOLDERS -$3,031,432 -$2,878,111 -$2,132,754 -$1,355,223 -$2,486,567
BASIC AND DILUTED NET LOSS PER COMMON
SHARE FROM CONTINUING OPERATIONS: -$0.33 -$0.48 -$0.87 -$0.52 -$1.27
BASIC AND DILUTED NET LOSS PER COMMON
SHARE FROM DISCONTINUED OPERATIONS: -$0.27 -$0.27 -$0.10 -$0.30 -$0.64
BAISIC AND DILUTED NET LOSS PER COMMON SHARE -$0.60 -$0.75 -$0.97 -$0.82 -$1.91
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 5,080,323 3,820,061 2,209,371 1,652,019 1,302,042
CONSOLIDATED BALANCE SHEET DATA:
WORKING CAPITAL $9,285,585 $4,967,712 $4,058,275 $2,245,956 $1,488,699
TOTAL ASSETS $20,867,796 $17,352,638 $16,706,423 $10,992,645 $5,871,669
LONG TERM OBLIGATIONS $7,797,566 $2,668,691 $1,196,241 $788,162 $342,750
TOTAL SHAREHOLDERS' EQUITY $5,660,250 $6,932,701 $6,573,057 $2,943,832 $2,082,537
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
PLAN OFOPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
OVERVIEW
Synergy Brands Inc. (SYBR or the Company) is a holding company that
principally operates through a wholly owned subsidiary, PHS Group Inc. ("PHS")
in the wholesale distribution of nationally known brands and proprietary private
label Groceries and Health and Beauty Aid (HBA) products as well as wholesale
luxury goods. 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 grocery private label market in FY 2006. The Company uses
logistics based distribution programs to optimize its costs on both wholesale
and retail levels.
The Company also owns a wholly owned subsidiary Gran Reserve Corporation
that principally operates in the wholesale, retail and online sales of Premium
hand made cigars and accessories.
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.
PHS GROUP (GROCERY & HBA OPERATIONS)
PHS Group distributes Grocery and HBA products to retailers and wholesalers
predominately located in the Northeastern United States. PHS is the largest
business segment of the Company's business operations, representing about 97% of
the overall Company sales and 88% 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 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 among many others, and uses promotions, logistics and
distribution savings to streamline and reduce its sale prices and increase gross
profit thereby. The second business segment within the Company's sector wherein
PHS participates was previously Proset Hair Systems (Proset) but Proset
discontinued its operations in the 4th quarter of FY 2006 as further discussed
infra.
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 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.
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)
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 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.
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.
29
CONSOLIDATED RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2006
AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2005.
SUMMARY OF OPERATING SEGMENTS AND SUMMARY CONSOLIDATED RESULTS OF OPERATIONS
OPERATING OPERATING AND
SEGMENTS CORPORATE SEGMENTS
Y/E 12/31/2006
Revenue $71,759,908 13.27% $ 71,759,908 13.27%
Gross Profit 4,959,245 23.79% 4,959,245 23.79%
SG&A 2,896,658 -5.48% 4,287,344 13.92%
Operating Profit 1,894,202 145.30% 426,816 693.15%
Net Profit (loss) from
continuing operations attributable
to common shareholders 468,424 184.05% (1,671,968) -9.45%
Per share continuing operations 0.09 (0.33)
Net loss from discontinued
operations (1,359,464) 31.79%
Per share discontinued operations (0.27)
Net loss attributable
to shareholders (3,031,432) 5.33%
Net loss per common share (0.60)
Interest and financing expense 1,403,739 8.20% 2,050,856 35.50%
Y/E 12/31/2005
Revenue $63,350,182 $ 63,350,182
Gross Profit 4,006,114 4,006,114
SG&A 3,064,639 3,763,526
Operating Profit (loss) 772,194 (71,957)
Net Profit (loss) from
continuing operations attributable
to common shareholders (557,289) (1,846,535)
Per share continuing operations (0.14) (0.48)
Net loss from discontinued
operations (1,031,576)
Per share discontinued operations (0.27)
Net loss attributable
to shareholders (2,878,111)
Net loss per common share (0.75)
Interest and financing expense 1,297,348 1,513,406
SYNERGY BRANDS
Synergy Brands is a holding Company that operates through its two current
segments as previously referred to and described herein. Synergy discontinued
its Proset segment in the fourth quarter of 2006. In order to better understand
the results of operations, each present segment is analyzed respectively and the
discontinued operations summarized with the financial details thereof included
as are relevant to discussion of past performance.
Overall revenues increased by 13% to $71,759,908 for the year ended
December 31, 2006, as compared to $63,350,182 for the year ended December 31,
2005. The largest percentage increase was in the Company's grocery and HBA
operations conducted through its wholly owned subsidiary PHS Group. The
Company's grocery operation continued to develop additional vendor relationships
in the grocery and HBA businesses as well as developed a Private Label grocery
business offered to U.S. and Canadian customers.
Overall gross profit increased by 24% to $4,959,245 for the year ended
December 31, 2006 as compared to $4,006,114 for the year ended December 31,
2005. During the latest annual period the Company invested in its direct store
delivery (DSD) operation as well as private label grocery distribution, which
have contributed to higher gross margins as compared to the prior fiscal year.
Overall Selling General and Administrative expenses (SGA) increased by 14%
while revenues increased by 13% for the year ended December 31, 2006 as compared
to the year ended December 31, 2005. The largest subsidiary of the Company, PHS
Group, decreased its SGA expenses by 3% to $2,161,320 for the year ended
December 31, 2006 as compared to $2,211,290 for the year ended December 31,
2005. 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 rose, sales commissions and certain
operating expenses resulting from sales increased commensurately.
30
The overall net loss attributable to Common Stockholders of the Company was
$3,031,432 for the year ended December 31, 2006 as compared to a net loss of
$2,878,111 for the year ended December 31, 2005. Interest and financing costs
represents approximately 68% of the total loss. The reasons for the increase in
net loss the Company attributes in significant part to a charge of $1.35 million
incurred by the Company in connection with discontinuing Proset's operations and
$655,020 in non-cash charges. Corporate expenses such as legal, accounting,
corporate employees and regulatory costs as well as depreciation costs primarily
represent the difference between the Company's consolidated results and
operating results. Management believes that its corporate expenses may increase
as a result of additional regulatory requirements that have been enacted by the
Securities and Exchange Commission (SEC). The Company is and will likely
continue to be required to comply with those and additional governance and
financial regulations that will likely result in additional corporate expenses.
Corporate expenses for the year ended December 31, 2006 totaled $1,390,686,
which include legal, accounting, corporate employees, and regulatory expenses as
compared to $698,887 for the year ended December 31, 2005. The operating
segments of PHS Group and Gran Reserve Corporation are further analyzed herein
as relate to the operating performance of the Company as well there following
herein a discussion relating to discontinuing Proset operations.
31
Below is a summary of the results of operation by segment:
PHS Group: (Grocery and HBA operations)
Synergy's Grocery and HBA business improved its operation through an
expansion of its DSD and private label wholesale and distribution operations.
Sales improved by 14% to $69.8 million and operating profit increased by 83% to
$2.2 million. PHS represented 97% of the Company's overall revenues and provides
most of the cash flow for the Company's other segments as well as corporate
regulatory expenses. PHS plans to continue attempting to build its DSD
operations, expand its private label programs, and increase its international
sales which are anticipated to help continue its direction toward greater
profitability.
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
has been 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 during this period increased by 1% to $1.9
million while operating loss was reduced by 29% to $303,418. Retail store
operations commenced in December of 2005 with a grand opening, which occurred on
March 4, 2006. GRC plans to have its retail outlets act as its hubs for
expansion in FY 2007. The combination of online sales as well as retail store
sales is expected to be the focus for growth in FY 2007. The retail store is an
expansion of Bill Rancic's Cigars Around the World (CAW) concept of providing
the ultimate destination to a cigar aficionado. The Company has been
disappointed by GRC's growth and believes that rapidly changing antismoking
legislation may be shifting the Cigar business to be a complete destination
business as opposed to a leisurely activity which GRC has commenced focus upon
through its retail store operations.
Corporate Expenses:
The Company's allocation to corporate expenses increased by 99% to
$1,390,686. Corporate expenses represent 32% of overall operating expense of the
Company. The Company relates the increase in expenses to higher legal, corporate
employees, regulatory and accounting expenses as well as management allocations
to corporate costs. Operating expenses for all operations including corporate
expenses totaled $4.3 million in FY 2006.
Below is a detailed review of the Company's performance.
In order to better understand the Company's financial historical status and
performance a discussion of the Company's segments and their respective
financial 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 97% 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.
32
PHS SEGMENT INFORMATION OF OPERATING BUSINESSES
PHS Group CHANGE
Year ended December 31, 2006
Revenue 69,840,886 13.65%
Gross Profit 4,370,869 27.66%
SG&A 2,161,320 -2.66%
Operating Profit (loss) 2,197,620 83.16%
Net Profit (loss) 779,634 797.45%
Interest and financing expenses 1,403,739 8.20%
Year ended December 31, 2005
Revenue 61,450,467
Gross Profit 3,423,960
SG&A 2,211,290
Operating Profit (loss) 1,199,866
Net loss (111,784)
Interest and financing expenses 1,297,348
PHS increased its revenues by 14% to $69.8 million for year ended December
31, 2006 as compared to $61.4 million for the year ended December 31, 2005. The
increase in PHS business is attributable by the Company 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 located 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 to 6.3% in 2006 compared to 5.6% at December 31,2005. In 2006, several
PHS vendors created special packaging with promotional pricing that enabled PHS
to widen its profit margin. As an example, special packaging was created for
Folgers, Marcal paper, Crest displays as well as Gain Detergent among others,
with unique retail display features, that PHS has been able to strongly promote
during FY 2006 as opposed to marketing those products for normal replenishment.
The Company believes that promotional displays allow PHS to sell better mixes of
product as well as introduce new items in combination with regularly stocked
items. As long as the Company maintains or expands its vendor relationships,
management believes that it can continue to improve its operating results.
However, the Company is dependant on promotional allowances and any material
changes to manufacturers' allowances will likely have a material adverse effect
on the Company's operating results. Net profit for this segment was $779,634 for
the year ended December 31, 2006 as compared to a loss of $111,784 for the year
ended December 31, 2005.
33
GRAN RESERVE SEGMENT INFORMATION OF OPERATING BUSINESSES
GRC CHANGE
Year ended December 31, 2006
Revenue 1,919,022 1.02%
Gross Profit 588,376 1.07%
SG&A 735,338 -13.83%
Operating Profit(loss) (303,418) -29.05%
Net Profit(loss) (311,210) -30.14%
Year ended December 31, 2005
Revenue 1,899,715
Gross Profit 582,154
SG&A 853,349
Operating Profit(loss) (427,672)
Net Profit(loss) (445,505)
The Company's direct to consumers activities are conducted through its
wholly owned subsidiary Gran Reserve Corporation (GRC). GRC operates the
following businesses
o Cigars Around the World markets premium cigars to restaurants,
hotels, casinos, country clubs and many other leisure related
destinations. This company was acquired in June 2003.
(www.cigarsaroundtheworld.com)
o CigarGol.com markets premium cigars through the Internet directly to
the consumer. (www.cigargold.com)
o GRC opened its first retail store in Miami Lakes, Florida in March,
2006. The store is expected to be an extension to the CAW operation
with the store called Cigars Around the World.
o BeautyBuys.com sells salon hair care products directly to the
consumer via the Internet. (www.beautybuys.com)
o The Company's direct to consumers websites are also expected to
generate revenue through affiliates and partnership agreements such as
www.overstock.com, www.google.com and paid links.
