SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2007.
Commission file number 0-19409
SYNERGY BRANDS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-2993066
(State of incorporation) (I.R.S. Employer Identification No.)
223 Underhill Blvd.
Syosset, NY 11791
(Address of corporate offices)
Registrant's telephone number, including area code: 516-714-8200
Securities registered pursuant to Section 12(b) of the
Act:
Title of Each Class Name of Exchange
Common Stock, $.001 par value NASDAQ/Capital Market System
and Boston Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. YES __ NO_X____
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. YES___NO__X____
Note-Checking the box will not relieve any registrant required to file
reports pursuant to Section 13 or 15(d) of the Exchange Act from their
obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes_X_ NO__
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. []
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes__NO_X_
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). YES________NO X___
Indicate by check mark whether the registrant is and is reporting utilizing
the scaled disclosure standards of Regulation SK allowed to Smaller Reporting
Company. YES_X__NO___
Synergy Brands Inc. revenues for its most recent fiscal year were
$89,540,501.
On March 28, 2008, the aggregate market value of the voting stock of
Synergy Brands Inc., held by non-affiliates of the Registrant was approximately
$6,900,000. This determination of affiliate status is not necessarily a
conclusive determination for other purposes. The number of outstanding shares of
the Registrant's Common Stock as of March 28, 2008 was 11,698,010.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Registrant's 2007 Annual Meeting of
Stockholders currently scheduled to be held June 2008 are incorporated by
reference in Part III (for other documents incorporated by reference refer to
Exhibit Index and Item 5 - Market for the Registrant's Common Stock and Related
Shareholder Matters); also committee charters are included verbatim on the
Company's website at www.sybr.com.
PART I
Other than historical and factual statements, the matters and items
discussed in this report on Form 10-K are forward-looking information that
involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking statements. Factors
that could contribute to such differences are discussed in the forward-looking
statements and are summarized in Item 1A "Risk Factors Forward-Looking
Information and Cautionary Statements."
ITEM 1. DESCRIPTION OF BUSINESS
A. OVERVIEW
Synergy Brands Inc. (SYBR or the Company) is a holding company that
principally operates through a wholly owned subsidiary, PHS Group Inc. ("PHS"),
in the wholesale distribution of Groceries and Health and Beauty Aid (HBA)
products and in the manufacturing and retail/wholesale distribution of
proprietary baking mix products and spices and presently operates as well,
through its wholly owned subsidiary, Gran Reserve Corporation, the business of
wholesale and on-line distribution of premium cigars and accessories which
business segment the Company expects and has contracted in principal to transfer
to a non-affiliated investor familiar with the business operations of such
segment (see Item 9B "Other Information" infra), and through such subsidiary,
trading as Beautybuys.com, the Company also markets salon products and luxury
goods. It principally focuses on the sale of nationally known brand name
consumer products manufactured by major U.S. manufacturers and has also entered
the grocery private label market in FY 2006 and proprietary baking mix and spice
market in 2007. The consumer products significantly marketed and distributed are
concentrated within the Grocery and Health & Beauty Aids (HBA) industries. The
Company uses logistics based programs to optimize its distribution costs on both
wholesale and retail levels and markets most of its tobacco and salon products
through internet presentation and processing.
The Company also owns 20% of the outstanding common stock of Interline
Travel and Tours, Inc. (aka: PERX.com). PERX provides cruise and resort hotel
packages through a proprietary reservation system to airline employees and their
retirees. PERX is believed to be the largest Company in this sector of the
travel industry. Information on PERX can be found at www.perx.com. The Company
believes that its capital investment in this unique travel company should
provide for material future capital appreciation. Synergy Brands does not manage
PERX's day-to-day operations.
For further information please visit the Company's corporate website at
www.sybr.com.
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PHS GROUP (GROCERY & HBA OPERATIONS).
PHS Group distributes Grocery and HBA products, including proprietary
baking mix products and spices, to retailers and wholesalers predominately
located in the Northeastern United States. PHS is the largest subsidiary of the
Company and largest operating segment of the Company , representing about 98% of
the overall Company sales and 95% of gross profit. PHS's core sales base remains
the distribution of nationally branded consumer products in the grocery and
health and beauty (HBA) sectors. PHS has positioned itself as a distributor for
major manufacturers as opposed to a full line wholesaler. A full line wholesaler
has the responsibility of servicing the entire needs of a retail operation,
whereas a distributor caters to specific merchandising categories. As a result,
PHS is able to plan the needs of its customers and benefit the manufacturer as
the direct supply source and in turn increase sales to its customers at
optimized pricing through this unique strategy. PHS concentrates on what it
perceives to be faster moving promotional items such as: Tide, Bounty, Nyquil,
Pantene, Clorox bleach, Scott tissues, Marcal tissues,Duracell batteries, among
many others, and uses promotions, logistics and distribution savings to
streamline and reduce its sale prices and increase gross profit thereby. A
second business segment within this sector was Proset Hair Systems (Proset) but
Proset discontinued its operations in the 4th quarter of FY 2006.
In the third quarter of 2006 PHS entered the private label grocery market
specializing in the distribution of baking mixes and spices to national chains
on a proprietary basis. PHS hopes to continue to develop private label programs
for national accounts by creating proprietary baking mix products and spice
planograms specifically designed for retail need. Through acquisition of baking
mix manufacturing operations in Monroe, Michigan, the Company by way of its
subsidiary, Quality Food Brands Inc., manufactures baking mix products for
further sale under proprietary labeling programs for other customers of PHS and
markets such products wholesale and retail through PHS Group Inc. In the latter
half of 2007 the Company also established in China independent manufacturing
operations in a co-packing arrangement for proprietary spices and in North
Dakota for proprietary potato products, pasta salads and dried beans which have
added to its product distribution menu. Income from sales of these proprietary
products is anticipated to add considerably to the gross sales of the Company.
The Company utilized the proprietary product line as a co-packing opportunity
offered to PHS customers. The largest sector of this recently acquired and
developed proprietary product production line is the Company's baking mix
product operation centered in Monroe, Michigan.
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GRAN RESERVE CORPORATION (PREMIUM CIGAR OPERATIONS)
The Company's premium cigar operations are presently conducted through its
wholly owned subsidiary Gran Reserve Corporation (GRC). The Company has
authorized the sale of the Company's cigar operations, which transfer is
probable in 2008. Although no formal commitments have yet been finalized, a
contract in principal has been reached with a group of management and
supervisory personnel associated with the GRC cigar operations but who otherwise
have no official capacity with Synergy Brands Inc. or its subsidiaries. If such
should transpire cigar regulation will no longer have any material impact on
Company operations. Information is hereby presented on such operating segment as
an ongoing venture as well as its historical contribution to Company business
opportunities but its significance to the Company and the Company's focus on
such segment have diminished and this and the increasing cost and exposure of
the applicable regulatory framework under which the cigar business is operating
have provided impetus for the Company to enter an arrangement for the transfer
of such segment. GRC operates the following businesses (under the business names
stated)
o Cigars Around the World (CAW) sells premium cigars to restaurants,
hotels, casinos, country clubs and many other leisure related
destinations. This company was acquired in June, 2003. CAW also opened
a retail store and lounge in Miami Lakes, Florida selling premium
cigars and accessories in March 2006.
o CigarGold.com sells premium cigars through the Internet directly to
the consumer and through partnership online affiliations.
o BeautyBuys.com sells salon hair care products directly to the
consumer via the internet and through partnership online affiliations.
THE COMPANY'S CORPORATE OFFICES ARE LOCATED AT 223 UNDERHILL BLVD.,
SYOSSET, NY 11791, AND ITS TELEPHONE NUMBER IS 516-714-8200. THE COMPANY
MAINTAINS A CORPORATE WEBSITE AT WWW.SYBR.COM. The Company is a reporting
Company as defined in Regulation 12B of the Securities Exchange Act of 1934 and
files electronically with the SEC the Company's quarterly 10Q and Year-end 10-K
reports and interim Form 8K reports. The general public may read and copy any
materials the Company has filed with the SEC at the SEC Public Reference Room at
450 Fifth Street NW, Washington DC. The general public may obtain information on
the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The SEC also maintains an Internet site that contains reports, proxy and
information statements, and other information required of issuers that file
electronically with the SEC which website can be accessed at www.sec.gov. Filed
reports by the Company may be viewed at the SEC Edgar filing website to which
the Company's homepage website is directly linked. Information on the Company's
website is not deemed to be incorporated by reference into this report except as
otherwise specifically listed within this report.
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B. PHS GROUP (Grocery & HBA Operations)
PHS Group heading the principal business of the Company representing 98% of
total revenues, is involved in the purchase of name brand grocery and Health and
Beauty Aids (HBA) products and proprietary brands of limited baking mix and
potato products, and spices which are manufactured through other subsidiaries of
the Company and the further resale to traditional customers utilizing the
logistics and networking advantages of electronic commerce and just in time
distribution. PHS's core sales base remains the distribution of nationally
branded consumer products in the grocery and HBA sectors and wholesale
distribution of grocery items predominantly in the United States, Canada, and
other international markets. Sales of Company manufactured proprietary food
products has begun in 2007 and is expected to grow into a significant operating
element of PHS Group as a co-packer for other customers of the Company.
Reference is made to the financial statements, schedules, and notes to
financials wherein more specific disclosure is presented regarding amounts of
revenues derived from foreign sales as compared to domestic and separation
between brand name and proprietary products. Product sales to Canada constitute
what the Company believes to be the only material foreign sales. The Company
also sells to Israel, Colombia, and the Dominican Republic but such sales in
total constitute only approximately 2% of overall Company sales. All sales are
done in U.S. Dollars. Distribution of brand name products is directed to major
retailers and wholesalers from major U.S. and Canadian consumer product
manufacturers and distributors. Proprietary products are manufactured for
distribution through PHS by other subsidiaries of the Company. PHS has
positioned itself as a distributor for manufacturers as opposed to a full line
wholesaler. A full line wholesaler has the responsibility of servicing the
entire need of a retail operation, whereas a distributor caters to specific
merchandising categories. As a result, PHS is able to plan the needs of its
customers directly from the source of supply and in turn increase sales to its
customers through this unique focus. PHS concentrates in brand name product
distribution on what it perceives to be the fastest moving promotional items and
uses logistics and distribution savings to streamline and reduce its sale
prices.
PHS conducts its business through its sales offices in New York. The
Company maintains its information system and warehousing operations in Long
Island, NY. PHS services over 1000 outlets in the northeastern quadrant of the
United States and Canada. PHS utilizes leased trucks on an as needed basis with
no formal long term lease in addition to consigning common carriers for overflow
sales.
In the third quarter of 2006 PHS entered the private label grocery market
specializing in the acquisition and further distribution of baking mixes and
spices and in the fourth quarter of 2007 that of potato products, pasta salads
and dried beans, to national chains on a proprietary basis. PHS continues to
develop these private label programs as co-packer for national accounts by
creating proprietary product planograms specifically designed for retail need.
On May 18, 2007 PHS through a controlling subsidiary acquired the assets of a
baking mix manufacturing facility that was formerly operated under the entity
Loretta Baking Mix Products (LBMP) for a combined cost of $10.4 million.
The factors that were involved in the Company's decision to acquire the
manufacturing facility consisted of many business factors including:
(1) PHS has secured and established business with several national chains
that have been generating substantial orders for PHS of products produced by
LBMP and there for was no available replacement capability perceived by the
Company for this business. Although PHS did not own the private label brands,
the factory had the artwork, the packaging, the recipes, inventory assets, the
configurations, governmental approvals, logistics, line design and many
strategic capabilities that allowed PHS to have a turnkey solution and
uninterrupted business. Restaurant Artwork, packaging and recipes were
formulated and are owned by PHS customers for whom PHS acts as a co-packer.
(2) Baking mix facilities have to be American Baking Association (ABA)
approved. The ABA approval process and subsequent FDA approval are tedious and
time consuming. The LBMP plant was already certified for all regulatory baking
mix needs and has certifications and quality control at the optimum levels. This
facility was already co-packing for PHS and the customers were satisfied with
the quality of the product.
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(3) PHS has started to develop proprietary brands under the County Fare,
Country Value and Rich and Moist Labels. PHS has started the process of seeking
customers that may not have their own private label brands, but are only selling
baking mix national brands such as Duncan Hines. PHS has positioned the brands
that it has developed as value brands that could provide higher margins to the
retailer then national brands, but do not have the costs of development that a
private label brand might otherwise have. The Company believes that its market
capitalization suffers because there is no proprietary brand that it owns
whereas presently the Company merely distributes. The Company believes that
building brand value could enhance shareholder value. Gaining direct
manufacturing capabilities with no delays or financial hardship is believed to
be a valuable resource.
(4) PHS started to develop a broker network, distributed presentations to
several national chains, and hired sales support for co-packing expansion.
Interruption of this progress would have reduced PHS future profits. This
facility enabled operations to likely continue more seamlessly. Furthermore,
controlling the facility will likely enable PHS to expand, bring new lines into
activation, run more shifts and PHS strong credit should allow it to close deals
with customers that were tenuous about the co-packing relationship as opposed to
full PHS production and manufacturing control.
(5) PHS plans on expanding the business in the existing facility. Since all
process approvals that have been granted are for the use of this facility, any
expansion would likely be modular and cost effective. The facility already has
the regulatory certifications to operate a baking mix manufacturing plant and
would therefore ease the process of future expansion. The anticipated expansion
is being ascertained for existing PHS customers that PHS has been servicing for
12 months and expansion opportunities that PHS has been developing internally.
(6) The information systems needed to support this operation already
existed within the manufacturing process. The IT requirements as well as
logistical requirements were already in place to support PHS customers.
Customers have their own product mix that is customized to the line. A customer
programs the manufacturing line. This integrated process is an important part of
the manufacturing process, job order costing, quality control and motion time
study that determines capacity.
C. GRAN RESERVE CORPORATION (Cigar Sector).
GRC owns multiple internet domains including Cigargold.com,
cigarsaroundtheworld.com and affiliations. GRC focuses on sale of a mix of brand
name and private label premium cigar items and cigar related accessories and
markets them through these sites. GRC also manages the internet sales of
Beautybuys.com which are less than 5% of overall online sales. GRC operations
account for less than 2% of the Company's present consolidated revenues, and the
diminished capacity of the cigar operations in the overall business plan for the
Company and cost saving opportunity for the Company if GRC operated independent
of the Company, as well as regulatory burdens perceived as increasing in the
future for the Company if its present cigar operations are retained, the Company
has sought and been able to locate a suitor for this business segment and is
pursuing such opportunity and agreement in principal has been reached for
transfer of such segment to a non-affiliated but familiar acquiree candidate.
Provided such transaction prevails, the information included herewith regarding
cigar operations shall be considered in material part to be historical in
nature. There have been none and the Company does not intend to guarantee
continued effective performance of this operating segment. GRC cigar operations
include two businesses. This segment includes Cigars Around the World (CAW) and
CigarGold. Through CAW the Company sells premium cigars to Hotels, Restaurants,
Casinos, PGA Clubs and other leisure related destinations. CAW was founded by
Bill Rancic, initial winner of the NBC show The Apprentice and his business was
acquired by the Company with continued support from Mr. Rancic. Mr. Rancic
serves on the Board of Directors of Synergy Brands. CAW sells, its cigars, in
large part in customized retail displayed humidors that it provides to its
customers. CAW also has its own retail website that operates under the name
www.CigarsAroundTheWorld.com. Its displays range from counter top humidors to
Walled Display units. CAW also organizes events such as cigar dinners and
merchandising opportunities within its destinations.
CigarGold (CG) is the Company's main present cigar online unit. CG sells
premium cigars online to retail customers throughout the United States. It has a
selection of over 1000 products, which include brand-name hand made premium
cigars and cigar accessories as well as private label and proprietary products.
CigarGold operates under the domain name: www.CigarGold.com.
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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.
The Company believes that the following are principal competitive
advantages present in its operations and product presentation: brand
recognition, selection, convenience, price, web site performance and
accessibility, customer service, quality of information provided and reliability
and speed of order shipment, acute knowledge of cigar brands, quality of
products, stable source of supply, editorial contribution regarding cigar news
and one on one online customer interaction.
The second business area of this segment within the Company's B2C sector is
sale directly to the consumer of salon products on-line through Beautybuys.com
and other on-line partnership affiliations. This latter online unit operates at
www.BeautyBuys.com. BeautyBuys.com sells salon hair products exclusively through
Internet admissibility directly to the retail consumer.
D. COMPETITION
The Company is smaller in comparison to many of its competitors in the
marketing of grocery and health and beauty care products and cigars. Access to
product remains important but the Company is confident of the continued
availability of product from manufacturers, wholesalers, and distributors with
whom the Company has successfully acquainted itself or developed in house.
Source of products the Company believes should stay stable. Sources and
availability of raw materials may pose certain concerns, including pricing, but
most ingredients in the Company's baking mix operations, as the Company's
principal proprietary grocery product, principally flour, sugar, and edible
oils, are readily available in house and from numerous outside sources. Prices
for our raw materials are dependent on a number of factors including the
weather, crop production, transportation and processing costs, government
regulation and policies, worldwide market supply of, and demand for, such
commodities and alternative demand for raw materials, such as the recent demand
for corn for use in the production of ethanol. Although the Company believes
that it has a capable purchasing function to obtain and allow for competitive
pricing, the inherent volatility of commodity prices occasionally and
potentially exposes the Company to fluctuating costs. The Company attempts to
recover the majority of its commodity cost increases by operating efficiencies.
Most of the Company's suppliers are regulated under fair trade and pricing
regulations. As a result the Company can remain competitive as long as it
purchases products at prescribed volume and credit limitation set by the
suppliers. The Company believes it competes in its supply chain operation on the
basis of product pricing, quality and assortment, scheduling capabilities
regarding and reliability of deliveries, the range and quality of services
provided, technological capabilities and location and logistics of distributor
facilities and arrangements. In the Company's proprietary baking mix product
sector, competition is based upon primarily product quality, pricing, customer
service, and development of brand recognition and loyalty through promotional
activities and information dissemination techniques. The Company acts as a
co-packer in the proprietary product area and emphasis is placed on customer
preferences and success dependent in great part on being able to recognize and
service such preferences. Competition here is significantly related to existence
of similar brand name products, and development of proprietary brand recognition
in such market is accomplished through offering and maintenance primarily of
competitive pricing and product quality.
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E. MAJOR CUSTOMERS.
During the year ended December 31, 2007, sales to two customers accounted
for 13%, and 10% of the Company's total sales and in 2006 sales to three
customers accounted for 21%, 16% and 12% of total sales. During such periods 1
supplier of product for the Company further retail/wholesale distribution
contributed 59% of such supply. These major customers and suppliers relate to
the grocery logistics business within the Company's PHS Group (grocery and HBA
operation) sector.
F. INFORMATION SYSTEMS AND WEBSITE TECHNOLOGY FOR INTERNET SALES.
The various web sites established for sale of the Company's products are of
multi-tier construction to allow for ease of administration and record keeping.
Behind the screen not visible to the consumer when visiting the Company's
various product category websites are internet based marketing and accounting
information programs to allow the Company to review interest shown in its
websites and account for sales made there from. The Company also maintains its
own websites regarding information on the Company as a public entity and its
various business interests. The Company's home page website is linked directly
to the SEC Edgar based listing of all Company SEC filings where further Company
information disclosure as required by the SEC is contained including reference
to and listing of various Company committee charters and disclosure policies
which charters and policies should also be accessible by link from the Company's
website at www.sybr.com. Internet sites presently available regarding Company
business and product sales are:
PHSGroup.com
BeautyBuys.com
SynergyBrands.Com
DealbyNet.com
Perx.com (managed by Interline Travel & Tours)
SYBR.com
CIGARGOLD.com
CigarsAroundtheWorld.com
The Company's website design work is proprietary. It was developed to
accommodate the specific marketing and record keeping requirements of the
Company. State-of-the-art technology is utilized in site design, tracking
systems, hosting and affiliated programs. The Company strives through internal
development efforts to create and enhance its specialized, proprietary software
that the Company believes is unique to its Business.
The Company utilizes a computerized web based database management system
that collects, integrates and allows analysis of data concerning sales, order
processing, shipping, purchasers, receiving, inventories, and financial
reporting. At any given time, the database management systems utilized by the
Company are designed to allow management to determine the quantity of product
stored by item, cost by item, aging and other characteristics necessary for
expeditious fulfillment and distribution.
The Company has implemented a broad array of services and systems for site
management, searching, customer interaction, transaction processing and
fulfillment. The Company uses a set of software applications for: accepting and
validating customer orders; organizing, placing, and managing orders with
vendors and fulfillment partners; receiving product and assigning it to customer
orders; and managing shipment of products to customers based on various ordering
criteria.
The Company's websites can be accessed 24 hours a day, seven days a week
from anywhere that a visitor thereto has Internet access. The Company offers a
large selection of products for sale on its relevant websites and in addition
provides various levels of selected product content, buying guides and other
tools designed to help consumers make educated purchasing decisions.
Additionally, shopping list and e-mail reminders are designed to make it easier
for customers to regularly purchase their preferred products.
The Company's marketing efforts in internet sales are aimed at flexibility
of presentation to attract new and repeat customers and give ease of access to
product availability and information. The Company's online stores provide
flexibility to change featured products or promotions without having to alter
the physical layout of a store. The Company is also able to dynamically adjust
its product mix in response to changing customer demand, new seasons or holidays
and special promotions.
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The Company has the ability to offer products to individual customers based
on their brand preferences. The Company also cross-sells its departments to
promote impulse buying by customers.
The Company's proprietary internet technology and that independently
developed as utilized by the Company does focus on and gives protection for
customers and supplier privacy concerns.
The Company also maintains a Virtual Private Network (VPN) and intranet
system. This network allows for real time sales and order processing across to
Company's regional offices and warehouses. The network has been customized for
logistics, warehousing accounting, management information systems, and
distribution.
G. SEASONALITY
Sales by PHS Group usually peak at the end of a calendar quarter, when the
Company's suppliers offer promotions which lower prices and, in turn, the
Company is able to lower its prices and increase sales volume. Suppliers tend to
promote at quarter end and as a result reduced product costs may increase sales.
Sales of beauty care products and fragrances increase over traditional gift
giving holidays.
Cigar product sales also increase during holiday periods and summer months,
as well as around special sporting events. In particular sales are stronger
before Father's Day, the summer golf season and the Christmas holiday season.
Consumer propensity for baking products (and similarly for the ingredients
therefor) is stronger in the Spring and Fall.
H. SHIPPING AND HANDLING
Products sold on a Business to Business basis by the Company are shipped in bulk
from inventory maintained by the Company at its warehouse facilities by leased
trucks and common carriers. All direct customer orders are consolidated in
Company leased fulfillment facilities; then packed and shipped to the customer
usually within 3 to 7 days mainly by UPS. Approximately 95% of direct customer
product inventory is in warehouse stock and 5% is purchased by the Company on an
as needed "just in time" basis. The Company is dependent on common carriers and
PHS utilizes leased trucks on an as needed basis with no formal long term lease.
Although the Company can call upon any of several hundred common carriers to
distribute its products, from time to time the trucking industry is subject to
strikes or work stoppages which could have a material adverse effect on the
Company's operations if alternative modes of shipping are not then available.
Additionally, the trucking industry is subject to various natural disasters
which can close transportation lanes in any given region of the country. To the
extent common carriers utilized by the Company are prevented from or delayed in
utilizing transportation lanes, the Company may incur higher freight costs due
to the limited availability of trucks during any such period that transportation
lanes are restricted. Trucking expenses are regulated by the cost of fuel and
destination lanes. Increasing fuel prices can cause an increase in shipping
rates. The Company attempts to pass along these charges through a fuel
surcharge. This charge cannot be passed to the customers on all occasions.
