SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual report under section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended December 31, 2002
[ ] Transition report under section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from ___________ to _____________
Commission file number: 02-26721
SYNERGY TECHNOLOGIES CORPORATION
(Name of small business issuer in its charter)
Colorado 84-1379164
-------- ----------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
333 East 53rd Street, # 7E, New York, NY 10022
(Address of principal executive offices) (Zip code)
Issuer's telephone number, including area code: (212) 207-6655
Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under Section 12(g) of the Exchange Act:
(Title of class) (Name of each exchange on which registered
100,000,000 shares of Common Stock, par value $0.002
----------------------------------------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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.
[X] Yes [ ] No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $0.
The aggregate market value of shares of common held by non-affiliates of the
registrant on May 5, 2003 was $32,923.02.
(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST 5 YEARS)
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13, or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. [ ] Yes [ ] No
The number of shares outstanding of issuer's class of common equity at May 5,
2003 was 48,005,521.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Transitional Small Business Disclosure Format (Check one): [ ] Yes [X] No
ITEM 1. DESCRIPTION OF BUSINESS
Filing of Bankruptcy Petition.
As previously reported, on November 13, 2002 (the "Petition Date"),
Synergy Technologies Corporation ("we," "us," "Synergy" or the "company") and
it's wholly-owned subsidiary, Carbon Resources Limited ("Carbon"), each filed a
voluntary petition for relief under Chapter 11 of Title 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court
for the Southern District of New York (the "Bankruptcy Court"). After November
13, 2002, we and Carbon operated our respective businesses as
debtors-in-possession. On March 12, 2003, we sold substantially all of our
assets to a third party for the sum of $300,000 in cash plus the forgiveness of
$527,783 in secured debt and accrued interest incurred subsequent to the
Petition Date. Thereafter, we and Carbon ceased operations. The asset sale was
completed in accordance with the Bankruptcy Code and pursuant to an order of the
Bankruptcy Court. Since the asset sale, we have conducted no operations other
than in accordance with, and as required by, the Bankruptcy Code.
The company expects to file a plan of reorganization and disclosure
statement with the Bankruptcy Court, which plan of reorganization is subject to
both creditor and Bankruptcy Court approval. Such plan and disclosure statement
will provide the framework for how the company will deal with its creditors and
shareholders in bankruptcy and the manner in which the company will be
restructured upon its emergence from bankruptcy. We cannot be certain that the
plan of reorganization will be approved by the relevant parties and approved by
the Bankruptcy Court.
Until a plan or reorganization is confirmed, we can not make any
statements regarding our future operations, management, capital requirements or
sources of capital.
The financial statements included in this Form 10-KSB have been
prepared on the basis of our not operating as a going concern, and the assets
and liabilities have been adjusted to reflect the consideration received from
the March 12, 2003 sale.
Prior to filing for protection under the Bankruptcy Code, Synergy
and its subsidiaries had engaged in the commercialization of two proprietary and
patented processes for use in the oil and gas industry. We lacked sufficient
capital resources to successfully commercialize these technologies and never
generated any revenues from sales or licenses of them. We were unable to obtain
additional funding to continue our development and commercialization efforts.
Employees
As of May 7, 2003, we had no full-time employees and 2 part-time
employees.
Risk Factors
We currently have no business operations and no ability to generate revenues and
our future operations are uncertain; therefore, an investment in our common
stock is highly speculative and you may lose the entire amount of your
investment.
Since we sold our assets in March 2003, we have not conducted any
business operations and do not have any means of generating revenues. Our only
asset is cash received from the sale of assets in March 2003, which likely will
be distributed to creditors upon the confirmation of a plan of reorganization.
We can not speculate what, if any, operations the company will engage in when it
emerges from bankruptcy. Accordingly, an investment in our common stock is
highly speculative.
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Holders of the common stock should be prepared to lose the entire value of their
investment in the company's stock.
There is a limited trading market for our common stock and holders of the stock
may not be able to sell their shares when they desire.
Our common stock is admitted for quotation on the Over the Counter
Electronic Bulletin Board. Since we filed for protection under the Bankruptcy
Code, there has been limited trading volume in our stock. Since the company
conducts no operations and is essentially inactive, this condition may continue
for the foreseeable future. Because the common stock is thinly traded, holders
may not be able to liquidate their stock when they desire.
Cautionary Statement Regarding Forward-Looking Statements
This Annual Report and the exhibits hereto may include "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements are based on management's current expectations and are
subject to uncertainty and changes in circumstances. Actual results may differ
materially from these expectations due to the company's bankruptcy proceedings,
among other factors not currently known to management.
ITEM 2. DESCRIPTION OF PROPERTY
On March 12, 2003, we sold all of our assets pursuant to Bankruptcy
Court order in accordance with the authority of the Bankruptcy Court hearing our
petition under Chapter 11 of the Bankruptcy Code. As of the date hereof, we
neither own nor lease any tangible or intangible properties. We are utilizing
the offices of one of our executive officers at no charge until further notice.
This office is located at 333 West 53rd Street, # 7E, New York, New York 10022.
ITEM 3. LEGAL PROCEEDINGS
On October 17, 2002, Texas T Petroleum, Ltd. ("Texas T") filed a
Statement of Claim in the Court of Queen's Bench of Alberta (Canada), Judicial
District of Calgary seeking to cause Synergy to convey its heavy oil technology
(the "Technology") to Texas T (the "Texas T Suit"). Texas T based its claim on
an agreement executed in March 2002 pursuant to which Synergy purchased Texas
T's 50% interest in Carbon, the company which owned the Technology.
Subsequent to the filing for relief under Chapter 11 of the
Bankruptcy Code, Synergy and Carbon commenced an adversary proceeding against
Texas T wherein they sought: (a) avoidance of the claims to the Technology made
by Texas T in the Texas T Suit because they amounted to "preferences" under the
Bankruptcy Code; (b) termination of certain of Texas T's claims on the grounds
that Texas T had no security interest in any assets of Synergy or Carbon; and
(c) a declaratory judgment that Texas T had no security interest in the
Technology it was claiming or any other assets of Synergy or Carbon. Synergy and
Carbon prevailed in a motion requesting that the court grant summary judgment
with respect to its claims and the Bankruptcy Court ordered and determined that
(i) Texas T had no security interest in the Technology or in any other asset of
either Synergy or Carbon; (ii) the Technology is the property of Synergy's and
Carbon's bankruptcy estates; (iii) the claims previously filed by Texas T were
defective and invalid; and (iv) Synergy and Carbon were authorized to prepare
and file the documents necessary to terminate Texas T's claims in the states in
which they were filed.
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ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Price of Synergy's Common Stock.
Our common stock trades on the OTC Bulletin Board under the trading
symbol OILS. The prices set forth below reflect the quarterly high and low bid
prices for shares of our common stock during the last two fiscal years as
reported by the OTC Bulletin Board. These quotations reflect inter-dealer
prices, without retail markup, markdown or commission, and may not represent
actual transactions.
2002 HIGH LOW
Fourth Quarter $0.02 $0.012
Third Quarter $0.17 $0.065
Second Quarter $0.57 $0.35
First Quarter $1.10 $0.57
2001 HIGH LOW
Fourth Quarter $0.97 $0.60
Third Quarter $1.18 $0.57
Second Quarter $1.43 $0.58
First Quarter $2.25 $0.75
As of May 7, 2003, there were 15 market makers in Synergy's common
stock. The last available reported trade by the OTC Bulletin Board prior to the
filing of this report was May 15 2003, at $0.004 per share. As of June 30, 2002,
there were approximately 2,430 holders of record of Synergy's common stock.
Synergy has not paid any cash dividends to its shareholders during
its last two fiscal years or at any other time.
Recent Sales of Unregistered Securities
Sets forth below is information regarding the sale of equity
securities of our company during the period covered by this report that were not
registered under the Securities Act of 1933 (the Securities Act) and not
included in any other report filed by Synergy with the Securities and Exchange
Commission prior to the date hereof.
On September 4, 2002, Synergy completed a private placement of
1,575,000 shares of common stock pursuant to Rule 506 of Regulation D
promulgated by the SEC under the Securities Act of 1933. The offering was made
and sold to four accredited investors (as such term is defined in Rule 501 of
Regulation D promulgated under the Securities Act), three of which were
affiliates of the company at the time of the investment. The company raised an
aggregate of $315,000. Synergy paid no commissions in
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connection with the placement of these securities. The Company used the proceeds
derived from this offering for working capital and general corporate purposes.
ITEM 6. PLAN OF OPERATION
In November 2002, we filed for protection under Chapter 11 of the
Bankruptcy Code and sold substantially all of our assets in March 2003 under the
auspices and with the approval of the Bankruptcy Court hearing our petition. We
do not currently engage in any business operations and can not make any
statements regarding our future operations, management, capital requirements or
sources of capital.
ITEM 7. FINANCIAL STATEMENTS
We submit with this report the financial statements and related
information listed in the Index to Financial Statements on page F-1 following
this report's signature page.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Changes in Registrant's Certifying Accountant
By letter dated April 11, 2003, KPMG LLP notified us that it
discontinued serving as our independent accountant, effective immediately,
because we no longer conducted any operations in Canada.
On April 8, 2003, Geoffrey Albers, an individual seeking to acquire
a controlling interest in our company in accordance with a confirmed plan of
reorganization by the United States Bankruptcy Court hearing our petition under
the Bankruptcy Code, engaged Demetrius & Company, L.L.C. ("Demetrius & Company")
as the independent accountant to audit our financial statements for the period
ended December 31, 2002 and to review the quarters ended March 31, 2003 and
ending June 30, 2003.