Cigars Around the World (CAW), a wholly owned subsidiary of Synergy Brands,
Inc. (NASDAQ: SYBR), officially opened its first retail outlet and cigar club in
Miami Lakes, Florida, on March 4, 2006. The 6,000 square-foot facility, located
at 15804 57th Ave, in Miami Lakes features more than 1,000 unique cigars that
include brand name, hand made premium cigars as well as Gran Reserve Corp's
(GRC) proprietary brands as well as Cigar Accessories. The entire facility is
temperature and humidity controlled and designed so that all the Cigars can be
viewed in a total store experience. In addition, the store houses a Cigar Lounge
with presently Free satellite TV and Free Wireless Internet designed to enhance
the customer's Cigar smoking and shopping experience. CAW expects to use this
facility for Radio remotes for special events, seminars on upcoming news in the
Cigar world, and other organized events for its members benefits.
CAW features top selling Cigar brands which include Macanudo, Partagas,
Montecristo, Cohiba, Arturo Fuentes-Opus X, Hemingway, Padron, Punch, Romeo y'
Julietta, Suarez Gran Reserve, Davidoff, Ashton, Mike Ditka and Breton labels
among others. The store also offers premium brands of upscale accessories. All
the products in the store are available nationally on the Store's website
www.CigarsAroundTheWorld.com.
Bill Rancic, founder of CAW at www.CigarsAroundTheWorld.com and Donald
Trump's first "Apprentice" on the popular NBC-TV program, was on hand for the
store's grand opening. One of the attractions of the new store is the membership
program, which enables club members to rent a climate-controlled locker to keep
their personal cache in an optimally controlled temperature and humidity
environment. Management believes that the club has the potential to provide an
additional revenue stream to the strong sales we continue to see in the cigar
division.
34
Upcoming events include plans for a Father's Day celebration in the lounge
of Cigars Around the World similar to the grand opening. Fathers will be given
the special treatment the Company believes that they deserve as well as
exceptional discounts on their favorite cigars. CAW plans NFL weekends as the
football season starts and a Super Bowl event next year. Based upon this model
and the perceived results thereof, CAW is exploring other retail opportunities
to expand this concept.
The store's grand opening celebration received coverage by local media
including WSVN-TV, FOX; WPLG-TV, ABC; WAXY-AM, 790 The Ticket; the Miami Herald;
the Miami Lakes; and the Miami New Times.
Revenues in the Company's B2C operation for the year ended December 31,
2006 were $1,919,022 as compared to $1,899,715 for the year ended December 31,
2005. CAW on a current operating basis represented approximately 56% of B2C
revenues for the year ended December 31, 2006. Gross profit for year ended
December 31, 2006 was $588,376 as compared to $582,154 for the year ended
December 31, 2005. The table above provides comparative details for the
Company's B2C operation.
CAW is operating profitably, but the logistical needed for support of the
Miami Lakes, Florida operations is consuming much of the segment's resources and
thereby slowing it to show a profit at those sales levels. The On-line segment
has over 20,000 customers, generates an average order of $100, with over a 50%
repeat rate and generates at a 99% fulfillment rate. The Company believes that
building its B2C segment brands along with popularity of Bill Rancic, the winner
of the ABC show "The Apprentice" should bring the segment effective critical
mass.
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 to the Company of
Proset's revenues (because of the cost factor) did not warrant continuing its
operations because such revenues 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 is little likelihood of
establishing a plan to bring 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 financial operations of Proset for the
period being discussed.
Year ended Dec.31, 2006 Year ended Dec. 31, 2005
Net Sales $1,222,834 $786,908
Cost of sales
Cost of product 1,260,694 867,036
Shipping and handling costs 144,772 98,607
---------- --------
1,405,466 965,643
Gross Profit (182,632) (178,735)
Operating expenses:
Advertising and promotion 1,046 900
General and administrative 594,008 291,134
Depreciation and amortization 157,650 183,420
Asset impairment charge 359,353 293,586
---------- --------
1,112,057 769,040
Operating profit (loss) (1,294,689) (947,775)
Other Income (expenses):
Other income (expenses) (1,024) (1,035)
Interest and financing expenses (62,765) (80,233)
---------- --------
(63,789) (81,268)
Net loss before income taxes (1,358,478) (1,029,043)
---------- --------
Income tax expense 986 2,533
---------- --------
Net loss from discontinued operations $ (1,359,464) $ (1,031,576)
---------- --------
35
CONSOLIDATED RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2005
AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2004.
SUMMARY OF OPERATING SEGMENTS AND SUMMARY CONSOLIDATED RESULTS OF OPERATIONS
OPERATING OPERATING AND
SEGMENTS CORPORATE SEGMENTS
Y/E 12/31/2005
Revenue $63,350,182 20.02% $ 63,350,182 20.02%
Gross Profit 4,006,114 21.07% 4,006,114 21.07%
SG&A 3,064,639 9.09% 3,763,526 8.37%
Operating Profit (loss) 772,194 122.08% (71,957) -88.25%
Net Profit (loss) from
continuing operations attributable
to common shareholders (557,289) -31.44% (1,846,535) -3.50%
Per share continuing operations (0.14) (0.48)
Net loss from discontinued
operations (1,031,576) 370.60%
Per share discontinued operations (0.27)
Net loss attributable
to shareholders (2,878,111) 34.95%
Net loss per common share (0.75)
Interest and financing expense 1,297,348 7.12% 1,513,406 14.60%
Y/E 12/31/2004
Revenue $52,781,221 $ 52,781,221
Gross Profit 3,308,845 3,308,845
SG&A 2,809,340 3,472,867
Operating Profit (loss) 347,703 (612,592)
Net Profit (loss) from
continuing operations attributable
to common shareholders (812,821) (1,913,550)
Per share continuing operations (0.37) (0.87)
Net loss from discontinued
operations (219,204)
Per share discontinued operations (0.10)
Net loss attributable
to shareholders (2,132,754)
Net loss per common share (0.97)
Interest and financing expense 1,211,107 1,320,608
SYNERGY BRANDS
Synergy Brands is a holding Company that operates through wholly owned
segments. In order to better understand the results of operations, each of these
segments is analyzed respectively.
Overall revenues increased by 20% to $63,350,182 for the year ended
December 31, 2005, as compared to $52,781,221 for the year ended December 31,
2004. The largest percentage increase was in the Company's B2B (PHS) operations.
The Company's grocery operation within this segment continued to develop
additional vendor relationships in the grocery and HBA businesses as well as
expanding its sales in Canada.
Overall gross profit increased by 21% to $4,006,114 for the year ended
December 31, 2005 as compared to $3,308,845 for the year ended December 31,
2004. The Company invested in its direct store delivery (DSD) operation during
this period which have contributed to higher margins as compared to the prior
fiscal year.
Overall Selling General and Administrative expenses (SGA) increased by 8%
while revenues increased by 20% for the year ended December 31, 2005 as compared
to the year ended December 31, 2004. The Company streamlined its operations by
centralizing all administrative functions at its corporate offices, reduced
staff in its then existing Proset operation through outsourcing, and increased
its focus on wholesale distribution as opposed to retail store sales. The
largest subsidiary of the Company, PHS Group, increased its SGA expenses by 18%
to $2,211,290 for the year ended December 31, 2005 as compared to $1,870,312 for
the year ended December 31, 2004. The increase in SGA for PHS group was
attributed to a 21% increase in revenues. PHS incurs variable expenses in
connection with selling costs such as sales commission, drivers, warehousing and
administrative personnel as well as its promotional expenses. As revenues have
risen sales commissions and certain operating expenses resulting from sales have
increased commensurately.
36
The overall net loss attributable to Common Stockholders of the Company was
$2,878,111 for the year ended December 31, 2005 as compared to a net loss of
$2,132,754 for the year ended December 31, 2004. Interest and financing costs
represented 53% of the total loss. The Company believes that the reasons for the
increase in net loss relate to one-time non-cash charges. Corporate expenses
such as legal, accounting, and regulatory costs as well as depreciation costs
represent in significant part the difference between the Company's consolidated
results and operating results. Management believes that its corporate expenses
may increase as a result of additional regulatory requirements that have been
enacted by the Securities and Exchange Commission (SEC). The Company is and will
likely continue to be required to comply with additional governance and
financial regulations that will likely result in additional corporate expenses.
Corporate expenses for the year ended December 31, 2005 totaled $698,887, which
include legal, accounting and regulatory expenses as compared to $663,527 for
the year ended December 31, 2004.
Below is a summary of the results of operations by segment:
PHS Group: (Grocery and HBA Operations))
Synergy's Grocery and HBA operation (through PHS) improved its operation
through an expansion of its Metro NY wholesale operation. Sales improved as
between the referenced periods by 21% to $61.4 million and operating profit for
this segment increased by 29% to $1.2 million. PHS represented 97% of the
Company's overall revenues and provides most of the cash flow for the Company's
other segments as well as to cover corporate regulatory expenses. PHS plans to
continue attempting to build its Metro NY, operations and increase its
international sales to Canada and the Caribbean.
Gran Reserve Corporation (Cigar Operations)
Gran Reserve operations of the Company as are the focus of this segment
consist of www.CigarGold.com, www.CigarsAroundtheWorld.com, www.BeautyBuys.com;
retail store operation in Miami Lakes, Florida and online partnership programs
such as www.Overstock.com and www.Google.com. The principal operation has been
relocated to a 6,000 square foot facility in Miami Lakes Florida, which handles
order flow for the operation as well as retail operations. Sales as between the
referenced periods deceased by 7% to $1.9 million while operating loss was
reduced by 27% to $427,672. Revenues were reduced due in material part to
Hurricane Wilma, which disrupted operations in the fourth quarter of 2005.
Retail store operations commenced in December of 2005 with a grand opening,
which occurred on March 4, 2006. GRC planned its retail outlets to act as its
hubs for expansion in FY 2006 and beyond. The combination of online sales as
well as retail store sales, as expected was a good part of the focus for growth
in FY 2006. The retail store is an expansion of Bill Rancic's Cigars Around the
World (CAW) concept of providing the ultimate destination to a cigar aficionado.
The Company has been disappointed by GRC's growth and believes that rapidly
changing antismoking legislation may have contributed to a likely shift in the
Cigar business to a complete destination business as opposed to a leisurely
activity.
Corporate Expenses:
The Company's allocation to corporate expenses increased during the period
by 5% to $698,887. Corporate expenses represented 19% of overall operating
expense of the Company. Operating expenses for all operations including
corporate expenses totaled $4 million in FY 2005.
Below is a more detailed review of the Company's performance.
In order to better understand the Company's results a discussion of the
Company's segments and their respective results during the represented period
follow;
PHS Group (Grocery and HBA Operations)
The Company's grocery and HBA sector for the period consists mainly of one
operating business, PHS Group. PHS Group distributes Grocery and HBA products to
retailers and wholesalers predominately located in the Northeastern United
States as well as in Canada. PHS is the largest subsidiary of the Company and
represents on average about 97% 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 and which in turn appears to increase sales to its customers
through this unique focus. PHS concentrates on the fastest moving promotional
items and uses logistics and distribution savings to streamline and reduce its
sale prices.
37
PHS SEGMENT INFORMATION OF OPERATING BUSINESSES
PHS Group CHANGE
Year ended December 31, 2005
Revenue 61,450,467 21.14%
Gross Profit 3,423,960 22.03%
SG&A 2,211,290 18.23%
Operating Profit (loss) 1,199,866 29.17%
Net loss (111,784) -33.44%
Interest and financing expenses 1,297,348 11.02%
Year ended December 31, 2004
Revenue 50,728,560
Gross Profit 2,805,747
SG&A 1,870,312
Operating Profit (loss) 928,934
Net loss (167,951)
Interest and financing expenses 1,168,607
PHS increased its revenues by 21% to $61.4 million for year ended December
31, 2005 as compared to $50.7 million for the year ended December 31, 2004. The
increase in PHS business is attributable by the Company to the utilization of
additional vendors, development of a wholesale operation and expansion of the
Canadian distribution business in Ontario, Canada, increase of its Domestic
Wholesale business and expansion of its business into the Dominican Republic.