Proprietary Banking Mix business operations are centered in Monroe,
Michigan where the Company maintains manufacturing and warehousing facilities on
a long term lease basis considered of sufficient capacity to fulfill projected
needs. Use of Company owned facilities for both manufacture and storage saves on
cost.
I. TRADEMARKS, LICENSES AND PATENTS
The Company has obtained rights to various trademarks and tradenames, and
domain names in its internet business. The Company has obtained a wholesale
controlled substance license through the Drug Enforcement Agency (DEA). The
Company has domestic rights to the "Suarez Gran Reserva", "Breton Legend",
"Breton Vintage", "Anduleros", "Don Otilio","Alminante" "Nativo" "Ditka" and
various other trade names in marketing of premium handmade cigars. GR also owns
and utilizes in its cigar distribution business the following trade names:
CigarGold, Netcigar, GoldCigar, Cigars Around The World and Cigar Kingdom. PHS
is the dominant tradename utilized by the Company in its other business sectors.
PHS also has exclusive distributorship rights in the Dominican Republic for
"Fitti" diaper brand. The baking mix proprietary co-packing operation
manufactures products under proprietary tradenames including, Country Value and
County Fare, Rich n Moist, and Rich n Fluffy, and in the spice manufacture
sector under Palm Spices and Gourmet Select.
J. EMPLOYEES
The Company and its subsidiaries taken together as of the date of this
report employ and contract approximately 40 full time and part time non Union
employees all of whom work in executive, administrative, sales, marketing, data
processing, accounting or clerical activities and certain work as Company
employees that integrate with the various warehouses where Company products are
stored and as drivers and delivery personnel in the Company leased trucks.
Administration and operation of the baking mix manufacture and distribution
operation centered in Monroe, Michigan employs an additional five (5) full time
personnel. Additional part-time labor personnel are employed on an as needed
basis.
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The Company leases and staffs its warehouses in New York , New Jersey ,
Pennsylvania and Florida (GRC), from where it facilitates storage, sorting,
packing and shipping of products sold on its websites. Otherwise warehousing is
contracted on an as needed arrangement staffed through the warehousing entity
contracted with exception for supervisory personnel hired by the Company. The
Company relies on a stable working environment with its contract warehousing and
trucking. The Company also leases and staffs facilities approximating 110,000
square feet utilized in administering the Baking Mix manufacture and
distributions operations.
K. GOVERNMENT REGULATION
1. TOBACCO INDUSTRY REGULATION AND TOBACCO INDUSTRY LITIGATION
There is and has been various tobacco industry regulation at federal, state
and local Levels from which the cigar industry to date only been affected mainly
only tangentially. There appears a recent trend toward increasing regulation of
the tobacco industry, and the increase in popularity of cigars could lead to an
increase in regulation of cigars. Because in part of the changing regulatory
framework within which the Company's cigar marketing business operates, the
Company has considered and has entered in principal an agreement to transfer out
its cigar operations business and assets to a group of management and
supervisory personnel associated with the GRC cigar operations but who otherwise
have no official capacity with Synergy Brands Inc. or its subsidiaries. If such
should transpire cigar regulation will no longer have any material impact on
Company operations. The Company has in the past reported existence of cigar
regulation in greater depth and reference is made thereto for expanded
disclosure. The changing regulatory environment relevant to cigar production and
marketing is emphasized in this report and historical reference is made to past
disclosure on past tobacco regulation having present and/or potential future
application to the cigar industry
The Food and Drug Administration (the "FDA") has determined that nicotine
is a drug and has asserted that it has jurisdiction over cigarettes and
smokeless tobacco products, as nicotine-delivering medical devices, and
therefore, promulgated regulations restricting and limiting the sale,
distribution and advertising of cigarette and smokeless tobacco products. FDA
jurisdiction is also the subject of current federal legislation which will, if
and when enacted, codify much of the past regulatory scheme established for
tobacco products and as agreed in settlement agreements reached with the tobacco
industry to avoid the myriad of lawsuits filed. In the Fall of 2004, the U.S.
Senate considered legislation that would grant the FDA authority to regulate
tobacco products. Among other things, the legislation called for the prohibition
of free samples and self-service displays. The proposed legislation also limited
certain advertising and labeling to a text only format and called for a ban on
the sale or distribution of non-tobacco items that bear tobacco brand names,
such as hats and t-shirts, and would have restricted sponsorship of events to
corporate name only. In addition, the FDA was to be empowered to adopt rules
regarding the manufacture, ingredient content, and pre-approval of tobacco
products. The proposed legislation passed the US Senate, but failed to garner
sufficient support in the House of Representatives and was not enacted into law.
There remains uncertainty as to whether the U.S. Congress can gain passage of
legislation in the future to permit the FDA to regulate tobacco as outlined
above or to permit the FDA to regulate tobacco in a different manner. In 2004,
Congress passed legislation to eliminate the federal price support system for
tobacco farmers and, in its place, provided an estimated US $10.1 billion buy
out of tobacco farmers over the next 10 years. The buy out will be funded by
quarterly assessments on tobacco manufacturers. Even within this legislation
however cigar products are not included but there is no assurance that they may
not be included in these or similar regulations in the future. There has been an
increased pressure on Congress to enact legislation that would ease State
efforts in the collection of taxation on cigarette sales. Although cigar sales
are not currently included in the recent regulatory initiatives there may be
future action against cigar companies which could have material adverse effect
on the Company's business. Recently the US Bureau of Alcohol Tobacco Firearms
and Explosives, the major credit card companies and State attorneys general
reached agreement to disallow use of credit cards for cigarette purchases over
the internet across State lines and to take action against Internet Sellers that
authorities identify as violating State and Federal laws regulating cigarette
sales. New York was the first State to ban Internet cigarette sales totally.
Further States may likely follow suit. Those bans are based both on tax evasion
issues and underage purchasing concerns. Such treatment of tobacco product tax
issues is not a new phenomena however but a revisiting of and more active
promotion of the federal Jenkins Act which originated in 1949 to address
interstate tax issues regarding tobacco sales through use of United States mail.
Cigars are not specifically included in the FDA's regulations. Present tobacco
regulations which do appear applicable to cigars in addition to focusing on
cigarettes are the prohibition on retailers from selling cigarettes, cigarette
tobacco or smokeless tobacco to persons under the age of 18 and requiring
retailers to check the photographic identification of every person under the age
of 27 who requests purchases of tobacco products, and requirement that cigars
carry warning labels similar to those contained on cigarette packages which
Cigar companies are now required to display clearly and permanently on packages,
in print ads, on audio and video ads, on point of purchase displays and on the
Internet.
9
States have legislation mandating, in varying degrees, the prohibition of
smoking in public places. Local legislative and regulatory bodies have also
increasingly moved to curtail smoking by prohibiting smoking in certain
buildings or areas or by requiring designated "smoking" areas Consideration at
both the Federal and State level also has been given to consequences of tobacco
on others that are not presently smoking (so-called "second-hand" smoke). A 2006
U.S. Surgeon General Report ("The Report") detailed the adverse physical impacts
of second-hand smoke; thereby invalidating the contention that smoking in public
is a "victimless crime." The Report has been a propelling factor in the
expansion of anti-smoking legislation.
While the cigar industry historically has not been subject to government
regulatory efforts, focus has increased on possible need to increase regulation
in this area and there can be no assurance that there will not be an increase in
federal regulation in the future against cigar manufacturers or distributors.
The costs to the Company of increased government regulations could have a
material adverse effect on the Company's business and results of operations and
is one of multiple business reasons underlying the Company's expected transfer
out of its cigar business.
There can be no assurance as to the ultimate content, timing, or effect of
any additional regulation of tobacco products by any Federal, State, local or
regulatory body, and there can be no assurance that any such legislation or
regulation would not have a material adverse effect on the Company's business.
While the cigar industry has not been subject to health-related litigation
to date similar to the various cases brought against and settled with the
cigarette industry, there can be no assurance that there will not be an increase
in health-related litigation in the future against cigar manufacturers or
distributors. The costs to the Company and/or other suppliers of cigar products
marketed by the Company of defending prolonged litigation and settlement or
successful prosecution of any health-related litigation could have a material
adverse effect on the Company's business and results of operations.
Cigars long have been subject to Federal, State and local excise taxes, and
such taxes frequently have been increased or proposed to be increased, in some
cases significantly, to fund various legislative initiatives. The Federal excise
tax rate on large cigars (weighing more than three pounds per thousand cigars)
is a material component of the manufacturer's selling price. The State
Children's Health Insurance Program ("SCHIP") is a jointly financed program by
the Federal and State governments designed at providing health insurance to the
children of families from modest incomes. In 2007, Congress passed legislation
expanding the SCHIP program. Funding for the SCHIP expansion was to be financed
through an increase in the federal excise tax on tobacco products, whereby the
cigar industry would bear the greatest increase of roughly 6,000%. On October 3,
2007, President Bush vetoed the bill. Congress' attempt to override the
President's veto by the two-thirds majority failed, however the House of
Representatives passed a similar bill, H.R. 3963, which was subsequently passed
by the Senate on November 1, 2007. On December 12, 2007, President Bush vetoed
the second bill as well on the grounds that it was essentially similar to
earlier legislation. Thereafter President Bush signed legislation extending
SCHIP to cover current enrollment levels through March 2009. Congress may
attempt similar legislative efforts to expand SCHIP which would have significant
financial impacts on the cigar industry. If such legislation is passed, with the
increase of the excise tax on tobacco products, cigar prices would rise
dramatically. This may potentially lead to decreased consumption of cigars and
subsequent decline in revenues from cigar sales. The Company believes that the
enactment of significantly increased excise taxes could have a material adverse
effect on the business of the Company. The Company is unable to predict the
likelihood of the passage or the enactment of future increases in tobacco excise
taxes as they relate to cigars.
Tobacco products also are subject to certain state and local taxes. An
example is the passage of the Proposition 10 referendum in California, an act
used to fund early childhood development programs, children's health and
development concerns at the state level. The majority of states now impose
excise taxes on cigars. In certain of the states without tobacco taxes proposals
are pending to add such taxes. State cigar excise taxes are not necessarily
subject to caps similar to the Federal excise tax. There are increased State
efforts to change the classifications of cigars to increase tax revenues. At the
end of 2006, the Alcohol and Tobacco Tax and Trade Bureau and the Department of
Treasury have proposed rule changes to the classifications and labeling of
cigars and cigarettes in an effort to reduce possible revenue losses due to
misclassification. The rule changes attempt to clarify the classification
criteria. Specifically, and as an example of use of revised classification, in
January 2008 New York Governor Eliot Spitzer proposed changing the
classification of little cigars to cigarettes, thereby increasing the tax on
said goods. Increased taxation either directly or through reclassifications of
tobacco products could have an adverse effect on sales as cigar consumption
generally declines. From time to time, the imposition of state and local taxes
has had some impact on sales regionally. The enactment of new state excise taxes
and the increase in existing state excise taxes are likely to have an adverse
effect on regional sales as cigar consumption generally declines.
10
2. OTHER GOVERNMENT REGULATION.
The United States Food and Drug Administration through the United States
Food, Drug and Cosmetic Act and the Fair Packaging and Labeling Act and other
various rules and regulations regulate, among other things, the purity and
packaging of HBA products and fragrances and cosmetic products and various
aspects of the manufacture and packaging of other grocery items sold by the
Company. Similar statutes are in effect in various states. Manufacturers and
distributors of such products are also subject to the jurisdiction of the
Federal Trade Commission with respect to such matters as advertising content and
other trade practices. To the Company's knowledge, it only deals with
manufacturers and manufactured products in a manner which complies with such
regulations and who periodically submit their products to independent
laboratories for testing. However, the failure by the Company's manufacturer or
supplier contacts to comply with applicable government regulations could result
in product recalls or lack of product availability that could adversely affect
the Company's relationships with its customers. In addition, the extent of
potentially adverse government regulations which might arise from future
legislation or administrative action cannot be predicted.
As a provider of directly manufactured food items, the Company's operations
are subject to stringent quality, labeling and traceability standards, including
the Federal Food and Drug Act of 1906 and Bioterrorism Act of 2002, and rules
and regulations governing trade practices, including advertising. Our food
production operations and our delivery fleet are subject to various federal,
state and local environmental laws and workplace regulations, including the
federal Occupational Safety and Health Act of 1970, the federal Fair Labor
Standards Act of 1938, the federal Clean Air Act of 1990, the federal Clean
Water Act of 1972 and the Comprehensive Environmental Response, Compensation and
Liability Act, or CERCLA. Future compliance with or violation of such laws or
regulations, and future regulation by various federal, state and local
government entities and agencies, which could become more stringent, may have a
material adverse effect on our financial condition and results of operations. We
could also be subject to litigation arising out of such governmental regulations
that could have a material adverse effect on our financial condition and results
of operations. We believe that our current legal and environmental compliance
programs adequately address such concerns and that we are in substantial
compliance with such applicable laws and regulations. From time to time the
Company receives notices of violation relating to regulatory matters. When such
notices are received, the Company works with the appropriate authorities to seek
a resolution to the violations, which may include, adjustment to company
operations or protocols, site remediation, or the acquisition or repair of
related equipment and other facility improvements, if necessary. The Company
believes its manufacturing and warehousing facilities to be regulatory
compliant.
The Company is not aware of government regulation directly related to
internet sales different from that applicable to traditional marketing but
immense interest has been indicated on policing the internet focusing on contact
and access but the nature of the products marketed by the Company over the
internet does not appear to involve any of such concerns beyond product labeling
and advertising content which would apply regardless of the medium in which the
products are sold except for developing limitations on internet sales of tobacco
products as aforementioned herein. The Company is subject to the same foreign
and domestic laws as other companies conducting business on and off the
Internet. Today, there are still relatively few laws specifically directed
towards online services. However, due to the increasing popularity and use of
the Internet and online services, many laws relating to the Internet are being
debated at various levels of government and it is possible that such laws and
regulations will be adopted. These laws and regulations focus on issues such as
user privacy, freedom or expression, pricing, fraud, content and quality of
products and services, taxation, advertising, intellectual property rights, and
information security. It is not clear how existing laws governing issues such as
property ownership, copyrights and other intellectual property issues, taxation,
libel and defamation, obscenity, and personal privacy apply to online
businesses. The vast majority of these laws were adopted prior to the advent of
the Internet and related technologies and, as a result, do not contemplate or
address the unique issues of the Internet and related technologies. Those laws
that do reference the Internet such as the U.S. Digital Millennium Copyright Act
have begun to be interpreted by the courts and implemented but their
applicability and scope remain somewhat uncertain. The application of indirect
taxes (such as sales and use tax, value added tax, or VAT, goods and services
tax, business tax, and gross receipt tax) to e-commerce business such as that
operated by the Company is a complex and evolving issue. Many of the fundamental
statutes and regulations that impose these taxes were established before the
growth of the Internet and e-commerce. In many cases, it is not clear how
existing statutes apply to the Internet or e-commerce. In addition, some
jurisdictions have implemented or may implement laws specifically addressing the
Internet or some aspect of e-commerce. The application of existing, new, or
future laws could have adverse effects on the Company's business. Several
proposals have been made at the U.S. state and local level that would impose
additional taxes on the sale of goods and services through the Internet. These
proposals, if adopted, could substantially impair the growth of e-commerce, and
could diminish the Company's opportunity to derive financial benefit from its
business activities. In December 2004, the U.S. Federal Government enacted
legislation extending the moratorium on states and other local authorities
imposing access or discriminatory taxes on the Internet through November 2007.
On October 31, 2007, the Internet Tax Freedom Act Amendments Act of 2007 was
enacted into law thereby amending the Internet Tax Freedom Act to extend the
moratorium until November 1, 2014.
11
This moratorium does not prohibit federal, state, or local authorities from
collecting taxes on the Company's income or from collecting taxes that are due
under existing tax rules. In conjunction with the Streamlined Sales Tax Project,
the U.S. Congress continues to consider overriding the Supreme Court's Quill
decision, which limited the ability of state governments to require sellers
outside of their own state to collect and remit sales taxes on goods purchased
by in-state residents. An overturning of the Quill decision could harm the
Company's business. For further discussion of other present and potential
government regulation of the Internet see "Forward Looking Information and
Cautionary Statements No.22 Government Regulation of the Internet and E-Commerce
is Evolving and Unfavorable Changes Could Harm the Company's Business" infra.
ITEM 1A: RISK FACTORS.
FORWARD LOOKING INFORMATION AND CAUTIONARY STATEMENTS
Other than the factual matters set forth herein, the matters and items set
forth in this report are forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. These statements relate to
future events and/or to the Company's future financial performance and include,
but are not limited to, statements concerning:
The anticipated benefits and risks of the Company's key strategic
partnerships, business relationships and acquisitions;
The Company's ability to attract and retain customers;
Concentration of customers;
The anticipated benefits and risks associated with the Company's
business strategy, including those relating to its distribution and
fulfillment strategy and its current and future product and service
offerings;
Company proprietary and other distributed product brand recognition;
Protection of Company's intellectual property and trade secrets;
The Company's future operating results, its need for and availability
of financing to sustain its operations and expand thereon; and the
future value of its common stock;
The anticipated size or and trends in the market segments in which the
Company competes and the anticipated competition in those markets;
Production and Inventory concerns;
Potential government regulation;
Interruption of production facilities operations;
The Company's future capital requirements and its ability to satisfy
its capital needs;
Risk associated with cost increases in materials, ingredients, energy,
and employee wages and benefits;
Ability to obtain and maintain adequate terms with vendors and service
providers;
Risks associated with product price increases, including the risk that
such actions will not effectively offset inflationary costs pressures
and may adversely impact sales of products;
The effectiveness of efforts to hedge exposure to price increases with
respect to various ingredients and energy;
Ability to attract, motivate and/or retain key executives and
employees;
Successful implementation of information technology improvements;
The continuing effect of changes in consumers' eating habits and
dietary guidelines
12
Furthermore, in some cases, you can identify forward-looking statements by
terminology such as may, will, could, should, expect, plan, intend, anticipate,
believe, estimate, predict, potential or continue, the negative of such terms or
other comparable terminology. These statements are only predictions. Actual
events or results may differ materially. Factors that could cause such
differences include, but are not limited to, those identified herein and other
risks included from time to time in the Company's other Securities and Exchange
Commission ("SEC") reports and press releases, copies of which are available
from the Company upon request.
o The availability of capital on acceptable terms in light of the
various factors discussed herein,;
o The availability and cost of raw materials, packaging, fuels, and
utilities, and the ability to recover these costs in the pricing of
products, improved efficiencies and other strategies;
o Actions of competitors, including pricing policies and promotional
spending;
o The effectiveness of advertising and marketing spending;
o The effectiveness and adequacy of information and data processing
systems;
o Changes in general economic and business conditions;
o Any inability to protect and maintain the value of intellectual
property;
o Changes in consumer tastes or eating habits;
o Costs associated with environmental compliance and remediation;
o Actions of governmental entities, including regulatory requirements;
o Acceptance of new product offerings by consumers and our ability to
expand existing brands;
o Expenditures necessary to carry out cost-saving initiatives and
savings derived from these initiatives;
o Changes in our business strategies;
o Business disruption from terrorist acts, our nation's response to
such acts and acts of war;
o Changes in general economic or business conditions nationally and in
the Company's primary markets;
o The availability of capital upon terms acceptable to the Company;
o The availability and pricing or raw materials;
o The level of demand for the Company's products;
o The outcome of legal proceedings to which the Company is or may
become a party;
o The actions of competitors within the industry wherein the Company
operates;
o The success of business strategies implemented by the Company to meet
future challenges;
o The costs to upgrade and enhance existing facilities;
o The costs to acquire (or lease) fit-out new facilities and relocate
thereto;
13
o The costs and availability of capital to fund improvements or new
facilities;
o The retention of key employees;
o The ability to develop and market in a timely and efficient manner
new products which are accepted by consumers; and
o Other factors.
Although the Company believes that the expectations reflected in the
forward-looking statements are reasonable, it cannot guarantee future results,
levels of activity, performance or achievements and continued availability of
logistics and financial support therefore. Moreover the Company assumes no
responsibility for the accuracy and completeness of the forward-looking
statements to conform such statements to actual results or to changes in its
expectations. If any of the Company's assumptions prove incorrect or should
unanticipated circumstances arise, its actual results could differ materially
from those anticipated by such forward-looking statements. The differences could
be caused by a number of factors or combination of factors, including, but not
limited to, those stated herein. Readers are strongly encouraged to consider
these factors when evaluating any such forward-looking statements.
These statements speak only as of the date of this report, and the Company
disclaims any intention or obligation to update or revise any forward-looking
statements to reflect new information, future events or developments or
otherwise, except as required by law. All subsequent written and oral
forward-looking statements attributable to the Company and persons acting on its
behalf are qualified in their entirety by the cautionary statements contained in
this section and elsewhere in this report.
In addition to the other information in this Form 10-K, the following risk
factors should be carefully considered in evaluating the Company business
because these factors may have a significant impact on the Company's business,
operating results and financial condition. As a result of the risk factors
discussed below and elsewhere in this Form 10-K and the risks discussed in the
Company's other SEC filings, actual results could differ materially from those
projected in any forward-looking statements.
1. THE COMPANY HAS INCURRED OPERATING LOSSES, HAS MATERIAL DEBT, AND HAS
BEEN AND IS RELIANT UPON FINANCING TO EXTEND CREDIT TO ITS CUSTOMERS.
The Company has a long history of operating losses. To date, a large
portion of the Company's expenses have been financed through capital raising
activities. A large portion of the Company's historical losses are a direct
result of fees and expenses associated with stock and/or other working capital
financing. The Company believes that Financing costs must be reduced in order to
improve operating results. Failure to reduce financing costs will likely inhibit
the Company's growth. There is no assurance that further financing will not be
needed for operating purposes, and where needed there can be no assurances of
continued availability of financing at affordable levels of expense. The Company
has made strides in the last several years to become less reliant on capital
raising efforts, substituting debt financing at advantageous interest rate
levels, thereby utilizing to a much greater extent working capital generated
from increasingly positive business operations.
14
As of December 31, 2007, the Company had long-term indebtedness of
approximately $12,000,000. Although the Company made debt principal reduction
payments over the last several years, it may incur substantial additional debt
in the future, and in any event a significant portion of the Company's future
cash flow from operating activities is likely to remain dedicated to the payment
of interest and the repayment of principal on its indebtedness. The Company's
indebtedness could limit its ability to obtain additional financing for working
capital, capital expenditures, debt service requirements, acquisitions or other
purposes in the future, as needed; to plan for, or react to, changes in
technology and in its business and competition; and to react in the event of an
economic downturn. There is no guarantee that the Company will be able to meet
its debt service obligations. If the Company is unable to generate sufficient
cash flow or obtain funds for required payments, or it we fail to comply with
covenants in its indebtedness, the Company will be in default. In addition, the
Company may not be able to refinance its indebtedness on terms acceptable to the
Company, or at all.
Due to the Company's historical losses, its evolving business model, and
the unpredictability of its industries, the Company may not be able to
accurately forecast its rate of continued growth. The Company bases its current
and future expense levels and its investment plans on estimates of future net
sales and rate of growth. Its expenses and investments are to a large extent
fixed, and the Company may not be able to adjust its spending quickly enough if
its net sales fall short of its expectations.