The KPMG LLP reports on our financial statements for years ended
December 31, 2001 and 2000, being the last two fiscal years during which it
served as our independent accountant, contained no adverse opinion or disclaimer
of opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principles; however, KPMG LLP did modify its opinion due to going
concern uncertainties.
During the two fiscal years ended December 31, 2001 and 2000, and
the subsequent interim period through April 11, 2003, there were no
disagreements with KPMG LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of KPMG LLP, would have
caused KPMG LLP to make reference thereto in their report on the financial
statements for such years.
During the two fiscal years ended December 31, 2001 and 2000 and the
subsequent interim period through April 11, 2003, there were no reportable
events [as defined in Regulation S-B Item 304(a)(1)(iv)].
During the two fiscal years ended December 31, 2001 and 2000 and the
subsequent interim period through April 11, 2003, neither Mr. Albers, the
company nor anyone acting on their behalf, have consulted with Demetrius &
Company regarding (i) either the application of accounting principles to a
specified transaction, either completed or proposed or the type of audit opinion
that might be rendered on our financial statements, or (ii) any matter that was
either the subject of a disagreement, as that term is
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defined in Item 304(a)(1)(iv) of Regulation S-B and the related instructions to
Item 304 of Regulation S-B, or a reportable event, as that term is defined in
Item 304(a)(1)(iv) of Regulation S-B.
KPMG LLP subsequently furnished us with a letter addressed to the
Securities and Exchange Commission that stated that it agreed with the above
statements.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table sets forth the names and ages of all directors
and executive officers of Synergy as of the date of this report, indicating all
positions and offices with Synergy held by each person:
NAME AGE POSITION
Barry Coffey 51 Chairman, President and CEO
Thomas E. Cooley 61 Chief Technology Officer and member of the Board of Directors
Duane F. Baumert 61 Member of the Board of Directors and Audit Committee
Cameron Haworth 42 Member of the Board of Directors
James E. Nielson 70 Member of the Board of Directors and Audit Committee
James Shone 27 Member of the Board of Directors and Audit Committee
Kelly Warrack 35 Controller, Secretary-Treasurer
Graham H. Batcheler 57 Member of the Board of Directors
The members of Synergy's Board of Directors are elected by the
holders of Synergy's common stock. Cumulative voting for directors is not
permitted. The term of office of directors of Synergy ends at the next annual
meeting of Synergy's shareholders or when their successors are elected and
qualified. The annual meeting of shareholders is specified in Synergy's bylaws
to be held within six months of the end of each fiscal year and the last annual
meeting was held on July 17, 2002. The term of office of each officer of Synergy
ends at the next annual meeting of the Synergy's Board of Directors, expected to
take place immediately after the next annual meeting of shareholders, or when
his or her successor is elected and qualified. Except as otherwise indicated
below, no organization by which any officer or director previously has been
employed is an affiliate, parent, or subsidiary of Synergy.
Barry Coffey has been a member of the Board of Directors since
January 2001 and was elected as the Chief Executive Officer of Synergy on
January 1, 2002. Mr. Coffey is a senior human resources and operations executive
with broad domestic and international experience spanning more than 20 years. He
has held several senior management positions including positions with RJR
Nabisco (1984-1991), Sony Corporation (1991-1995), and QED Consulting
(1995-2001), a global management-consulting firm of which he was a founder and
managing partner. Mr. Coffey earned a B.A. degree and a M.A. degree from
Scarritt College in 1976 and 1977 and a Ph.D. (ABD) in Philosophy from Drew
University in 1980.
Thomas Cooley has been Synergy's technology director since October
1997, became a member of the Board of Directors on August 2, 2000 and serve as
our Chief Executive Officer from January 16, 2001 until December 31, 2001. Mr.
Cooley served as President of Kvaerner Membrane Systems, Inc. from August 1994
through October 1997. Prior thereto, from 1984 through August 1994, Mr. Cooley
was the General Manager - Marketing and Engineering for Grace Membrane Systems,
which was acquired by
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Kvaerner in August 1994. Mr. Cooley is a registered professional engineer in the
State of Texas and the Province of Alberta, Canada. Mr. Cooley holds three U.S.
patents and two Canadian patents and he has had eight papers published. Mr.
Cooley earned a B.A. degree in Chemical Engineering from Rice University in 1963
and a B.S. degree in Chemical Engineering from Rice University in 1964.
Duane Baumert was elected to the Board of Directors in September
2000. Mr. Baumert has experience in the area of worldwide licensing of
technology and intellectual property rights. Mr. Baumert has been the Business
Director of UNICARB(R)Systems Business of the Union Carbide Corporation since
1990. Mr. Baumert has been with Union Carbide since 1966 and during that time
has held the positions of Director of Marketing, National Sales Manager and
International Business Director. Mr. Baumert received a B.S. in Business
Administration and Management from the University of Nebraska in 1963.
Cameron Haworth has been a Director of Synergy since December 1997.
Mr. Haworth was previously employed by Schlumberger (formerly REDA Services) as
a sales manager. Mr. Haworth has several years of experience in the oil and gas
industry supervising and coordinating the marketing, sales and field services
and order initiation for the Canadian market. Mr. Haworth has extensive
experience in preparing business plans and presentation material. He was awarded
a bachelor of science degree from the University of Wyoming in December 1987 and
a Degree in Petroleum Technology from SAIT in 1984
James Nielson has served on Synergy's Advisory Board from January
2000 until his election to the Board of Directors in September 2000. Mr. Nielson
has been a member of the Audit Committee since March 16, 2001. Mr. Nielson was
President and Chief Executive Officer of Husky Oil of Calgary, Alberta, Canada,
from 1973 to 1979. In 1979, Mr. Nielson formed JN Oil and Gas, a privately owned
exploration and production Company. After 12 years with JN Oil and Gas, he
formed Nielson and Associates. Mr. Nielson, currently serves as a director at
the American Petroleum Institute, the Shoshone First Bank of Cody, Wyoming,
Y-Tex Corporation of Cody, Wyoming and Ultra Petroleum Corp.
James Shone has been a Director of Synergy since December 1997 and
has been a member of the Audit Committee since March 16, 2001. Mr. Shone is
currently employed by the Business Development Bank of Canada in the finance
department. Prior thereto he was employed by the Trust Company of the Bank of
Montreal as a client service officer and understands the review and assessment
of the financial aspects of corporate operations. Mr. Shone has knowledge of
financial statement review and preparation, budgeting and financial forecasting.
Mr. Shone is a graduate of McGill University with a B.Com degree in Finance in
1996.
Graham H. Batcheler has joined our board of directors in July 2002.
Most recently, since 1999, Mr. Batcheler founded and was the principal officer
of TESI, a corporation that focuses on opportunities related to fuel cell energy
systems, hydrocarbon to liquids processing and alternate fuels. From 1981
through 1999, he was employed by various entities within the Texaco family of
corporations. During the last half of 1997, he served as President of Texaco
Global Gas and Power's International Marketing & Business Development. Earlier
in 1997, he was the President of Texaco Natural Gas International. From 1993
through 1997, he acted as the President of Texaco Natural Gas based in Texaco's
Houston headquarters. Mr. Batcheler graduated from Loughborough University of
Technology in England with a Bachelor of Technology degree in 1974.
Kelly Warrack has been Synergy's Controller since January 2000 and
was appointed Secretary-Treasurer on July 31, 2001. Mr. Warrack previously
served as Divisional Controller for Tesco Corporation from June 1995 through
December 1999. Prior to that, from 1988 through 1995, Mr. Warrack held positions
as Accounting Supervisor and Budget Coordinator for Texaco Canada Petroleum Inc.
Mr. Warrack became a Certified Management Accountant in the Province of Alberta,
Canada in 1991.
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Section 16(A) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Act of 1934 requires our officers
and directors, and greater than 10% stockholders, to file reports of ownership
and changes in ownership of our securities with the Securities and Exchange
Commission. Copies of the reports are required by SEC regulation to be furnished
to us. As of the date hereof, we have not received copies of any reports from
the persons required by Section 16(A) to file them and believe no reports have
been filed.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the
annual and long-term compensation of the person serving as our chief executive
officer during the last three years. No other executive officers received annual
compensation in excess of $100,000 during the last three fiscal years.
Name and Principal Position Year Salary Other Annual Securities Underlying Options All Other Compensation
Compensation
Cameron Haworth, 2000 $66,134 - - -
President
John Gradek, Chief Executive 2000 $44,018 - - -
Officer
Thomas E. Cooley, Chief 2000 $140,000 $10,673 250,000 $1,583
Technology Officer
Thomas E. Cooley, Chief 2001 $140,000 $6,588 - $18,583
Technology Officer and Acting
Chief Executive Officer
Barry Coffey, Chief Executive 2002 $240,000 $7,126 1,500,000
Officer (1)
(1) Includes (a) $75,000 in cash, (b) $90,000 applied to acquire securities in a
private placement made by the company during 2002, and (c) deferred compensation
of $75,000.
Option Grants in the Last Fiscal Year
The following table presents certain information concerning stock
options granted to the executives named below during the fiscal year ended
December 31, 2002.
Individual Grants
Percent of
Number of Total
Securities Options Granted
Underlying Options to Employees in Exercise Price Expiration
Name Granted (Shares) Fiscal Year Per Share Date
---- ------------------- ------------------ --------- ----
Barry Coffey (1)(3) 4,500,000 88.7 $0.72 12/31/2011
Graham Batcheler (2)(3) 200,000 3.9 $1.00 5/1/12
William Engles, Jr. 368,000 7.2 $0.72 12/31/12
(1) Vests monthly over a three-year term at 150,000 options per month.
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(2) Vests as to one-third of these shares on each of the first three
anniversaries of the date of grant.