PHS increased its gross profit by increasing Direct Store Delivery sales as well
as focusing on promotional merchandise offered by its vendors. The overall gross
profit percentage remained consistent at 5.6% for the referenced period . In
2005, several PHS vendors created special packaging with promotional pricing
that enabled PHS to widen its margin. As an example, special packaging was
created for Folgers, Marcal paper, Crest displays as well as Gain Detergent
among others, with unique retail display features, that PHS has been able to
strongly promote during FY 2005 as opposed to marketing those products for
normal replenishment. Promotional displays allow PHS to sell better mixes of
product as well as to introduce new items in combination with regularly stocked
items. As long as the Company maintains or expands its vendor relationships,
management believes that it can continue to improve its operating results.
However, the Company is dependant on promotional allowances and any material
changes to manufacturers' allowances will likely have a material adverse effect
on the Company's operating results. Net loss was $111,784 for the year ended
December 31, 2005 as compared to a loss of $167,951 for the year ended December
31, 2004.
38
GRAN RESERVE SEGMENT INFORMATION OF OPERATING BUSINESSES
GRC CHANGE
Year ended December 31, 2005
Revenue 1,899,715 -7.45%
Gross Profit 582,154 15.71%
SG&A 853,349 -9.12%
Operating Profit(loss) (427,672) -26.42%
Net loss (445,505) -30.92%
Interest and financing expenses - -100.00%
Year ended December 31, 2004
Revenue 2,052,661
Gross Profit 503,098
SG&A 939,028
Operating Profit(loss) (581,231)
Net Profit(loss) (644,870)
Interest and financing expenses 42,500
The Company's direct to consumers activities are conducted through its
wholly owned subsidiary Gran Reserve Corporation (GRC). GRC operates the
following businesses
o Cigars Around the World markets premium cigars to restaurants,
hotels, casinos, country clubs and many other leisure related
destinations. This company was acquired in June 2003.
(www.cigarsaroundtheworld.com)
o CigarGold.com markets premium cigars through the Internet directly to
the consumer. (www.cigargold.com)
o GRC opened its first retail store in Miami Lakes, Florida in March,
2006. The store as designed is expected to be an extension to the CAW
operation with the store called Cigars Around the World.
o BeautyBuys.com sells salon hair care products directly to the
consumer via the Internet. (www.beautybuys.com)
o The Company's direct to consumers websites are also expected to
generate revenue through affiliates and partnership agreements such as
www.overstock.com, www.google.com and paid links.
Cigars Around the World (CAW), a wholly owned subsidiary of Synergy Brands,
Inc. (NASDAQ: SYBR), officially opened its first retail outlet and cigar club in
Miami Lakes, Florida, on March 4, 2006 as was contemplated in 2005.
CAW features top selling Cigar brands which include Macanudo, Partagas,
Montecristo, Cohiba, Arturo Fuentes-Opus X, Hemingway, Padron, Punch, Romeo y'
Julietta, Suarez Gran Reserve, Davidoff, Ashton, Mike Ditka and Breton labels
among others. The store also offers premium brands of upscale accessories. All
the products in the store are available nationally on the Store's website
www.CigarsAroundTheWorld.com.
Revenues in the Company's direct to consumers operation for the year ended
December 31, 2005 were $1,899,715 as compared to $2,052,661 for the year ended
December 31, 2004. CAW on a current operating basis represented approximately
59% of B2C revenues for the year ended December 31, 2005. Gross profit for year
ended December 31, 2005 was $582,154 as compared to $503,098 for the year ended
December 31, 2004. The table above provides comparative details for the
Company's B2C operation.
CAW is operating profitably, but the logistical support needed for the
Miami Lakes, Florida operation is consuming much of the segment's resources and
thereby restricting it from show of a profit at those sales levels. The On-line
segment has over 20,000 customers, generates an average order of $100, with over
a 50% repeat rate and generates at a 99% fulfillment rate. The Company believes
that building its B2C segment brands along with popularity of Bill Rancic, the
winner of the ABC show "The Apprentice" should bring the segment effective
future critical mass.
39
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 is little likelihood of
establishing a plan to bring 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 period being discussed.
Year ended Dec. 31, 2005 Year ended Dec. 31, 2004
Net Sales $ 786,908 $3,923,823
Cost of sales
Cost of product 867,036 3,206,187
Shipping and handling costs 98,607 129,482
---------- --------
965,643 3,335,669
Gross Profit (178,735) 588,154
Operating expenses:
Advertising and promotion 900 -
General and administrative 291,134 282,747
Depreciation and amortization 183,420 210,920
Asset impairment charge 293,586 -
---------- --------
769,040 493,667
Operating profit (loss) (947,775) 94,487
Other Income (expenses):
Other income (expenses) (1,035) (80,778)
Interest and financing expenses (80,233) (232,913)
---------- --------
(81,268) (313,691)
Net loss before income taxes (1,029,043) (219,204)
---------- --------
Income tax expense 2,533 -
---------- --------
Net loss from discontinued operations $ (1,031,576) $(219,204)
---------- --------
40
LIQUIDITY AND CAPITAL RESOURCES
Year ended 2006 2005
Working Capital $ 9,285,585 $ 4,967,712
Assets 20,867,796 17,352,638
Liabilities 15,207,546 10,419,937
Equity 5,660,250 6,932,701
Line of Credit Facility 5,836,928 4,033,242
Receivable turnover (days) 57 44
Inventory Turnover (days) 7 7
Net cash used in operating activies (4,324,635) (4,064,235)
Net cash provided by (used in ) investing activites 420,590 (791,007)
Net cash provided by financing activites 4,293,432 4,160,250
The Company's working capital increased by $4.3 million in FY 2006 to $9.3
million due to a combination of several factors including amortization of debt,
refinancing of short term debt to long term debts and operating profits from PHS
Group. Receivables including trade and other receivables increased by $4.4
million due to revenue increases and vendor rebates. The Company plans to
further improve its working capital through conversion of short-term debt to
long-term debt, increasing its operating profit, reducing its financing expenses
and the utilization of equity financing.
The Company needed $4.3 million to support cash needed for operating
activities. The predominant need for cash involved the increase of accounts
receivable by $4.3 million. The Company supported this need through an increase
of its utilization of lines of credit, additional equity and debt instruments.
In addition, improved operating performance by PHS Group contributed to the
operating needs of the Company. The Company financed its operating activities by
issuing $1.75 million in 10% notes in the first quarter of 2006, and utilized
its asset based financing facilities and trade financing for $1.8 million in the
fourth quarter of 2006.
41
Liquidity for the Company predominately involves the need to finance
accounts receivables, inventory, interest and operating expenses. 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 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. The Company generated a net loss
attributable to Common Shareholders of approximately $3,031,000 in 2006.
Financing costs totaled $2,050,856 and non-cash charges totaled approximately
$600,000 for the period. Reductions in 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.
The capital resources that were available to the Company consisted of $7.0
million in lines of Credit, $3.7 million in short term notes, $3.65 million of
non-redeemable preferred and $2.0 million in long-term notes as of December 31,
2006. The Company's objective is to reduce its notes through the issuance of
equity and cash flow as well as refinancing its current obligations with debit
with lower rates. Towards such goal, in the first quarter of 2007 the Company
refinanced it's $6 million dollar senior line of credit with a $6.5 million 10
year term facility and reduced its interest rate to 11.25%. However there is no
assurance that the Company will be able to achieve its stated objectives.
Achieving these goals and objectives is believed material to the Company's
success.
The Company's liquidity relies in material part on the turnover of it
inventory and accounts receivable. The Company has for the last fiscal year
turned its receivables on average every 57 days and the Company has turned its
overall inventory on average approximately every 7 days. The Company believes
that its collection procedures and procurement policies are consistent with
industry standards. However, nearly 60% 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 potential. The Company's sales are reliant in significant
part on extending credit that ranges from 30 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 respective manufactures change their
policies or the Company does not meet the manufacturers standards, incentives
may be reduced.
42
Management believes that continued cost containment, improved financial and
operating controls, 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 but achievement of these goals, however, 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 continues to 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:
12/31/07 12/31/08 12/31/09 12/31/10 Total
$227,000 $102,000 $74,000 $53,000 $456,000
Variable interest rate on notes of $570,000 was 11.25%. Variable interest
rate on note of $500,000 was 7.75%.
The following table presents the Company expected cash requirements for
contractual obligations outstanding at December 31, 2006.
Payments Due By Period
Contractual Obligations Less Than 1-3 4-5 After 5
1 Year Years Years Years Total
Line-Of-Credit $5,836,928 $5,836,928
Notes Payable $4,227,000 $1,386,000 $857,000 $6,470,000
Operating Leases $429,746 $835,737 $642,152 $103,714 $2,011,349
Total Contractual
Cash Obligations $10,493,674 $2,221,737 $1,499,152 $103,714 $14,318,277
43
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 - 90 days and are stated at amounts due from
customers net of an allowance for doubtful accounts. Accounts outstanding longer
than the contractual payment terms are considered past due. Estimates are used
in determining the allowance for doubtful accounts based on the Company's
historical collections experience, current trends, credit policy and a
percentage of its accounts receivable by aging category. In determining these
percentages, the Company looks at historical write-offs of its receivables. The
Company also looks at the credit quality of its customer base as well as changes
in its credit policies. The Company continuously monitors collections and
payments from its customers. The Company writes off accounts receivable when
they become uncollectible, and payments subsequently received on such
receivables are credited to the allowance for doubtful accounts.
VALUATION OF DEFERRED TAX ASSETS.
Deferred tax assets and liabilities represent temporary differences between
the basis of assets and liabilities for financial reporting purposes and tax
purposes. Deferred tax assets are primarily comprised of reserves, which have
been deducted for financial statement purposes, but have not been deducted for
income tax purposes as well as net operating loss carry forwards. The Company
annually reviews the deferred tax asset accounts to determine if is appears more
likely than not that the deferred tax assets will be fully realized. At December
31, 2006, 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.
44
RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARDS BOARD ("FASB")
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 151 "Inventory Costs."
This statement amends Accounting Research Bulletin No. 43, Chapter 4, "Inventory
Pricing" and removes the "so abnormal" criterion that under certain
circumstances could have led to the capitalization of these items. SFAS No. 151
requires that idle facility expense, excess spoilage, double freight and
re-handling costs be recognized as current-period charges regardless of whether
they meet the criterion of "so abnormal." SFAS 151 also requires that allocation
of fixed production overhead expenses to the costs of conversion be based on the
normal capacity of the production facilities. The provisions of this statement
shall be effective for all fiscal years beginning after June 15, 2005. The
Company's adoption of SFAS No.151 did not have a material impact on the
Company's financial position or results of operations.
On December 16, 2004, the FASB issued SFAS No. 153, "Exchange of
Non-monetary Assets", an amendment of Accounting Principles Board ("APB")
Opinion No. 29, which differed from the International Accounting Standards
Board's ("IASB") method of accounting for exchanges of similar productive
assets. Statement No. 153 replaces the exception from fair value measurement in
APB No. 29, with a general exception from fair value measurement for exchanges
of non-monetary assets that do not have commercial substance. The statement is
to be applied prospectively and is effective for non-monetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. The Company's
adoption of SFAS No.153 did not have a material impact on the Company's
financial position or result of operations.
In May 2005, the FASB issued Statement No. 154, "Accounting Changes and
Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No.