The Company's revenue and operating profit growth depends on the continued
growth of demand for the products offered by the Company or its sellers, and its
business is affected by general economic and business conditions throughout the
world. A softening of demand, whether caused by changes in consumer preferences
or a weakening of the U.S. or global economies, may result in decreased revenue
or growth. Terrorist attacks and armed hostilities create economic and consumer
uncertainty that could adversely affect its revenue or growth. Such events could
create delays in, and increase the cost of, product shipments, which may
decrease demand. Revenue growth may not be sustainable and its company-wide
percentage growth rate may decrease in the future.
The Company's net sales and operating results will also fluctuate for many
other reasons, including:
- its ability to expand its network of purchasers and suppliers, and to
enter into, maintain, renew, and amend on favorable terms its commercial
agreements and strategic alliances;
- its ability to acquire merchandise, manage inventory, and fulfill orders;
- the introduction by the Company's current or future competitors of
websites, products, services, price decreases, or improvements;
- changes in usage of the Internet and e-commerce, including in non-U.S.
markets;
- timing, effectiveness, and costs of upgrades and developments in the
Company's systems and infrastructure;
- the effects of commercial agreements and strategic alliances and the
Company's ability to successfully implement the underlying relationships
and integrate them into its business;
- the effects of acquisitions, and other business combinations and the
Company's ability to successfully integrate them into its business;
- the success of the Company's geographic and product line expansions;
- technical difficulties, system downtime, or interruptions;
- Variations in the mix of products and services the Company sells;
15
- Variations in the Company's level of merchandise and vendor returns;
- disruptions in service by shipping carriers;
- the extent to which the Company offers and provides additional benefits
to its customers which reduce its gross or operating profits;
- the extent the Company invests in technology and content, fulfillment,
marketing and other expense categories;
- the extent to which the Company provides for and pays taxes; and
- an increase in the prices of fuel and gasoline, which are used in the
transportation of packages, as well as an increase in the prices of other
energy products, primarily natural gas and electricity, and commodities
like paper and packing supplies, as well as raw materials used in
preparatory product manufacture, all of which are used in the Company's
operating facilities.
2. DEPENDENCE ON PUBLIC TRENDS.
The Company's business is subject to the effects of changing customer
preferences and the economy, both of which are difficult to predict and over
which the Company has no control. A change in either consumer preferences or a
down-turn in the economy may affect the Company's business prospects.
3. POTENTIAL PRODUCT LIABILITY.
As a participant in the distribution chain between the manufacturer and
consumer, the Company would likely be named as a defendant in any product
liability action brought by a consumer. To date, no claims have been asserted
against the Company for product liability. There can be no assurance, however,
that such claims will not arise in the future. Currently, the Company does carry
product liability insurance. In the event that any products liability claim is
not fully funded by insurance, and if the Company is unable to recover damages
from the manufacturer or supplier of the product that caused such injury, the
Company may be required to pay some or all of such claims from its own funds.
Any such payment could have a material adverse impact on the Company.
16
4. RELIANCE ON COMMON CARRIERS.
Although the Company has in the last few years leased a fleet of trucks
operated by the Company to make deliveries, the Company is still dependent, for
shipping of product purchased, on common carriers in the trucking industry.
Although the Company uses several hundred common carriers, the trucking industry
is subject to strikes from time to time, which could have material adverse
effect on the Company's operations if alternative modes of shipping are not then
available. Additionally the trucking industry is susceptible to various natural
disasters which can close transportation lanes in any given region of the
country. To the extent common carriers are prevented from or delayed in
utilizing local transportation lanes or otherwise trucking services are
curtailed because of any other case, the Company will likely incur higher
freight costs due to the limited availability of trucks during any such period
that transportation lanes are restricted.
5. COMPETITION.
The Company is subject to competition in all of its various product sale
businesses. While these industries may be highly fragmented, with no one
distributor dominating the industry, the Company is subject to competitive
pressures from other distributors based on price and service and product quality
and origin which reduces the gross profit and may increase inventory risk.
The food industry is sensitive to a number of economic conditions such as:
(i) food price deflation or inflation, (ii) softness in local and national
economies, (iii) increases in commodity prices, (iv) the availability of
favorable credit and trade terms, and (v) other economic conditions that may
affect consumer buying habits. Any one or more of these economic conditions can
affect the demand for products PHS distributes to its customers.
The industries in which PHS competes in are extremely competitive. Both the
wholesale grocery operation and supply chain services to businesses are subject
to competitive practices that may affect: (i) the prices at which PHS is able to
sell products to its service area, (ii) sales volume, (iii) the ability of our
traditional food distribution customers to sell products PHS supplies, which may
affect future orders, and (iv) ability to attract and retain customers. In
addition, the nature and extent of consolidation in the food and traditional
food distribution industries could affect the competitive position. PHS competes
with larger distributors and retailers that have greater resources then the
Company.
The U.S. market for e-commerce services is extremely competitive. The
Company expects competition to intensify as current competitors expand their
product offerings and enter the e-commerce market, and new competitors enter the
market.
17
The principal competitive factors are the quality and breadth of services
provided, potential for successful transaction activity and price. E-commerce
markets are characterized by rapidly changing technologies and frequent new
product and service introductions. The Company may fail to update or introduce
new market pricing formats, selling techniques and/or other mechanics and
administrative tools and formats for internet sales consistent with current
technology on a timely basis or at all. If its fails to introduce new service
offerings or to improve its existing service offerings in response to industry
developments, or if its prices are not competitive, the Company could lose
customers, which could lead to a loss of revenues.
Because there are relatively low barriers to entry in the e-commerce
market, competition from other established and emerging companies may develop in
the future. Many of the Company's competitors may also have well-established
relationships with the Company's existing and prospective customers. Increased
competition is likely to result in fee reductions, reduced margins, longer sales
cycles for the Company's services and a decrease or loss of its market share,
any of which could harm its business, operating results or financial condition.
Many of the Company's competitors have, and new potential competitors may
have, more experience developing Internet-based software applications and
integrated purchasing solutions, larger technical staffs, larger customer bases,
more established distribution channels, greater brand recognition and greater
financial, marketing and other resources than the Company has. In addition,
competitors may be able to develop products and services that are superior to
those of the Company or that achieve greater customer acceptance. There can be
no assurance that the e-commerce solutions offered by the Company's competitors
now or in the future will not be perceived as superior to those of the Company
by either businesses or consumers.
The principal raw materials used in the Company's baking mix and other
lesser directly manufactured food items operations, including flour, sugar,
spices and edible oils, and the paper, films and plastics used to package its
products, are subject to substantial price fluctuations, and some raw materials
are at historically high prices. The prices for raw materials are influenced by
a number of factors, including the weather, crop production, transportation and
processing costs, government regulation and policies, worldwide market supply
and demand an alternative demand for raw materials, such as the recent demand
for corn for use in the production of ethanol. Commodity prices have
historically been volatile and may continue to be volatile. Any substantial
increase in the prices of raw materials may adversely affect the Company's
financial condition, results of operations and cash flows.
The Company relies on utilities to operate its business; its manufacturing
plants and other facilities use natural gas, propane and electricity to operate.
In addition, its distribution operations use gasoline and diesel fuel to deliver
its products. For these reasons, substantial future increases in prices for, or
shortages of, these fuels or electricity could adversely affect the Company's
financial condition, results of operations and cash flows.
6. FURTHER CONSOLIDATION IN THE RETAIL FOOD INDUSTRY MAY ADVERSELY IMPACT
PROFITABILITY
As supermarket chains and grocery product manufacturers continue to
consolidate and as mass merchants gain scale, the Company's larger customers may
seek more favorable terms for their purchase of the Company's products,
including increased spending on promotional programs, and availability of
product for distribution may lessen if the Company has not established good
business relationships with all participants in the consolidated ventures.
7. LITIGATION
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions should not materially affect
the financial position, results of operations or cash flows of the Company, but
there can be no assurance as to this.
18
8. POSSIBLE LOSS OF NASDAQ CAPITAL MARKET LISTING.
Synergy's qualification for trading on the NASDAQ system is presently and
has in the past been questioned, the focus being on the market quotes for the
Company's stock, the current bid price presently being and having for a time in
the past been reduced below the applicable minimum NASDAQ standard of $1 and
having been below such level for an appreciable period of time, as well as the
Company also being notified in the past that stockholders' equity had fallen
below minimum applicable NASDAQ continued listing standard of $2,500,000. NASDAQ
has established, and the Commission has approved, certain maintenance
requirements to which the Company must adhere to remain listed, including the
requirement that a stock listed in such market have a bid price greater than or
equal to $1.00 and the listed Company maintain stockholders equity above
$2,500,000. The bid price per share for the Common Stock of Synergy had been
below $1.00 in the past and the Common Stock has remained on the NASDAQ Capital
Market System because Synergy had complied with alternative criteria which are
now eliminated under the new and revised NASDAQ rules. If the bid price dips
below $1.00 per share, and is not brought above such level for a sustained
period of time or the Company fails to maintain stockholders' equity at a level
of at least $2,500,000 the Common Stock could be delisted from the NASDAQ System
and thereafter trading would likely be reported in the NASDAQ's OTC Bulletin
Board or in the "pink sheets." The Company is presently and has in the recent
past been under warning from NASDAQ to better conform by evidencing and
maintaining a bid price at or better than $1 or chance being delisted. (see Item
5-"Market For The Registrant's Common Stock and Related Stockholder Matters"
supra for a more in depth discussion of the Company's current NASDAQ listing
status)In the event of delisting from the NASDAQ Capital Market System, the
Common Stock would become subject to the rules adopted by the Commission
regulating broker-dealer practices in connection with transactions in "penny
stocks", including what the Company believes to be stringent disclosure rules
very different from NASDAQ trading practice procedures. These disclosure
requirements may have the effect of reducing the level of trading activity in
the secondary market for a stock that becomes subject to the penny stock rules.
If the Common Stock became subject to the penny stock rules, many broker-dealers
might be unwilling to engage in transactions in the Company's securities because
of the added disclosure requirements, thereby making it more difficult for
purchasers of the Common Stock to dispose of their shares. The Company's common
stock has historically remained at NASDAQ trading levels above $1 except for
limited periods of time. The Company is hopeful of experiencing and maintaining
its bid price in conformity with applicable NASDAQ listing standards as
instructed by NASDAQ administration. The Company has also achieved and is
confident of maintaining a level of Stockholders' equity above $2,500,000.
Historical stability combined with the Company's increasing business share in
the market and its continuing establishment as a viable force in the industries
wherein it participates gives the Company confidence that its susceptibility to
market deficiencies is in a much lessened state then in years past and that it
can continue to achieve and maintain NASDAQ listing compliance, but of this
there can be no assurance.
19
9. RISKS OF BUSINESS DEVELOPMENT-INTERNET MARKETING -THE COMPANY DEPENDS ON
CONTINUED USE OF THE INTERNET AND GROWTH OF THE ONLINE PRODUCT PURCHASE MARKET.
Because still the lines of product and product distribution established for
the Company regarding its e-commerce marketing are relatively new and different
from its historical non-internet product distribution business, the Company's
operations in these areas should continue to be considered subject to all of the
risks inherent in a new business enterprise, including the absence of an
appreciable operating history and the expense of new product development and
uncertainties on demand and logistics of delivery and other satisfaction of
customer demands. Various problems, expenses, complications and delays may be
encountered in connection with the development of the Company's new products and
methods of product distribution through use of the Internet. These expenses must
either be paid out of the proceeds of future equity offerings or out of
generated revenues and Company profits and will likely be a drain on Company
capital if revenues and revenue collection do not keep pace with Company
expenses. There can be no assurance as to the continued availability of funds
from revenues or from any other sources.
The Company's future potential revenues and profits from product sales over
the Internet as well as use of the Internet to arrange products sales in
generaldepend to a great extent upon the widespread acceptance and use of the
internet as an effective medium of business and communication by the Company's
target customers. Rapid growth in the use of and interest in the Internet has
occurred. As a result, acceptance and use continue to develop, and a
sufficiently broad base of consumers have adopted, and continue to use, the
Internet and other online services as a medium of commerce but there can be no
assurance of continued use at the levels anticipated by the Company to sustain
its internet business segments.
As the Internet and online commerce industry evolve, the Company must
license leading technologies useful in its business, enhance its existing
services, develop new services and technology that address the increasingly
sophisticated and varied needs of its prospective customers and respond to
technological advances and emerging industry standards and practices on a
cost-effective and timely basis. The Company may not be able to successfully
implement new technologies or adapt its proprietary technology and transaction
processing systems to customer requirements or emerging industry standards. If
the Company is unable to do so, it could adversely impact its ability to build
on its varied businesses and attract and retain customers.
The Company's future revenues and profits depend to a large extent upon the
widespread acceptance and use of the Internet and other online services as a
medium for commerce by merchants and consumers. The use of the Internet and
e-commerce may not continue to develop at past rates and a sufficiently broad
base of business and individual customers may not adopt or continue to use the
Internet as a medium of commerce. The market for the sale of goods and services
over the Internet is a relatively new and emerging market. Demand and market
acceptance for recently introduced services and products over the Internet are
subject to a high level of uncertainty. Growth in the Company's customer base
depends on obtaining businesses and consumers who have historically used
traditional means of commerce to purchase goods. For the Company to be
successful, the Company believes that these market participants must accept and
use the novel ways of conducting business and exchanging information as is
provided by the internet.
20
The Internet is still relatively new and rapidly changing technology and
continues to experience significant growth in the number of users, frequency of
use and bandwidth requirements. There can be no assurance that the
infrastructure of the Internet and other online services will be able to support
the demands placed upon them and/or that the Company may be able to keep pace
therewith. Furthermore, the Internet has experienced a variety of outages and
other delays as a result of damage to portions of its infrastructure, and could
face such outages and delays in the future. These outages and delays could
adversely affect the level of Internet usage and also the level of traffic and
the processing of transactions. In addition, the Internet or other online
services could lose their viability due to delays in the development or adoption
of new standards and protocols required to handle increased levels of Internet
or other online service activity, or due to increased governmental regulation.
Changes in or insufficient availability of telecommunications services or other
Internet service providers to support the Internet or other online services also
could result in slower response times and adversely affect usage of the Internet
and other online services generally and the Company's service in particular. If
use of the Internet and other online services does not continue to grow or grows
more slowly than expected, if the infrastructure of the Internet and other
online services does not effectively support growth that may occur, or if the
Internet and other online services do not become or sustain as a viable
commercial marketplace, the Company will have to adapt its business model to any
resulting new environment, which could adversely affect its results
of operations and financial condition.
10. RAPIDLY CHANGING MARKET MAY IMPACT OPERATIONS.
The market for the Company's products is rapidly changing with evolving
industry standards and frequent new product introductions. The Company's future
success will depend in part upon its continued ability to enhance its existing
products and to introduce new products and features to meet changing customer
requirements and emerging industry standards and to continue to have access to
such products from their sources on a pricing schedule conducive to the Company
operating at a profit. The Company will have to continuously develop, change and
implement as and where necessary an appropriate marketing strategy for its
various products. There can be no assurance that the Company will successfully
complete the development of future products or that the Company's current or
future products will achieve market acceptance levels and be made available for
sale by the Company conducive to the Company's fiscal needs. Any delay or
failure of these products to achieve market acceptance or limits on their
availability for sale by the Company would adversely affect the Company's
business. In addition, there can be no assurance that the products or
technologies developed by others will not render the Company's products or
technologies non-competitive or obsolete.
Management believes actions taken and presently being taken to meet and
enhance the Company's operating and financial requirements should assure and
provide the opportunity for the Company to continue as a going concern. However,
Management cannot predict the outcome of future operations and no adjustments
have been made to offset the outcome of this uncertainty in the operating
segments of the Company highly dependent on Internet sales.
21
11.EXTENSIVE AND INCREASING REGULATION OF TOBACCO PRODUCTS AND LITIGATION
MAY IMPACT CIGAR INDUSTRY.
The tobacco industry in general has been subject to extensive regulation at
the federal, state and local levels. Recent trends have increased regulation of
the tobacco industry. Although regulation initially focused on cigarette
manufacturers, it has begun to have a broader impact on the industry as a whole
and may focus more directly on cigars in the future. The increase in popularity
of cigars may likely lead to an increase in regulation of cigars. A variety of
bills relating to tobacco issues have been introduced in the U.S. Congress,
including bills that would (i) prohibit the advertising and promotion of all
tobacco products or restrict or eliminate the deductibility of such advertising
expense, (ii) increase labeling requirements on tobacco products to include,
among others things, addiction warnings and lists of additives and toxins, (iii)
shift control of tobacco products and advertisements from the Federal Trade
Commission (the "FTC") to the Food and Drug Administration (the "FDA"), (iv)
increase tobacco excise taxes and (v) require tobacco companies to pay for
health care costs incurred by the federal government in connection with tobacco
related diseases. There has also been recent cooperation between federal and
State authorities to curtail internet sales of tobacco products because of tax
issues as well as underage purchase questions. Future enactment of such
proposals or similar bills may have an adverse effect on the results of
operations or financial condition of the Company. Although, except for warning
labeling and smoke free facilities, current legislation and regulation focuses
on cigarette smoking and sales, there is no assurance that the scope of
legislation will not be expanded in the future to encompass cigars as well.
A majority of states restrict or prohibit smoking in certain public places
and restrict the sale of tobacco products to minors. Local legislative and
regulatory bodies also have increasingly moved to curtail smoking by prohibiting
smoking in certain buildings or areas or by designating "smoking" areas. These
restrictions generally do not distinguish between cigarettes and cigars. These
restrictions and future restrictions of a similar nature have and likely will
continue to have an adverse effect on the Company's sales or operations because
of resulting difficulty placed upon advertising and sale of tobacco products,
such as restrictions and in many cases prohibition of counter access to or
display of premium handmade cigars, and/or decisions by retailers not to
advertise for sale and in many cases to sell tobacco products because of public
pressure to stop the selling of tobacco products. Numerous proposals also have
been and are being considered at the state and local levels, in addition to
federal regulations, to restrict smoking in certain public areas, regulating
point of sale placement and promotions of tobacco products and requiring warning
labels.
Increased cigar consumption and the publicity such increase has received
may increase the risk of additional regulation. The Company cannot predict the
ultimate content, timing or effect of any additional regulation of tobacco
products by any federal, state, local or regulatory body, and there can be no
assurance that any such legislation or regulation would not have a material
adverse effect on the Company's business.
In addition numerous tobacco litigation has been commenced and may in the
future be instituted, all of which may adversely affect(albeit focusing
primarily on cigarette smoking) cigar consumption and sale and may pressure
applicable government entities to institute further and stricter legislation to
restrict and possibly prohibit cigar sale and consumption, any and all of which
may have an adverse affect on Company business (see "Government Regulation -
Tobacco Industry Regulation and Tobacco Industry Litigation" supra).
12. NO DIVIDENDS LIKELY.
No dividends have been paid on the Common Stock since inception, nor, by
reason of its current financial status and its contemplated financial
requirements, does Synergy contemplate or anticipate paying any dividends upon
its Common Stock in the near future but the Company does have outstanding
preferred stock upon which dividends are paid currently.
13. POTENTIAL LIABILITY FOR CONTENT ON THE COMPANY'S WEB SITE.
Because the Company posts product information and other content on its Web
sites, the Company faces potential liability for negligence, copyright, patent,
trademark, defamation, indecency and other claims based on the nature and
content of the materials that the Company posts. Such claims have been brought,
and sometimes successfully pressed, against other Internet content distributors.
In addition, the Company could be exposed to liability with respect to the
unauthorized duplication of content or unauthorized use of other parties'
proprietary technology or infiltration into the Company's system by unauthorized
personnel. The Company is not aware of any present claim of such nature or any
current basis therefore but because of the nature of the product marketing
techniques utilized by the Company with application of the internet, likelihood
of claims of such nature arising in the future cannot be predicted.
22
14. THE COMPANY'S NET SALES WOULD BE HARMED IF IT EXPERIENCES SIGNIFICANT
CREDIT CARD FRAUD.
A failure to adequately control fraudulent credit card transactions would
harm the Company's net sales and results of operations because it does not carry
insurance against such risk. Under current credit card practices, the Company
may be held liable for fraudulent credit card transactions where it does not
obtain a cardholder's signature, a frequent practice in internet sales.
15. POTENTIAL FUTURE SALES OF COMPANY STOCK.
The majority of the shares of common stock of the Company outstanding are
"restricted securities" as that term is defined in Rule 144 promulgated under
the Securities Act of 1933. In general under current revised Rule 144 a person
(or persons whose shares are aggregated) who has satisfied a six month holding
period may if they are an affiliate, under certain circumstances and processes,
sell within any three month period a number of shares which does not exceed the
greater of 1% of the then outstanding shares of common stock or the average
weekly trading volume during the four calendar weeks prior to such sale and
non-affiliates have no such limitations, but under both scenarios the Company
must be current in their reporting. Rule 144 also permits, the sale of shares by
a person who is not an affiliate of the Company and who has satisfied a one year
holding period without any limitations. The majority of holders of the shares of
the outstanding common stock of the Company deemed "restricted securities" have
already satisfied at least their six month holding period or will do so with the
next fiscal year, and such stock is either presently or within the next fiscal
year will become eligible for sale in the public market (subject to volume
limitations of Rule 144 when applicable). The Company is unable to predict the
effect that sales of its common stock under Rule 144, or otherwise, may have on
the then prevailing market price of the common stock. However, the Company
believes that the sales of such stock under Rule 144 may have a depressive
effect upon the market.
16. THE COMPANY MAY NOT BE ABLE TO CONTINUE ATTRACTING NEW CUSTOMERS.
The success of the Company's business model depends in large part on its
continued ability to maintain and re sell to current customers and to increase
its number of customers in the future. The market for its businesses may grow
more slowly than anticipated because of or become saturated with competitors,
many of which may offer lower prices or broader distribution. The Company is
also highly dependant on internet sales which require interest of potential
suppliers in the internet mode of product purchasing. Some potential suppliers
may not want to join the Company's networks because they are concerned about the
possibility of their products being listed together with their competitors'
products thus limiting availability of product mix made available by the
Company. If the Company cannot continue to bring new customers to its internet
sites or maintain its existing customer base or attract listing of a mixture of
product, the Company may be unable to offer the benefits of the network model at
levels sufficient to attract and retain customers and sustain that aspect of its
business.
17. THE COMPANY'S BUSINESS MAY SUFFER IF IT IS NOT ABLE TO PROTECT
IMPORTANT INTELLECTUAL PROPERTY.
The Company's ability to compete effectively against other companies in its
industry will depend, in part, on its ability to protect its proprietary
technology and systems designs relating to its technologies and its various
tradenames and trademarks. In the baking mix operations, as an example,
proprietary manufacturing is accomplished for products under the Country Value,
County Fare, Rich n Fluffy and Rich n Moist tradename brands; and in the spice
manufacturing sector recognized tradenames are Palm Spices and Gourmet Select.
The Company does not know whether it has been or will be completely successful
in doing so. Further, its competitors may independently develop or patent
technologies that are substantially equivalent or superior to those of the
Company so as to effectively compete and gain acceptance of products under other
more highly recognized tradenames and trademarks.
18. THE COMPANY MAY NOT BE ABLE TO MAINTAIN THE CONFIDENTIALITY OF ITS
PROPRIETARY KNOWLEDGE.
The Company relies, in part, on contractual provisions to protect its trade
secrets and proprietary knowledge. These agreements may be breached, and the
Company may not have adequate remedies for any breach. Its trade secrets may
also be known without breach of such agreements or may be independently
discovered by competitors. Its inability to maintain the proprietary nature of
its technology could harm its business, results of operations and financial
condition by adversely affecting its ability to compete.
23
19. OTHERS MAY ASSERT THAT THE COMPANY'S TECHNOLOGY INFRINGES THEIR
INTELLECTUAL PROPERTY RIGHTS.