(3) The options terminate on the earlier of the expiration date, nine months
after death or disability, 90 days after termination of employment without
cause or by resignation or immediately upon termination of employment for
cause.
Fiscal Year-End Option Numbers and Values
The following table sets forth certain information concerning the number
and value of unexercised options held by the executives named below for the
fiscal year ended December 31, 2002. There were no stock options exercised by
the executives named below during the fiscal year ended December 31, 2002.
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Fiscal Year-End: at Fiscal Year-End:
Name Exercisable/Unexercisable Exercisable/Unexercisable
---- ------------------------- -------------------------
Thomas Cooley 250,000 0/0
Barry Coffey 1,500,000/3,000,000 0/0
Graham H. Batcheler 66,667/133,333 0/0
William Engles 249,714/118,286 0/0
Compensation of Non-Employee Directors
We do not compensate our Directors for participation in Board or
Committee meetings. We reimbursed non-employee Directors for travel expenses for
meetings attended during 2002.
On May 2, 2002, we granted to Graham H. Batcheler, a member of our
board of directors, options to purchase up to 200,000 shares of our common stock
at a price of $1.00 per share for a period of ten years. Mr. Batcheler shall be
entitled to exercise options to acquire 66,667 shares during the first year
after the date of the option agreement, options to acquire 66,667 shares during
the second year after the date of the option agreement, and options to acquire
66,666 shares during the third year after the date of the option agreement.
Employment Agreements
Chief Executive Officer and President
On January 1, 2001, we entered into an agreement with Barry Coffey
to serve as our Chief Executive Officer and President for a period of 3 years,
automatically renewable for successive 12 month periods thereafter unless either
party gives notice of its intention not to renew the agreement 60 days prior to
an expiration date. We have agreed to pay to Mr. Coffey a base salary equal to
$240,000 per year and to make him eligible for a bonus equal to up to 100% of
that amount based upon the achievement of certain milestones to be agreed upon
between Mr. Coffey and the Board of Directors. In addition, we granted Mr.
Coffey options under the 2002 Stock Option Plan to purchase up to 4,500,000
options at a price of $.72 per share. An aggregate of 1,500,000 options vest to
Mr. Coffey in each of the three years of the employment agreement. We also have
agreed to furnish Mr. Coffey with payments to cover expenses for insurance not
to exceed $20,000 per annum and to reimburse him for all reasonable expenses
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incurred by him in connection with maintaining his home office in New York City.
The employment agreement contains customary confidentiality and non-competition
clauses.
Acting Chief Financial Officer
On June 2, 2002, we entered into a consulting agreement with William
R. Engles, Jr. to serve as our Chief Financial Officer. The agreement provided
that Mr. Engles would furnish consulting services to Synergy consistent with
the duties and responsibilities of a Chief Financial Officer. This agreement
extended through September 2, 2002. We agreed to pay to Mr. Engles $1,000 per
day for his services and to reimburse Mr. Engles for all out-of-pocket expenses
associated with the work performed pursuant to this agreement. We also granted
to Mr. Engles options representing the right to purchase 100,000 shares of
common stock at an exercise price of $0.72 per share. The options have a term
of 10 years. We agreed to register all shares issued to Mr. Engles pursuant to
this agreement and all shares underlying his option for public resale under the
Securities Act of 1933.
On September 2, 2002, the Company extended the consulting agreement
with Mr. Engles to serve an additional 17 weeks as our Acting Chief Financial
Officer. The agreement included the grant of 130,000 options to purchase shares
of common stock of the Company at an exercise price of $0.72. All other terms
and conditions are as described in the original agreement with Mr. Engles.
On December 9, 2002, the Company extended the consulting agreement
with Mr. Engles to serve as our Acting Chief Financial Officer until May 2,
2003. The agreement includes the grant of 138,000 options to purchase shares of
common stock of the Company at a strike price of $0.72, vesting pro-rata over
the term of the agreement. All other terms and conditions shall be as described
in the original Agreement.
Mr. Engles discontinued rendering services to Synergy on May 2,
2003.
2002 Stock Option Plan.
On December 14, 2001, the Board of Directors adopted the 2002 Stock
Option Plan ("Plan") to take effect on January 1, 2002, subject to the approval
of the shareholders. Our shareholders approved the Plan at the Special Meeting
of Shareholders held on February 18, 2002.
The following is a brief summary of the Plan, which was designed to
enhance our long-term profitability and shareholder value by aligning the
interests of selected directors, officers, employees and consultants with our
performance targets.
The Plan authorizes the issuance of statutory and non-statutory
options to purchase up to 10,000,000 shares of our common stock.
The Plan is administered by the Board of Directors, which may
empower a committee to administer the Plan. The Board is generally empowered to
interpret the Plan, prescribe rules and regulations relating thereto, determine
the terms of the option agreements, amend them with the consent of the optionee,
determine the individuals to whom options are to be granted, and determine the
number of shares subject to each option and the exercise price thereof. The per
share exercise price for options granted under the Plan is determined by the
Board, provided that the exercise price of incentive stock options is not be
less than 100% of the fair market value of a share of the common stock on the
date the option is granted (110% of fair market value on the date of grant of an
incentive stock option if the optionee owns more than 10% of our common stock).
Upon exercise of an option, the optionee may pay the purchase price with
previously acquired securities of the company.
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Options will be exercisable for a term determined by the Board,
which will not be greater than ten years from the date of grant and five years
in the case of incentive stock options, unless such grant is for a period of ten
years, as determined by the Board, except that an Incentive Stock Option granted
to the beneficial owner of more than 10% of the outstanding shares of our common
stock shall expire, to the extent that it has not theretofore been exercised, at
the close of business five (5) years from the date of grant. Options may be
exercised only while the original grantee has a relationship with us which
confers eligibility to be granted options or within three months after
termination of such relationship with us, or up to one year after death or total
and permanent disability. In the event of the termination of such relationship
between the original grantee and us for cause, as defined in the Plan, all
options granted to that original optionee terminate immediately. In the event of
certain basic changes in the company, including a reorganization, merger or
consolidation of the company, or the purchase of shares pursuant to a tender
offer for shares of our common stock, in the discretion of the Board or
administering committee, each option may become fully and immediately
exercisable. Incentive stock options are not transferable other than by will or
the laws of descent and distribution. Non-qualified stock options may be
transferred to the optionee's spouse or lineal descendants, subject to certain
restrictions. Options may be exercised during the holder's lifetime only by the
holder, his or her guardian or legal representative.
Options granted pursuant to the Plan may be designated as incentive
stock options ("ISO"), with the attendant tax benefits provided under Sections
421 and 422 of the Internal Revenue Code of 1986. Accordingly, the Plan provides
that the aggregate fair market value determined at the time an ISO is granted of
the common stock subject to incentive stock options exercisable for the first
time by an employee during any calendar year under all our plans may not exceed
$100,000. The Board may modify, suspend or terminate the Plan; provided,
however, that certain material modifications affecting the Plan must be approved
by the shareholders, and any change in the Plan that may adversely affect an
optionee's rights under an option previously granted under the Plan requires the
consent of the optionee.
Equity Compensation Plan Information
The following table sets forth certain information concerning the
company's existing stock option plans for the fiscal year ended December 31,
2002.
Equity Compensation Plan Information
----------------------- ------------------- -------------------- ---------------------
(a) (b) (c)
----------------------- ------------------- -------------------- ---------------------
Plan Category Number of Weighted-average Number of
securities to be exercise price of securities available
issued upon outstanding for future issuance
exercise of options, warrants under equity
outstanding and rights compensation
options, warrants plans [excluding
and rights securities reflected
in column (a)]
----------------------- ------------------- -------------------- ---------------------
Equity 4,548,881 (1) $0.93 4,924,000
compensation
plans approved
by security holders
----------------------- ------------------- -------------------- ---------------------
Equity 6,163,704 (2) $1.56 N/A
compensation
plans not approved
by security holders
----------------------- ------------------- -------------------- ---------------------
Total 10,712,585 $1.29 4,924,000
----------------------- ------------------- -------------------- ---------------------
11
(1) Table does not include options to purchase shares of common stock which had
not vested at December 31, 2002.
(2) Consists of warrants to purchase shares of common stock.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of May 7, 2003, certain
information with respect to the beneficial ownership of shares of common stock
by (i) officer of our company, (ii) each director of our company, (iii) each
person known to us to be the beneficial owner of more than 5 percent of our
outstanding shares of common stock, and (iv) our directors and executive
officers as a group.
For the purpose of this table, the beneficial ownership of a person
includes shares as to which that person has sole or shared voting or investment
power as well as shares that the person has the right to acquire within 60 days
(such as upon conversion of convertible securities or exercise of warrants or
options) as of May 7, 2003. For the purpose of calculating the ownership
percentages for each person listed, we have considered to be outstanding both
the total number shares actually outstanding on May 7, 2002 and the total number
of shares that various people then had the right to acquire within 60 days.
NUMBER
BENEFICIAL OWNER OF SHARES PERCENT OF CLASS
---------------- --------- ----------------
Barry Coffey (1) 2,775,000 5.5%
Thomas Cooley (2) 709,048 1.5%
Duane F. Baumert (3) 365,500 0.8%
Cameron Haworth (4) 275,537 0.6%
James E. Nielson (5) 703,847 1.5%
James Shone (6) 154,400 0.3%
Kelly Warrack (7) 216,454 0.4%
Graham H.Batcheler (8) 66,667 0.1%
Laxarco Holdings Limited 14,793,510 30.8%
All officers and directors as 5,266,452 10.7%
a group (8 persons)
1. Mr. Coffey's total shareholdings include securities exercisable for an
aggregate of 2,641,667 shares of common stock.