3. " ("SFAS 154") This Statement requires retrospective application to prior
period financial statements of a voluntary change in accounting principle unless
it is impracticable and is effective for fiscal years beginning after December
15, 2005. Previously, most voluntary changes in accounting principle were
recognized by including the net income of the period of the change the
cumulative effect of change to the new accounting principle. The Company's
adoption of SFAS No. 154 did not have a material impact on the Company's
financial position or result of operations.
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. We believe
that the adoption of this standard on January 1, 2007 will not have a material
effect on our consolidated financial statements.
45
In September 2006, the FASB issued 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.
In July 2006, the FASB issued FASB Interpretation 48, "Accounting for
Uncertainty in Income Taxes ("FIN 48"). 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 guidance on
derecognizing, classification interest and penalties, accounting in interim
periods, disclosure and transition. We believe that the adoption of FIN 48 will
not have a material impact of our consolidated financial statements. For our
Company, this interpretation will be effective beginning January 1, 2007.
The SEC issued Staff Accounting Bulletin No. 108 ("108") in September 2006.
SAB 108 expresses the views of the SEC staff regarding the process of
quantifying the materiality of financial misstatements. SAB 108 requires both
the balance sheet and income statement approaches be used when quantifying the
materiality of misstatement amounts. In addition, SAB 108 contains guidance on
correcting errors under the dual approach and provides transition guidance for
correcting errors existing in prior years. SAB 108 was effective in the
Company's fourth quarter of 2006. The adoption of SAB 108 did not have a
material impact on the Company's consolidated 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. In particular, the first and second quarters are usually better operating
quarters. Sales of beauty care products and fragrances increase over traditional
gift giving holidays such as Christmas, Mother's Day, Father's Day, and
Valentine's Day.
Cigar product sales also increase during holiday periods and summer months
as well as around special sporting events.
INFLATION
The Company believes that inflation, under certain circumstances, could be
beneficial to the Company's major business, PHS Group. When inflationary
pressures drive product costs up, the Company's customers sometimes purchase
greater quantities of product to expand their inventories to protect against
further pricing increases. This enables the Company to sell greater quantities
of products that are sensitive to inflationary pressures.
However, inflationary pressures frequently increase interest rates. Since
the Company is dependent on financing, any increase in interest rates will
increase the Company's credit costs, thereby reducing its profits.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does rely partly not to any material extent on variable
interest rate debt instruments representing less than 10% in amount of all
working capital financing, and the Company does not therefore consider there to
be any overall material market risk potentially derived from the existence of
such loan terms (See MD&A supra for further details regarding existing variable
interest rate instruments). The Company does not believe that it has any other
potential market risk sensitive financial instruments.
46
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, 2006 and 2005 F-3-F-4
Consolidated Statements of Operations for the Years Ended
December 31, 2006, 2005 and 2004 F-5
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Loss for the
Years Ended December 31, 2006, 2005 and 2004 F-6-F-9
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2006, 2005 and 2004 F-10-F-11
Notes to Consolidated Financial Statements F-12-F-39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
ITEM 9A. CONTROLS AND PROCEDURES
As certified herein by the Company's Chief Executive Officer and Chief
Financial Officer, they have as of the date of this report evaluated the
disclosure controls and procedures of the Company and believe same to be
effective to ensure that material information relating to the Company, including
its consolidated subsidiaries, is made known to the Company sufficient to allow
evaluation by the Company of accuracy in their recording, processing,
summarizing and reporting financial and other Company information and data, and
there do not appear to be any deficiencies in the design or operation of such
internal controls which would adversely and materially affect the Company's
ability to discover, evaluate and report such information.
The Company has adopted an Audit Committee Charter providing expanded
authority of such committee and the independent nature and identity of its
director participants as required by the enactment of the Sarbanes-Oxley
Act. The Company believes that at least one director participant therein will be
qualified as an "audit committee financial expert" as defined in such Act.
There have been no significant changes in the Registrants internal controls
or in other factors that could significantly affect these controls subsequent to
the date of the evaluation thereof, including any corrective actions with regard
to significant deficiencies and material weaknesses.
The Company's disclosure controls and procedures are designed to provide
reasonable assurance that information required to be disclosed in its reports
filed under the Exchange Act, such as this Form 10-K, is recorded, processed,
summarized and reported within the time periods specified in the SEC rules and
forms. The Company's disclosure controls and procedures are also designed to
ensure that such information is accumulated and communicated to management to
allow timely decisions regarding required disclosure. The Company's internal
controls are designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of its financial statements in
conformity with GAAP.
47
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.
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, 2006. The annual meeting is scheduled to be in June 2007. Such Proxy
Statement is expected to be filed with the Commission by April 30, 2007 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.
48
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 Holtz Rubenstein Reminick LLP 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
49
(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, which financial arrangement was disclosed
in an 8K filing made by the Company on January 22, 2007 and such filing
is incorporated by reference hereafter for further description of the
subject transactions. 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 $2,225,000 debt
remaining as currently owed to Laurus Master Fund, Ltd. arising from
Secured Convertible Term Notes dated April 2, 2004, January 25, 2005,
June 21, 2005 and March 13, 2006 and $490,000 in total long term debt
to three non-affiliated parties by Secured Promissory Notes dated March
1, 2004.
(4) Incorporated by reference to the Registration Statement of the Company
on Form S-8 (File No. 333-92243) filed with the Commission on 12/17/99,
as amended
(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
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Synergy Brands Inc.
by /s/ Mair Faibish
--------------------------------
Mair Faibish
Chairman of the Board
Dated: March 30, 2007
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 30, 2007
by /s/ Mitchell Gerstein
----------------------------------
Mitchell Gerstein
Chief Financial Officer
Dated: March 30, 2007
by /s/ Joel Sebastian
-----------------------------------
Joel Sebastian, Director
Dated: March 30, 2007
by /s/ Lloyd Miller
-----------------------------------
Lloyd Miller, Director
Dated: March 30, 2007
by /s/ William Rancic
-----------------------------------
William Rancic, Director
Dated: March 30, 2007
by /s/ Frank A. Bellis Jr.
-----------------------------------
Frank A. Bellis, Director
Dated: March 30, 2007
by /s/ Randall J. Perry
-----------------------------------
Randall J. Perry, Director
51
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)) 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) 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
(c) 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 30, 2007
/s/ Mair Faibish
- ----------------
Mair Faibish
Chief Executive Officer
52
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)) 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) 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
(c) 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 30, 2007
/s/ Mitchell Gerstein
- ---------------------
Mitchell Gerstein
Chief Financial Officer
53
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, 2006 and 2005 and the related consolidated statements
of operations, stockholders' equity and comprehensive loss, and cash flows for
each of the three years in the period ended December 31, 2006. 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 standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our 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, 2006 and 2005 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2006 in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note B to the financial statements, the Company adopted
Financial Accounting Standard No. 123(R), "Share-Based Payment", effective
January 1, 2006.
HOLTZ RUBENSTEIN REMINICK LLP
Melville, New York
March 9, 2007
F-2
Synergy Brands, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31, 2006 and 2005
ASSETS
CURRENT ASSETS 2006 2005
---------- ---------
Cash and cash equivalents $ 644,870 $ 255,483
Accounts receivable trade, less allowance for doubtful accounts of
$127,481 and $127,481 11,165,980 7,478,139
Other receivables 2,453,705 1,730,806
Notes receivable - current 344,699 287,967
Inventory 1,289,221 1,181,223
Prepaid assets and other current assets 669,908 392,789
Assets of discontinued operations 127,182 1,392,551
---------- ---------
Total Current Assets 16,695,565 12,718,958
PROPERTY AND EQUIPMENT, NET 252,950 276,844
OTHER ASSETS 909,454 802,887
NOTES RECEIVABLE 2,207,233 2,691,439
INTANGIBLE ASSETS, net of accumulated amortization of
$389,226 and $329,310 288,297 348,213
GOODWILL 514,297 514,297
---------- ---------
TOTAL ASSETS $ 20,867,796 $ 17,352,638
========== =========
The accompanying notes are an integral part of these statements.
F-3
Synergy Brands, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS (Continued)
December 31, 2006 and 2005
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES 2006 2005
----------- -----------
Lines of credit $ - $ 4,033,242
Notes payable - current 4,196,757 1,326,000
Accounts payable 2,170,408 1,640,448
Related party note payable 23,706 61,882
Accrued expenses 151,037 36,855
Deferred income 755,503 127,000
Liabilities of Discontinued operations 112,569 525,819
----------- -----------
Total Current Liabilities 7,409,980 7,751,246
NOTES PAYABLE, net of discount of $313,749 and 46,309, respectively 1,960,638 2,668,691
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 100,000 shares issued and outstanding;
liquidation preference of $10.50 per share 93 100
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 330,000 shares issued and outstanding; liquidation preference of
$10.00 per share 285 330
Class B Series B Preferred stock-$.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;
6,484,275 and 4,457,530 shares issued 6,484 4,458
Additional paid-in capital 47,252,064 45,918,817
Deficit (41,585,416) (38,910,484)
Unearned Compensation - (67,260)
Accumulated other comprehensive loss (8,340) (8,340)
----------- -----------
5,665,250 6,937,701
Less treasury stock, at cost, 1,000 shares (5,000) (5,000)
----------- -----------
Total Stockholders' Equity 5,660,250 6,932,701
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $20,867,796 $17,352,638
=========== ===========
The accompanying notes are an integral part of these statements.
F-4
Synergy Brands, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
2006 2005 2004
----------- ----------- ------------
Net sales $71,759,908 $63,350,182 $ 52,781,221
----------- ----------- ------------
Cost of sales
Cost of product 65,631,282 58,403,752 48,701,653
Shipping and handling costs 1,169,381 940,316 770,723
----------- ----------- ------------
66,800,663 59,344,068 49,472,376
----------- ----------- ------------
Gross profit 4,959,245 4,006,114 3,308,845
Operating expenses
Advertising and promotional 234,582 62,255 150,181
General and administrative 4,052,762 3,701,271 3,322,686
Depreciation and amortization 245,085 314,545 448,570
----------- ----------- ------------
4,532,429 4,078,071 3,921,437
----------- ----------- ------------
Operating Profit (loss) 426,816 (71,957) (612,592)
Other income (expense)
Interest income 147,533 102,644 4,610
Other income (expense) (22,039) (20,469) 33,795
Equity in earnings of investee 227,054 56,311 172,224
Interest and financing expenses (2,050,856) (1,513,406) (1,320,608)
----------- ----------- ------------
(1,698,308) (1,374,920) (1,109,979)
----------- ----------- ------------
Loss from continuing operations before income taxes (1,271,492) (1,446,877) (1,722,571)
Income tax expense 43,976 82,325 34,604
----------- ----------- ------------
Loss from continuing operations (1,315,468) (1,529,202) (1,757,175)
----------- ----------- ------------
Discontinued operations
Loss from operations of discontinued component (1,358,478) (1,029,043) (219,204)
Income tax expense 986 2,533 -
----------- ----------- ------------
Loss from discontinued operations (1,359,464) (1,031,576) (219,204)
----------- ----------- ------------
Net Loss (2,674,932) (2,560,778) (1,976,379)
Dividend - Preferred Stock (356,500) (317,333) (156,375)
----------- ----------- ------------
Net loss attributable to common stockholders $ (3,031,432) $ (2,878,111) $ (2,132,754)
=========== =========== ============
Basic and diluted net loss per common share from continuing
operations: $ (0.33) $ (0.48) $ (0.87)
Basic and diluted net loss per common share from discontinued
operations: $ (0.27) $ (0.27) $(0.10)
----------- ----------- ------------
$ (0.60) $ (0.75) $(0.97)
----------- ----------- ------------
Weighted average shares used in the compution of loss per common
shares:
Basic and diluted 5,080,323 3,820,061 2,209,371
=========== =========== ============
The accompanying notes are an integral part of these statements.