The Company believes that its technology does not infringe the proprietary
rights of others. However, the e-commerce industry is characterized by the
existence of a large number of patents and trademarks and frequent claims and
litigation based on allegations of patent infringement and violation of other
intellectual property rights. As the e-commerce market and the functionality of
products in the industry continues to grow and overlap, the Company believes
that the possibility of an intellectual property claim against it will increase.
For example, the Company may inadvertently infringe an intellectual property
right of which it is unaware, or there may be applications to protect
intellectual property rights now pending of which it is unaware which it may be
infringing when they are issued in the future, or the Company's service or
systems may incorporate and/or utilize third party technologies that infringe
the intellectual property rights of others. The Company has been and expects to
continue to be subject to alleged infringement claims. The defense of any claims
of infringement made against the Company by third parties, whether or not
meritorious, could involve significant legal costs and require the Company's
management to divert time and attention from its business operations. Either of
these consequences of an infringement claim could have a material adverse effect
on the Company's operating results. If the Company is unsuccessful in defending
any claims of infringement, it may be forced to obtain licenses or to pay
royalties to continue to use its technology. The Company may not be able to
obtain any necessary licenses on commercially reasonable terms or at all. If the
Company fails to obtain necessary licenses or other rights, or if these licenses
are costly, its operating results may suffer either from reductions in revenues
through the Company's inability to serve customers or from increases in costs to
license third-party technologies.
20. THE COMPANY'S BUSINESS MAY BE ADVERSELY AFFECTED IF IT IS UNABLE TO
CONTINUE TO LICENSE SOFTWARE THAT IS NECESSARY FOR ITS SERVICE OFFERING.
Through distributors, the Company licenses a variety of commercially
available Internet technologies, which are used in its services and systems to
perform key functions. As a result, the Company is to a certain extent dependent
upon continuing to maintain these technologies. There can be no assurance that
the Company would be able to replace the functionality provided by much of its
purchased Internet technologies on commercially reasonable terms or at all. The
absence of or any significant delay in the replacement of that functionality
could have a material adverse effect on the Company's business, financial
condition and results of operations.
24
21. THE COMPANY'S SYSTEMS INFRASTRUCTURE MAY NOT KEEP PACE WITH THE DEMANDS
OF ITS CUSTOMERS.
Interruptions of service as a result of a high volume of traffic and/or
transactions could diminish the attractiveness of the Company's services and its
ability to attract and retain customers. There can be no assurance that the
Company will be able to accurately project the rate or timing of increases, if
any, in the use of its service, or that it will be able to expand and upgrade
its systems and infrastructure to accommodate such increases in a timely manner.
The Company currently maintains systems in the U.S. Any failure to expand or
upgrade its systems could have a material adverse effect on its results of
operations and financial condition by reducing or interrupting revenue flow and
by limiting its ability to attract new customers. Any such failure could also
have a material adverse effect on the business of its customers, which could
damage the Company's reputation and expose it to a risk of loss or litigation
and potential liability.
Service offerings involving complex technology often contain errors or
performance problems. Many serious defects are frequently found during the
period immediately following introduction and initial implementation of new
services or enhancements to existing services. Although the Company attempts to
resolve all errors that it believes would be considered serious by its customers
before implementation, its systems are not error-free. Errors or performance
problems could result in lost revenues or cancellation of customer agreements
and may expose the Company to litigation and potential liability. In the past,
the Company has discovered errors in software used in the Company after its
incorporation into Company sites. The Company cannot assure that undetected
errors or performance problems in its existing or future services will not be
discovered or that known errors considered minor by it will not be considered
serious by its customers. The Company has experienced periodic minor system
interruptions, which may continue to occur from time to time.
The Company's success depends on the efficient and uninterrupted operation
of its computer and communications hardware systems. These systems are
vulnerable to damage or interruption from natural disasters, fires, power loss,
telecommunication failures, break-ins, sabotage, computer viruses, intentional
acts of vandalism and similar events. Despite any precautions the Company takes
or plans to take, the occurrence of a natural disaster or other unanticipated
problems could result in interruptions in its services. In addition, if any
hosting service fails to provide the data communications capacity the Company
requires, as a result of human error, natural disaster or other operational
disruption, interruptions in the Company's services could result. Any damage to
or failure of its systems could result in reductions in, or terminations of, its
services, which could have a material adverse effect on its business, results of
operations and financial condition.
22. THE COMPANY MAY ACQUIRE OTHER BUSINESSES OR TECHNOLOGIES, WHICH COULD
RESULT IN DILUTION TO ITS STOCKHOLDERS, OR OPERATIONAL OR INTEGRATION
DIFFICULTIES WHICH COULD IMPAIR ITS FINANCIAL PERFORMANCE.
If appropriate opportunities present themselves, the Company may acquire
complementary or strategic businesses, technologies, services or products that
it believes will be useful in the growth of its business. The Company does not
currently have any commitments or agreements with respect to any new
acquisitions. They may not be able to identify, negotiate or finance any future
acquisition successfully. Even if the Company does succeed in acquiring a
business, technology, service or product, the process of integration may produce
unforeseen operating difficulties and expenditures and may require significant
attention from the Company's management that would otherwise be available for
the ongoing development of its business. Moreover the anticipated benefits of
any acquisition may not be realized or may depend on the continued service of
acquired personnel who could choose to leave. If the Company makes future
acquisitions, it may issue shares of stock that dilute other stockholders, incur
debt, assume contingent liabilities or create additional expenses related to
amortizing intangible assets, any of which might harm its financial results and
cause its stock price to decline. Any financing that it might need for future
acquisitions may only be available to it on terms that restrict its business or
that impose on it costs that reduce its revenue.
23. GOVERNMENT REGULATION OF THE INTERNET AND E-COMMERCE IS EVOLVING AND
UNFAVORABLE CHANGES COULD HARM THE COMPANY'S BUSINESS
The Company is subject to general business regulations and laws, as well as
regulations and laws specifically governing the Internet and e-commerce. Such
existing and future laws and regulations may impede the growth of the Internet
or other online services. These regulations and laws may cover taxation, user
privacy, data protection, pricing, content, copyrights, distribution, electronic
contracts and other communications, consumer protection, the provision of online
payment services, broadband residential Internet access, and the characteristics
and quality of products and services. It is not clear how existing laws
governing issues such as property ownership, sales and other taxes, libel, and
personal privacy apply to the Internet and e-commerce. Unfavorable resolution of
these issues may harm the Company's business.
25
Like many Internet-based businesses, the Company operates in an environment
of tremendous uncertainty as to potential government regulation. The Internet
has rapidly emerged as a commerce medium, and governmental agencies have not yet
been able to adapt all existing regulations to the Internet environment. Laws
and regulations have been introduced or are under consideration and court
decisions have been or may be reached in the U.S. and other countries in which
the Company does business that affect the Internet or other online services,
covering issues such as pricing, user privacy, freedom of expression, access
charges, content and quality of products and services, advertising, intellectual
property rights and information security. In addition, it is uncertain how
existing laws governing issues such as taxation, property ownership, copyrights
and other intellectual property issues, libel, obscenity and personal privacy
will be applied to the Internet. The majority of these laws were adopted prior
to the introduction of the Internet and, as a result, do not address the unique
issues of the Internet. Recent laws that contemplate the Internet, such as the
Digital Millennium Copyright Act in the U.S., have not yet been fully
interpreted by the courts and their applicability is therefore uncertain. The
Digital Millennium Copyright Act provides certain "safe harbors" that limits the
risk of copyright infringement liability for service providers such as the
Company with respect to infringing activities engaged in by users of the
service.
In the area of user privacy, several states have legislation and/or have
proposed legislation that limits or would limit the uses of personal user
information gathered online or require online services to establish privacy
policies. The Federal Trade Commission also has become increasingly involved in
this area. The Company does not sell personal user information regarding its
customers. The Company does use aggregated data for analysis regarding the
Company network, and does use personal user information in the performance of
its services for its customers. Since the Company does not control what its
customers do with the personal user information they collect, there can be no
assurance that its customers' sites will be considered compliant.
As online commerce evolves, the Company expects that federal, state or
foreign agencies will continue to adopt regulations covering issues such as
pricing, content, user privacy, and quality of products and services. Any future
regulation may have a negative impact on the Company's business by restricting
its methods of operation or imposing additional costs. Although many of these
regulations may not apply to its business directly, the Company anticipates that
laws regulating the solicitation, collection or processing of personal
information could indirectly affect its business.
Internet regulation which has met with the most successful challenges is
that which touches upon Free Speech. Title V of the Telecommunications Act of
1996, known as the Communications Decency Act of 1996, prohibits the knowing
transmission of any comment, request, suggestion, proposal, image or other
communication that is obscene or pornographic to any recipient under the age of
18. The prohibitions scope and the liability associated with a violation are
currently unsettled. In addition, although substantial portions of the
Communications Decency Act of 1996 have been held to be unconstitutional, the
Company cannot be certain that similar legislation will not be enacted and
upheld in the future. Subsequent attempts at such legislation such as the Child
Online Protection Act passed in 1998 have met with similar and successful
constitutional attack. It is possible that such legislation could expose
companies involved in online commerce to liability, which could limit the growth
of online commerce generally. Legislation like the Communications Decency Act
and Child Online Protection Act could reduce the growth in Internet usage and
decrease its acceptance as a communications and commerce medium.
The worldwide availability of Internet web sites often results in sales of
goods to buyers outside the jurisdiction in which the Company or its customers
are located, and foreign jurisdictions may claim that the Company or its
customers are required to comply with their laws. Foreign regulation of internet
use has not met with the success of constitutional and other judicial scrutiny
that US regulation has been limited by. As an Internet Company, it is also
unclear which jurisdictions may find that the Company is conducting business
therein. Its failure to qualify to do business in a jurisdiction that requires
it to do so could subject the Company to fines or penalties and could result in
its inability to enforce contracts in that jurisdiction.
The Company is not aware of any recent related legislation other than that
specifically referenced herein which may affect the manner in which the Company
utilizes the internet in its business but there can be no assurance that future
government regulation will not be enacted further restricting use of the
internet that might adversely affect the Company's business.
26
24. TAXES MAY BE IMPOSED ON INTERNET COMMERCE.
In the U.S., the Company does not collect sales or other similar taxes on
goods sold through the Company's internet websites. The Internet Tax Freedom Act
of 1998, (extended through November 2003 and internet access tax prohibitions
though November 1, 2007), prohibits the imposition of new or discriminatory
taxes on electronic commerce by United States federal and State taxing
authorities except for taxes caused by nexus of the Seller of the goods in the
State. Sales to customers in such States may be taxable, but to date no such
taxes have ever been collected by the Company. The Company notes that there is
currently Congressional legislation pending, the Permanent Internet Tax Freedom
Act of 2007, which is intended to amend the Internet Tax Freedom Act of 1998,
thereby placing a permanent moratorium on multiple and discriminatory taxes on
electronic commerce and Internet access taxes. Said amendment is currently being
considered by the Committee on the Judiciary and the Committee on Commerce,
Science, and Transportation in the U.S. House of Representatives and Senate,
respectively. Currently, decisions of the U.S. Supreme Court restrict the
imposition of obligations to collect state and local sales and use taxes with
respect to sales made over the Internet. However, a number of States, as well as
the U.S. Congress, have been considering various initiatives that could limit or
supersede the Supreme Court's position regarding sales and use taxes on Internet
sales. If any of these initiatives addressed the Supreme Court's constitutional
concerns and resulted in a reversal of its current position, the Company could
be required to collect sales and use taxes. The imposition by State and local
governments of various taxes upon Internet commerce could create administrative
burdens for the Company and could decrease its future sales. The status of the
prohibition is uncertain and States have attempted to impose sales and use tax,
often successfully mainly based upon the nexus of the retailer with the State
imposing the tax on customers in that State. A number of proposals have been
made at the State and local level that would impose additional taxes on the sale
of goods and services through the Internet. Such proposals, if adopted and not
in conflict with federal prohibitions, could substantially impair the growth of
electronic commerce, and could adversely affect the Company's opportunity to
derive financial benefit from such activities. There has been recent activity in
attempts to increase enforcement of the federal Jenkins Act, which requires
persons whom engage in the sale of cigarettes and smokeless tobacco in
interstate commerce to report said sale to the buyer's state tobacco tax
administrator. A 2003 U.S. Government Accounting Office report found that a
significant number of Internet cigarette vendors fail to comply with the Jenkins
Act. Although the Jenkins Act and subsequent bills have sought the increased
collection of state cigarette taxes, cigars remain outside the scope of the
regulation. However, the Company cannot predict the ultimate content, timing or
effect of any additional regulation of tobacco products by any federal, state,
or local or regulatory body, and there can be no assurance that any such
legislation or regulation would not have material adverse effect on the
Company's business. In addition, non-U.S. countries may seek to impose service
tax (such as value-added tax) collection obligations on companies that engage in
or facilitate Internet commerce. A successful assertion by one or more states or
any foreign country that the Company should collect sales or other taxes on the
sale of merchandise could impair its revenues and its ability to acquire and
retain customers.
27
25. THERE MAY BE SIGNIFICANT SECURITY RISKS AND PRIVACY CONCERNS RELATING
TO ONLINE COMMERCE.
A significant barrier to online commerce and communications is the secure
transmission of confidential information over public networks. A compromise or
breach of the technology used to protect the Company's customers' and their
end-users' transaction data could result from, among other things, advances in
computer capabilities, new discoveries in the field of cryptography, or other
events or developments. Any such compromise could have a material adverse effect
on the Company's reputation and, therefore, on its business, results of
operations and financial condition. Furthermore, a party who is able to
circumvent the Company's security measures could misappropriate proprietary
information or cause interruptions in its operations. The Company may be
required to expend significant capital and other resources to protect against
security breaches or to alleviate problems caused by such breaches. Concerns
over the security of transactions conducted on the Internet and other online
services and the privacy of users may also inhibit the growth of the Internet
and other online services generally, especially as a means of conducting
commercial transactions. The Company currently has practices and procedures in
place to protect the confidentiality of its customers' and their end-users'
information. However, its security procedures to protect against the risk of
inadvertent disclosure or intentional breaches of security might fail to
adequately protect information that it's obligated to keep confidential. The
Company may not be successful in adopting more effective systems for maintaining
confidential information, and its exposure to the risk of disclosure of the
confidential information of others may grow with increases in the amount of
information it possesses. To the extent that the Company activities involve the
storage and transmission of proprietary information, such as credit card
numbers, security breaches could damage its reputation and expose it to a risk
of loss or litigation and possible liability. The Company's insurance policies
may not be adequate to reimburse it for losses caused by security breaches.
26. IF THE COMPANY'S FULFILLMENT CENTERS ARE NOT EFFECTIVELY OPERATED THE
COMPANY'S BUSINESS MAY BE ADVERSELY AFFECTED.
If the Company does not successfully operate its fulfillment centers such
could significantly limit the Company's ability to meet customer's demands,
which would likely result in diminished revenues, adversely affecting the
Company's business. Because it is difficult to predict sales increases the
Company may not manage its facilities in an optimal way which may result in
excess inventory, warehousing, fulfillment and distribution capacity having an
adverse impact on working capital of the Company, or the lack of sufficiency in
such areas causing delays in fulfillment of customer orders adversely affecting
customer confidence and loyalty.
28
27. OUR VENDOR RELATIONSHIPS SUBJECT US TO A NUMBER OF RISKS
Although we continue to increase the number of vendors that supply products
to us and only two vendors account for 10% or more of our inventory purchases,
we have significant vendors that are important to our sourcing and co-packing
and labeling on proprietary products. We do not have long-term contracts or
arrangements with most of our vendors to guarantee the availability of
merchandise and channeling of product distribution, particular payment terms, or
the extension of credit limits. If the Company's current vendors were to stop
selling merchandise to us or assisting in product distribution channeling on
acceptable terms, the Company may not be able to acquire merchandise or channel
product from other vendors and customer sources in a timely and efficient manner
and on acceptable terms.
28. CHANGE IN TOP CUSTOMERS/SUPPLIERS SELLING/BUYING PATTERNS MAY ADVERSELY
AFFECT THE COMPANY'S SALES AND PROFITS
The Company's top 2 customers represent 23% of its 2007 total sales, and
top 3 customers 49% of its 2006 total sales. The Company's largest supplier,
Proctor and Gamble, represents 59% of its product distribution availability in
2007 and 2006. If any of the top customers change their buying patterns with the
Company and/or top suppliers limit product supply, the Company's sales and
profits could be adversely affected.
29. LOSS OF FACILITIES COULD ADVERSELY AFFECT THE COMPANY'S FINANCIAL AND
OPERATIONAL RESULTS
The Company has one principal production facility for its baking mix
operations, which facility is a four story manufacturing plant in Monroe,
Michigan where the Company's signature baking mix products are exclusively
manufactured. The loss of such production facility could have material adverse
impact on the Company's operations, financial condition and results of
operations.
30. TERMS OF INDEBTEDNESS IMPOSE SIGNIFICANT RESTRICTIONS ON OUR BUSINESS
The Company's Credit and Debt Instruments Agreements, ("Agreements")
contain various covenants that limit the Company's ability to, among other
things, incur or become liable for additional indebtedness; create or suffer to
exist certain liens; enter into business combinations or asset sale
transactions; make restricted payments, including dividends over a specified
amount; and make investments.
These restrictions could limit the Company's ability to obtain future
financing, sell assets, make acquisitions or needed capital expenditures,
withstand a future downturn in its business or the economy in general, conduct
operations or otherwise take advantage of business opportunities that may arise.
31. THREATS OR POTENTIAL THREATS TO SECURITY OR FOOD SAFETY MAY ADVERSELY
AFFECT OUR BUSINESS
Wartime activities, threats or acts of terror, data theft, information
espionage, or other criminal activity directed at the grocery or drug store
industry, the transportation industry, or computer or communications systems,
including security measures implemented in recognition of actual or potential
threats, could increase security costs, adversely affect the Company's
operations, or impact consumer behavior and spending and customer orders. Other
events that give rise to actual or potential food contamination, drug
contamination, or food-borne illness could have an adverse effect on the
Company's operating results.
32. THE COMPANY'S STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE.
The stock market, and in particular the market for Internet-related stocks,
has, from time to time, experienced extreme price and volume fluctuations. Many
factors may cause the market price for the Company's common stock to decline,
perhaps substantially, including:
- actual or anticipated variations in the Company's quarterly operating
results and expected future results;
- changes in, or failure to meet, financial estimates by securities
analysts;
- unscheduled system downtime;
- additions or departures of key personnel;
- announcements of technological innovations or new services by the
Company or its competitors;
- initiation of or developments in litigation affecting the Company;
29
- conditions or trends in the Internet and online commerce industries;
- changes in the market valuations of other Internet, online commerce,
or technology companies;
- developments in regulation;
- announcements by the Company or its competitors of significant
acquisitions, strategic partnerships, joint ventures, new product of
capital commitments;
- unanticipated economic or political events;
- sales of the Company's common stock or other securities in the open
market; and
- other events or factors, including those described in the "Risk
Factors", section and others that may be beyond the Company's control.
- failure to meet its development plans;
- the demand for its common stock;
- downward revision in securities analyst's estimates or changes in
general market conditions;
- technological innovations by competitors or in competing
technologies; and
- investor perception of the Company's industry or its prospects.
The Company's stock pricing has fluctuated significantly in the past and
there is no assurance such trend may not continue in the future.
30
33. INTERNATIONAL BUSINESS RISKS.
The Company deals with Companies not located in the United States. Although
almost all business activity is conducted in United States Dollars, the Company
may be subject to currency risks and may be subject to international risks that
are not under the jurisdiction of U.S. Laws. In 2007 the Company had
transactions with Companies located in Canada, China, Dominican Republic,
Colombia, Italy and Israel.
ITEM 2: DESCRIPTION OF PROPERTY
The Company's corporate offices and administrative headquarters are located
in Syosset, New York.
The Company maintains satellite and representative offices in New York,
Pennsylvania, New Jersey, Illinois, and Florida.
Warehousing facilities utilized by the Company are located in New Jersey,
New York and Florida. The Grocery inventory is warehoused in New York, Salon
products are warehoused in New Jersey, and cigars are warehoused in Florida. The
facilities operate under contractual warehousing agreements except in Florida
and New York which facilities are leased. The Company also uses warehousing
facilities on a spot contract basis as needed.
The Company also leases space for manufacturing and warehousing regarding
its baking mix operation in Michigan (USA) of approximately 110,000 square feet.
ITEM 3: LEGAL PROCEEDINGS
The Company is a party to a number of legal proceedings in connection with
claims made for goods sold and various other aspects of its business, all of
which are considered routine litigation incidental to the business of the
Company. The Company is not aware of any other litigation pending which might be
considered material and not in the ordinary course of business.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2007 no matters were submitted for shareholder
approval.
31
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock trades on NASDAQ Capital Market under the Symbol
"SYBR", and on the Boston Stock Exchange under the Symbol "SYB". The high and
low sales prices in the NASDAQ Capital Market for the Company's Common Stock, as
reported by the NASDAQ for each of the quarters of the Company's two most recent
fiscal years are as follows:
COMMON STOCK
Quarter Ended High Low Close
- ------------- ------- ------- ------
March 31, 2006 1.97 1.22 1.38
June 30, 2006 1.45 1.00 1.12
September 30, 2006 1.17 .93 1.04
December 31, 2006 1.35 .81 .93
March 31, 2007 1.07 .66 .83
June 30, 2007 1.07 .72 .84
September 30, 2007 1.34 .80 1.04
December 31, 2007 1.29 .80 .89
On March 28, 2008, the Company had approximately 3000 shareholders of
record.
The Company has never paid any dividends on its Common Stock and does not
presently intend to pay any dividends on the Common Stock in the foreseeable
future. The Company does pay a dividend on its preferred stock. There are no
unexercised stock options outstanding.
The Company is presently and in the past has been under warning from NASDAQ
administration to achieve and maintain a bid price for its Common Stock above $1
or chance being delisted (see further explanations at Risk Factor 8 "Possible
Loss of NASDAQ Capital Market Listing," supra; reference is also made to the
report of the Company on Form 8K regarding the present NASDAQ warning filed by
the Company on January 28, 2008 which report is incorporated herein by
reference).
The Company has authorized stock of 15,000,000 shares divided into
14,000,000 Common Stock $.001 par value, 100,000 shares of Class A Preferred
Stock par value $.001 and 900,000 shares of Class B Preferred Stock, 500,000
shares of which are designated Series A Class B Preferred. The Company has had
approved by its Board of Directors and Shareholders an increase in its total
authorized stock (without further change in designation beyond common stock and
without any amendment in the amount authorized in each present designation) to
26 million shares which increase, although authorized, has not as of the date of
this report been effectuated.
Refer to the Company's Consolidated Statement of Changes in Stockholders'
Equity in the Company's audited financial statements included in this report for
information on issuances of equity securities during fiscal year 2006. These
issuances were made either under exemption from registration allowed under
Section 4 (2) or Regulation D of the Securities Act of 1933 as amended.
32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
OVERVIEW
Synergy Brands Inc. is a holding company that principally operates through
a wholly owned subsidiary, PHS Group Inc. ("PHS") in the wholesale distribution
of nationally known brands, proprietary private label groceries, general
merchandise, and Health and Beauty Aid (HBA) products. It principally focuses on
the sale of nationally known brand name consumer products manufactured by major
U.S. manufacturers and has begun focusing on the manufacturing and distribution
of certain grocery private label products including baking mixes, spices and
packaged meals. Information can be found at www.phsgroup.com.