2. Mr. Cooley's total shareholdings include options to purchase 250,000
shares. Mr. Cooley is also a shareholder in Laxarco Holdings Limited but
disclaims any voting or dispositive power over Laxarco Holdings, for
purposes hereof.
3. Mr. Baumert's total shareholdings include securities exercisable for an
aggregate of 204,000 shares; his wife Dorothy T. Baumert, owns 3,500 shares
in her retirement plan.
4. Mr. Haworth's total shareholdings include options to purchase 244,500
shares.
5. Mr. Nielson's total shareholdings include securities exercisable for an
aggregate of 310,256 shares.
6. Mr. Shone's total shareholdings include securities exercisable for an
aggregate of 122,200 shares.
7. Mr. Warrack's total shareholdings include securities exercisable for an
aggregate of 182,500 shares.
8. Represents options to purchase shares of common stock.
12
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On January 3, 2002, we entered into a settlement agreement with John
Gradek, our former Chief Executive Officer, which extinguished a lawsuit filed
by Mr. Gradek against us on February 27, 2001. In that suit, Mr. Gradek claimed
that Synergy breached its employment agreement with him by terminating him
without cause and asserted that Synergy owed him his monthly salary of $10,000
for 32 months plus paid vacation days and attorney fees of up to $80,000.
Pursuant to the settlement agreement, we agreed to (i) pay to Mr. Gradek the sum
of $100,000 in two installments of $50,000 each, the first on or before February
1, 2002, which sum was paid, and the second by May 1, 2002, which sum was paid
on July 19, 2002, and (ii) issue to Mr. Gradek 150,000 shares of common stock.
In addition, each party released the other from all actions or claims with
respect to Mr. Gradek's employment with Synergy.
During the fiscal year ended December 31, 2001, we paid an aggregate
of $196,210 to Glidarc Technologies Inc. for process management services and
technical personnel. Mr. Thomas Cooley is an officer of Glidarc Technologies and
is also our Chief Technology Officer and a member of our Board of Directors. Mr.
Cooley also serves on the Board of Directors of Syngen Technologies Limited and
Carbon Resources Limited, wholly owned subsidiaries of the Company.
On October 19, 2000, we issued a three-year promissory note in the
principal amount of $1,000,000 in favor of Stone Canyon Resources, Inc., a
former affiliate of Synergy by virtue of common officers, directors and
shareholders, in settlement of the terms of a certain Share Exchange Agreement,
previously filed with, and described in, past filings made by Synergy with the
Securities and Exchange Commission. We issued the promissory note to Stone
Canyon to settle what Stone Canyon alleged was a breach of the Share Exchange
Agreement resulting from our inability to develop certain oil and gas producing
properties. On February 9, 2001, Stone Canyon converted the promissory note into
shares of common stock at the price of $1.00 per share.
On July 1, 2001, Synergy entered into a Management and Consulting
Agreement with Huntingtown Associates LLC, an entity wholly owned by Baumart, a
member of our board of directors and the sole owner of Huntingtown. Under this
agreement, Synergy engaged Huntingtown for a minimum of 40 days during 2001 and
a minimum of 80 days up to a maximum of 120 days during 2002 to provide
assistance with the development of product licensing, business and patent
strategies, business plan development and certain other matters. Under the
agreement, during 2001 we compensated Huntingtown at the rate of $1,500 per day
payable in stock options valued at 33% of the higher of $1 or the average market
price for our common stock during the month in which the services were rendered.
During 2002, we agreed to compensate Huntingtown at the rate of $1,500 per day
payable $350 in cash and the balance ($1,150) in stock options valued at 33% of
the higher of $1 or the average market price for our common stock during the
month in which the services were rendered and agreed to register the common
stock issued to Huntingtown for public resale. During the fiscal year ended
December 31, 2002, Huntingtown billed us for consulting services and
reimbursement of actual expenses in the amount of $3,850. At December 31, 2002,
we had an outstanding balance owing to Huntingtown of $14,481, which includes
unpaid amounts due from 2001.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. The financial statements and related information referred to in
response to Item 7.
2. The following financial statement schedules: None
13
3. There are filed herewith the following Exhibits:
Exhibit No. Title
23 CONSENT OF EXPERTS AND COUNSEL.
23.1 Consent of KPMG LLP
99 ADDITIONAL EXHIBITS
99.1 Certification of Chief Executive Officer under Section 906
of the Sarbanes-Oxley Act of 2002
99.2 Certification of Secretary under Section 906 of the
Sarbanes-Oxley Act of 2002
(b) The following Current Reports on Form 8-K during the fourth quarter of 2002
and first quarter of 2003.
1. April 22, 2003
2. October 24, 2002
ITEM 14. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the company
carried out an evaluation, under the supervision and with the participation of
its management, including its Chief Executive Officer, of the effectiveness of
the design and operation of its disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive
Officer concluded that the company's disclosure controls and procedures are
effective in timely alerting them to material information relating to the
company (including its consolidated subsidiaries) required to be included in its
periodic SEC filings. It should be noted that the design of any system of
controls 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, regardless of
how remote.
Since the date of our evaluation to the filing date of this Annual
Report, there have been no significant changes in our internal controls or in
other factors that could significantly affect internal controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Synergy Technologies Corporation
Dated: May 15, 2003 By: /s/ Barry Coffey
------------------------------------------
Barry Coffey, Chief Executive Officer
Name Title Date
/s/ Barry Coffey Chief Executive Officer and Director May 15, 2003
-----------------
Barry J. Coffey
/s/ Thomas E. Cooley Chief Technical Officer and Director May 15, 2003
--------------------
Thomas E. Cooley
/s/ Cameron Haworth Director May 15, 2003
-------------------
Cameron Haworth
/s/ James Shone Director May 15, 2003
---------------
James Shone
/s/ James E. Nielson Director May 15, 2003
--------------------
James E. Nielson
/s/ Duane F. Baumert Director May 15, 2003
--------------------
Duane F. Baumert
/s/ Graham H. Batcheler Director May 15, 2003
-----------------------
Graham H. Batcheler
15
CERTIFICATIONS
I, Barry Coffey, certify that:
1. I have reviewed this annual report on Form 10-KSB of Synergy
Technologies Corporation;
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. I am responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. I have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. I have indicated in this annual report whether there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Barry Coffey
/s/ Barry Coffey
----------------
President and Chief Executive Officer
May 15, 2002
16
FINANCIAL STATEMENTS
SYNERGY TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
SYNERGY TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
TABLE OF CONTENTS.............................................................................. F-2
Financial Statements:
Reports of Independent Auditors................................................. F-3
Consolidated Balance Sheets - December 31, 2002 and December 31, 2001........... F-4
Consolidated Statements of Operations for the years ended December 31, 2002
and 2001 and for the Period from February 10, 1997 (Date of Inception) to
December 31, 2002............................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2002
and 2001 and for the Period from February 10, 1997 (Date of Inception) to
December 31, 2002............................................................... F-6
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
for the year ended December 31, 2002 and December 31, 2001...................... F-7
Notes to Consolidated Financial Statements..................................................... F-8 - F-17
F-2
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Synergy Technologies Corporation
We have audited the accompanying consolidated balance sheet of Synergy
Technologies Corporation and Subsidiaries (a development stage enterprise) at
December 31, 2002, and the related consolidated statements of operations,
changes in stockholders' equity (deficit) and cash flows for the year then ended
and the period from February 10, 1997 (inception) to December 31, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The cumulative statements of operations, cash flows, and changes in
stockholders' equity (deficit) for the period from February 10, 1997 (inception)
to December 31, 2002 which were audited by other auditors whose reports have
been furnished to us, and our opinion, insofar as it relates to the amounts
included for the period from February 10, 1997 (inception) to December 31, 2001
is based solely on the reports of other auditors.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, based on our audit and the reports of other auditors, the
financial statements referred to above present fairly in all material respects
the consolidated financial position of Synergy Technologies Corporation and
Subsidiaries (a development stage enterprise) as of December 31, 2002, and the
consolidated results of their operations and their cash flows for the year then
ended and for the period from February 10, 1997 (inception) to December 31,
2002, in conformity with accounting principles generally accepted in the United
States of America.
The accompanying consolidated financial statements have been prepared assuming
that the company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company had experienced losses from operations and
negative cash flows in recent years, and as a result on November 12, 2002, the
Company filed a voluntary petition for relief under Chapter 11 of the Bankruptcy
Code.
In addition, on March 12, 2003, the Company ceased operations and sold
substantially all its assets. These matters raise substantial doubt about the
Company's ability to continue as a going concern. Management's plan in regard to
these matters is also described in Note 2. The accompanying consolidated
financial statements do not include any adjustments relating as to the amounts
and classification of recorded liabilities that might be necessary when the
Company's plan of reorganization is confirmed.
/s/DEMETRIUS & COMPANY, L.L.C.