F-5
Synergy Brands, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND
COMPREHENSIVE LOSS
Years ended December 31, 2006, 2005 and 2004
Class A Class B-Series A Class B-Section B Additional
Preferred Stock Preferred Stock Preferred Stock Comonn Stock Paid-in
Shares Amount Shares Amount Shares Amount Shares Amount Capital
------- ------ ------- -------- ------- -------- --------- ------- ------------
Balance at January 1, 2004 100,000 $100 160,000 $160 - - 1,919,359 $1,919 $ 37,748,004
Amortization of unearned compensation
Common stock returned and retired (61,500) (61) 61
Common stock issued 100,000 100 470,685
Net proceeds from issuance of
Issuance of common stock in
common stock in
Connection with private placement 170,000 170 255,000 255 1,454,575
Issuance of common stock for note
conversion 688,338 688 2,733,957
Exercise of stock options 110,000 110 102,140
Issuance of common stock for services 58,195 58 190,563
Issuance of common stock in
connection with CAW acquisitions 175,000 175 524,825
Issuance of common stock along 19,600 20 74,980
with debt
Option Expense 30,750
Preferred stock dividend 156,375)
Consulting expense (40,000)
Change in unrealized gain on
Marketable securities
Cumulative translation adjustments
Net loss
------- ------ ------- -------- ------- -------- --------- ------- ------------
Comprehensive loss
Balance at December 31, 2004 100,000 $100 330,000 $330 - - 3,263,992 $3,264 $ 43,134,165
======= ====== ======== ======== ======= ======== ========= ======= ============
F-6
Synergy Brands, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND
COMPREHENSIVE LOSS
Years ended December 31, 2006, 2005 and 2004
Continued
Accumulated
Other Stockholders
Comprehensive Treasury Unearned notes
Deficit Income (loss) Stock Compensation receivable
------------- -------------- ---------- ------------ -----------
Balance at January 1, 2004 $(34,373,327) $ (1,772) $ (5,000) $(426,252) -
Amortization of unearned compensation 224,496
Common stock returned and retired
Common stock issued
Net proceeds from issuance of
Issuance of common stock in
common stock in
Connection with private placement
Issuance of common stock for note
conversion
Exercise of stock options
Issuance of common stock for services
Issuance of common stock in
connection with CAW acquisitions
Issuance of common stock along
with debt
Option Expense
Preferred stock dividend
Consulting expense
Change in unrealized gain on
Marketable securities 4,105)
Cumulative translation adjustments (2,463)
Net loss (1,976,379)
------------- -------------- ---------- ------------ -----------
Comprehensive loss
Balance at December 31, 2004 $ (36,349,706) $ (8,340) $ (5,000) $ (201,756) -
============= ============== ========== ============ ===========
F-6
Synergy Brands, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued)
Years ended December 31, 2006, 2005 and 2004
Class A Class B-Series A Class B-Section B Additional
Preferred Stock Preferred Stock Preferred Stock Comonn Stock Paid-in
Shares Amount Shares Amount Shares Amount Shares Amount Capital
------- ------ ------- -------- ------- -------- --------- ------- ------------
Amortization of unearned
compensation
Common stock issued 454,300 454 537,619
Redemption of
preferred stock for shares
of common stock (7,000) (7) (45,000) (45) 785,925 786 (734)
Issuance of common stock for
note conversion 635,610 635 600,565
Issuance of common stock for
Services 150,910 151 190,297
Preferred stock dividend (356,500)
Issuance of stock warrants 362,000
Net loss
------- ------ ------- -------- ------- -------- --------- ------- -----------
Balance at December 31, 2006 93,000 93 285,000 $285 80,000 $80 6,484,275 $6,484 $47,252,064
======= ====== ======= ======== ======= ======== ========= ======== ===========
F-7
Synergy Brands, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued)
Years ended December 31, 2006, 2005 and 2004
Continued
Accumulated
Other Stockholders
Comprehensive Treasury Unearned notes
Deficit Income (loss) Stock Compensation receivable
------------- -------------- ---------- ------------ -----------
Amortization of
unearned compensation 67,260
Common stock issued
Redemption of
preferred stock for shares
of common stock
Issuance of common stock for
note conversion
Issuance of common stock for
Services
Preferred stock dividend
Issuance of stock warrants
Net loss (2,674,932)
------------- -------------- ---------- ----------- ------------
Balance at December 31, 2006 $(41,585,416) $(8,340) $(5,000)
============= =============== ========== =========== ============
F-7
Synergy Brands, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued)
Years ended December 31, 2006, 2005 and 2004
Balance at January 1, 2004 $2,943,832
Amortization of unearned compensation 224,496
Common stock returned and retired -
Common stock issued 470,785
Net proceeds from issuance of
common stock in
connection with private placement 1,455,000
Issuance of common stock for note 2,734,645
conversions
Exercise of stock options 102,250
Issuance of common stock for services 190,621
Issuance of common stock in
connection with CAW acquisitions 525,000
Issuance of common stock along
with debt 75,000
Option Expense 30,750
Preferred stock dividend (156,375)
Consulting expense (40,000)
Change in unrealized gain on
Marketable securities (4,105) $ (4,105)
Cumulative translation adjustments (2,463) (2,463)
Net loss (1,976,379)(1,976,379)
---------- -----------
Comprehensive loss ($1,982,947)
============
Balance at December 31, 2004 $6,573,057
=========
Comprehensive
Loss
Amortization of unearned compensation 134,496
Common stock issued 330,925
Net proceeds from issuance of
common stock in
connection with private placement 798,891
Issuance of common stock for note
conversions 1,751,419
Issuance of common stock for services 204,024
Preferred stock dividend (317,333)
Issuance of stock warrants 18,000
Net loss (2,560,778)(2,560,778)
=========== ==========
Comprehensive loss $(2,560,778)
===========
Balance at December 31, 2005 $6,932,701
==========
The accompanying notes are an integral part of these statements.
F-8
Synergy Brands, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued)
Years ended December 31, 2006, 2005 and 2004
Comprehensive
Loss
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) (2,674,932)
------------ ------------
Comprehensive loss $(2,674,932)
=============
Balance at December 31, 2006 $ 5,660,250
============
The accompanying notes are an integral part of these statement
F-9
Synergy Brands, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
2006 2005 2004
------------- -------------- -------------
Cash flows from operating activities
Net loss $ (2,674,932) $ (2,560,778) $ (1,976,379)
Adjustments to reconcile net loss to net cash
used in operating activities
Loss on sale of accounts receivable - - 79,134
Depreciation and amortization 245,085 314,545 448,570
Amortization of financing cost 38,059 63,283 90,746
Loss on sale of marketable securities - - 15,793
Equity in earnings of investee (227,054) (56,311) (172,224)
Non-cash compensation - - 30,750
Operating expenses paid with common stock and warrants
180,549 104,025 154,620
Changes in operating assets and liabilities
(Increase) decrease in
Accounts receivable and other receivables (4,410,740) (1,173,399) (7,126,272)
Inventory (107,998) (27,055) 474,877
Prepaid expenses, related party note receivable and
other assets 71,278 177,396 (66,011)
Increase (decrease) in
Accounts payable, related party note payable,
accrued expenses and other current liabilities 661,647 (1,189,575) (143,425)
Deferred Income and other liabilities 727,821 - -
Net assets of discontinued operations 1,171,650 283,634 1,229,419
------------- -------------- -------------
Net cash (used in) operating activities (4,324,635) (4,064,235) (6,960,402)
------------- -------------- -------------
Cash flows from investing activities
Payment of security deposit - (17,172) (35,848)
Purchase of marketable securities - - (168,377)
Proceeds from sale of marketable securities - - 194,515
Purchase of property and equipment (35,684) (72,329) (112,058)
Refund of collateral security deposit - - 500,000
Payments received on notes receivable 453,469 284,894 433,033
Issuance of notes receivable (25,995) (1,015,200) -
Investee dividend received 28,800 28,800 -
------------- -------------- -------------
Net cash provided by (used in) investing activities 420,590 (791,007) 811,265
------------- -------------- -------------
F-10
Synergy Brands, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years ended December 31,
2006 2005 2004
------------ ------------ ------------
Cash flows from financing activities
Borrowings under line of credit 33,593,364 37,488,600 35,608,070
Repayments under line of credit (31,458,478) (37,428,968) (31,804,326)
Increase in deferred financing cost (67,750) (57,070) -
Proceeds from the issuance of notes payable 6,391,319 3,339,564 1,990,000
Repayments of notes payable (3,777,165) (240,000) (100,000)
Proceeds from issuance of common stock 288,173 285,926 462,732
Net proceeds from the issuance of common and Preferred stock
in a private placement - 770,000 1,460,000
Proceeds from the exercise of stock purchase options - - 102,250
Payment of dividends (356,500) (317,333) (156,375)
Net assets of discontinued operations (319,531) 319,531 (1,219,814)
------------ ------------ ------------
Net cash provided by financing activities 4,293,432 4,160,250 6,342,537
------------ ------------ ------------
Foreign currency translation - - (2,463)
------------ ------------ ------------
Net Increase (Decrease) In Cash 389,387 (694,992) 190,937
------------ ------------ ------------
Cash and cash equivalents, beginning of year 255,483 950,475 759,538
------------ ------------ ------------
Cash and cash equivalents, end of year $ 644,870 $ 255,483 $ 950,475
------------ ------------ ------------
Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest $1,219,870 $ 928,597 $ 1,084,238
============ ============ ============
Income taxes paid $ 44,962 $ 84,858 $ 34,604
============ ============ ============
Supplemental disclosures of non-cash, investing
and financing activities:
Common stock issued for acquisition $ - $ - $ 244,068
============ ============ ============
Common stock issued for note conversions $ 661,200 $ 1,764,354 $ 2,734,646
============ ============ ============
The accompanying notes are an integral part of these statements
F-11
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2006, 2005 and 2004
NOTE A - DESCRIPTION OF THE BUSINESS
Synergy Brands, Inc. and its subsidiaries (collectively, "Synergy" or the
"Company") is engaged in the distribution of a variety of products, including
health and beauty aids and premium handmade cigars, directly to consumers
(business to consumer) and to businesses (business to business). In addition,
the Company develops and operates Internet platform operations and
Internet-based businesses designed to sell these products. Synergy was
incorporated on September 26, 1988 in the state of Delaware.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation of
the accompanying consolidated financial statements is as follows:
1. Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Synergy, its wholly-owned subsidiaries and majority-owned subsidiary
(collectively, the "Company"). 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.
F-12
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2006, 2005 and 2004
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.
F-13
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2006, 2005 and 2004
NOTE B (continued)
Accounts receivable trade, net consist of the following components at December
31, 2006 and 2005:
2006 2005
----------- ----------
Accounts receivable - business to business $11,154,841 $7,484,084
Accounts receivable - business to consumer 138,620 121,536
----------- ----------
Total $11,293,461 $7,605,620
Less allowance for doubtful accounts (127,481) (127,481)
----------- ----------
$11,165,980 $7,478,139
=========== ==========
Changes in the Company's allowance for doubtful accounts during the years ended
December 31, 2006 and 2005 are as follows:
2006 2005
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, 2006 totaled approximately $600,000.
There are no balances in excess of Federally insured limits at December 31,
2005.
During the year ended December 31, 2006, sales to three customers accounted for
21%, 16% and 12% of total sales, respectively. 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 year ended December 31, 2005, sales to three customers accounted for
12%, 11% and 10% of total sales and in 2004, sales to two customers accounted
for 21% and 18% of total sales, respectively. Four customers accounted for 22%,
20%, 15% and 12%, respectively of accounts receivable at December 31, 2005.
These concentrations relate to the Company's PHS Group segment.
During the years ended December 31, 2006, 2005 and 2004, the Company purchased
approximately 40%, 40 % and 53%, respectively, of its products from one
supplier. If the Company were unable to maintain this relationship, it might
have a material impact on future operations.