The Company also owns a small wholly owned subsidiary representing less
then 2% of the Company's revenues, Gran Reserve Corporation (GRC), that
principally operates in the wholesale, retail and online sales of Premium hand
made cigars and accessories The Company has authorized the sale of GRC and plans
to focus on its expanding grocery operations. Further information can be found
at www.cigargold.com. The Company also owns 20% of a travel company called
Interline Vacations (PERX). Information can be found at www.perx.com.
For further information please visit the Company's corporate website at
www.sybr.com.
PHS GROUP (GROCERY & HBA OPERATIONS)
PHS Group distributes Grocery and HBA products to retailers and wholesalers
predominately in the United States. PHS is the largest business segment of the
Company's business operations, representing about 98% of the overall Company
sales and 95% of gross profit. PHS's core sales base remains the distribution of
nationally branded consumer products in the grocery and health and beauty (HBA)
sectors. PHS has positioned itself as a distributor for major manufacturers as
opposed to a full line wholesaler. A full line wholesaler has the responsibility
of servicing the entire needs of a retail operation, whereas a distributor
caters to specific merchandising categories. As a result, PHS is able to better
plan for the needs of its specific customers and at the same time benefits the
manufacturer as the direct supply source and in turn, increase sales to its
customers at optimized pricing through this unique strategy. PHS concentrates on
what it perceives to be faster moving promotional items such as: Tide, Bounty,
Duracell, Folgers, Crest, Clorox bleach, Scott tissues, Marcal tissues among
many others, and uses promotions, logistics and distribution savings to
streamline and reduce its sale prices and increase gross profit thereby.
In the third quarter of 2006, PHS entered the private label grocery market
specializing in the distribution of baking mixes and spices to grocery and drug
chains as well as wholesalers and distributors on a proprietary basis. PHS hopes
to develop private label programs for national accounts by creating proprietary
baking mix products and spice plan-o-grams specifically designed for particular
retail needs. PHS further hopes to expand its grocery distribution business by
complementing the distribution of its promotional grocery and HBA items with
higher margin secondary items that would blend a higher margin into PHS
operations.
On May 18, 2007, PHS acquired the assets of a baking mix manufacturing
facility through a wholly owned subsidiary that was known as Loretta Baking Mix
Products (LBMP) for a combined cost of $10.4 million.
Factors that were involved in PHS and Synergy decision to acquire LBMP
manufacturing facility consisted of the following:
o PHS has secured and established business with several national chains
that have been generating substantial orders for PHS of products produced
by LBMP and there was no immediate replacement capability perceived by the
Company for this business. Although PHS did not own the private label
brands, the factory had the artwork, the packaging, the recipes, (inventory
assets) the configurations, governmental approvals, logistics, line design
and many strategic capabilities that allowed PHS to have a turnkey solution
and uninterrupted business. The artwork, packaging and recipes were
formulated and are owned by PHS customers.
33
o Baking mix facilities have to be American Baking Association (ABA)
approved. The ABA approval process and subsequent FDA approval are tedious
and time consuming. The LBMP plant was already certified for all regulatory
baking mix needs and has certifications and quality control at the optimum
levels. This facility was already co-packing for PHS and the customers were
satisfied with the quality of the product.
o PHS has started to develop proprietary brands under the County Fare,
Country Value and Rich and Moist Labels. PHS has started the process of
seeking customers that may not have their own private label brands, but are
only selling baking mix national brands such as Duncan Hines. PHS has
positioned the brands that it has developed as value brands that could
provide higher margins to the retailer then national brands, but do not
have the costs of development that a private label brand might otherwise
have. Synergy Brands believes that its market capitalization suffers
because there is no proprietary brand that Synergy Brands owns whereas
presently the Company merely distributes. Synergy believes that building
brand value may enhance shareholder value. Gaining direct manufacturing
capabilities with no delays or financial hardship is believed to be
valuable.
o PHS started to develop a broker network, distributed presentations to
several national chains, and hired sales support for co-packing expansion.
Interruption of this progress would have reduced PHS future profits. This
facility enabled operations to likely continue more flawlessly.
Furthermore, controlling the facility will likely enables PHS to expand,
bring new lines into activation, run more shifts and PHS strong credit
should allow it to close deals with customers that were tenuous about the
co-packing relationship as opposed to full PHS production and manufacturing
control.
o PHS plans to expand the business in the existing facility. Since all
process approvals that have been granted are for the use of this facility,
any expansion would likely be modular and cost effective. The facility
already has the regulatory certifications to operate a baking mix
manufacturing plant and would therefore ease the process of future
expansion. The anticipated expansion is being ascertained for existing PHS
customers that PHS has been servicing for 12 months and expansion
opportunities that PHS has been developing internally.
o The information systems needed to support this operation already existed
within the manufacturing process. The IT requirements as well as logistical
requirements were already in place to support PHS customers. Customers have
their own product mix that is customized to the line. The customer's
formula programs the manufacturing line. This integrated process is an
important part of the manufacturing process, job order costing, quality
control and motion time study that determines capacity.
GRAN RESERVE CORPORATION (PREMIUM CIGAR OPERATIONS)
The Company's premium cigar operations are conducted through its wholly
owned subsidiary Gran Reserve Corporation (GRC). GRC operates the following
businesses (under the business names stated). Cigars Around the World (CAW)
sells premium cigars to restaurants, hotels, casinos, country clubs and many
other leisure related destinations. This company was acquired in June 2003. CAW
opened a retail store and lounge in Miami Lakes, Florida selling premium cigars
and accessories in March 2006 as well as established and furthered a web site
related to its operations, www.cigarsaroundtheworld.com. CigarGold.com sells
premium cigars through the Internet directly to the consumer and through
partnership online affiliations. GRC, under the tradename BeautyBuys.com, sells
salon hair care products directly to the consumer via the Internet and through
partnership online affiliations.
34
CONSOLIDATED RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2007
AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2006.
OPERATING OPERATING AND
SEGMENTS CORPORATE SEGMENTS
Y/E 12/31/2007
Revenue $89,540,501 24.78% $ 89,540,501 24.78%
Gross Profit 8,833,419 78.12% 8,833,419 78.12%
SG&A 4,327,546 49.40% 5,858,185 36.64%
Operating Profit 3,293,750 73.89% 1,755,019 311.19%
Net Profit (loss) from continuing operations
attributable to common shareholders 1,740,677 271.60% (315,309) -81.14%
Per share continuing operations 0.19 (0.04)
Net loss from discontinued
operations (114,997) -91.54%
Per share discontinued operations (0.01)
Net profit (loss) attributable
to common shareholders (430,306) -85.81%
Net profit (loss) per common share (0.05)
Interest and financing expense 1,546,969 10.20% 2,184,141 6.50%
Y/E 12/31/2006
Revenue $71,759,908 $ 71,759,908
Gross Profit 4,959,245 4,959,245
SG&A 2,896,658 4,287,344
Operating Profit 1,894,202 426,816
Net Profit (loss) from continuing operations
attributable to common shareholders 468,424 (1,671,968)
Per share continuing operations 0.09 (0.33)
Net loss from discontinued
operations (1,359,464)
Per share discontinued operations (0.27)
Net loss attributable
to common shareholders (3,031,432)
Net loss per common share (0.60)
Interest and financing expense 1,403,739 2,050,856
Synergy Brands
Synergy Brands is a holding Company that operates through wholly owned
segments. In order to fully understand the results of operations, each segment
is analyzed respectively.
Revenues increased by 25% to $89,540,501 for the year ended December 31,
2007, as compared to $71,759,908 for the year ended December 31, 2006. The
increase in sales was predominately from the sale of PHS private label products
and an increase in the Company's PHS wholesale distribution operations.
The Company has been able to diversify its product selection in both
national brand and private label to achieve better operating margins. The
Company was able to grow revenue by 25% and gross profit increased by 78%. The
Company attained an operating profit of $1,755,019 for the year ended December
31, 2007 as compared to a $426,816 operating profit for the year ended December
31, 2006.
Selling General and Administrative expenses (SGA) increased by 37% to
$5,858,185 for the year ended December 31, 2007 as compared to $4,287,344 for
the year ended December 31, 2006. The increase in SG&A by 37% resulted from
increases in certain variable costs that correlate to increases in revenue. SG&A
expense for PHS Group increased by 68% to $3,623,994 for the year ended December
31, 2007 as compared to $2,161,320 for the year ended December 31, 2006. PHS
incurs variable expenses in connection with selling costs such as sales
commission, drivers, warehousing and administrative personnel as well as its
promotional expenses. As revenues rise, sales commissions and certain operating
expenses resulting from sales increase commensurately. Overall SGA costs were
6.5% in 2007 as compared to 6% of Revenues in 2006 while gross profit increased
materially for the same period.
The net loss attributable to Common Stockholders of the Company was
$430,306 for the year ended December 31, 2007 as compared to a loss of
$3,031,432 for the year ended December 31, 2006. Synergy Brands earned an
operating profit of $3,293,750 from as compared to an operating profit of
$1,894,202 for the same period last year. Corporate expenses for the year ended
December 31, 2007 totaled $1,530,639, which include legal, accounting, corporate
employees, and regulatory expenses as compared to $1,390,686 for the year ended
December 31, 2006. Management believes that its corporate expenses may increase
because of additional regulatory requirements that have been enacted by the
Securities and Exchange Commission (SEC). The Company will be required to comply
with additional governance and financial regulations that will likely result in
additional corporate expenses.
35
Below is a summary of the results of operation by segment:
PHS Group: (Grocery and HBA operations)
Synergy's Grocery and HBA business known as PHS Group improved its
operation through the expansion of its direct store delivery (DSD) and private
label wholesale and distribution operations. Sales for this segment for the year
improved by 26% to $87.9 million and operating profit increased by 100% to
$4,391,213. PHS represented 98% of the Company's overall revenues and provides
most of the cash flow for corporate regulatory expenses. PHS plans to continue
attempting to build its DSD operations, expand its private label programs, and
increase its national sales.
GRAN RESERVE CORPORATION (Cigar operations)
Gran Reserve segment operations headed by GRC consist of subcategories
www.CigarGold.com, www.CigarsAroundtheWorld.com, www.BeautyBuys.com, and the
retail store operation in Miami Lakes, Florida as well as online partnership
programs such as www.Overstock.com and www.Google.com. The principal operation
was relocated in March 2006 to a 6,000 square foot facility in Miami Lakes,
Florida, which handles order flow for the operation as well as retail
operations. Sales for this segment for the year ended December 31, 2007
decreased by 16% while operating loss increased by 262% to $1,097,463. The
Company has authorized the sale of GRC in FY 2008.
Corporate Expenses:
The Company's allocation to corporate expenses increased by 10% to
$1,530,639 for the year ended December 31, 2007 as compared to $1,390,686 for
the year ended December 31, 2006. Corporate expenses represent 26% of overall
operating expense of the Company. Operating expenses for all operations
including corporate expenses totaled $5.9 million for the year ended December
31, 2007. Corporate expenses reflected the charges needed to operate the public
corporation, Synergy Brands Inc. These included all the regulatory costs, board
fees, governance fees, legal and accounting expenses and employees that oversee
the operations of the Company's assets.
Below is a detailed review of the Company's performance.
In order to fully understand the Company's results a discussion of the
Company's segments and their respective results follow;
PHS GROUP (Grocery and HBA operations)
PHS Group distributes Grocery and HBA products to retailers and wholesalers
predominately located in the Northeastern United States as well as in Canada.
PHS constitutes the largest segment of the Company's operations from a financial
prospective, representing about 98% of the overall Company sales. PHS's core
sales base remains the distribution of nationally branded consumer products in
the grocery and health and beauty (HBA) sectors. PHS has positioned itself as a
distributor for major manufacturers as opposed to a full line wholesaler. A full
line wholesaler has the responsibility of servicing the entire needs of a retail
operation, where as a distributor caters to specific merchandising categories.
As a result, PHS is able to plan the needs of its customers directly from the
source of supply, which in turn is designed to increase sales to its customers
through this unique focus. PHS concentrates on what it perceives to be the
fastest moving consumer product items and uses promotional savings to streamline
and reduce their sale prices. PHS focuses on approximately 1,000 products
manufactured by the top Grocery and HBA Companies in the United States and as a
result, the Company believes that they have a competitive advantage in
comparison to the traditional wholesaler, which may concentrate on over 10,000
different items.
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PHS SEGMENT INFORMATION OF OPERATING BUSINESSES
PHS Group CHANGE
YEAR ENDED DECEMBER 31, 2007
Revenue 87,933,523 25.91%
Gross Profit 8,368,974 91.47%
SG&A 3,623,994 67.68%
Operating Profit 4,391,213 99.82%
Net Profit 2,838,318 264.06%
Interest and financing expenses 1,546,969 10.20%
YEAR ENDED DECEMBER 31, 2006
Revenue 69,840,886
Gross Profit 4,370,869
SG&A 2,161,320
Operating Profit 2,197,620
Net Profit 779,634
Interest and financing expenses 1,403,739
PHS increased its revenues by 26% to $87.9 million for the year ended
December 31, 2007 as compared to $69.8 million for the year ended December 31,
2006. The increase in PHS business is attributable to the utilization of
additional vendors, development of a private label grocery program designed to
sell proprietary products, more specifically in the baking mix and spice market,
to national chains in the United States and Canada, and organic growth in sales
to its customers in the Northeastern section of the United States. PHS increased
its gross profit by increasing Direct Store Delivery sales, developing a private
label market to national chains, as well as focusing on promotional merchandise
offered by its vendors. The overall gross profit percentage increased from 6.3%
to 9.5%. PHS has been able to maintain its sales and customer base while
increasing gross profit by 91%. This has been achieved through its wholesale
operations by generating incremental retail sales as opposed to lower margin
wholesale revenues. Additionally, PHS has taken advantage of promotional
rebates, which further enables its cost of foods to be reduced. PHS plans to
continue this approach, but it does rely on manufacturer promotions to achieve
its targeted results. Any material changes in manufacturer promotional rebate
policies may have an adverse effect on PHS's cost of goods. Continuing the
development of private label grocery products produced for the benefit of PHS
customers is another objective currently being developed and executed by PHS as
well as designing brand labels controlled by PHS. Net profit was $2,838,318 for
the year ended December 31, 2007 as compared to a profit of $779,639 for the
year ended December 31, 2006. The increased net profit resulted from a higher
gross profit realized by PHS through the sale of higher margin items and items
with increased promotional allowances.
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GRAN RESERVE SEGMENT
GRC CHANGE
YEAR ENDED DECEMBER 31, 2007
Revenue $1,606,978 -16.26%
Gross Profit 464,445 -21.06%
SG&A 703,552 -4.32%
Operating loss (1,097,463) 261.70%
Net loss (1,097,641) 252.70%
YEAR ENDED DECEMBER 31, 2006
Revenue 1,919,022
Gross Profit 588,376
SG&A 735,338
Operating loss (303,418)
Net loss (311,210)
Revenues in the Company's cigar operation decreased by 16% for the year
ended December 31,2007 to $1,606,978 as compared to $1,919,022 for the year
ended December 31, 2006. CAW on a current operating basis represents
approximately 45% of cigar revenues for the year ended December 31, 2007. Gross
profit for the year ended December 31, 2007 decreased by 21% to $464,445 as
compared to $588,376 for the year ended December 31, 2006. Gran Reserve recorded
an impairment loss of $742,678 for the year ended December 31, 2007.
DISCONTINUED OPERATIONS
The Company discontinued Proset's operation in the fourth quarter of 2006
and such discontinuance is reflected in the financial statements hereinafter
provided. The prior Proset segment of the Company's business has never been
considered a significant component thereof. After review of the relevant
components required for measuring the importance of and particulars of the
Proset segment, the Company determined that the lessened value of the Company of
Proset's revenues did not warrant continuing its operations because such
revenues (because of the cost factor) had not become sufficient to sustain the
costs of its operations. Proset has not been able to acquire and sell salon hair
care products at costs needed to market those products profitably. In addition,
Proset's inventory could not be replenished at appropriate levels to accommodate
customers' needs as determined by the Company. Proset has continued to operate
at a loss and management believed that there was little likelihood of
establishing a plan to make such segment profitable. Management further believes
that the expansion of its profitable grocery operations will provide for
vertical growth that may require additional capital that would be better
invested in PHS operations rather then Proset operations.
The table below summarizes the historical financial operations of Proset
for the periods being discussed.
Year Ended Year Ended
December 31, 2007 December 31, 2006
----------------- ------------------
Net Sales $9,856 $1,222,834
Cost of sales
Cost of product 55,133 1,260,694
Shipping and handling costs 13,616 144,772
----------------- ------------------
68,749 1,405,466
Gross Profit (loss) -58,893 -182,632
Operating expenses:
Advertising and promotion - 1,046
General and administrative 56,104 594,008
Depreciation and amortization - 157,650
Asset impairment charge - 359,353
----------------- ------------------
56,104 1,112,057
Operating loss -114,997 -1,294,689
Other Income (expenses):
Other income (expenses) - -1,024
Interest and financing expenses - -62,765
----------------- ------------------
- -63,789
Net loss before income taxes -114,997 -1,358,478
Income tax expense 986
----------------- ------------------
Net loss from discontinued operations ($114,997) ($1,359,464)
================= ==================
38
LIQUIDITY AND CAPITAL RESOURCES
Year ended 2007 2006
Working Capital $ 6,262,577 $ 9,285,585
Assets 31,440,090 20,867,796
Liabilities 22,419,884 15,207,546
Equity 9,020,206 5,660,250
Line of Credit Facility - 5,836,928
Receivable turnover (days) 17 57
Inventory Turnover (days) 15 7
Net cash provided by (used in) operating activies 349,736 (4,324,635)
Net cash provided by investing activites (203,784) 420,590
Net cash (used in) provided by financing activites (289,070) 4,293,432
The Company's working capital decreased by $3.0 million in FY 2007 to $6.3
million due to a combination of several factors including amortization of debt
and the purchase of the baking mix plant. Liquidity for the Company
predominately involves the need to finance accounts receivables, inventory, and
fixed costs. The cash flow realized from the Company's gross profit has been
sufficient to cover the Company's operating expenses. However, the Company
relies on debt and equity financing in order to support the interest that it
pays in support of financing its receivables and inventory. The Company
historically has not been able to date to completely support its financing costs
solely from operations and has relied on equity and debt financing to bridge the
gap. However, in FY 2007, the Company has been able to support its operation
from its operating profit. The Company improved its cash flow from operating
activities by $4.7 million. The Company generated a net loss attributable to
Common Shareholders of approximately $430,000 for the year ended December 31,
2007. Financing costs totaled $2,184,141 and non-cash charges totaled
approximately $1,664,000 for the year. Reductions in certain financing expenses
through equity conversions and debt repayments through operating or capital
transactions have been and should continue to be beneficial to the Company's
performance. Although the Company was able to fund its operations from internal
cash flow, it still requires inventory and receivable financing for growth as
well as cash flow to support debt amortization.
The capital resources that were available to the Company as of December 31,
2007 consisted of $12.0 million in long-term notes, $4.2 million in short term
notes, and $3.65 million of non-redeemable preferred stock. The Company's
objectives are to reduce its debt through the cash flow from operation,
dispositions of assets, as well as refinancing its current obligations with
lower rates. In 2007, the Company refinanced its $6 million dollar senior line
of credit with a $8.0 million 10 year term facility and materially reduced its
interest rate to 11.75%. Management would also consider conversions of debt to
equity depending on market conditions.
The Company's liquidity relies in material part on the turnover of it
inventory and accounts receivable. The Company turns its receivables on average
every 17 days and the Company has turned its overall inventory on average
approximately every 15 days. The Company believes that its collection procedures
and procurement policies are consistent with industry standards. However, 24% of
the Company's assets consist of trade receivables and inventory. The Company
must maintain a strict policy on insuring collections of receivables and
adequate procurement based upon customer demands to optimize its profit. The
Company's sales are reliant in significant part on extending credit that ranges
from 10 to 60 days. As a result, the Company must have financing facilities that
will continue to allow the Company to procure inventory and extend accounts
receivable credits. The Company has strict credit policies and reviews. However,
credit extensions may pose material financial risks to the Company. In addition,
the Company relies on performance incentives from its manufacturers that are
based upon sales. Provided the Company maintains its performance standards with
the manufacturers with whom it contracts for procurement of goods, its estimates
of incentives that are due should remain accurate. However, if the manufacturers
change their policies or the Company does not meet the manufacturer's standards,
incentives may be reduced and may cause a material financial problem for the
company.
39
Management believes that continued cost containment, improved financial and
operating controls, long term debt reduction, and a focused sales and marketing
effort should provide sufficient cash flow from operations in the near term and
the Company is working toward reliance on such financial sources and attributes
to cover its cash flow requirements. However, achievement of these goals will
likely continue to be dependent upon the Company's attainment of increased
revenues, improved operating costs, reduced financing cost and trade support
levels that are consistent with management's plans. Such operating performance
will likely continue to be subject to financial, economic and other factors
likely to be beyond its control, and there can be no assurance that the
Company's goals will be achieved. In the interim while such goals are being
pursued, achievement of positive cash flow has been and may be reliant on equity
and debt financing, including the Company's exchange of notes payable for common
shares and its issuance of further common and preferred stock in private
placements and the Company is hopeful that the market will continue to recognize
the Company's stature so that such financing method will continue to be
available in the future because, at least in the near future, the Company is
likely to continue to use such financing opportunities to maintain adequate cash
flow.
Expected interest payments on notes payable for the period ended December
31, are as follows:
12/31/08 12/31/09 12/31/10 12/31/11 12/31/12 Total
$1,157,000 $879,000 $756,000 $621,000 $19,000 $3,432,000
CRITICAL ACCOUNTING POLICIES.
The discussion and analysis of the Company's financial condition and
results of operations are based upon its financial statements, which have been
prepared in accordance with generally accepted accounting principles in the
United States. The preparation of financial statements requires management to
make estimates and disclosures on the date of the financial statements. On an on
going basis, management evaluates its estimates. Management uses authoritative
pronouncements, historical experience and other assumptions as the basis for
making judgments. Actual results could differ from those estimates. Management
believes that the following critical accounting policies affect its more
significant judgments and estimates in the preparation of the Company's
financial statements.
ACCOUNTS RECEIVABLE/ALLOWANCE FOR DOUBTFUL ACCOUNTS.
The Company's accounts receivable are due from businesses engaged in the
distribution of grocery, health and beauty products as well as from consumers
who purchase health and beauty products and premium handmade cigars from the
Company's Web sites. Credit is extended based on evaluation of a customers'
financial condition and, generally, collateral may be required. Accounts
receivable are due within 10 - 60 days and are stated at amounts due from
customers net of an allowance for doubtful accounts. Accounts outstanding longer
than the contractual payment terms are considered past due. Estimates are used
in determining the allowance for doubtful accounts based on the Company's
historical collections experience, current trends, credit policy and a
percentage of its accounts receivable by aging category. In determining these
percentages, the Company looks at historical write-offs of its receivables. The
Company also looks at the credit quality of its customer base as well as changes
in its credit policies. The Company continuously monitors collections and
payments from its customers. The Company writes off accounts receivable when
they become uncollectible, and payments subsequently received on such
receivables are credited to the allowance for doubtful accounts.
40
VALUATION OF DEFERRED TAX ASSETS.
Deferred tax assets and liabilities represent temporary differences between
the basis of assets and liabilities for financial reporting purposes and tax
purposes. Deferred tax assets are primarily comprised of reserves, which have
been deducted for financial statement purposes, but have not been deducted for
income tax purposes as well as net operating loss carry forwards. The Company
quarterly reviews the deferred tax asset accounts to determine if is appears
more likely than not that the deferred tax assets will be fully realized. At
December 31, 2007, the Company has established a full valuation allowance.