Wayne, New Jersey
May 9, 2003
F-3
SYNERGY TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
ASSETS
AS AT DECEMBER 31, AS AT DECEMBER 31,
2002 2001
-------------------------------------------
CURRENT ASSETS
Cash $ 17,898 $ 38,746
Receivables - 38,560
Prepaid expenses 48,439 39,727
-------------------------------------------
TOTAL CURRENT ASSETS 66,337 117,033
INVESTMENTS (Note 3)
SynGen Technologies and associated assets 303,312 3,500,000
CPJ Technologies and associated assets 454,968 1,432,500
Investment in Private US corporation - 1,000,000
-------------------------------------------
758,280 5,932,500
Investment in joint venture (Note 3) - 80,768
-------------------------------------------
TOTAL INVESTMENTS 824,617 6,130,301
Office equipment and computers, net of accumulated depreciation
$34,946 44,325 59,780
-------------------------------------------
TOTAL ASSETS $ 868,942 $ 6,190,081
===========================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
LIABILITIES NOT SUBJECT TO COMPROMISE
CURRENT LIABILITIES
Accounts payable (Note 5) $ 38,791 $ 1,018,649
Accrued expenses 43,000 74,744
Notes payable (Note 5) 257,960 2,250,000
Accrued interest on notes (Note 5) 2,361 368,182
-------------------------------------------
TOTAL CURRENT LIABILITIES 342,112 3,711,575
LONG TERM LIABILITIES
Notes payable - 135,223
Investment in joint venture (Note 3) - 97,490
-------------------------------------------
TOTAL LONG TERM LIABILITIES - 232,713
LIABILITIES SUBJECT TO COMPROMISE (NOTE 6)
Accounts payable 2,032,608 -
Convertible debentures 1,259,100 -
Loans payable 130,000 -
Accrued interest to November 12, 2002 21,220 -
-------------------------------------------
TOTAL LIABILITIES SUBJECT TO COMPROMISE 3,442,928 -
TOTAL LIABILITIES 3,785,040 3,944,288
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $0.002 par value, 100,000,000 shares
authorized, 48,005,521 Shares issued and outstanding 96,992 69,333
Additional paid in capital 57,700,516 49,633,286
Deferred compensation - (13,879)
Deficit accumulated during development stage (60,713,606) (47,442,947)
-------------------------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (2,916,098) 2,245,793
===========================================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 868,942 $ 6,190,081
===========================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
SYNERGY TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
CUMULATIVE
PERIOD FROM
FOR THE YEARS ENDED FEBRUARY 10, 1997
DECEMBER 31 (DATE OF
INCEPTION) TO
2002 2001 DEC. 31, 2002
----------------------------------------------------------------------------------------------------------------------
OTHER INCOME
Interest income 72 4,365 35,880
Consulting income - - 8,927
----------------------------------------------------------------------------------------------------------------------
72 4,365 44,807
EXPENSES
General and administrative 2,367,407 2,662,442 8,199,430
Stock option compensation 13,879 92,391 997,830
Compensation related to warrants - - 343,744
Technology development 777,077 715,445 3,739,733
Other technology costs 1,025,000 - 1,025,000
Dry well expenses - - 722,210
----------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 4,183,363 3,470,278 15,027,947
----------------------------------------------------------------------------------------------------------------------
LOSS BEFORE THE FOLLOWING (4,183,291) (3,465,913) (14,983,139)
OTHER EXPENSES
Amortization of debt discount and offering costs - - (2,250,000)
Conversion inducement (888,548) - (888,548)
Accrued interest on notes payable (169,105) (234,096) (537,287)
Share of expenses incurred by joint venture (43,280) (298,881) (342,161)
Write-down of Syngen technology (7,886,264) (34,528,244) (42,414,508)
Gain on disposition - 114,643 802,208
----------------------------------------------------------------------------------------------------------------------
(8,987,197) (34,946,578) (45,630,297)
----------------------------------------------------------------------------------------------------------------------
NET LOSS BEFORE REORGANIZATION ITEMS AND TAXES (13,170,488) (38,412,491) (60,613,436)
----------------------------------------------------------------------------------------------------------------------
REORGANIZATION ITEMS
Professional fees (100,170) - (100,170)
PROVISION FOR INCOME TAX - - -
----------------------------------------------------------------------------------------------------------------------
NET LOSS $(13,270,658) $ (38,412,491) $ (60,713,606)
======================================================================================================================
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.31) $ (1.19) $ (2.87)
======================================================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES USED IN CALCULATION 42,472,760 32,326,988 21,126,797
======================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-5
SYNERGY TECHNOLOGIES CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOW
CUMULATIVE
FOR THE YEARS ENDED PERIOD FROM
DECEMBER 31 FEBRUARY 10,
1997 (DATE OF
INCEPTION)
2002 2001 TO DEC. 31, 2002
---------------------------------------------------------------------------------------------------------------------------
CASH FROM OPERATING ACTIVITIES
Net loss (13,270,658) (38,412,491) (60,713,606)
Adjustments to reconcile net loss to net cash from operations
Dry well expense - - 722,210
Depreciation, amortization and write downs 7,936,366 34,657,482 45,754,861
Conversion inducement 888,548 - 888,548
Accrued interest on notes payable (83,151) 234,096 285,031
Issuance of shares for services 1,231,293 963,729 2,538,251
Issuance of warrants for services - 0 343,744
Settlement of debt and acquisition of CPJ 357,529 - 357,529
Re-issue of founders shares 38,500 106,500 145,000
Investment in joint ventures 33,490 16,720 50,209
Exchange rate loss 13,474 27,353 75,805
Loss on disposition of assets - 1,993 (684,239)
Changes in assets and liabilities
Accounts receivable 38,561 46,199 -
Prepaid expenses and deposits (38,737) 33,986 (78,480)
Accounts receivable - related parties - 2,843 -
Accounts payable 1,052,637 435,859 2,389,267
Accounts payable - related parties - 153,088 153,088
Accrued expenses (31,743) (10,695) 42,999
---------------------------------------------------------------------------------------------------------------------------
NET CASH FLOWS FROM OPERATING ACTIVITIES (1,833,891) (1,743,338) (7,729,783)
CASH USED IN INVESTING ACTIVITIES
Acquisition of property and equipment (20,770) (18,257) (140,175)
Other - - (788,188)
---------------------------------------------------------------------------------------------------------------------------
NET CASH FLOWS FROM INVESTING ACTIVITIES (20,770) (18,257) (928,363)
CASH FROM FINANCING ACTIVITIES
Proceeds from (payments to) notes payable - related parties - (26,983) 531,933
Proceeds from (payments to) notes payable 252,737 9,118 1,076,256
Net proceeds from convertible debt - - 2,137,500
Sales of common stock 1,594,550 1,769,500 4,603,660
Other - - 402,500
---------------------------------------------------------------------------------------------------------------------------
NET CASH FLOWS FROM FINANCING ACTIVITIES 1,847,287 1,751,635 8,751,849
EFFECT OF EXCHANGE RATE CHANGES ON CASH (13,474) (27,353) (75,805)
NET CHANGE IN CASH (20,848) (37,313) 17,898
CASH AT BEGINNING OF PERIOD 38,746 76,059 -
-----------------------------------------------------
CASH AT END OF PERIOD $ 17,898 $ 38,746 $ 17,898
===========================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-6
SYNERGY TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
-------------- ---------- --------------- ---------------- ---------------- ----------------
DEFICIT
ADDITIONAL ACCUMULATED UNEARNED TOTAL
SHARES AMOUNT PAID IN DURING COMPENSATION STOCK-HOLDERS'
CAPITAL DEVELOPMENT EQUITY (DEFICIT)
STAGE
-------------- ---------- --------------- ---------------- ---------------- ----------------
INCEPTION TO DECEMBER 31, 2000
Shares issued in recapitalization 2,549,500 5,099 (5,099) - - -
Issuance of shares for services 6,100,026 12,200 1,438,375 - - 1,450,575
Issuance of shares for cash 4,800,007 9,600 989,410 - - 999,010
Other 16,091,631 33,178 43,363,627 - - 43,396,805
Unearned compensation - - - - (89,770) (89,770)
Losses - - - (9,030,456) - (9,030,456)
-------------- ---------- --------------- ---------------- ---------------- ----------------
BALANCE AT DECEMBER 31, 2000 29,541,164 $60,077 $ 45,786,313 $ (9,030,456) $ (89,770) $36,726,164
Units for stock - debenture 1,000,000 2,000 998,000 - - 1,000,000
Units for stock - cash 264,000 528 263,472 - - 264,000
Options exercised 5,500 11 5,489 - - 5,500
Re-issue of founders shares 157,143 300 106,200 - - 106,500
Issuance of stock options - - 120,000 - - 120,000
Shares for services 893,154 1,786 858,443 - - 860,229
Issuance of shares for cash 2,315,382 4,631 1,495,369 - - 1,500,000
Unearned compensation - - - - 75,891 75,891
Net loss for the year - - - (38,412,491) - (38,412,491)
-------------- ---------- --------------- ---------------- ---------------- ----------------
BALANCE AT DECEMBER 31, 2001 34,176,343 $69,333 $ 49,633,286 $(47,442,947) $ (13,879) $2,245,793
Issuance of warrants - - 40,500 - - 40,500
Conversion inducement - - 888,548 - - 888,548
Re-issue of founders shares 50,000 100 38,400 - - 38,500
Shares for technology acquisition 4,291,334 8,583 3,081,177 - - 3,089,760
Issuance of shares for debt 2,504,966 5,010 1,514,416 - - 1,519,426
Shares for services 3,121,594 6,243 917,361 - - 923,604
Issuance of shares for cash 3,861,284 7,723 1,586,828 - - 1,594,550
Unearned compensation - - - - 13,879 13,879
Net loss for the year - - - (13,270,658) - (13,270,658)
-------------- ---------- --------------- ---------------- ---------------- ----------------
BALANCE AT DECEMBER 31, 2002 48,005,521 $96,992 $57,700,516 $(60,713,606) $ - $(2,916,098)
============== ========== =============== ================ ================ ================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-7
SYNERGY TECHNOLOGIES CORPORATION AND SUBSIDARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Financial Instruments - The amounts reported as cash, receivables, accounts
payable, and accrued liabilities are considered to be reasonable approximations
of their fair values. The fair value estimates presented herein were based on
market information available to management at the time of preparation of the
financial statements. For the purpose of the statement of cash flows, cash and
cash equivalents are defined as demand deposits as well as other funds with
original maturities of three months or less.