F-14
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2006, 2005 and 2004
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, 2006 and
2005, the Company recognized approximately $ 2,272,273 and $2,196,955 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
$2,453,705 and $1,730,806 at December 31, 2006 and 2005.
F-15
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2006, 2005 and 2004
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.
On June 1, 2003, the Company acquired the common stock of Ranley Group, Inc.
(d.b.a. Cigars Around the World ("CAW") of Chicago, Illinois). Intangible assets
acquired, which consist primarily of customer lists, are being amortized over an
eleven (11) year estimated useful life from the date of acquisition.
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.
Prior to the adoption of Statement of Financial Accounting Standards No. 142
("SFAS No. 142"), "Goodwill and Other Intangible Assets," these intangible
assets other than Goodwill were amortized over their estimated useful life of
five years. As a result of the adoption of SFAS No. 142 in 2002, intangible
assets with indefinite useful lives are no longer being amortized but instead
are being reviewed for impairment when impairment indicators are present. As a
result, the Company's trade names will no longer be amortized. The Company's
customer lists have finite lives. Management considered various factors,
including appraisals, in determining that a revision to the estimated useful
life of the Company's customer lists should be made. Based upon the analysis, it
was determined in 2003 that the estimated useful life should be extended
prospectively, by a term of six years from the original useful life of five
years. As a result, the remaining carrying amount will be amortized
prospectively over the remaining useful life. In 2006, 2005, and 2004 the
amortization expense recorded for each of the years was $59,916.
At December 31, 2006 and 2005, intangible assets are comprised of the following:
Amortized intangible assets 2006 2005
---------- ----------
Customer lists $ 677,523 $ 677,523
Less accumulated amortization (389,226) (329,310)
---------- ----------
Total $288,297 $348,213
========== ==========
Amortization expense for the Company over the next four years is estimated to be
approximately $60,000 per year. Amortization expense for 2012 is estimated to be
$50,000.
F-16
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2006, 2005 and 2004
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.
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 is recorded as
deferred revenue.At December 31, 2006 approximately $600,000 was received by the
Company for goods to be shipped in January 2007. In addition, the Company at
December 31, 2006 and 2005 has recorded deferred revenue of $127,000 in relation
to the ITT warrants (see Note H).
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 Loss Per Share
Basic and diluted loss per share is calculated by dividing the net loss by the
weighted-average number of common shares outstanding during each period.
Incremental shares from assumed
F-17
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2006, 2005 and 2004
NOTE B (continued)
exercises of stock options, warrant and convertible debt and equity securities
of 995,749, 1,317,702 and 951,468 for the years ended December 31, 2006, 2005
and 2004, 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, 2006, the Company has two stock-based employee compensation
plans, which are described more fully in Note K. The Company had accounted for
stock-based compensation to employees and directors using the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations ("APB
No. 25") and had adopted the disclosure provisions of SFAS No. 148. 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.
The following table illustrates the effect on net income (loss) and earnings
(loss) per share had the Company applied the fair value recognition provisions
of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," to stock-based employee compensation.
Year ended December 31,
2005 2004
Net loss, as reported $ (2,560,778) $(1,976,379)
Add: Total stock-based employee
compensation expense included
in reported net loss
Deduct: Total stock-based employee
compensation expense determined
under fair value-based method for all
awards (27,184) -
------------- -------------
Pro forma net loss $ (2,587,962) $(1,976,379)
============== =============
Loss per share attributable to common shareholders
Basic and diluted - as reported from continuing operations $ ( 0.48) $ (0.87)
============== =============
Basic and diluted - as reported from discontinued operations $ ( 0.27) $ (0.10)
============== =============
Basic and diluted - pro forma from continuing operations $ (0.49) $ (0.87)
============== =============
Basic and diluted - pro forma from discontinued operations $ (0.27) $ (0.10)
============== =============
F-18
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2006, 2005 and 2004
NOTE B (continued)
Pro forma compensation expense may not be indicative of pro forma expense in
future years. For purposes of estimating the fair value of each option on the
date of grant, the Company utilized the Black-Scholes option-pricing model.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The weighted-average option fair values and the assumptions used to estimate
these values are as follows:
2005
------
Dividend yield 0%
Expected volatility 40%
Risk-free rate of return 4.0%
Expected life 1 year
Weighted-average option fair value $2.07
On October 1, 2005 performance stock options to purchase 300,000 shares of
common stock at $2.07 per share were granted to employees. These options were
cancelled in January 2006. There were no stock options granted in 2006 and 2004.
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 S).
F-19
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2006, 2005 and 2004
NOTE B (CONTINUED)
17. Recent Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 151 "Inventory Costs."
This statement amends Accounting Research Bulletin No. 43, Chapter 4, "Inventory
Pricing" and removes the "so abnormal" criterion that under certain
circumstances could have led to the capitalization of these items. SFAS No. 151
requires that idle facility expense, excess spoilage, double freight and
re-handling costs be recognized as current-period charges regardless of whether
they meet the criterion of "so abnormal." SFAS 151 also requires that allocation
of fixed production overhead expenses to the costs of conversion be based on the
normal capacity of the production facilities. The provisions of this statement
shall be effective for all fiscal years beginning after June 15, 2005. The
Company's adoption of SFAS No.151 did not have a material impact on the
Company's financial position or results of operations.
On December 16, 2004, the FASB issued SFAS No. 153, "Exchange of Non-monetary
Assets", an amendment of Accounting Principles Board ("APB") Opinion No. 29,
which differed from the International Accounting Standards Board's ("IASB")
method of accounting for exchanges of similar productive assets. Statement No.
153 replaces the exception from fair value measurement in APB No. 29, with a
general exception from fair value measurement for exchanges of non-monetary
assets that do not have commercial substance. The statement is to be applied
prospectively and is effective for non-monetary asset exchanges occurring in
fiscal periods beginning after June 15, 2005. The Company's adoption of SFAS
No.153 did not have a material impact on the Company's financial position or
result of operations.
In May 2005, the FASB issued Statement No. 154, "Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3."
("SFAS 154") This Statement requires retrospective application to prior period
financial statements of a voluntary change in accounting principle unless it is
impracticable and is effective for fiscal years beginning after December 15,
2005. Previously, most voluntary changes in accounting principle were recognized
by including in net income of the period of the change the cumulative effect of
changing to the new accounting principle. The Company's adoption of SFAS 154 did
not have a material impact on the Company's financial position or results of
operations.
F-20
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2006, 2005 and 2004
NOTE B (CONTINUED)
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.
We believe that the adoption of this standard on January 1, 2007 will not have a
material effect on our consolidated financial statements.
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.
In July 2006, the FASB issued FASB Interpretation 48, "Accounting for
Uncertainty in Income Taxes ("FIN 48"). 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. We believe that the adoption of FIN 48 will
not have a material impact on our consolidated financial statements. For our
Company, this interpretation will be effective beginning January 1, 2007.
The SEC issued Staff Accounting Bulletin No. 108 ("SAB 108") in September 2006.
SAB 108 expresses the views of the SEC staff regarding the process of
quantifying the materiality of financial misstatements. SAB 108 requires both
the balance sheet and income statement approaches be used when quantifying the
materiality of misstatement amounts. In addition, SAB 108 contains guidance on
correcting errors under the dual approach and provides transition guidance for
correcting errors existing in prior years. SAB 108 was effective in the
Company's fourth quarter of 2006. The adoption SAB 108 did not have a material
impact on the Company's consolidated financial statements.
18. Reclassifications
Certain 2004 and 2005 balances have been reclassified to conform with 2006
classifications, including presenting the operations of the Pro-Set segment (see
Note S).
F-21
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2006, 2005 and 2004
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 - MARKETABLE SECURITIES
At December 31, 2006 and 2005, the Company has no marketable securities. In the
past, the Company accounted for marketable securities as available-for-sale
securities. In accordance with FASB 115, these equity securities were accounted
for at fair market value and any unrealized gains (losses) were treated as an
increase or decrease to equity.
Proceeds from the sale of available-for-sale securities and the resulting net
realized gains included in the determination of net loss for the years ended
December 31, 2004.
2004
Available-for-sale securities ---------
Proceeds $194,515
Gross realized gains 19,973
Gross realized losses (35,766
F-22
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2006, 2005 and 2004
NOTE E - INVENTORY
Inventory as of December 31, 2006 and 2005 consisted of the following:
2006 2005
--------- --------
Grocery, health and beauty products $802,090 $739,769
Tobacco finished goods 487,131 441,454
---------- --------
$1,289,221 $1,181,223
=========== ==========
The allowance for slow moving and obsolete inventory approximated $35,000 and
$35,000 at December 31, 2006 and 2005, respectively.
NOTE F - PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 2006 and 2005 consisted of the
following:
2006 2005
--------- ---------
Office equipment $205,742 $205,742
Furniture and fixtures 84,196 84,196
Leasehold improvements 422,538 386,854
--------- ---------
712,476 676,792
Less accumulated depreciation and amortization (459,526) (399,948)
--------- ---------
$252,950 $276,844
========= =========
Depreciation and amortization expense on property and equipment for the years
ended December 31, 2006, 2005 and 2004 was approximately $60,000, $62,000 and
$76,000, respectively.
F-23
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2006, 2005 and 2004
NOTE G - OTHER ASSETS
Other assets consist of the following at December 31, 2006 and 2005:
2006 2005
--------- ---------
Investment (a) $562,593 $364,340
Investment in warrants (b) 127,000 127,000
CAW purchase agreement; net of accumulated amortization of $145,827
and $87,495 29,173 87,505
Deferred financing net of accumulated
amortization of $204,660 and $103,555
Other 121,591 154,945
69,097 69,097
--------- ---------
$ 909,454 $ 802,887
========= =========
(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, 2006, the Companies 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 $227,054, $56,311 and $172,224 during the years ended December 31, 2006,
2005 and 2004, respectively. At December 31, 2006, the investment in ITT is
$562,593 as included in "Other Assets" on the accompanying balance sheet.
(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). In relation to the ITT warrants, Company
has recorded deferred income of $127,000.
F-24
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2006, 2005 and 2004
NOTE G (continued)
Summarized audited financial information of this investee as of December 31,
2006, 2005, and 2004 and for the years then ended is as follows:
Financial position: 2006 2005
------------ ------------
Current assets $5,334,000 $4,229,000
Property and equipment 666,000 735,000
Other assets 5,728,000 4,720,000
------------ ------------
Total assets $11,728,000 $9,684,000
------------ ------------
Current liabilities $4,977,000 $3,823,000
Long-term debt 4,289,000 4,983,000
------------ ------------
Total liabilities $9,266,000 $8,806,000
------------ ------------
Results of operations: 2006 2005 2004
------------ ------------ ------------
Revenues $32,464,000 $14,715,000 $10,883,000
Total expenses (30,993,000) (14,528,000) (9,934,000)
Other income 322,000 325,000 111,000
------------ ------------ ------------
Income before income taxes 1,793,000 512,000 1,069,000
Income tax expense (632,000) (211,000) (359,000)
------------ ------------ ------------
Net income $ 1,161,000 $ 301,000 $ 701,000
------------ ------------ ------------
F-25
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2006, 2005 and 2004
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. Sales of
selected products to this customer base approximated $3,180,000 in 2004. The
Company recorded a loss of $79,134 related to the sale of the accounts
receivable to West Cost Supplies, Inc. in 2004. The balance of the Note
Receivable at December 31, 2006 was $1,635,340.
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. The
outstanding balance of the note payable at December 31, 2006 was $857,143.