VALUATION OF LONG-LIVED ASSETS.
The Company reviews its long-lived assets periodically to determine
potential impairment by comparing the carrying value of the assets with expected
net cash flows expected to be provided by the operating activities of the
business or related products. Should the sum of the expected future net cash
flows be less than the carrying value, the Company would determine whether an
impairment loss should be recognized. An impairment loss would be measured by
comparing the amount by which the carrying value exceeds the fair value of the
Asset. Long-lived assets and intangible assets are reviewed for impairment
whenever events or changes in circumstances indicate the carrying value may not
be recoverable. Impairment is measured by comparing the carrying value of the
long-lived assets to the estimated undiscounted future cash flows expected to
result from use of the assets and their ultimate disposition. To the extent
impairment has occurred, the carrying amount of the asset would be written down
to an amount to reflect the fair value of the asset.
RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARD BOARD ("FASB").
In February 2006, FASB issued SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments An Amendment of FASB No. 133 and 140. The purpose of SFAS
statement No. 155 is to simplify the accounting for certain hybrid financial
instruments by permitting fair value re-measurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would require
bifurcation. SFAS No. 155 also eliminates the restriction on passive derivative
instruments that a qualifying special-purpose entity may hold. SFAS No. 155 is
effective for all financial instruments acquired or issued after the beginning
of any entity's first fiscal year beginning after September 15, 2006. The
adoption of this standard on January 1, 2007 did not have a material effect on
our consolidated financial statements.
In July 2006, the FASB issued FASB Interpretation 48, "Accounting for
Uncertainty in Income Taxes " ("FIN 48") and in May, 2007, issued FASB Staff
Position FIN 48-1. FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in an enterprise's financial statements in accordance with SFAS
No. 109, "Accounting for Income Taxes." This interpretation prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides a guidance on derecognition, classification
interest and penalties, accounting in interim periods, disclosure and
transition. The adoption of FIN 48 did not have a material impact on our
consolidated financial statements. For our Company, this interpretation was
effective beginning January 1, 2007.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements."
SFAS No. 157 defines fair value, establishes a framework for measuring fair
value and requires enhanced disclosures about fair value measurements. SFAS No.
157 requires companies to disclose the fair value of their financial instruments
according to a fair value hierarchy as defined in the standard. Additionally,
companies are required to provide enhanced disclosure regarding financial
instruments in one of the categories (level 3), including a reconciliation of
the beginning and ending balances separately for each major category of assets
and liabilities. SFAS No. 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years. We believe that the adoption of SFAS No. 157 will not have a
material impact on our consolidated financial statements.
41
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities including an amendment of SFAS 115"
(SFAS No. 159). The new statement allows entities to choose, at specified
election dates, to measure eligible financial assets and liabilities at fair
value that are not otherwise required to be measured at fair value. If a company
elects the fair value option for an eligible item, changes in that item's fair
value in subsequent reporting periods must be recognized in current earnings.
SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We
are currently evaluating the potential impact of SFAS No. 159 on our financial
position and results of operations.
In December 2007, the FASB issued Statements No. 141 (R), "Business
Combinations", and No. 160, "Noncontrolling Interests in Consolidated Financial
Statements." Effective for fiscal years beginning after December 15, 2008, these
statements revise and converge internally the accounting for business
combinations and the reporting of noncontrolling interests in consolidated
financial statements. The adoption of these statements is not expected to have a
material impact on the Company's financial statements.
SEASONALITY
Sales by PHS Group usually peak at the end of the calendar quarter, when
the Company's suppliers offer promotions which lower prices and, in turn, the
Company is able to lower its prices and increase sales volume. Suppliers tend to
promote at quarter end and as a result, reduced products costs may increase
sales. Sales of HBA products increase over traditional gift giving holidays such
as Christmas, Mother's Day, Father's Day, and Valentine's Day. Baking goods
increase in beginning of spring and fall.
Cigar product sales also increase during holiday periods and summer months
as well as around special sporting events.
INFLATION
The Company believes that inflation, under certain circumstances, could be
beneficial to the Company's major business, PHS Group. When inflationary
pressures drive product costs up, the Company's customers sometimes purchase
greater quantities of product to expand their inventories to protect against
further pricing increases. This enables the Company to sell greater quantities
of products that are sensitive to inflationary pressures. However, inflationary
pressures frequently increase interest rates. Since the Company is dependent on
financing, any increase in interest rates will increase the Company's credit
costs, thereby reducing its profits. However, inflation increases prices which
maybe a natural hedge to an increase in interest, commodity prices such as corn,
wheat and sugar in the Company's consumer business. This may cause a decline in
sales that would result in a reduced operating profit.
42
ITEM 8. FINANCIAL STATEMENTS
The following financial statements of the Company are contained in this
Report on the pages indicated:
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of December 31, 2007 and 2006 F-3- F-4
Consolidated Statements of Operations for the Years Ended
December 31, 2007 and 2006 F-5
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Loss for the
Years Ended December 31, 2007 and 2006 F-6 - F-7
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2007 and 2006 F8-F9
Notes to Consolidated Financial Statements F-10 - F-32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
ITEM 9A. CONTROLS AND PROCEDURES
Under the Supervision of the Company's Chief Executive Officer and Chief
Financial Officer, the Company has as of December 31, 2007, the end of the
period covered by this Annual Report on Form 10K evaluated the effectiveness of
the design and operation of the disclosure controls and procedures (as defined
in Rule 13a-15(e)under the Exchange Act) of the Company and concluded as of such
valuation date same to be effective to ensure that material information relating
to the Company, including its consolidated subsidiaries and required to be
disclosed in reports the Company files or submits under the Exchange Act, is
made known to the Company sufficient to allow evaluation by the Company of
accuracy in their recording, processing, summarizing and reporting financial and
other Company information and data, and there do not appear to be any
deficiencies in the design or operation of such internal controls which would
adversely and materially affect the Company's ability to discover, evaluate and
report such information.
The Company has adopted an Audit Committee Charter providing expanded
authority of such committee and the independent nature and identity of its
director participants as required by the enactment of the Sarbanes-Oxley
Act. The Company believes that at least one director participant therein will be
qualified as an "audit committee financial expert" as defined in such Act.
There have been no significant changes in the Registrants internal controls
or in other factors that could significantly affect these controls subsequent to
the date of the evaluation thereof, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Management's Annual Report on Internal Control Over Financial Reporting
The financial statements, financial analyses and all other information
included in this Annual Report on Form 10-K were prepared by the Company's
management, which is responsible for establishing and maintaining adequate
internal control over financial reporting.
43
The Company's disclosure controls and procedures are designed to provide
reasonable assurance that information required to be disclosed in its reports
filed under the Exchange Act, such as this Form 10-K, is recorded, processed,
summarized and reported within the time periods specified in the SEC rules and
forms. The Company's disclosure controls and procedures are also designed to
ensure that such information is accumulated and communicated to management to
allow timely decisions regarding required disclosure. The Company's internal
controls are designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of its financial statements in
conformity with GAAP.
The Company's internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. The Company's internal control
over financial reporting includes those policies and procedures that:
i. Pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the Company;
ii. Provide reasonable assurances that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the Company are being made only in accordance with authorizations of management
and directors of the Company; and
iii. Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition and use or disposition of the Company's assets that
could have a material effect on the financial statements.
There are inherent limitations in the effectiveness of any internal
control, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even effective internal controls can
provide only reasonable assurances with respect to financial statement
preparation. Further, because of changes in conditions, the effectiveness of
internal controls may vary over time.
Management assessed the design and effectiveness of the Company's internal
control over financial reporting as of December 31, 2007. In making this
assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in Internal
Control-Integrated Framework. Based on management's assessment using this
framework, it believes that, as of December 31, 2007, the Company's internal
control over financial reporting is effective.
44
The Company's management, including its principal executive officer and the
principal financial officer, does not expect that the Company's disclosure
controls and procedures and its internal control processes will prevent all
error and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.
Over time, controls may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and may not be detected. The
Company monitors its disclosure controls and procedures and internal controls
and makes modifications as necessary; the Company's intent in this regard is
that the disclosure controls and procedures and the internal controls will be
maintained as dynamic systems that change (including with improvements and
corrections) as conditions warrant.
This annual report does not include an attestation report of the Company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the Company's
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only management's
report in this annual report.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the fiscal quarter ended December 31, 2007, there has been no change
in the Company's internal control over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act) that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
ITEM 9B OTHER INFORMATION.
In the latter half of 2007 the Company began manufacture and distribution of a
broad line of spice products under proprietary labels under a co-packing
arrangement. The Company leases facilities for such production and storage in
Qingdao, China located in the Shandong province. Such facility is utilized to
consolidate the commodity requirements of the production cycle, which include
raw materials, packaging and distribution, under high quality controls. Customer
orders are filled and shipped directly from the facility. The Company has also
expanded its Syosset, New York and Monroe, Michigan facilities as further
storage and distribution centers for such products. The Company in latter half
of 2007 has also entered into a co-packing arrangement in North Dakota (USA)
with an experienced operator for the production for distribution by the Company
of boxed pasta dinners, potato products and dried beans under proprietary
labeling. These additional proprietary products are expected to add to the
revenue level of the PHS operating segment of the Company.
The Company has located an opportunity to sell its cigar operations,
presently conducted under the GRC business segment, and its Board of Directors
have authorized a proposed contract for such transaction under which certain of
the management contingent of the Company's Miami Lakes, Florida cigar emporium
and its cigar warehousing facilities have in principal agreed to purchase the
GRC segment for a total purchase price of $400,000, $350,000 of which would
involve Seller financing. The assets of the GRC cigar operations being purchased
consist of approximately $400,000 in product inventory and $75,000 in Accounts
Receivable. Accounts Payable are approximately $150,000 resulting in net value
(without considering goodwill) of approximately $350,000. The GRC operating
segment is working at a significant loss to the consolidated financial status of
the Company and Management of the Company believes such segment has become an
insignificant, non-strategic asset, rendering far less than the 10% benchmark
for 'significance' regarding assets and revenues of the segment as compared to
the total for the Company. The Company also believes the Tobacco industry is
more likely in the future to increase including the cigar trade as an integral
part thereof for regulatory purposes, and that the cigar industry is entering a
phase of uncertain taxation and moratoriums. The Company would rather transfer
the GRC segment as an operating unit so as preserve its business cohesion and
historic values, and to allow the opportunity for effective continuance, and in
recognition of the likelihood that liquidation value would be materially less
than value to be derived from an organized sale. The transfer agreement is still
being considered by all relevant parties.
45
PART III
The information required by items 10-14 are omitted pursuant to general
instruction G(3) to Form 10K including executive compensation and auditor fee
information . The Company has included this information in its proxy statement
expected to be mailed to shareholders and filed with the Commission on or before
April 30, 2007. The annual meeting is scheduled to be in June 2008. Such Proxy
Statement is expected to be filed with the Commission by April 30, 2008 and is
incorporated herein by reference. The Company has established and adopted a Code
of Ethics outlining and providing guidelines for executive and employer conduct
regarding the disclosure, promotion and handling of Company business and
business relationships and a policy for comment and complaint on compliance with
applicable conduct codes ("whistleblower policy") and the Company has also
established a Nominating Committee of certain of its Directors to assist in the
election and succession of members of the Company's Board of Directors and a
Compensation Committee to assist in establishing executive compensation. Copies
of the Company's Code of Ethics, whistleblower policy, Nominating Committee and
Compensation Committee Charters may be found disclosed in the aforesaid Proxy
Statement to be confirmed at the relevant shareholders meeting and included by
reference thereto on the Company's Internet home page website.
46
ITEM 15. EXHIBITS, and FINANCIAL STATEMENT SCHEDULES
(a) financial statements-see Item 8
(b) Exhibits:
EXHIBIT INDEX
Exhibit No. Description Page
- ----------- ----------- ----
3.1 Certificate of Incorporation and amendments thereto (1) --
3.2 By-Laws (2) --
4 Preferred Stock, Common Stock, and Options and
Warrants and other Instruments defining rights of security
holders, including indentures (3) EX-4
10 Synergy Brands Inc. 1994 Services and Consulting Compensation
Plan, as amended (4)
14 Code of Ethics EX-14
EX-14.1 Audit Committee Charter (5) EX-14.1
EX-14.2 Nominating Committee Charter (5) EX-14.2
EX-14.3 Whistleblower Policy (5) EX-14.3
EX-14.4 Nominating Committee Charter (5) EX-14.4
21 Listing of Company Subsidiaries EX-21
23.1 Consent of Independent Registered Public Accounting Firm EX-23.1
32.1 Certification Pursuant to 18 U.S.C. Section 1350. As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
signed by the Chief Executive Officer. EX-32.1
32.2 Certification Pursuant to 18 U.S.C. Section 1350. As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
signed by the Chief Financial Officer. EX-32.2
99 Listing of Company Intellectual Properties EX-99
(1) A copy of the Amendment to the Certificate of Incorporation dated
September 14, 2004 and Certificates of Correction (3) filed February
25, 2005 are included as exhibits by incorporation by reference to the
10K/A report filed for the Company for the year ended 12/31/04. A copy
of the Restated Certificate of Incorporation filed November 10, 2003
and the clarification amendment to the Certificate of Incorporation
filed March 2004 are incorporated by reference to the 10KSB filed for
the Company for the year ended 12/31/03. The amendments to Certificate
of Incorporation filed 7/29/96 and filed 6/24/98 and Certificate of
Designation regarding Preferred Stock filed 6/24/98, are incorporated
by reference to the exhibits filed to the Form 10K/A of the Company
filed 9/3/98. The amendment to the Certificate of Incorporation filed
July 2000 is incorporated by reference to the exhibits filed to the
form 10KSB/A of the Company filed 8/9/01. The amendment to the
Certificate of Incorporation filed April 1, 2001 is incorporated by
reference to the exhibits filed to the Form 10-KSB of the Company filed
March 2002. The amendment to the Certificate of Incorporation filed
February 11, 2003 and the Certificate of Designation regarding
Preferred Stock filed March 13, 2003 are incorporated by reference to
the 10KSB filed for the Company for the year ended 12/31/02. The
original Certificate of Incorporation and other amendments thereto are
incorporated by reference to the exhibits filed to the registration
statement of the Company on Form S-1 (File No. 33-83226) filed by the
Company with the Commission on August 24, 1994.
(2) The amendment to the By-Laws approved by the Company's Board of
Directors on March 7, 1997 are incorporated by reference to the
exhibits filed to the Form 10K/A of the Company filed 9/3/98. The
original By-Laws are incorporated by reference to the exhibits filed to
the registration statement of the Company on Form S-1 (File No.
33-83226) filed by the Company with the Commission on August 24, 1994
47
(3) Description of rights of Preferred Stock are included in the Restated
Certificate of Incorporation filed November 10, 2003 and Clarification Amendment
to the Certificate of Incorporation filed March , 2004 and in the Certificate of
Designation filed 3/13/03 all incorporated by reference herein (See footnote
(1)), and in the Certificate of Designation regarding Preferred Stock, as
amended, and included as exhibit to the Form 10K/A of the Company filed 9/3/98
as well as the amendment to the certificate of incorporation filed in July 2000
and included as an exhibit to the Form 10KSB/A of the Company filed 8/9/01 which
latter documents are incorporated by reference herein. Description of the
Company's Common Stock is incorporated by reference to the description contained
in the Company's Registration Statement on Form 8-A (File No. 0-19409) filed
with the Commission pursuant to Section 12(b) of the Exchange Act on July 16,
1991, including any amendments or reports filed for the purpose of updating such
description. A facsimile of outstanding warrants is included by reference to the
similar exhibit in the Company's Form 10-K/A for the fiscal year ended December
31, 2004. In January 2007 the Company entered into a Securities Purchase
Agreement with Lloyd Miller, III and affiliated entity thereof under which terms
the Company obligated itself to a borrowing of $6.5 million and agreed to issue
1,075,000 shares of its Common Stock and in April 2007 such same parties entered
into an amendment to such financial arrangement the designed purpose being to
arrange an increase in the amount of such borrowing to $8 million, such
extension not having any equity component, which financial arrangements were
disclosed in an 8K filing made by the Company on January 22, 2007 and again on
April 5, 2007 and such filings are incorporated by reference hereafter for
further description of the subject transactions. Effective May 18, 2007 Quality
Food Brands Inc. a controlled subsidiary of the Company purchased a baking mix
operation in Michigan out of foreclosure and financed such acquisition from the
foreclosing lender, Laurus Master Funds Ltd. through issuance by said purchaser
of a 9% secured term note in the principal amount of $4,750,000 which
transaction was made the subject of an 8K filing made by the Company on May 23,
2007 which filing is also incorporated herein be reference. One half of such
latter financing was satisfied by and assigned to an affiliated entity of Lloyd
Miller III in August 2007. Information and particulars on other long term debt
instruments outstanding shall be supplied if and as requested by the Commission
as allowed by applicable regulation as on none of such debt instruments on an
individual basis does the total amount of securities authorized thereunder
exceed 10% of the Company's total assets. Such instruments include approximately
$1,270,000 debt remaining as currently owed to Laurus Master Fund, Ltd. arising
from Secured Convertible Term Note dated March 13, 2006 and $250,000 in total
long term debt to one non-affiliated party by Secured Promissory Note dated
March 1, 2004.
(4) Incorporated by reference to the Registration Statement of the Company
on Form S-8 (File No. 333-92243) filed with the Commission on 12/17/99,
as amended
(5) These charters and policies are available in full text on the Company's
website and such information is incorporated herein by reference
therefrom.
(c) Financial Statement Schedules
None
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Synergy Brands Inc.
by /s/ Mair Faibish
--------------------------------
Mair Faibish
Chairman of the Board
Dated: March 28, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
by /s/ Mair Faibish
----------------------------------
Mair Faibish
Chairman of the Board
Dated: March 28, 2008
by /s/ Mitchell Gerstein
----------------------------------
Mitchell Gerstein
Chief Financial Officer
Dated: March 28, 2008
by /s/ Joel Sebastian
-----------------------------------
Joel Sebastian, Director
Dated: March 28, 2008
by /s/ Lloyd Miller
-----------------------------------
Lloyd Miller, Director
Dated: March 28, 2008
by /s/ William Rancic
-----------------------------------
William Rancic, Director
Dated: March 28, 2008
by /s/ Frank A. Bellis Jr.
-----------------------------------
Frank A. Bellis, Director
Dated: March 28, 2008
by /s/ Randall J. Perry
-----------------------------------
Randall J. Perry, Director
49
Certification
I, Mair Faibish, certify that:
1. I have reviewed this annual report on Form 10-K of Synergy Brands, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and we have:
(a) designed such disclosure controls and procedures or caused such disclosure
controls and procedures to be designed under our supervision to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures as of the end of the period covered by
this report based on such evaluation; and
(d) disclosed in this annual report any changes in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(a) all significant deficiencies and material weaknesses we find in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: March 28, 2008
/s/ Mair Faibish
- ----------------
Mair Faibish
Chief Executive Officer
50
Certification
I, Mitchell Gerstein, certify that:
1. I have reviewed this annual report on Form 10-K of Synergy Brands, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15 (e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and we have:
(a) designed such disclosure controls and procedures or caused such disclosure
controls and procedures to be designed under our supervision to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures as of the end of the period covered by
this report based on such evaluation; and
(d) disclosed in this annual report any changes in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(a) all significant deficiencies and material weaknesses we find in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information ; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: March 28, 2008
/s/ Mitchell Gerstein
- ---------------------
Mitchell Gerstein
Chief Financial Officer
51
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Synergy Brands, Inc.
We have audited the accompanying consolidated balance sheets of Synergy Brands,
Inc., as of December 31, 2007 and 2006 and the related consolidated statements
of operations, stockholders' equity and cash flows for the two years then ended.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
option on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosure in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Synergy Brands, Inc.
as of December 31, 2007 and 2006 and the results of its operations and its cash
flows for the two years then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/ HOLTZ RUBENSTEIN REMINICK LLP
Melville, New York
March 26, 2008
F2
CONSOLIDATED BALANCE SHEETS
December 31, 2007 and 2006
ASSETS
CURRENT ASSETS 2007 2006
----------- ----------
Cash and cash equivalents $ 501,752 $ 644,870
Accounts receivable trade, less allowance for doubtful accounts of
$127,481 and $127,481 4,000,805 11,165,980
Other receivables 5,038,607 2,453,705
Notes receivable - current 356,909 344,699
Inventory 3,525,635 1,289,221
Prepaid assets and other current assets 3,231,673 669,908
Assets of discontinued operations - 127,182
----------- ----------
Total Current Assets 16,655,381 16,695,565
PROPERTY AND EQUIPMENT, NET 10,180,261 252,950
OTHER ASSETS 2,999,188 909,454
NOTES RECEIVABLE 1,605,260 2,207,233
INTANGIBLE ASSETS, net of accumulated amortization of
$449,142 and $389,226. - 288,297
GOODWILL - 514,297
----------- ----------
TOTAL ASSETS $ 31,440,090 $ 20,867,796
=========== ==========
The accompanying notes are an integral part of these statements.
F3
Synergy Brands, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS (Continued)
December 31, 2007 and 2006
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES 2007 2006
---------- ----------
Notes payable - current $4,199,348 $4,196,757
Accounts payable 5,720,504 2,194,114
Accrued expenses 35,176 151,037
Deferred income 437,776 755,503
Liabilities of Discontinued operations - 112,569
---------- ----------
Total Current Liabilities 10,392,804 7,409,980
NOTES PAYABLE, net of discount of $ 587,105 and $313,749, respectively 12,027,080 1,960,638
LINES OF CREDIT - 5,836,928
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Class A preferred stock - $.001 par value; 100,000 shares authorized;
93,213 and 93,213 shares issued and outstanding;
liquidation preference of $10.50 per share 93 93
Class B preferred stock - $.001 par value; 150,000 shares authorized, none issued - -
Class B Series A Preferred stock-$.001 par value; 500,000 shares authorized;
285,000 and 285,000 shares issued and outstanding; liquidation preference of
$10.00 per share 285 285
Class B Series B Preferred stock-$.001 par value, 250,000 shares authorized;
80,000 shares issued and outstanding; liquidation preference of
$10.00 per share 80 80
Common stock - $.001 par value; 14,000,000 shares authorized;
11,328,764 and 6,484,275 shares issued 11,329 6,484
Additional paid-in capital 50,712,481 47,252,064
Deficit (41,690,722) (41,585,416)
Accumulated other comprehensive loss (8,340) (8,340)
---------- ----------
9,025,206 5,665,250
Less treasury stock, at cost, 1,000 shares (5,000) (5,000)
---------- ----------
Total Stockholders' Equity 9,020,206 5,660,250
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $31,440,090 $20,867,796
========== ==========
The accompanying notes are an integral part of these statements.