Foreign Currency Translation - Exchange gains and losses from holding foreign
currencies and having liabilities paid in foreign currencies are included in the
results of operations.
Property and Equipment - Property and equipment are reported at cost. Minor
repairs, enhancements, and maintenance costs are expensed when incurred.
Depreciation is computed using the straight-line and accelerated methods over
the estimated useful lives of the assets. Major categories of property and
equipment and estimated useful lives are as follows:
Estimated Useful Life
---------------------
Furniture and fixtures 3-5 years
Computer equipment 2 years
Intangibles - Intangible assets will be amortized over the estimated useful life
of the asset which will be determined at the time of commencement of their
commercial application. Each respective technology has patents in effect for a
17-19 year period. No amortization expense has been recorded on these amounts
for 2002 or prior periods.
Basic and Diluted Loss Per Share - Basic loss per common share is computed by
dividing net loss by the weighted average number of common shares outstanding
during the period. Diluted loss per share is calculated to give effect to
potentially issuable common shares except during loss periods when those
potentially issuable common shares would decrease the loss per share.
NOTE 2 - BANKRUPTCY PROCEEDING, SALE OF ASSETS AND DISCONTINUATION OF OPERATIONS
The Company is in the development stage and has not realized any revenues, has
incurred losses and had negative cash flows from operations for all of 2002 and
each year since its inception. The Company's efforts have been focused on the
development of its technologies and raising capital necessary to finance its
development and administrative activities. To date, a substantial portion of its
activities have been paid for by the issuance of common shares, options and
warrants.
On November 13, 2002 (the "Petition Date"), the Company and it's wholly-owned
subsidiary, Carbon Resources Limited ("Carbon"), each voluntarily filed a
petition for relief under Chapter 11 of the United
F-8
States Bankruptcy Code ("Chapter 11") in the United States Bankruptcy Court,
Southern District of New York (the "Bankruptcy Court"). SynGen Technologies
Limited, a wholly-owned subsidiary of the Company, and Lanisco Holdings Limited,
a wholly-owned subsidiary of Carbon, were not included in the Chapter 11 filing.
After November 13, 2002, we and Carbon operated our respective businesses as
debtors-in-possession. At March 12, 2003 substantially all the Company's assets
were sold to a third party for $300,000 in cash plus the forgiveness of $527,783
in debt and accrued interest incurred subsequent to the Petition Date, and the
Company ceased operations. The asset sale was completed following an auction
conducted in accordance with the Bankruptcy Code and pursuant to an order of the
Bankruptcy Court. The Company expects to file a plan of reorganization for
itself and other filing subsidiaries to be submitted to the Bankruptcy Court for
confirmation after submission to any vote and approval required by affected
parties. As of May 9, 2003, the plan for reorganization has yet to be submitted.
NOTE 3 - INVESTMENTS, ACQUISITIONS AND TECHNOLOGY DEVELOPMENT
Investments reported on the Consolidated Balance Sheet of the Company include
the following:
DECEMBER 31, DECEMBER 31,
2002 2001
------------------------------------
Investment in SynGen Technology and associated assets
(See Note 3(a) below) $ 303,312 $ 3,500,000
Investment in CPJ Technology and associated assets
(See Note 3(b) below) 454,968 1,432,500
Investment in private U.S. corporation - 1,000,000
------------------------------------
$ 758,280 $ 5,932,500
====================================
(a) SynGen: During 2000, the Company completed the acquisition of the shares of
the company holding the Syngen technology and associated assets for
consideration including the issue and release from escrow of 14,943,510 common
shares of Synergy to Laxarco Holdings Limited ("Laxarco"). The shares were
ascribed a value of $2.5448 per share on the basis of the five-day average
closing price of the Company's shares. The aggregate value of the shares issued,
$38,028,244, was allocated to the Syngen technology rights and associated
assets.
As at December 31, 2001 the Company determined that the cash flows expected to
be received through the construction of a plant, licensing or other arrangements
had not been achieved. Accordingly, the net book value of the Syngen technology
and other associated assets had been written down to $3,500,000 representing the
value of the associated pilot plants, fuel cells, catalysts and associated
patents.
As at December 31, 2002 the Company has revised the value of these assets based
on the sale price for the Company's assets received during the first quarter of
2003. Accordingly, the net book value of the Syngen technology and other
associated assets has been written down to its fair value of $303,312.
(b) CPJ: During the fiscal year ended December 31, 2000, the Company and
technology development partner Texas T Petroleum Ltd. renegotiated the royalty
agreement with the Inventor of the CPJ technology, Dr. Pierre Jorgensen which
resulted in the execution of an Amended and Restated Technology Transfer
Agreement on September 25, 2000 by the Company, Carbon, Jorgensen and Capital
Reserve Corporation, an affiliate of Texas T Petroleum Ltd. Under the terms of
this amended and restated agreement Dr. Jorgensen agreed to reduce his royalty
to five percent of the net proceeds realized from the licensing and/or
sublicensing of the CPJ technology and was issued 500,000 shares of common stock
of the
F-9
Company and 500,000 shares of common stock of Capital Reserve Corporation. The
500,000 shares of the Company issued to Dr. Jorgensen in respect of the royalty
reduction were recorded on the balance sheet as an investment in the amount of
$1,062,500 which amount represents a fair market value for the issued shares of
$2.125 per share, which was the closing price on the Company's common shares
traded on the Over the Counter Bulletin Board on the date of the agreement.
During the year ended December 31, 2001, the Company recorded a liability of
$370,000 to the inventor, Dr. Jorgensen, based on the amended royalty agreement
signed in fiscal 2000, whereby, Dr. Jorgensen was to receive proceeds of not
less than $250,000 from the sale of 100,000 shares of Synergy Technologies
Corporation by February 28, 2001 and an additional $250,000 from the sale of a
further 100,000 shares by February 28, 2002. As of December 31, 2001, Dr.
Jorgensen had not sold any of the shares and therefore, based on the closing
stock price of $0.65 per share, the difference in net proceeds is $370,000. As
of December 31, 2002, an amount of $1,025,000 was recorded as a liability based
on the above less a cash payment of $75,000 made during the year.
As at December 31, 2002 the Company has revised the value of these assets based
on the sale price for the Company's assets received during the first quarter of
2003. Accordingly, the net book value of the CPJ technology and other associated
assets has been written down to its fair value of $454,968.
(c) Joint Ventures: During 2002, Synergy entered into an agreement with Texas T
Petroleum Ltd. ("Texas T"), Capital Reserve Corporation, Carbon Resources
Limited ("Carbon") and Pierre Jorgensen to purchase from Texas T the 50% of
Carbon not owned by Synergy. The details of this agreement are as follows:
1) Texas T transferred to Synergy all of it's right, title and interest in
and to the Carbon stock.
2) Synergy issued to Texas T 400,000 shares common stock of Synergy.
3) Synergy also issued in the name of Texas T 1,900,000 common shares of
Synergy and delivered the stock to an escrow agent to be held pursuant
to an escrow agreement.
Under the terms of an agreement entered into in September 2000, the Company and
Texas T had each issued shares to Mr. Jorgenson together with a commitment to
make up the difference between the proceeds received on the sale of shares and
$1 million. As at December 31, 2001 the Company had accrued $370,000 for its
share of the shortfall between the value of the shares and $500,000. In
connection with the acquisition of the additional shares of Carbon in 2002 the
Company assumed the remaining 50% of this obligation to Mr. Jorgenson, agreed to
an increase in the minimum value to $1,100,000, and issued an additional
1,491,334 shares to Mr. Jorgenson in respect of this obligation. The Company is
required to issue sufficient shares to Mr. Jorgensen to achieve resale proceeds
of $1,100,000. Mr. Jorgenson is required to return to the Company any shares in
excess of those required to achieve the committed resale proceeds of $1,100,000.
A value of $1,073,760 was attributed to this transaction based on the five-day
average share price of $0.72 per share. An additional 500,000 shares were issued
in order to replace the 500,000 Capital Reserve Corporation shares that were
returned to Texas T pursuant to the purchase agreement. A value of $360,000 was
attributed to this transaction based on a five-day average share price of $0.72
per share.
The acquisition of Texas T's 50% interest in Carbon closed on March 5, 2002. Up
to that date the investment in Carbon was recorded using the equity method. From
the closing date forward Carbon has been recorded using the consolidation
method. The investment in private US Corporation at December 31, 2001 was
eliminated upon the closing of this agreement.
F-10
Investment in Carbon as at December 31, 2002:
2002 2001
---- -------------------------------------------------------------- -- ------------------------ -- -----------------------
o Shares of Carbon
o 2,500 shares valued at Cyprus 1.00 per share $ - 5,029
o Advances to Carbon - 712,937
o 50% of net liabilities of Carbon - (815,456)
------------------------ -- -----------------------
$ - $ (97,490)
---- -------------------------------------------------------------- -- ------------------------ -- -----------------------
On February 7, 2001, Synergy and Drake Oil Limited entered into a joint venture
in Nigeria, Africa to carry on in Nigeria and other parts of Africa all such
acts and things incidental to the adaptability and application of the
proprietary process known as GlidArc, which converts associated natural gas into
synthetic gas, together with Fischer-Tropsch technology used for the conversion
of synthetic gas into liquid hydrocarbons, and also to utilize any other
gas-to-liquids conversion technology.
As at December 31, 2002 the Company has written down the value of its interest
in this joint venture to its fair value based on the sale price of the Company's
assets received during the first quarter of 2003. Accordingly, the investment in
Drake Synergy Petroleum and other associated assets has been written off.
Investment in Drake Synergy Petroleum as at December 31, 2002:
2002 2001
---- -------------------------------------------------------------- -- ------------------------ -- -----------------------
o Shares of Drake Synergy Petroleum Ltd.