NOTE I - LINE OF CREDIT AGREEMENT, NOTES PAYABLE AND NOTE PAYABLE TO STOCKHOLDER
In 2002, two of the Company's subsidiaries entered into two revolving loan and
security agreements with the same financial institution (the "Lender"). The
lines of credit, as amended in July 2006, allow for the borrowing of up to
$6,000,000 based on the sum of 85% of the net face amount of eligible accounts
receivable, as defined, plus the lesser of (1) $2,750,000 or (2) eligible
inventory and eligible goods in transit, as defined. $5,836,928 was outstanding
under the agreements at December 31, 2006. As amended, the agreement extended
through December 31, 2007. The Company is seeking to refinance its secured
financing needs through other asset based Lenders (see Note T). Interest accrues
on outstanding borrowings at the greater of (i) 5% per annum in excess of the
prime rate or (ii) 10.5% per annum. At December 31, 2006, the interest rate on
outstanding borrowings was 13.25%. Outstanding borrowings are collateralized by
a continuing security interest in all of the subsidiaries' accounts receivable,
chattel paper, inventory, equipment, instruments, investment property, documents
and general intangibles. In addition, 202,120 shares of the Company's common
stock remain as collateral on the outstanding borrowings. The agreements provide
for minimum annual interest charges. In 2006, the lender converted $331,200 of
outstanding debt into 289,080 shares of common stock (see note J). In 2005, the
lender converted $1,003,000 of outstanding debt into 427,532 shares of common
stock (see Note J).
F-26
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2006, 2005 and 2004
NOTE I (continued)
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, 2007. In addition, 19,600 restricted
shares of the Company's common stock were also issued as part of the financing.
The relative estimated fair value of the common stock that was issued of $75,000
was recorded as debt discount and will be amortized over the life of the notes
payable. As security for the notes, the Company pledged as collateral its
investment in the common stock of ITT (see Note G). Amortization expense
recorded in 2006, 2005 and 2004 was approximately $6,259, $37,500, and $31,000
respectively. At December 31, 2006 the outstanding balance was $490,000.
On April 2, 2004 the Company completed a financing with Laurus Master Funds
("Laurus"). The financing consisted of a $1.5 million secured convertible
debenture that converts into common stock under certain conditions at $1.75 per
share as amended, and matures on April 2, 2007. The debenture provides for
monthly payments of $50,000, plus interest commencing October 1, 2004. In
addition, Laurus was issued 100,000 warrants exercisable at $3.00 per share. The
debenture has a three-year term with a coupon rate of prime plus 3%. The Company
has filed an S-3 registration statement, which has been granted effectiveness to
register the common stock underlying the debenture and warrant. In 2004, the
Company converted $500,000 of this outstanding debt into 100,000 shares of
common stock. In March 2005, the Company converted $525,000 of this outstanding
debt into 150,000 shares of common stock. In 2006 the Company converted $150,000
of this outstanding debt into 159,574 shares of common stock. The conversion
price was reduced from $1.75 to $0.94. The Company repaid $175,000 of this debt
at December 31, 2006. At December 31, 2006, the outstanding balance was
$150,000.
On January 25, 2005, the Company completed a second financing with Laurus. The
financing consisted of a $500,000 secured convertible debenture that converts
into common stock under certain conditions at $1.75 per share as amended, and
matures on January 25, 2008. The financing provides Laurus with registration
rights for common shares it is issued under conversion. The debenture provides
for monthly payments of $16,666.67 plus interest, commencing August 1, 2005. The
Company repaid $83,334 of this debt at December 31, 2005 and $150,000 during
2006. In July 2006, the Company converted $50,000 of this outstanding debt into
50,000 shares of common stock. The conversion price was reduced from $1.75 to
$1.00. In December 2006, the Company converted $40,000 of this outstanding debt
into 43,478 shares of common stock. The conversion price was reduced from $1.75
to $ 0.92. In addition, Laurus was issued 33,333 warrants exercisable at $3.50
per share. The debenture has a three-year term with a coupon rate of prime plus
3%. The conversion prices on the Laurus debentures were always above the current
stock price at the closing date. At December 31, 2006 the outstanding balance
was $176,666.
F-27
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2006, 2005 and 2004
NOTE I (continued)
In January 2005, the Company entered into a promissory note with major regional
bank for $1,000,000. Borrowing under the note bears interest at prime (7.75% at
December 31, 2006). This note was extended and the Company is not required to
repay any principal until the maturity date of the note, September 1, 2007. As
security for the note, a pledge agreement was entered by certain Shareholders of
ITT. Borrowings at December 31, 2006 were $500,000.
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. In addition, 25,000 restricted shares of the Company's common stock were
also issued as part of the financing. The relative estimated fair value of the
common stock that was issued of $54,000 was recorded as debt discount and will
be amortized over the life of the notes payable. As security for the notes, the
Company pledged as collateral its investment in the common stock of ITT (see
Note G). Amortization expense recorded in 2006 and 2005 was approximately
$27,000 and $20,250.
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. In addition, 5,000 restricted shares of the Company's common stock were
also issued as part of the financing. The relative estimated fair value of the
common stock that was issued of $9,500 was recorded as debt discount and will be
amortized over the life of the notes payable. As security for the notes, the
Company pledged as collateral its investment in the common stock of ITT (See
Note G). Amortization expense recorded in 2006 and 2005 was approximately $4,800
and $3,200.
On June 21, 2005, the Company completed a third financing with Laurus. The
financing consisted of a $500,000 secured convertible debenture that converts
into common stock under certain conditions at $1.75 per share as amended, and
matures on June 21, 2008. The financing provides Laurus with registration rights
for common shares it is issued under conversion. The debenture provides for
monthly payments of $16,666.67 plus interest, commencing December 1, 2005. The
Company repaid $16,667 of the debt at December 31, 2005 and $150,000 during
2006. In July 2006, the Company converted $50,000 of this outstanding debt into
50,000 shares of common stock. The conversion price was reduced from $1.75 to
$1.00. In December 2006, the Company converted $40,000 of this outstanding debt
into 43,478 shares of common stock. The conversion price was reduced from $1.75
to $0.92. In addition, Laurus was issued 33,333 warrants exercisable at $ 3.50
per share. The Company's common stock quoted market price at the date of closing
was $2.15 per share. The debenture has a three-year term with a coupon rate of
prime plus 3%. The Company recorded a charge of $18,000 as prepaid expense for
the fair value of the warrants, and this amount will be amortized over the life
of the note. At December 31, 2006 the outstanding balance was $243,333.
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).
On March 14, 2006 the Company closed a $1.75 million junior secured three year
loan with an Laurus bearing a fixed interest rate of 10%. Payments will be made
at a rate of $32,000 per month starting 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 at December 31, 2006. At December 31, 2006 the outstanding
balance was $1,654,000.
In the fourth quarter of 2006, the Company secured $1,800,000 from shareholders
of short term financing that matures in the first quarter of 2007. The advance
may be extended by mutual consent.
Principal repayments of notes payable at December 31, 2006 are as follows:
Year Ending December 31,
2007 $ 4,227,000
2008 $ 500,000
2009 $ 886,000
2010 $ 857,000
-------------
$ 6,470,000
Discounts $ (312,000)
------------
Total $ 6,158,000
============
F-28
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2006, 2005 and 2004
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 of $10.50
per share before common stock and redemption at option of Company at $10.50 per
share. In November 2006, 6,787 Class A preferred stock was redeemed 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 2006 and January 2005 in compliance
with the subscription agreements dated February 26, 2003 and 50,000 common
shares to Class B Series A Preferred Shareholder in July 2006 and July 2005, 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. In November
2004, the Company sold 17 units and received aggregate proceeds of $1,700,000.
Also in November 2004, the Company exchanged $245,000 compensation due to
William Rancic for two units of Class B Series A Preferred stock at $100,000 per
unit. 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.
In 2006, Laurus Master Funds converted $330,000 of debt into 346,530 of shares
of common stock and in 2005, Laurus Master Funds converted $525,000 of debt into
150,000 shares of common stock. Also in 2006, the Company converted $331,200
outstanding debt of IIG into 289,080 shares of common stock and in 2005, the
Company converted $1,003,000 outstanding debt of IIG into 427,532 shares of
common stock. In 2005, certain shareholders of ITT converted $236,354 of debt
into 94,452 shares of common stock (see Note I).
For the years ended December 31, 2006 and 2005, the Company issued 150,910 and
98,964 shares of common stock as compensation for past and future service and
recorded a charge to operations of $180,549 and $104,025. For the year ended
December 31, 2006 the Company issued 499,300 shares of common stock in
connection with the sale of securities and the satisfaction of certain
obligations which included 130,000 shares to satisfy certain liabilities (See
Note H).
F-29
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2006, 2005 and 2004
NOTE J (continued)
Effective January 2006, the Company cancelled options to acquire 300,000 shares
of common stock held by employees. There are no option outstanding with
employees at December 31, 2006.
For the years ended December 31, 2004 the Company received proceeds of $102,250
from the exercise of stock options to purchase 110,000 shares of the Company's
common stock. In connection with such options of which 15,000 were modified, in
2004 the Company recorded compensation expense and a credit to additional
paid-in capital of $30,750.
The following is a summary of transactions involving warrants to purchase common
stock for the years ended December 31, 2006, 2005 and 2004.
Weighted-
Number average
of shares exercise price
---------- --------------
Outstanding at January 1,, 2004 210,000 $ 6.40
Granted 100,000 5.00
----------
Outstanding at December 31, 2004 310,000 $ 5.95
Granted 66,666 1.00
Cancelled/Forfeited (96,250) (6.75)
----------
Outstanding at December 31, 2005 280,416 $ 4.38
Granted 270,000 -
Cancelled/Forfeited (82,500) (6.52)
---------- ------------
Outstanding at December 31, 2006 467,916 $1.47
========== ============
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 2006 life (years) price 2006 price
---------------- --------------- -------------- ------------ ---------------- -----------
$0.00-$0.99 270,000 4.25 $0.0010 270,000 $0.0010
$1.00-$4.00 166,666 5.16 $ 3.20 166,666 $ 3.20
$5.00-$12.00 31,250 5.16 5.50 31,250 5.50
--------------- -------------- ------------ ---------------- -----------
467,916 4.85 $ 1.47 467,916 $ 1.47
=============== ============== ============ ================ ===========
F-30
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2006, 2005 and 2004
NOTE K - STOCK COMPENSATION PLANS
In 1994, Synergy adopted the 1994 Services and Consulting Compensation Plan (the
"Plan"). Under the Plan, as amended, 8,400,000 shares of common stock have been
reserved for issuance. The Plan terminates with respect to the granting of
common stock and options in 2009. Since the inception of the Plan, Synergy has
issued 1,430,907 shares for payment of services to employees and professional
service providers such as legal, marketing, promotional and investment
consultants. Common stock issued in connection with the Plan was valued at the
fair value of the common stock at the date of issuance or at an amount equal to
the service provider's invoice amount. During the years ended December 31, 2006,
2005 and 2004, the Company issued 150,910, 98,964 and 42,195 shares of its
common stock, respectively, to various service providers and has recorded a
charge to earnings of $180,549, $104,025 and $150,621. 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, 2006 and 2005.
The following is a summary of such stock option transactions for the years ended
December 31, 2006, 2005 and 2004 in accordance with the Plan and other
restricted stock option agreements:
Weighted-
Number average
of shares exercise price
----------- ------------------
Outstanding at January 1, 2004 481,650 $ 10.42
Exercised (110,000) (3.68)
----------- ------------------
Outstanding at December 31, 2004 371,650 $ 13.10
Granted 300,000 2.07
Cancelled/Forfeited (371,650) (12.15)
----------- ------------------
Outstanding at December 31, 2005 300,000 $ 2.07
Cancelled/Forfeited (300,000) (2.07)
----------- ------------------
Outstanding at December 31, 2006 - -
=========== ==================
Shares available for grant
December 31, 2006 7,270,913
=========
December 31, 2005 7,120,003
=========
December 31, 2004 7,218,967
=========
F-31
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2006, 2005 and 2004
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, 2006 and 2005.