F4
Synergy Brands, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
2007 2006
----------- ------------
Net sales $89,540,501 $71,759,908
Cost of sales
Cost of product 79,468,861 65,631,282
Shipping and handling costs 1,238,221 1,169,381
----------- ------------
80,707,082 66,800,663
----------- ------------
Gross profit 8,833,419 4,959,245
Operating expenses
Advertising and promotional 201,562 234,582
General and administrative 5,656,623 4,052,762
Depreciation and amortization 477,537 245,085
Asset impairment charge 742,678 -
----------- ------------
7,078,400 4,532,429
----------- ------------
Operating Profit 1,755,019 426,816
Other income (expense)
Interest income 150,305 147,533
Other income (expense) (851) (22,039)
Equity in earnings of investee 342,683 227,054
Interest and financing expenses (2,184,141) (2,050,856)
----------- ------------
(1,692,004) (1,698,308)
----------- ------------
Profit (loss) from continuing operations before income taxes 63,015 (1,271,492)
Income tax expense 53,324 43,976
----------- ------------
Profit (loss) from continuing operations 9,691 (1,315,468)
----------- ------------
Discontinued operations
Loss from operations of discontinued component (114,997) (1,358,478)
Income tax expense - 986
----------- ------------
Loss from discontinued operations (114,997) (1,359,464)
----------- ------------
Net loss (105,306) (2,674,932)
Dividend - Preferred Stock (325,000) (356,500)
----------- ------------
Net loss attributable to common stockholders $(430,306) $ (3,031,432)
=========== ============
Basic and diluted net loss per common share from continuing operations: $ (0.04) $ (0.33)
Basic and diluted net loss per common share from discontinued operations: $ (0.01) $ (0.27)
----------- ------------
Basic and diluted net loss per share: $ (0.05) $ (0.60)
=========== ============
Weighted average shares used in the compution of loss per common
shares:
Basic and diluted 8,973,842 5,080,323
=========== ============
The accompanying notes are an integral part of these statements.
F5
Synergy Brands, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND
COMPREHENSIVE LOSS
Class A Class B - Series A Class B - Series B
Preferred stock Preferred stock Preferred stock Common stock
Shares Amount Shares Amount Shares Amount Shares Amount
-------- -------- --------- -------- ------- ------- --------- -------
Balance at January 1, 2006 100,000 $100 330,000 $330 80,000 $80 4,457,530 $4,458
Amortization of unearned
compensation
Common stock issued 454,300 454
Redemption of
preferred stock for shares
of common stock (7,000) (7) (45,000) (45) 785,925 786
Issuance of common stock for
note conversion 635,610 635
Issuance of common stock for
Services 150,910 151
Preferred stock dividend
Issuance of stock warrants
Net loss
-------- -------- --------- -------- ------- ------- --------- -------
Balance at December 31, 2006 93,000 93 285,000 285 80,000 80 6,484,275 6,484
Common stock issued 1,819,664 1,820
Issuance of common stock for
note conversion 917,039 917
Issuance of common stock for
Services 801,647 802
Preferred stock dividend
Issuance of common stock for
warrant conversion 231,139 231
Issuance of common stock
for loan inducement 1,075,000 1,075
Net loss
-------- -------- --------- -------- ------- ------- --------- -------
Balance at December 31,2007 93,000 $93 285,000 $285 80,000 $80 11,328,764 $11,329
-------- -------- --------- -------- ------- ------- --------- -------
Years ended December 31, 2007 and 2006
F6
Synergy Brands, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND
COMPREHENSIVE LOSS
(continued)
Accumulated
Additional other
paid in Comprehensive Treasury Unearned
capital Deficit income (loss) stock Compensation
------------- ------------- ------------- ------------- --------------
Balance at January 1, 2006 $ 45,918,817 ($38,910,484) $ (8,340) $ (5,000) $ (67,260)
Amortization of unearned
compensation 67,260
Common stock issued 537,619
Redemption of
preferred stock for shares
of common stock (734)
Issuance of common stock for
note conversion 600,565
Issuance of common stock for
Services 190,297
Preferred stock dividend (356,500)
Issuance of stock warrants 362,000
Net loss (2,674,932)
------------- ------------- ------------- ------------- --------------
Balance at December 31, 2006 47,252,064 (41,585,416) (8,340) (5,000)
Common stock issued 1,386,040
Issuance of common stock for
note conversion 513,497
Issuance of common stock for
Services 773,351
Preferred stock dividend (325,000)
Issuance of common stock for 135,354
warrant conversion
Issuance of common stock
for loan inducement 977,175
Net loss (105,306)
------------- ------------- ------------- ------------- --------------
Balance at December 31, 2007 $50,712,481 $(41,690,722) $(8,340) $(5,000)
------------- ------------- ------------- ------------- --------------
F6
(continued)
Synergy Brands, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued)
Years ended December 31, 2007 and 2006
Balance at January 1, 2006 $6,932,701
Amortization of unearned compensation 67,260
Common stock issued 538,073
Redemption of
preferred stock for
shares of common stock -
Issuance of common stock for note
conversions 601,200
Issuance of common stock for services 190,448
Preferred stock dividend (356,500)
Issuance of stock warrants 362,000
Net loss (2,674,932)
-----------
Balance at December 31, 2006 5,660,250
Common stock issued 1,387,860
Issuance of common stock for note
conversions 514,414
Issuance of common stock for services 774,153
Preferred stock dividend (325,000)
Issuance of common stock for warrant conversion 135,585
Issuance of common stock
for loan inducement 978,250
Net Loss (105,306)
-----------
Balance at December 31, 2007 $9,020,206
===========
The accompanying notes are an integral part of these statements
F7
Synergy Brands, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
2007 2006
------------ -------------
Cash flows from operating activities
Net loss $ (105,306) $ (2,674,932)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Depreciation and amortization 477,537 245,085
Amortization of financing cost 152,199 38,059
Asset impairment charge 742,678 -
Equity in earnings of investee (342,683) (227,054)
Operating expenses paid with common stock and warrants
439,667 180,549
Changes in operating assets and liabilities
(Increase) decrease in
Accounts receivable and other receivables (1,738,530) (4,410,740)
Inventory (1,447,034) (107,998)
Prepaid expenses, related party note receivable and
other assets (1,654,346) 71,278
Increase (decrease) in
Accounts payable, related party note payable,
accrued expenses and other current liabilities 4,130,938 661,647
Deferred income and other liabilities (285,977) 727,821
Net assets of discontinued operations (19,407) 1,171,650
------------ -------------
Net cash provided by (used in) operating activities 349,736 (4,324,635)
------------ -------------
Cash flows from investing activities
Payment of security deposit (15,604) -
Purchase of property and equipment (756,743) (35,684)
Payments received on notes receivable 623,713 453,469
Issuance of notes receivable (33,950) (25,995)
Investee dividend received 28,800 28,800
Investment in investee (50,000) -
------------ -------------
Net cash (used in) provided by investing activities (203,784) 420,590
------------ -------------
F8
Synergy Brands, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years ended December 31,
2007 2006
----------- ------------
Cash flows from financing activities
Borrowings under line of credit 375,751 33,593,364
Repayments under line of credit (6,025,679) (31,458,478)
Increase in deferred financing cost - (67,750)
Proceeds from the issuance of notes payable 10,455,000 6,391,319
Repayments of notes payable (4,800,464) (3,777,165)
Proceeds from issuance of common stock 31,322 288,173
Payment of dividends (325,000) (356,500)
Net assets of discontinued operations - (319,531)
----------- ------------
Net cash (used in) provided by financing activities (289,070) 4,293,432
----------- ------------
Net (Decrease) Increase In Cash (143,118) 389,387
----------- ------------
Cash and cash equivalents, beginning of year 644,870 255,483
----------- ------------
Cash and cash equivalents, end of year $501,752 $ 644,870
=========== ============
Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest $1,378,582 $1,219,870
=========== ============
Income taxes paid $ 53,324 $ 44,962
=========== ============
Supplemental disclosures of non-cash, investing
and financing activities:
Common stock issued for note conversions $ 709,998 $ 661,200
=========== ============
Common stock issued for financing cost $ 978,250 $ -
=========== ============
In May 2007, the Company acquired property and equipment valued at $9,559,000
and inventory valued at $841,000. Consideration consisted of the issuance of
$4,750,000 note and the offset of accounts receivable of $6,318,000 and accounts
payable of $668,000.
The accompanying notes are an integral part of these statements.
F9
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2007 and 2006
NOTE A - DESCRIPTION OF THE BUSINESS
Synergy Brands Inc. is a holding company that principally operates through a
wholly owned subsidiary, PHS Group Inc. ("PHS") in the wholesale distribution of
nationally known brands, proprietary private label groceries, general
merchandise, and Health and Beauty Aid (HBA) products. It principally focuses on
the sale of nationally known brand name consumer products manufactured by major
U.S. manufacturers and has begun focusing on the manufacturing and distribution
of certain grocery private label products including baking mixes, spices and
packaged meals. The Company also owns a small wholly owned subsidiary
representing less then 2% of the Company's revenues, Gran Reserve Corporation
(GRC), that principally operates in the wholesale, retail and online sales of
Premium hand made cigars and accessories. The Company also owns 20% of a travel
company call Interline vacations (PERX). Synergy was incorporated on September
26, 1988 in the State of Delware.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation of
the accompanying consolidated financial statements is as follows:
1. Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Synergy and its wholly-owned subsidiaries (collectively, the "Company"). All
significant intercompany accounts and transactions have been eliminated in
consolidation. The equity method of accounting is used for investments in 50% or
less owned companies over which the Company has the ability to exercise
significant influence.
2. Cash and Cash Equivalents
The Company considers all highly liquid investments with an initial maturity of
three months or less to be cash equivalents.
F10
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2007 and 2006
3. Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management of the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expense during the reporting
period. The most significant estimates relate to reserves for accounts
receivable, inventories, and deferred tax assets, and valuation of long-lived
assets. Actual results could differ from those estimates.
4. Accounts Receivable Trade
The Company's accounts receivable trade are due from businesses engaged in the
distribution of grocery, health and beauty products as well as from consumers
who purchase health and beauty products and premium handmade cigars either
direct or from the Company's Web sites. Credit is extended based on evaluation
of a customers' financial condition and, generally, collateral is not required.
Accounts receivable are due within 10 - 90 days and are stated at amounts
generally due from customers net of an allowance for doubtful accounts. Accounts
outstanding longer than the contractual payment terms are considered past due.
Estimates are used in determining the allowance for doubtful accounts based on
the Company's historical collections experience, current trends, credit policy
and a percentage of its accounts receivable by aging category. In determining
these percentages, the Company looks at historical write-offs of its
receivables. The Company also looks at the credit quality of its customer base
as well as changes in its credit policies. The Company continuously monitors
collections and payments from its customers. The Company writes off accounts
receivable when they become uncollectible.
F11
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2007 and 2006 NOTE B (continued)
Accounts receivable trade, net consist of the following components at December
31, 2007and 2006:
2007 2006
----------- ------------
Accounts receivable - PHS Group $4,057,363 $11,154,841
Accounts receivable - Cigars 70,923 138,620
----------- ------------
Total 4,128,286 11,293,461
Less allowance for doubtful accounts (127,481) (127,481)
----------- ------------
$4,000,805 $11,165,980
=========== ============
Changes in the Company's allowance for doubtful accounts during the years ended
December 31, 2007 and 2006 are as follows:
2007 2006
Beginning balance 127,481 $ 127,481
Provision for (reduction in) doubtful account - -
---------- ----------
Ending balance $127,481 $127,481
=========== ==========
5. Business and Credit Concentrations
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash and cash equivalents, and accounts
receivable. The Company places its cash and cash equivalents with financial
institutions it believes to be of high credit quality. Cash balances in excess
of Federally insured limits at December 31, 2007 and 2006 totaled approximately
$340,000 and $600,000, respectively.
During the year ended December 31, 2007, sales to two customers accounted for
13% and 10% of total sales, respectively. Two customers accounted for 19% and
13%, respectively of accounts receivable at December 31, 2007. These
concentrations relate to the Company's PHS Group segment.
During the year ended December 31, 2006, sales to three customers accounted for
21%, 16% and 12% of total sales. Three customers accounted for 27%, 23%, and
10%, respectively of accounts receivable at December 31, 2006. These
concentrations relate to the Company's PHS Group segment.
During the years ended December 31, 2007 and 2006, the Company purchased
approximately 59% and 40%, respectively, of its products from one supplier. If
the Company were unable to maintain this relationship, it might have a material
impact on future operations.
F12
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2007 and 2006
NOTE B (continued)
6. Inventory
Inventory is stated at the lower of cost or market. The Company uses the
first-in, first-out ("FIFO") cost method of valuing its inventory.
7. Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is computed using the straight-line method over the asset's estimated
useful lives, ranging from 3 to 10 years. Leasehold improvements are amortized
over the shorter of their estimated useful lives or the lease term.
Maintenance and repairs of a routine nature are charged to operations as
incurred. Betterments and major renewals that substantially extend the useful
life of an existing asset are capitalized and depreciated over the asset's
estimated useful life.
8. Vendor Allowances
The Company recognizes vendor allowances at the date goods are purchased and
recorded under fixed and determined arrangements. The Company receives
allowances and credits from suppliers for volume incentives, promotional
allowances and, to a lesser extent, new product introductions which are
typically based on contractual arrangements covering a period of one year or
less. Volume incentives and promotional allowances earned based on quantities
purchased and new product allowances are recognized as a reduction to the cost
of purchased inventory and recognized when the related inventory is sold.
Promotional allowances that are based on the sell-through of products are
recognized as a reduction of cost of sales when the products are sold for which
the promotional allowances are given. For the years ended December 31, 2007 and
2006, the Company recognized approximately $7,760,940 and $2,272,273 in vendor
allowances arising from arrangements with a major supplier that met the criteria
for being fixed and determinable. Vendor allowances from manufacturers, included
in other receivables in the accompanying consolidated balance sheet aggregated
$5,038,607 and $2,453,705 at December 31, 2007 and 2006.
F13
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2007 and 2006
NOTE B (continued)
9. Intangible Assets and Goodwill
Intangible assets include the "Gran Reserve" trade names and customer lists,
acquired in November 1999 and certain customer lists, the rights to the use of
the trade name. In 2007 and 2006, the amortization expense recorded for each of
the years was $59,916.
Goodwill is the excess of cost of an acquired entity over the amounts assigned
to assets and liabilities assumed in business combination. Effective January 1,
2002, with the adoption of SFAS No.142 "Goodwill and other Intangible Assets",
that have an indefinite life are not amortized. In the fourth quarter of 2007,
in connection with a contemplated disposal of the net assets of GRC, the Company
identified impairment losses for both intangible assets and goodwill based upon
estimated future cash flows. These losses, approximately $228,000 and $514,000,
respectively, are reflected in the accompanying consolidated statement of
operations as an "Asset Impairment Charge".
At December 31, 2007 and 2006, intangible assets are comprised of the following:
Amortized intangible assets 2007 2006
Customer lists $677,523 $ 677,523
Less accumulated amortization and impairment (677,523) (389,226)
--------- ---------
Total $ - $288,297
========== =========
F14
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2007 and 2006
NOTE B (continued)
10. Long-lived Assets
Long-lived assets and intangible assets are reviewed for impairment whenever
events or changes in circumstances indicate the carrying value may not be
recoverable. Impairment is measured by comparing the carrying value of the
long-lived assets to the estimated undiscounted future cash flows expected to
result from use of the assets and their ultimate disposition. To the extent
impairment has occurred, the carrying amount of the asset would be written down
to an amount to reflect the fair value of the asset (see Note B No 9).
11. Revenue Recognition
The Company recognizes revenue upon shipment of goods when title and risk of
loss passes to the customer. Net sales include gross revenue from product sales
and related shipping fees, net of discounts and provision for sales returns, and
other allowances. Cost of sales consists primarily of costs of products sold to
customers, including outbound and inbound shipping costs.
Payments received from customers prior to shipment of goods are recorded as
deferred revenue. At December 31, 2007, $342,526 was received by the Company for
goods to be shipped in January 2008 and at December 31, 2006 $628,503 was
received by the Company for goods to be shipped in January 2007. In addition, at
December 31, 2007 and December 31, 2006 the balance for deferred revenue was
$95,250 and $127,000 (see Note F).
12. Advertising
The Company expenses advertising and promotional costs as incurred.
13. Income Taxes
Deferred income taxes are recognized for temporary differences between financial
statement and income tax bases of assets and liabilities and net operating loss
carry forwards for which income tax expenses or benefits are expected to be
realized in future years. A valuation allowance is established if it is more
likely than not that all, or some portion, of deferred tax assets will not be
realized.
14. Basic and Diluted Net Loss Per Share
Basic and diluted loss per share is calculated by dividing the net loss by the
weighted-average number of common shares outstanding during each year.
Incremental shares from assumed
F15
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2007 and 2006
NOTE B (continued)
exercises of stock options, warrant and convertible debt and equity securities
of 1,036,844 and 995,749 for the year ended December 31, 2007 and 2006
respectively, have been excluded from the calculation of diluted loss per share
since their effect would be antidilutive.
15. Stock-Based Compensation Plans
At December 31, 2007, the Company has two stock-based employee compensation
plans, which are described more fully in Note K. Effective January 1, 2006, the
provisions of SFAS No. 123(R) were implemented to account for stock-base
compensation. Under APB No. 25, when the exercise price of the Company's
employee or director stock options equaled the market price of the underlying
stock on the date of grant, no compensation expense was recognized. These
options were cancelled in January 2006. There were no stock options granted in
2007 and 2006.
16. Segment Information
Segment information is presented in accordance with SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." This standard is based
on a management approach, which requires segmentation based upon the Company's
internal organization that is used for making operating decisions and assessing
performance as the source of the Company's reportable operating segments. SFAS
No. 131 also requires disclosures about products and services, geographic areas
and major customers. Proset segment of business has been eliminated from the
segment reporting (see Note P).
17. Comprehensive income (loss)
Other comprehensive income refers to revenues, expenses, gains and losses that
under generally accepted accounting principles in the United States of America
are included in comprehensive income but are exluded from net income as these
amounts are recorded directly as an adjustment to stockholders' equity.
Comprehensive income (loss) was equivalent to net income (loss) for all periods
presented.
F16
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2007 and 2006
NOTE B (CONTINUED)
18. Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS
No. 157 defines fair value, establishes a framework for measuring fair value and
requires enhanced disclosures about fair value measurements. SFAS No. 157
requires companies to disclose the fair value of their financial instruments
according to a fair value hierarchy as defined in the standard. Additionally,
companies are required to provide enhanced disclosure regarding financial
instruments in one of the categories (level 3), including a reconciliation of
the beginning and ending balances separately for each major category of assets
and liabilities. SFAS No. 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years. We believe that the adotion of SFAS No. 157 will not have a
material impact on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities including an amendment of SFAS 115"
(SFAS No. 159). The new statement allows entities to choose, at specified
election dates, to measure eligible financial assets and liabilities at fair
value that are not otherwise required to be measured at fair value. If a company
elects the fair value option for an eligible item, changes in that item's fair
value in subsequent reporting periods must be recognized in current earnings.
SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We
are currently evaluating the potential impact of SFAS No. 159 on our financial
position and results of operations.
In December 2007, the FASB issued Statements No. 141 (R), "Business
Combinations", and No. 160, "Noncontrolling Interests in Consolidated Financial
Statements." Effective for fiscal years beginning after December 15, 2008, these
statements revise and converge internally the accounting for business
combinations and the reporting of noncontrolling interests in consolidated
financial statements. The adoption of these statements is not expected to have a
material impact on the Company's financial statements.
F17
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2007 and 2006
NOTE C - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, marketable securities and
accounts receivable and accounts payable approximates fair value due to the
short-term maturities of the instruments. The carrying amounts of borrowings
under the line of credit agreement and notes receivable and notes payable
approximate their fair values.
NOTE D - INVENTORY
Inventory as of December 31, 2007 and 2006 consisted of the following:
2007 2006
Grocery, general merchandise and health and beauty products $2,664,633 $ 802,090
Premium Cigar finished goods 416,556 487,131
Raw materials 444,446 -
---------- ----------
$3,525,635 $1,289,221
========== ==========
The allowance for slow moving and obsolete inventory approximated $35,000 and
$35,000 at December 31, 2007 and 2006, respectively.
NOTE E - PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 2007 and 2006 consisted of the
following:
2007 2006
Machine and euipment $891,965 $205,742
Furniture and fixtures 92,899 84,196
Leasehold improvements 10,043,370 422,538
------------ ---------
11,028,234 712,476
Less accumulated depreciation and amortization (847,973) (459,526)
------------ ---------
$10,180,261 $252,950
============ =========
Depreciation and amortization expense on property and equipment for the years
ended December 31, 2007 and 2006 was approximately $389,000 and $60,000,
respectively.
F18
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2007 and 2006
NOTE F - OTHER ASSETS
Other assets consist of the following at December 31, 2007 and 2006:
2007 2006
Investment (a) $939,177 $562,593
Investment in warrants (b) 114,300 127,000
CAW purchase agreement; net of accumulated amortization of $175,000 and $145,827
Deferred financing net of accumulated - 29,173
amortization of $514,643 and $204,660 (c) 984,856 121,591
Prepaid costs and security deposit net of accumulated amortization of $17,846 (d) 876,154 -
Other 84,701 69,097
---------- ----------
$ 2,999,188 $ 909,454
============ ==========
(a) In December 2001, the Company made an investment in Interline Travel and
Tour. Inc. ("ITT") for approximately 20% of the outstanding common stock. At
December 31, 2007 and 2006, the Company's investment in ITT is approximately 20%
of the outstanding common stock. ITT provides cruise and resort hotel packages
through a proprietary reservation system to airline employees and their
retirees. The Company recorded equity in the net earnings of investee of
$342,683 and $227,054 during the years ended December 31, 2007 and 2006,
respectively. The Company's investment in ITT serves as collateral for
outstanding notes payable with aggregate outstanding balance approximately
$1,385,000 at December 31, 2007.
Summarized audited financial information of this investee as of December 31,
2007 and 2006 and for the years then ended is as follows:
Financial position: 2007 2006
----------- ------------
Current assets $6,697,000 $5,334,000
Property and equipment 502,000 666,000
Other assets 5,548,000 5,728,000
----------- ------------
Total assets $12,747,000 $11,728,000
=========== ============
Current liabilities $5,845,000 $5,127,000
Long-term debt 2,768,000 4,139,000
----------- ------------
Total liabilities $8,613,000 $9,266,000
=========== =============
Results of operations: 2007 2006
----------- ------------
Revenues $36,356,000 $32,464,000
Total expenses (34,340,000) (30,993,000)
Other income 421,000 322,000
----------- ------------
Income before income taxes 2,437,000 1,793,000
Income tax expense (764,000) (632,000)
----------- ------------
Net income $1,673,000 $ 1,161,000
=========== ============
(b) In October, 2005 SYBR.com Inc., a wholly owned subsidiary of the Company,
invested $1 million in a Private Placement of Senior Subordinated Debentures
issued by ITT. The investment consists of a five year 8% Note (ITT Note), and
200,000 warrants exercisable into 200,000 common shares of ITT stock at $5.00
per share (ITT Warrants). The Company financed this investment with a $1 million
fully recourse note with a major Shareholder under the same terms and conditions
as the ITT Note and assigned to such shareholder the ITT Warrants. As
consideration for the financing, the Company has retained the benefit to be
derived from 100,000 of the warrants received from ITT (see Note I) of the
deferred income. In relation to the ITT warrants, Company has recorded deferred
income of $127,000 in 2006. In 2007 the Company recognized $31,750 of the
deferred income.
(c) Valuation of stock in connection with secured 2007 debt and equity
financing (see Note I).
(d) Valuation of stock in connection of LBMP asset acquisition (see Note G).
F19
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2007 and 2006
NOTE G - ASSET ACQUISITION
On May 18, 2007, Quality Food Brands ("QFB") a wholly owned a subsidiary of PHS
Group., leased a baking mix facility, and acquired associated assets through a
foreclosure sale contracted by a secured lender (the "Seller"). The aggregate
purchase price approximated $10,400,000. The Lender financed the purchase
through the issuance by QFB of a 9% secured term note in the principal amount of
$4,750,000 that matures on May 18, 2012, with principal payment beginning
December 1, 2007. In addition, net accounts receivable due from the seller
approximating $6,300,000 and accounts payable due to the seller were offset as a
component of the purchase price. Further, the lender received a warrant to
acquire up to 30% of QFB's common stock.