2,500,000 shares valued at Naira 1.00 per $ 22,104 22,104
share
o Advances to Drake Synergy Petroleum 121,813 110,294
50% of net liabilities of Drake Synergy Petroleum (93,497) (51,630)
o Write-off of assets (50,420) -
------------------------ -- -----------------------
$ - $ 80,768
---- -------------------------------------------------------------- -- ------------------------ -- -----------------------
NOTE 4 - RELATED PARTY TRANSACTIONS
(a) During the year ended December 31, 2002, the Company was
charged $3,850 (2001: $138,674) for consulting services and
reimbursement of actual expenses by Huntingtown Associates LLC
(a Connecticut corporation) of which Mr. Baumert is the sole
proprietor. Mr. Baumert is a member of the Company's Board of
Directors. Huntingtown Associates charges consulting services
provided by Mr. Baumert at a rate of $1,500 per day plus
expenses. At December 31, 2002 an amount of $14,481 (2001:
$25,631) remained due and payable to Huntingtown Associates.
(b) During the year ended December 31, 2002, various officers and
directors subscribed to the private placement offering as
described in Note 8(c) in the amount of $268,500 for 358,000
shares at $0.75 per share.
NOTE 5 - CURRENT LIABILITIES
(a) At December 31, 2002, accounts payable includes $30,583 owed
to certain members of management who deferred payment of
salaries from November 13 to November 30, 2002.
(b) At December 31, 2002, notes payable of $257,960 resulted from
loans made to the Company subsequent to filing under Chapter
11. These funds bear interest at 12% per annum and have a
one-year maturity.
(c) Accrued interest on notes in the amount of $2,361 has been
accrued to December 31, 2002.
F-11
NOTE 6 - LIABILITIES SUBJECT TO COMPROMISE
(a) Accounts payable includes $385,702 owed to certain members of
management who deferred payment of salaries, benefits and
expenses from June 1 to November 12, 2002. Account payable
also includes a liability of $1,025,000 to Mr. Jorgensen based
on the agreement described in Note 3(c). Of the $1,100,000
originally owed to Mr. Jorgensen, $75,000 was paid in cash
during 2002.
(b) Convertible debentures of $1,259,100 includes $1,005,000 of
interest-bearing convertible promissory notes, $210,000 of
convertible promissory notes whose holders have requested
repayment under the terms of the notes and $44,100 of interest
on the notes whose holders have requested repayment.
(c) Loans payable includes a loan from a Company employee for
$80,000. This loan bears interest at the rate of Prime plus
one percent per annum and is due by December 9, 2003. Also
included is a loan for $50,000 from James Nielson who is also
a member of the Board of Directors. This loan has no stated
terms of repayment.
(d) Accrued interest consists of accrued but unpaid interest on
the convertible promissory notes through November 12, 2002.
In the Chapter 11 proceeding, substantially all unsecured and
undersecured liabilities of the Debtors as of the Petition Date are
subject to compromise or other treatment under a plan of reorganization
to be confirmed by the Bankruptcy Court after submission to any
required vote and approval by affected parties. Generally, all actions
to enforce or otherwise effect repayment of pre-Petition Date
liabilities as well as all pending litigation against the Debtors are
stayed while the Debtors continue their business operations as
debtors-in-possession. As a result of the Chapter 11 filings, no
principal or interest payments have been made on pre-Petition Date debt
obligations.
NOTE 7 - INCOME TAXES
The Company did not have a current or deferred provision for income taxes for
the years ended December 31, 2002 and 2001. Deferred tax assets comprise the
following at December 31, 2002 and 2001.
2002 2001
-----------------------------------------
Operating loss carry forwards $ 5,208,274 $ 3,279,671
Less: Valuation allowance (5,208,274) (3,279,671)
-----------------------------------------
Net Deferred Tax Asset $ - $ -
=========================================
The following is a reconciliation of the amount of benefit that would result
from applying the federal statutory rate to pretax loss with the provision for
income taxes for the years ended December 31:
2002 2001
----------------------------------------
Tax benefit at statutory rate (34%) $ (4,512,023) $ (13,060,247)
Non-deductible expenses 33,180 69,641
State taxes, net of federal benefit (434,711) (1,260,853)
Offshore rate differential 2,984,951 13,070,309
Deferred tax asset valuation change 1,928,603 1,181,150
----------------------------------------
Total Income Tax Benefit $ - $ -
========================================
NOTE 8 - COMMON STOCK
(a) On January 11, 2002 an agreement between the Company and
Richard and Anita Knight and Tedd and Mary Duncan was reached
to settle a dispute related to a transaction that occurred in
1999. The Company agreed to issue a total of 395,865 shares of
Synergy common stock. Of
F-12
the total shares issuable, 63,650 shares were issued from
treasury and the remaining shares were contributed from
founding shareholders based on the original agreement with
founding shareholders. In addition to this, a cash payment of
$11,451 was made for legal fees. A value of $43,200 has been
recorded in the Consolidated Statement of Operations based on
the average trading value of the stock from the date of
issuance.
(b) On January 2, 2002 an agreement was made between the Company
and Mr. John Gradek, a former CEO of the Company, regarding a
claim filed with the American Arbitration Association relating
to his termination of employment. As a result, Mr. Gradek
received cash consideration in the amount of $100,000 as well
as 150,000 shares of common stock of Synergy issued in
increments of 15,000 shares each on the first of each month
effective February 1, 2002 until November, 2002. A value of
$208,000 has been recorded under Accounts Payable on the
Consolidated Balance Sheet representing the fair value of the
stock at December 31, 2001 of $0.72 per share for $108,000
plus cash consideration of $100,000.
During 2002, founding shareholders transferred 60,000 shares
to Mr. Gradek in partial settlement of the above-mentioned
agreement and the Company issued the remaining 90,000 shares
from treasury. The shares were recorded as an expense in the
financial statements during 2001 and had been carried as a
liability during 2002.
(c) During 2002, cash proceeds of $883,050 were received for the
purchase of 1,177,400 units at $ 0.75 per unit pursuant to an
offering commenced during the first quarter of 2002. Each unit
consists of a share of common stock and one-half warrant to
purchase an additional share for $0.72, exercisable at any
time three years from the time of subscription. An additional
47,211 units were purchased by the conversion of outstanding
invoices totaling $35,408.
(d) During 2002, 1,939,759 shares were issued to certain firms for
services provided to the corporation. The shares are recorded
in the Consolidated Statement of Operations under General and
Administrative category at the five-day average trading value
of the stock on the date of execution of the agreements. A
value of $308,693 is recorded in the statements relating to
these transactions.
(e) During 2002, 251,495 shares were issued to Stone Canyon
Resources Limited for settlement of advances made during 2001.
An additional 166,221 shares were issued for settlement of
payments made related to the operations of the GTL Bantry
facility during 2001. The aggregate amount of $267,076 was
offset from the balance owing of $135,223 and the remaining
amount was written off as expense, for accounting purposes
only, due to the probability of recovering the receivable.
(f) During 2002, 50,000 shares were re-issued related to the
cancellation of founder's shares in September, 2000. These
shares were valued at the average trading value of the stock
from the date of issuance. A value of $38,500 is recorded in
the Statement of Operations related to this transaction at
$0.77 per share.
(g) On March 5, 2002, Synergy completed the transaction with Texas
T, Carbon, Capital Reserve Corporation and Pierre Jorgensen
for the purchase of the additional 50% of Carbon from Texas T.
The agreement required the issuance of 400,000 shares of
Synergy directly to Texas T and an additional 1,900,000 shares
held in trust in the name of Texas T pursuant to an escrow
agreement. A value of $1,656,000 was attributed to the
transaction based on a five-day average share price of $0.72
per share.
(h) Pursuant to the March 2002 agreement mentioned in 3(c) above,
an additional 1,491,334 shares were issued to Pierre
Jorgensen. This agreement calls for a cash payment of
$1,000,000 to be paid to Mr. Jorgensen as per the original
agreement dated September 25, 2000, plus an additional
$100,000 as recognition of the late payment of the
above-mentioned amount. The Company is required to issue
sufficient shares to Mr. Jorgensen to achieve resale proceeds
of $1,100,000. Mr. Jorgenson is required to return to the
Company any shares in excess of those required to achieve the
committed resale proceeds of $1,100,000. A value of $1,073,760
was attributed to this transaction based on a five-day average
share price of $0.72 per share. An additional 500,000 shares
were issued in order to replace the 500,000 Capital Reserve
Corporation shares that were returned to Texas T pursuant to
the purchase
F-13
agreement. A value of $360,000 was attributed to this
transaction based on a five-day average share price of $0.72
per share.
(i) During 2002, 171,433 shares were issued to a third party for
settlement of loans provided to the Company. A value of
$122,022 is recorded related to this transaction at $0.71 per
share. Included in this value is an expense of $7,637 related
to the premium paid on the principal amount of the converted
debt.
(j) During 2002, 247,500 shares were issued to a certain
investment firm for investor relation services. A value of
$101,475 was attributed to the shares based on a five-day
average share price of $0.41 per share.
(k) On June 20, 2002, the Company entered into a common stock
purchase agreement with Fusion Capital Fund II, LLC pursuant
to which Fusion Capital agreed to purchase on each trading day
during the term of the agreement, $10,000 of our common stock
or an aggregate of $6.0 million. We issued 424,041 shares
representing a commitment fee paid upon execution of the stock
purchase agreement. A value of $173,857 was attributed to the
shares based on a five-day average share price of $0.41 per
share and is recorded as a General and administrative expense
in the Consolidated Statement of Operations.