NOTE L - TRANSACTIONS WITH RELATED PARTIES
At December 31, 2006 and 2005, $23,706 and $61,882 is payable to the Company's
Chairman and Chief Executive Officer for short-term advances made to the
Company.
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.
F-32
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2006, 2005 and 2004
NOTE M - OTHER INCOME (EXPENSE)
Other income (expense) is comprised of the following:
2006 2005 2004
--------- ---------- ----------
Gain (loss) on sales of marketable securities (Note D) - - (15,793)
Other (22,039) (20,469) 49,588
--------- ---------- ----------
$(22,039) $(20,469) $ 33,795
========= ========== ==========
NOTE N - INCOME TAXES
At December 31, 2006, the Company had a net operating loss carry forward of
approximately $34,200,000 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, 2006 were approximately as follows:
Net operating loss carry forwards $ 11,628,000
Fixed assets and intangibles 484,000
Allowance for doubtful accounts 166,000
Inventory 126,000
Capital losses 56,000
Other (200,000)
Valuation allowance (12,260,000)
---------------
$ -
===============
The valuation allowance increased by approximately $ 583,000 in 2006.
Income taxes expense for the years ended December 31, 2006, 2005 and 2004
including amounts attributable to discontinued operations consisted, of the
following:
2006 2005 2004
-------- -------- ----------
State and local $44,962 $84,858 $ 34,604
======== ======== ==========
F-33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2006, 2005 and 2004
NOTE N (continued)
A reconciliation of income tax expense computed at the U.S. Federal statutory
rate of 34% and the Company's effective tax rate for the years ended December
31, 2006, 2005 and 2004 are as follows:
2006 2005 2004
------- ----- ------
Federal income tax expense at statutory rate (34)% (34)% (34)%
Increase (decrease) resulting from
Increase in valuation allowance 34 34 34
State and local income taxes, net of Federal
benefit .9 .9 .9
------- ----- ------
.9% .9% .9%
NOTE O - QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Quarterly financial results for the years ended December 31, 2006 and 2005 are
as follows:
THREE MONTHS ENDED
3/31/2006 6/30/2006 9/30/2006 12/31/2006 TOTAL
SALES $ 14,878,155 $ 15,679,679 $18,607,807 $22,594,267 $ 71,759,908
GROSS PROFIT $ 1,074,371 $ 1,148,123 $ 1,288,286 $ 1,448,465 $ 4,959,245
NET INCOME (LOSS) FROM CONTINUING OPERATIONS $ (375,272) $ (260,145) $ (247,924) $ (432,127) $(1,315,468)
NET INCOME (LOSS) FROM DISCONTINUED OPERATING $ (3,414) $ (55,519) $ (108,306) $(1,192,225) $(1,359,464)
------------- ------------- ------------ ----------- -------------
NET LOSS $ (378,686) $ (315,664) $ (356,230) $(1,624,352) $(2,674,932)
BASIC AND DILUTED NET LOSS PER COMMON SHARE FROM
CONTINUING OPERATING: $ (0.10) $ (0.07) $ (0.06) $ (0.10) $ (0.33)
BASIC AND DILUTED NET LOSS PER COMMON SHARE FROM
DISCONTINUED OPERATIONS: $ - $ (0.02) $ (0.02) $ (0.23) $ (0.27)
------------- ------------- ------------ ----------- -------------
TOTAL $ (0.10) $ (0.09) $ (0.08) $ (0.33) $ (0.60)
DIVIDEND PREFERED STOCK $ 90,250 $ 90,250 $ 85,750 $ 90,250 $ 356,500
THREE MONTHS ENDED
3/31/2005 6/30/2005 9/30/2005 12/31/2005 TOTAL
SALES $ 14,757,963 $ 15,339,974 $ 16,864,434 $16,387,811 $ 63,350,182
GROSS PROFIT $ 803,000 $ 1,154,480 $ 1,167,950 $ 880,684 $ 4,006,114
NET INCOME (LOSS) FROM CONTINUING OPERATIONS $ (493,472) $ (99,331) $ (176,660) $ (759,739) $ (1,529,202)
NET INCOME (LOSS) FROM DISCONTINUED OPERATING $ (124,425) $ (107,289) $ (141,029) $ (658,833) $ (1,031,576)
------------- ------------- ------------ ----------- -------------
NET LOSS $ (617,897) $ (206,620) $ (317,689) $1,418,572) $ (2,560,778)
BASIC AND DILUTED NET LOSS PER COMMON SHARE FROM
CONTINUING OPERATING: $ (0.17) $ (0.05) $ (0.06) $ (0.20) $ (0.48)
BASIC AND DILUTED NET LOSS PER COMMON SHARE FROM
DISCONTINUED OPERATIONS: $ (0.04) $ (0.03) $ (0.03) $ (0.17) $ (0.27)
TOTAL $ (0.21) $ (0.08) $ (0.09) $ (0.37) $ (0.75)
DIVIDEND - PREFERED STOCK $ 74,250 $ 74,250 $ 78,583 $ 90,250 $ 317,333
F-34
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2006, 2005 and 2004
NOTE P - 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 2006, 2005 and 2004 the Company
match was $28,627, $20,812 and $17,275.
NOTE Q - COMMITMENTS AND CONTINGENCIES
1. Lease Commitments
The Company leases office and warehouse space under operating leases expiring at
various dates through June 2011. The Company is also leasing vehicles under
operating leases. Future minimum lease payments under noncancelable operating
leases as of December 31, 2006 were as follows:
Year ending December 31,
2007 $429,747
2008 $422,420
2009 $413,317
2010 $408,390
2011 $233,762
thereafter $103,71
Rent expense under operating leases for the years ended December 31, 2006, 2005
and 2004 was approximately $382,000, $375,000 and $190,000 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.
F-35
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2006, 2005 and 2004
NOTE R- 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, 2006, 2005 and 2004,
as shown below the segment information does not include the discontinued segment
of Proset:
PHS Group GRC Corporate Total
------------ ------------ ------------ -----------
Year ended December 31, 2006
Revenue $69,840,886 $1,919,022 - $71,759,908
Net profit (loss) attributable to 779,634 (311,210) (2,140,392) (1,671,968)
common stockholder
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 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
PHS Group GRC Corporate Total
------------ ------------ ------------ -----------
Year ended December 31, 2005
Revenue $61,450,467 $1,899,715 - $63,350,182
Net loss attributable to common (111,784) (445,505) (1,289,246) (1,846,535)
stockholder
Depreciation and amortization 12,804 156,477 145,264 314,545
Interest income - - 102,644 102,644
Other income (expense) (3,581) (16,888) - (20,469)
Equity in earnings of investee - - 56,311 56,311
Interest and financing expenses 1,297,348 - 216,058 1,513,406
Identifiable assets 10,056,544 1,715,940 4,187,603 15,960,087
Additions to long-lived assets 10,735 61,594 - 72,329
Investment in affiliate - - 364,340 364,340
PHS Group GRC Corporate Total
------------ ------------ ------------ -----------
Year ended December 31, 2004
Revenue $50,728,560 $2,052,661 - $52,781,221
Net loss attributable to common
Stockholder $ (167,951) (644,870) (1,100,729) (1,913,550)
Depreciation and amortization 6,501 145,301 296,768 448,570
Interest income 4,344 - 266 4,610
Other income (expense) 71,586 (21,139) (16,652) 33,795
Equity in earnings of investee - - 172,224 172,224
Interest and financing expenses 1,168,607 42,500 109,501 1,320,608
Identifiable assets 9,160,367 1,837,998 3,590,427 14,588,792
Additions to long-lived assets 85,980 175,000 29,078 290,058
Investment in affiliate - - 336,828 336,828
F-36
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2006, 2005 and 2004
NOTE R (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, 2006, 2005 and 2004, is as follows:
2006 2005 2004
-------------- -------------- -------------
Revenue
United States $ 49,041,460 $ 31,103,702 $ 26,850,659
Canada 22,718,448 32,246,480 25,930,562
-------------- -------------- -------------
$71,759,908 $ 63,350,182 $ 52,781,221
============== ============== =============
Accounts receivable
United States $6,005,782 $ 795,738
Canada 5,160,198 6,682,401
-------------- --------------
$11,165,980 $ 7,478,139
============== ==============
Identifiable assets of continuing operations
United States $20,740,614 $15,960,087
Canada - -
-------------- --------------
$20,740,614 $ 15,960,087
============== ==============
F-37
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2006, 2005 and 2004
NOTE S - 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, 2006 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, 2006 and December 31, 2005.
The Company recorded impairment loss of (i) 293,586, for the year ended December
31, 2005 and (ii) an additional impairment loss of $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.
Summarized financial information of the Pro-Set segment as discontinued
operations for each of the three years ended as follows:
Year ended Year ended Year ended
------------- --------------- ----------------
Dec.31, 2006 Dec. 31, 2005 Dec. 31, 2004
------------- --------------- ----------------
Net Sales $ 1,222,834 $ 786,908 $3,923,823
Cost of sales
Cost of product 1,260,694 867,036 3,206,187
Shipping and handling costs 144,772 98,607 129,482
------------- --------------- ----------------
1,405,466 965,643 3,335,669
Gross Profit (182,632) (178,735) 588,154
Operating expenses:
Advertising and promotion 1,046 900 -
General and administrative 594,008 291,134 282,747
Depreciation and amortization 157,650 183,420 210,920
Asset impairment charge 359,353 293,586 -
------------- --------------- ----------------
1,112,057 769,040 493,667
Operating profit (loss) (1,294,689) (947,775) 94,487
Other Income (expenses):
Other income (expenses) (1,024) (1,035) (80,778)
Interest and financing expenses (62,765) (80,233) (232,913)
------------- --------------- ----------------
(63,789) (81,268) (313,691)
Net loss before income taxes (1,358,478) (1,029,043) (219,204)
Income tax expense 986 2,533 -
------------- --------------- ----------------
Net loss from discontinued operations $ (1,359,464) $ (1,031,576) $ (219,204)
============= =============== ================
F-38
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2006, 2005 and 2004
NOTE S (continued)
Dec.31, 2006 Dec. 31, 2005
-------------- --------------
ASSETS:
CURRET ASSETS:
CASH AND CASH EQUIVALENTS $ 1,782 $ 8,071
ACCOUNTS RECEIVABLE TRADE 44,632 16,185
OTHER RECEIVABLES 28,563 117,563
INVENTORY 52,205 728,092
PREPAID ASSETS AND OTHER CURRENT ASSETS - 5,637
PROPERTY AND EQUIPMENT, NET - 79,170
INTANGIBLE ASSETS,NET OF ACCUMULATED
AMORITIZATION OF $ 2,627,469 AND $ 2,189,639 - 437,833
-------------- --------------
TOTAL ASSETS $ 127,182 $1,392,551
-------------- --------------
LIABILITIES:
NOTES PAYABLE $ - $ 319,531
ACCOUNTS PAYABLE 112,569 206,288
-------------- --------------
TOTAL LIABILITIES $ 112,569 $ 525,819
============== ==============
NOTE T - SUBSEQUENT EVENTS
Effective January 19, 2007, Synergy Brands Inc. completed a $6.5 million secured
financing with Lloyd I. Miller, a major shareholder and a director of Synergy
Brands for its main operating subsidiary PHS Group Inc. The financing consisted
of $6.5 million in secured term notes to be amortized over a 5 year period, with
a balloon payment of $3,250,000 in January 2012 at an interest rate of 11.25%,
that may be reduced to 11% under certain conditions. The agreement further
involved a securities purchase agreement that added 1,075,000 common shares of
Synergy Brands to Lloyd Miller and retired all warrants beneficially owned by
Mr. Miller.
F-39