The allocation of the assets acquired (see table below) provide QFB with a
facility to produce baking mix products to supply existing customers of PHS.
Inventory $ 841,000
Property, equipment and leasehold $ 9,559,000
------------
Total $10,400,000
============
F20
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2007 and 2006
NOTE H - NOTES RECEIVABLE
In December 2004, the Company sold accounts receivable attributable to West
Coast Supplies, Inc. for $2,200,000. This promissory note, which is secured by
the accounts receivable, requires monthly payments of principal and interest at
4% for seven years, beginning in January 2005. As a condition for the sale, the
Company issued 150,000 shares of common stock to the note holder. The value of
the shares ($200,000) was treated as a reduction of sales price. The balance of
the Note Receivable at December 31, 2007 was $1,335,641.
In October, 2005 SYBR.com Inc., a wholly owned subsidiary of the Company,
invested $1 million in a Private Placement of Senior Subordinated Debentures
issued by ITT. The investment consists of a five year 8% Note (ITT Note), and
200,000 warrants exercisable into 200,000 common shares of ITT stock at $5.00
per share (ITT Warrants). The Company financed this investment with a $1 million
fully recourse note with a major Shareholder /Director under the same terms and
conditions as the ITT Note and assigned to such shareholder the ITT Warrants. As
consideration for the financing, the Company has retained the benefit to be
derived from 100,000 of the warrants received from ITT (see Note I). In relation
to the ITT warrants, Company has recorded deferred income of $127,000. On
September 29, 2006, $142,857 was paid by ITT to reduce the loan balance. As of
December 31, 2006 the outstanding loan balance was $857,143. As part of the
Company's agreement, the Company paid $142,857 on the note payable. In 2007, the
Company received payments from ITT of $285,714. As of December 31, the
outstanding loan balance was $571,429. As part of the Company's agreement, the
Company paid $285,714 in 2007 on the note payable. The outstanding balance of
the notes payable at December 31, 2007 was $571,429.
In 2007, the Company exercised warrants to acquire 10,000 additional shares of
ITT at a cost of $50,000. In addition, the Company recognized $31,750 of
deferred income in 2007 in connection with the amortization of deferred revenue
attributable to the warrants received.
NOTE I - NOTES PAYABLE
The Company financed a series of secured notes with IIG (lender) since 2002. At
December 31, 2006 the outstanding balance was $5,836,928. The Company's largest
shareholder has refinanced these notes during 2007.
On March 1, 2004, the Company received $490,000 pursuant to the issuance of
three secured promissory notes from certain shareholders of ITT, a 20% investee.
Borrowings under the notes bear interest at a rate of 12%. The notes were
extended and the Company is not required to repay any principal until the
maturity date of the notes, February 28, 2008. The maturity has been extended to
December 31, 2008. At December 31, 2007 the outstanding balance was $250,000.
F21
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2007 and 2006
NOTE I (continued)
On April 2, 2004 the Company completed a financing with Laurus Master Funds
("Laurus"). The financing consisted of a $1.5 million secured convertible
debenture that has been repaid as of December 31, 2007.
On January 25, 2005, the Company completed a second financing with Laurus. The
financing consisted of a $500,000 secured convertible debenture that has been
repaid as of December 31, 2007.
In January 2005, the Company entered into a promissory note with major regional
bank for $1,000,000, which was increased to $1,500,000 in September 2007.
Borrowing under the note bears interest at prime (6.75% at December 31, 2007).
This note was extended and the Company is not required to repay any principal
until the maturity date of the note, June 1, 2008. As security for the note, a
pledge agreement was entered by a certain Shareholder of ITT. Borrowings at
December 31, 2007 were $377,850. The Company has a $1,000,000 standby letter of
credit expiring June 1, 2008 with this Lender.
On April 6, 2005, the Company received $500,000 pursuant to the issuance of
three secured promissory notes from certain shareholders of ITT, a 20% investee.
Borrowings under the notes bear interest at a rate of 9%. The Company is not
required to repay any principal until the maturity date of the notes, April 5,
2007. The maturity has been extended to April 5, 2008.
On May 5, 2005, the Company received $100,000 pursuant to the issuance of one
secured promissory note from a certain stockholder of ITT, a 20% investee.
Borrowings under the note bear interest at a rate of 9%. The Company is not
required to repay any principal until the maturity date of the note, May 4,
2007. The maturity date has been extended to April 5, 2008.
On June 21, 2005, the Company completed a third financing with Laurus. The
financing consisted of a $500,000 secured convertible debenture that has been
repaid as of December 31, 2007.
In October 2005, SYBR.com Inc., a wholly owned subsidiary of the Company,
received $1 million, pursuant to the issuance of one senior secured promissory
note from a certain stockholder and director. Borrowings under the note bearing
interest at 8%, and the note is due October 7, 2010. The Company has secured
this borrowing with a $1 million wholly recourse note from ITT (see Note H). The
balance at December 31, 2007 was $571,429.
On March 14, 2006, the Company closed a $1.75 million junior secured three year
loan with Laurus bearing a fixed interest rate of 10%. Payments are being made
at a rate of $32,000 per month since October 1, 2006. The lender was issued a
warrant to acquire 270,000 shares of the Company's common stock valued at
$362,000. The relative fair value of the warrant of $362,000 is being charged to
operations as additional interest over the term of the loan. The Company repaid
$96,000 of this debt in 2006 and $384,000 in 2007. At December 31, 2007 the
outstanding balance, net of discount was $1,124,155.
F22
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2007 and 2006
NOTE I (continued)
In the fourth quarter of 2006, the Company secured $1,800,000 from shareholders
of short term financing that matured in the first quarter of 2007, and was paid
in April 2007. In July 2007, the Company secured $1,500,000 from shareholders of
short term financing bearing interest at 8% that matures in the third quarter of
2008. The balance of the notes at December 31, 2007 net of discount approximated
$1,605,000.
On April 15, 2007, Synergy Brands Inc. completed a $8.0 million secured
financing with a major shareholder and a director, for its main operating
subsidiary PHS Group Inc. The financing consisted of long term notes to be
amortized over a 5 year period with a balloon payment of $4,000,000 in January
2012 at an interest rate of 11.75%. This financing retired all of the Company's
debt with IIG. The agreement further involved a security purchase agreement,
under which there was issued 1,075,000 common shares of Synergy Brands issued to
this shareholder as a financing cost and all warrants beneficially owned by this
shareholder were retired. The Company repaid $643,361 of this debt at December
31, 2007. At December 31, 2007, the outstanding balance was approximately
$7,356,639.
The Company financed an asset acquisition through the issuance by QFB of two 9%
secured loans aggregating $4,750,000 that mature on May 18, 2012, with principle
payments beginning December 1, 2007. In addition, the Company issued 480,000
shares valued at $393,600. The relative fare value of these shares is being
charged to operations as additional interest over the term of the loan. Total
repayments in 2007 were $15,000. The balance of the notes net of discount
approximated $4,341,400 at December 31, 2007.
Principal repayments of notes payable at December 31, 2007 are as follows:
Year Ending December 31,
2008 $ 4,282,000
2009 1,939,000
2010 1,198,000
2011 1,794,000
2012 7,601,000
---------------
16,814,000
Discounts (585,572)
---------------
Total $ 16,226,428
===============
NOTE J - STOCKHOLDERS' EQUITY
The Company has 100,000 authorized and outstanding shares of Class A preferred
stock with a par value of $.001; 13-to-1 voting rights; liquidation right of
$10.50 per share before common stock and redemption at option of Company at
$10.50 per share. In November 2006, 6,787 shares of the outstanding Class A
preferred stock were exchanged into 75,009 common shares.
In January 2003, the Company designated 100,000 shares of Class B Preferred
stock, par value $.001 per share to be designated as Class B, Series A Preferred
Stock and in June 2003, the Company increased the authorized Class B, Series A
preferred stock to 500,000 shares. The holders of Class B, Series A Preferred
Stock have no voting rights with respect to general corporate matters. The
holders of Class B, Series A Preferred Stock are entitled to receive dividends
at the annual rate of $.90 per share per annum. The Company may, as its option,
at any time in whole, or from time to time in part, out of earned funds, capital
and surplus of the Corporation, redeem the Class B, Series A Preferred Stock on
any date set by the Board of Directors, at $10.00 per share plus, in each case,
an amount equal to all dividends of Class B, Series A Preferred Stock accrued
and unpaid thereon, pro rata to the date of redemption. If, however, as to each
share of Class B, Series A Preferred Stock outstanding, if not redeemed by the
Company within 2 years of the issuance of such shares, the Company will be
obligated to issue to the then holder of record of such outstanding Class B,
Series A Preferred Stock, half a share of the Company's unissued restricted
Common Stock per share of Class B, Series A Preferred Stock for each year that
said share is not redeemed. The Company issued 30,000 common shares to Class B
Series A Preferred shareholders in March 2007 and March 2006 in compliance with
the subscription agreements dated February 26, 2003 and 50,000 common shares to
Class B Series A Preferred Shareholder in July 2007 and July 2006, in compliance
with the subscription agreements dated July 2, 2003. No more than 19.9% of the
Company's stock can be issued in connection with stock dividend payments against
the Class B, Series A Preferred Stock.
In November 2004, the Board of Directors approved a Private Placement in which
17 units were offered, with each unit consisting of 10,000 shares of
unregistered Class B, Series A Preferred Stock and 15,000 shares of unregistered
restricted Common Stock at a purchase price of $100,000 per unit. Synergy
Brands, Inc. and Subsidiaries
F23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2007 and 2006
NOTE J (continued)
The Company issued 112,500 shares to Class B Series A Preferred shareholders in
November 2006 in compliance with the subscription agreement dated November 1,
2004. In November 2006, 45,000 Class B, Series A Preferred stock was redeemed
into 473,416 shares of common stock.
In March 2005, the Company designated 250,000 shares of Class B Preferred Stock,
par value $.001 per share to be designated as Class B, Series B Preferred Stock.
On July 22, 2005, the Company completed an $800,000 private placement of
Preferred Stock and Common Stock consisting of 80,000 shares of Series B Class B
Preferred Stock and 88,000 shares of restricted Common Stock. The holders of
Class B Series B Preferred Stock have no voting rights with respect to general
corporate matters. The holders of Class B Series B Preferred Stock are entitled
to receive dividends at the annual rate of $.80 per share per annum. The Company
may, as its option, at any time in whole, or from time to time in part, out of
earned funds of the Corporation, redeem the Class B, Series B Preferred Stock on
any date set by the Board of Directors, at $10.00 per share plus, in each case,
an amount equal to all dividends of Class B, Series B Preferred Stock accrued
and unpaid thereon, pro rata to the date of redemption. If however, as to each
share of Class B, Series B Preferred Stock outstanding, if not redeemed by the
Company within 2 years of the issuance of such shares, the Company will be
obligated to issue to the then holder of record of such outstanding Class B,
Series B Preferred Stock, half a share of the Company's unissued restricted
Common Stock per share of Class B, Series B Preferred Stock for each year that
said share is not redeemed within limits as provided under applicable law.
For the year ended December 31, 2007 and 2006, the Company issued 4,842,489 and
2,026,745 shares of common stock in connection with financing, the sale of
securities, conversions of debt to equity, services, other expenses, and
dividends in connection with Class B Preferred Stock valued at $3,460,419 and
$1,333,247. Detail of the issuances are listed in the consolidated statements of
changes in stockholders' equity in page F-6.
Effective January 2006, the Company cancelled options to acquire 300,000 shares
of common stock held by employees. There are no options outstanding with
employees at December 31, 2007 and 2006.
The following is a summary of transactions involving warrants to purchase common
stock for the years ended December 31, 2007and 2006.
Weighted-
Number average
of shares exercise price
Outstanding at January 1, 2006 280,416 $ 4.38
Granted 270,000 0.0010
Cancelled/Forfeited (82,500) (6.52)
----------- -------------
Outstanding at December 31, 2006 467,916 $ 1.47
Granted - -
Exercised (249,822) (0.0010)
Cancelled/Forfeited (31,250) $ (5.50)
----------- -------------
Outstanding at December 31, 2007 186,844 $ 2.85
=========== =============
F24
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2007 and 2006
NOTE J (continued)
The following table summarizes information concerning currently outstanding and
exercisable stock purchase warrants:
Warrants outstanding Warrants exercisable
---------------------------- --------------------------
Weighted-
Number average Weighted- Number Weighted-
outstanding at remaining average exercisable at average
Ranges of December 31, contractual exercise December 31, exercise
exercise prices 2007 life (years) price 2007 price
------------------ ---------------- --------------- ----------- -------------- -----------
$0.00-$0.99 20,178 4.25 $0.0010 20,178 $0.0010
$1.00-$4.00 166,666 5.16 $3.20 166,666 $3.20
---------- --------- -------- ------------- ----------
186,844 4.70 $2.85 186,844 $2.85
============ ======= ======== ============= ===========
NOTE K - STOCK COMPENSATION PLANS
In 1994, Synergy adopted the 1994 Services and Consulting Compensation Plan (the
"Plan"). Under the Plan, as amended, 8,500,000 shares of common stock have been
reserved for issuance. The Plan terminates with respect to the granting of
common stock and options in 2009. Since the inception of the Plan, Synergy has
issued 2,632,374 shares for payment of services to employees and professional
service providers such as legal, marketing, promotional and investment
consultants. Common stock issued in connection with the Plan was valued at the
fair value of the common stock at the date of issuance or at an amount equal to
the service provider's invoice amount. Under the Plan, Synergy has granted
options to selected employees and professional service providers. The maximum
term of options granted under the Plan is ten years. There were no options
issued during the years ended December 31, 2007 and 2006. In the first quarter
of 2008, the Company approved the issuance of 678,500 shares under the plan.
The following is a summary of such stock option transactions for the years ended
December 31, 2007 and 2006 in accordance with the Plan and other restricted
stock option agreements:
Weighted-
Number average
of shares exercise price
------------ ----------------
Outstanding at January 1, 2006 300,000 $ 2.07
Cancelled/Forfeited (300,000) (2.07)
------------ ----------------
Outstanding at December 31, 2006
Granted - -
Cancelled/Forfeited - -
------------ ----------------
Outstanding at December 31, 2007
- -
------------ ----------------
Shares available for grant
December 31, 2007 8,472,380
===========
December 31, 2006 7,270,913
===========
F25
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2007 and 2006
NOTE K (continued)
The Company has also reserved 100,000 shares for a stock option plan ("Option
Plan") for nonemployee, independent directors, which entitles each nonemployee,
independent director an option to purchase 10,000 shares of the Company's stock
immediately upon election or re-election to the Board of Directors. Options
granted under the Option Plan will be at the fair market value on the date of
grant, immediately exercisable, and have a term of ten years. The Company had no
options outstanding and exercisable and 84,000 shares available for grant at
December 31, 2007 and 2006.
NOTE L - TRANSACTIONS WITH RELATED PARTIES
Two of the Company's directors were members of the board of directors of a
significant customer of the Company. These individuals terminated their board
membership in the customer in 2006.
NOTE M - INCOME TAXES
At December 31, 2007, the Company had a net operating loss carry forward of
approximately $34,500,000 which, if not utilized, will begin expiring in 2011.
Utilization of these losses may be limited if the Company undergoes an ownership
change pursuant to Internal Revenue Code Section 382. The components of the
deferred tax asset at December 31, 2007 and 2006 were approximately as follows:
2007 2006
Net operating loss carry forwards $ 11,739,000 $ 11,628,000
Allowance for doubtful accounts 171,000 166,000
Inventory 141,000 126,000
Capital losses 56,000 56,000
Other (316,000) (200,000)
Fixed Assets and Intangibles 736,000 484,000
Valuation allowance (12,527,000) (12,260,000)
------------ -------------
$ - $ -
------------ -------------
The valuation allowance increased by approximately $ 267,000 in 2007.
F26
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2007 and 2006
NOTE M (continued)
Income taxes expense for the years ended December 31, 2007 and 2006 including
amounts attributable to discontinued operations consisted, of the following:
2007 2006
State and local $53,324 $44,962
A reconciliation of income tax expense computed at the U.S. Federal statutory
rate of 34% and the Company's effective tax rate for the years ended December
31, 2007 and 2006 are as follows:
2007 2006
Federal income tax expense at statutory rate (34)% (34)%
Increase (decrease) resulting from
Decrease in valuation allowance 34 34
State and local income taxes, net of Federal
benefit .9 .9
---- ----
.9 % .9 %
==== =====
F27
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2007 and 2006
NOTE N - RETIREMENT PLAN
On January 1, 2002, the Company established the Synergy Brands, Inc. 401(k) Plan
(the "Plan") covering employees 21 years of age and older who have completed six
months of continuous service. For the year ended 2007 and 2006 the Company match
was $38,958 and $28,627.
NOTE O - COMMITMENTS AND CONTINGENCIES
1. Lease Commitments
The Company and its subsidiaries lease office and warehouse space under
operating leases expiring at various dates through March 2027. The Company is
also leasing vehicles under operating leases. Future minimum lease payments
under noncancelable operating leases as of December 31, 2007 were as follows:
Year ending December 31,
2008 $ 934,339
2009 945,289
2010 958,878
2011 796,728
2012 628,878
thereafter 7,309,158
$11,573,270
Rent expense under operating leases for the years ended December 31, 2007 and
2006 was approximately $653,000 and $382,000, respectively.
2. Litigation
The Company is subject to legal proceedings and claims, which arise, in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability, if any, with respect to these actions will not materially
affect the Company's financial position, results of operations or cash flows.
3. NASDAQ Listing
On January 29, 2008, the Company announced that it had received notice from
NASDAQ Stock Market dated January 25, 2008, that for 30 consecutive days the bid
price of the Registrant's common stock had closed below the minimum $1.00 per
share requirement for listing. The Registrant has been provided until July 23,
2008 to regain compliance.
F28
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2007 and 2006
NOTE P - SEGMENT AND GEOGRAPHICAL INFORMATION
The Company offers a broad range of Internet access services and related
products to businesses and consumers throughout the United States and Canada.
Management evaluates the various segments of the Company based on the types of
products being distributed which were, as of December 31, 2007 and 2006, as
shown below the segment information does not include the discontinued segment of
Proset:
PHS Group GRC Corporate Total
------------ ------------- ----------- -----------
Year ended December 31, 2007
Revenue $87,933,523 $1,606,978 - $89,540,501
Income (loss) from continuing operations
attributable to common stockholder 2,838,318 (1,097,641) (2,055,986) (315,309)
Depreciation and amortization 353,767 115,678 8,092 477,537
Asset impairment charge - 742,678 - 742,678
Interest income - - 150,305 150,305
Other income (expense) (673) (178) - (851)
Equity in earnings of investee - - 342,683 342,683
Interest and financing expenses 1,546,969 - 637,172 2,184,141
Identifiable assets 26,607,086 591,878 4,241,126 31,440,090
Additions to long-lived assets 10,312,869 2,889 - 10,315,758
Investment in affiliate - - 939,177 939,177
PHS Group GRC Corporate Total
------------ ------------- ----------- -----------
Year ended December 31, 2006
Revenue $69,840,886 $1,919,022 - $71,759,908
Income (loss) from continuing operations
attributable to common stockholder 779,634 (311,210) (2,140,392) (1,671,968)
Depreciation and amortization 11,929 156,456 76,700 245,085
Interest income - - 147,533 147,533
Other income (expense) (14,247) (7,792) - (22,039)
Equity in earnings of investee - - 227,054 227,054
Interest and financing expenses 1,403,739 - 647,117 2,050,856
Identifiable assets - continuing operations 15,609,833 1,594,373 3,536,408 20,740,614
Additions to long-lived assets 35,684 - - 35,684
Investment in affiliate - - 562,593 562,593
The Company's premium cigar operations are presently conducted through its
wholly owned subsidiary Gran Reserve Corp. (GRC). In the first quarter of 2008,
management authorized the sale of the Company's cigar operations, which transfer
is probable in 2008. Although no formal commitments have yet been finalized, a
contract in principal has been reached with a group of management and
supervisory personnel associated with GRC cigar operations, but who otherwise
have no official capacity with Synergy Brands Inc. or its subsidiaries.
F29
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2007 and 2006
NOTE P (continued)
All of the Company's identifiable assets and results of operations are located
in the United States and Canada. Geographic data, as of and for the years ended
December 31, 2007 and 2006, is as follows:
2007 2006
------------- --------------
Revenue
United States $67,169,090 $ 49,041,460
Canada 22,371,411 22,718,448
------------- --------------
$89,540,501 $71,759,908
============= ==============
Accounts receivable
United States 3,410,535 $6,005,782
Canada 590,270 5,160,198
------------- --------------
$4,000,805 $11,165,980
============= ==============
Identifiable assets of continuing operations
United States $31,440,090 $20,740,614
Canada - -
------------- --------------
$31,440,090 $20,740,614
------------- --------------
NOTE Q - Discontinued Operations
In December 2006, the Company instituted a plan to discontinue the Pro-Set
segment. Accordingly, the operating results of Pro-set segment for each of the
three years ended December 31, 2007 has been presented as "(Loss) income from
discontinued operations, net of income taxes". Net assets and liabilities to be
disposed of or liquidated, at their book value, have been separately classified
in the accompanying balance sheets at December 31, 2007 and December 31, 2006.
The Company recorded impairment loss of (i) $359,353 during the year ended
December 31, 2006, in connection with the write-down of the assets that were to
be disposed of. During the year ended December 31, 2006, the Company recorded a
loss of $58,305 in connection with the write-down of fixed assets. Also in 2006,
$485,000 was recorded as additional reserves of accounts receivables, other
receivables, and inventory. Due to operating losses, there was no income tax
benefit from the write-down and disposal of these assets.
F30
Synergy Brands, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2007 and 2006
NOTE Q (continued)
Summarized financial information of the Pro-Set segment as discontinued
operations for each of the two years ended as follows:
Year ended Year ended
Dec.31, 2007 Dec.31, 2006
------------- --------------
Net Sales $9,856 $ 1,222,834
Cost of sales
Cost of product 55,133 1,260,694
Shipping and handling costs 13,616 144,772
------------- --------------
68,749 1,405,466
Gross Profit (loss) (58,893) (182,632)
Operating expenses:
Advertising and promotion - 1,046
General and administrative 56,104 594,008
Depreciation and amortization - 157,650
Asset impairment charge - 359,353
------------- --------------
- 1,112,057
Operating loss (114,997) (1,294,689)
Other Income (expenses):
Other income (expenses) - (1,024)
Interest and financing expenses - (62,765)
------------- --------------
- (63,789)
Net (loss) before income taxes (114,997) (1,358,478)
------------- --------------
Income tax expense - 986
------------- --------------
Net (loss) from discontinued operations $ (114,997) $ (1,359,464)
------------- --------------
F31
Synergy Brands, Inc. and Subsidiaries
CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years ended December 31, 2007 and 2006
NOTE Q (continued)
Dec.31, 2007 Dec.31, 2006
ASSETS:
CURRET ASSETS:
CASH AND CASH EQUIVALENTS $ - $ 1,782
ACCOUNTS RECEIVABLE TRADE - 44,632
OTHER RECEIVABLES - 28,563
INVENTORY - 52,205
PREPAID ASSETS AND OTHER CURRENT ASSETS - -
PROPERTY AND EQUIPMENT, NET - -
INTANGIBLE ASSETS,NET OF ACCUMULATED
AMORITIZATION OF $ 2,627,469 - -
--------- -----------
TOTAL ASSETS - $ 127,182
========= ===========
LIABILITIES:
NOTES PAYABLE - -
ACCOUNTS PAYABLE - 112,569
--------- -----------
TOTAL LIABILITIES $ - $ 112,569
========= ===========
F32