(l) During 2002, holders of convertible promissory notes in the
amount of $1,252,350, inclusive of accrued interest, agreed to
exchange their notes into securities of the Company. For every
$3 of principal and interest accrued thereon the Company
issued a new unit comprised of the following:
o 5 shares of our common stock.
o 3 warrants, each entitling the holder to purchase 1
share of common stock at an exercise price of $0.90
per share for a period of 5 years after the date of
issue.
In exchange for the notes mentioned above, the Company issued
2,087,250 shares and 1,252,350 warrants. The total amount of
principal and interest has been removed from the liabilities
and recorded in the equity section of the Balance Sheet. In
addition, a value of $888,548 has been recorded as an expense
in the Consolidated Statement of Operations relating to the
fair value of additional securities issued to induce
conversion of debt.
(m) During 2002, 250,000 warrants, which were recorded as an
expense in 2001, were issued to a certain investment firm for
financial advisory services. These warrants have an exercise
price of $1.00 and are exercisable for two years from the
original agreement date of April 16, 2001.
(n) During 2002, 50,000 warrants were issued to a consulting firm
for assistance in developing a business plan. These warrants
have an exercise price of $0.02 per share for a period of 5
years after the date of issue. An expense of $34,000 is
recorded in the General and administrative section based on
the Black-Scholes option-pricing model with the following
assumptions: dividend yield of 0.0%, expected volatility of
18.16%, interest rate of 4.25% and expected life of one year.
(o) During 2002, 100,000 warrants were issued to a consulting firm
for serving as the placement agent for the private offering of
Synergy securities. These warrants have an exercise price of
$0.90 per share for a period of 3 years after the date of
issue. An expense of $5,000 is recorded in the General and
administrative section based on the Black-Scholes
option-pricing model with the following assumptions: dividend
yield of 0.0%, expected volatility of 18.16%, interest rate of
4.25% and expected life of one year.
(p) On June 2, 2002, we entered into a consulting agreement with
William R. Engles, Jr. to serve as our Chief Financial
Officer. The agreement provides that Mr. Engles would furnish
consulting services to Synergy consistent with the duties and
responsibilities of a Chief Financial Officer. This agreement
extended through September 2, 2002. We agreed to pay to Mr.
Engles $1,000 per day for his services and to reimburse Mr.
Engles for all out-of-pocket expenses associated with the work
performed pursuant to this agreement. We also agreed to grant
to Mr. Engles options representing the right to purchase
100,000 shares of common stock at an exercise price of $0.72
per share. The options have a term of 10 years. We agreed to
register all shares issued to Mr. Engles pursuant to this
agreement and all shares underlying
F-14
his option for public resale under the Securities Act of 1933.
An expense of $1,500 is recorded in the General and
administrative section based on the Black-Scholes
option-pricing model with the following assumptions: dividend
yield of 0.0%, expected volatility of 18.16%, interest rate of
4.25% and expected life of one year.
On September 2, 2002 the Company extended the consulting
agreement with Mr. Engles to serve an additional 17 weeks as
our Acting Chief Financial Officer. The agreement included the
grant of 130,000 options to purchase shares of common stock of
the Company at a strike price of $0.72. All other terms and
conditions are as described in the original agreement.
On December 9, 2002 the Company extended the consulting
agreement with Mr. Engles to serve as our Acting Chief
Financial Officer until May 2, 2003. The agreement includes
the grant of 138,000 options to purchase shares of common
stock of the Company at a strike price of $0.72, vesting
pro-rata over the term of the agreement. All other terms and
conditions shall be as described in the original agreement.
(q) During 2002, cash proceeds of $500,000 were received for the
purchase of 1,246,884 shares at a price of $0.401 per share.
These shares were issued pursuant to a private placement with
one of the company's institutional shareholders.
(r) During 2002, cash proceeds of $315,000 were received for
the purchase of 1,575,000 shares at a price of $0.20 per
share. These shares were issued pursuant to a private
placement with one of the company's institutional shareholders
as well as a third party individual.
F-15
The following table summarizes the warrants issued, exercised and expired during
the two year period ended December 31, 2002:
Balance at December 31, 2000 914,666
Warrants issued during 2001
At $1.30 per share 2,315,382
At $3.50 per share 1,264,000
Warrants expired unexercised during the period, $1.00 per share (130,000)
------------
Warrants to purchase common shares, balance at December 31, 2001 4,364,048
Warrants issued during 2002
At $0.02 per share (Note 8(n)) 50,000
At $0.72 per share (Note 8(c)) 612,306
At $0.90 per share (Note 8(c) and (o)) 1,352,350
At $1.00 per share (Note 8(d)) 470,000
At $3.00 per share (Note 8(d)) 15,000
Warrants expired unexercised during the period, $1.00 per share (700,000)
------------
Warrants to purchase common shares, balance at December 31, 2002 6,163,704
============
STOCK OPTIONS
The Company has five stock option plans as follows:
o 1998 Directors and Employees Stock Option Plan (Plan "A");
o 1999 Directors and Employees Stock Option Plan (Plan "B");
o 1999 Directors and Advisory Board Members Stock Option Plan (Plan "C");
o 2000 Employees Stock Option and Stock Award Plan (Plan "D");
o 2001 Employees Stock Option and Stock Award Plan (Plan "E"); and,
o 2002 Stock Option Plan (Plan "F")
The following table will summarize options and awards granted, and options and
awards available for grant for the year ended December 31, 2002:
PLAN A PLAN B PLAN C PLAN D PLAN E PLAN F
1998 1999 1999 2000 2001 2002
------------ ------------- ------------ ------------- ------------- ------------
Total shares authorized under plan: 900,000 1,000,000 1,100,000 1,500,000 1,000,000 10,000,000
Options/awards granted:
Employees 250,000 335,000 - 131,573 4,508,000
Directors 400,000 425,000 400,000 36,315 200,000
Non-employees, consultants 250,000 200,000 - 1,316,175 368,000
Advisory Board members - - 500,000 - -
------------ ------------- ------------ ------------- ------------- ------------
Total options granted 900,000 960,000 900,000 1,484,063 455,754 5,076,000
Expired or cancelled (a) - 40,000 200,000 15,937 544,246 -
------------ ------------- ------------ ------------- ------------- ------------
Available for grant at December 31, 2002 - - - - - 4,924,000
============ ============= ============ ============= ============= ============
F-16
(a) Employees:
(i) 5,000 employee stock options granted to various employees,
under the 1999 Directors and Employees Option Plan, expired or
were cancelled.
(ii) 4,500,000 stock options were issued to Mr. Barry J. Coffey for
his services as CEO of the Company. This grant was issued
under the 2002 Stock Option Plan and has a strike price of
$0.72.
(b) Non-employees and consultants:
(i) During 2002, 368,000 options were granted to the Company's new
Acting Chief Financial Officer for consulting services. All of
these grants were issued under the 2002 Stock Option Plan and
have a strike price of $0.72.
(ii) On May 2, 2002, the Company offered Mr. Graham H. Batcheler a
position on the Company's Board of Directors along with a
grant of 200,000 options at an exercise price of $1.00 per
share which vest over a three-year period and are exercisable
for ten years.
(iii) The options granted to non-employees and advisory board
members are accounted for by the fair value method. The
aggregate fair value of options granted and shares issued
during the year ended December 31, 2002 was $1,500 and was
charged to earnings in the current year. The fair value of the
options was determined by using the Black-Scholes
option-pricing model with the following assumptions: dividend
yield of 0.0%, weighted average expected volatility of 18.16%,
weighted average risk-free interest rate of 4.25% and expected
life of one year.
The following table summarizes the status of the Company's stock options
(excluding stock awards) and changes thereto during the year ended December 31,
2002:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------------------------- --- -----------------------
Balance at December 31, 2000 2,795,000 $ 1.05
Granted during 2001 325,000 1.31
Canceled during 2001 (335,000) 1.10
Exercised during 2001 (5,500) 1.00
------------------------- --- -----------------------
Outstanding at end of year, December 31, 2001 2,779,500 $ 1.08
------------------------- --- -----------------------
Granted during 2002 5,076,000 0.73
Cancelled during 2002 (5,000) 1.56
Exercised during 2002 - -
------------------------- --- -----------------------
Outstanding at end of year, December 31, 2002 7,850,500 $ 0.85
========================= === =======================
Options exercisable at end of year 4,548,881 0.93
Weighted remaining contractual life 5.49 years
Range of exercise prices $ 0.50 - 1.56
The Company measures compensation to employees under stock-based options and
plans using the intrinsic value method prescribed in Accounting Principles Board
Opinion 25, Accounting for Stock Issued to
F-17
Employees, and related interpretations. Compensation for options to outside
directors is measured using the fair value method set forth under Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation.
Had compensation cost for the Company's options granted to employees been
determined based on the fair value at the grant dates consistent with the
alternative method set forth under Statement of Financial Accounting Standards
No. 123, net loss and loss per share would have increased to the pro forma
amounts indicated below:
FOR THE FISCAL YEARS ENDED CUMULATIVE FROM (DATE OF
DECEMBER 31, INCEPTION) THROUGH
2002 2001 DECEMBER 31, 2002
------------------------------------------------------------------------
NET LOSS:
AS REPORTED $ 13,270,658 $ 38,412,491 $ 60,713,606
PRO FORMA $ 13,721,058 $ 38,616,741 $ 61,946,876
BASIC AND DILUTED LOSS PER SHARE:
AS REPORTED $ 0.31 $ 1.19 $ 2.87
PRO FORMA $ 0.32 $ 1.19 $ 2.93
========================================================================
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Operating Lease - Under the Chapter 11 proceedings, the Company rejected the
lease related to its facility in Calgary, Alberta, Canada and is therefore
released from any obligations for future payments.
F-18