U.S. Securities and Exchange Commission
Washington, D.C. 20549
Post-Effective
Amendment No. 1
to
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
SYCONET.COM, INC.
(Name of small business issuer in its charter)
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<S> <C> <C>
Delaware 7812 54-1838089
(State or jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
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9208B Venture Court, Manassas, Virginia 20111, (703) 366-2946
(Address and telephone number of principal executive offices)
9208B Venture Court, Manassas, Virginia 20111, (703) 366-2946
(Address of principal place of business or intended principal place of business)
William Spears, President, SyCoNet.Com, Inc.,
9208B Venture Court, Manassas, Virginia 20111, (703) 366-2946
(Name, address and telephone number of agent for service)
Copy to: Richard G. Klein, Esq., Hofheimer Gartlir & Gross, LLP, 530 Fifth
Avenue, New York, NY 10036 (212) 818-9000
Approximate date of proposed sale to the public: On, and from time to time
after, the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 please check the following box. /X/ _____________
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. /_/ _____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. /_/ ___________
<PAGE>
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. /_/ ___________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. /_/
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Calculation of registration fee
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Title of each Proposed maximum Proposed
class of securities Amount to be offering price maximum aggregate Amount of
to be registered registered per share offering price registration fee
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Common Stock 4,800,588(1) $.72(2) $3,456,423.36 $ 912.50
Common Stock 181,562(3) $1.00 $ 181,562.00 $ 47.93
Common Stock 902,482(4) $.69687 $ 628,912.63 $ 166.03
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Total Registration Fee $1,126.46
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(1) Consists of shares of our common stock being registered for resale which
includes:
o shares issued in our November 1999 private placement offering,
o shares issued in our January 2000 private placement offering,
o shares issued pursuant to a funding agreement dated December 16, 1999,
as amended August 4, 2000, and upon the exercise of related common
stock purchase warrants,
o shares issued to certain individuals as payment for services rendered,
and
o shares issued pursuant to a sponsorship agreement dated March 3, 2000.
(2) Estimated solely for the purposes of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, based on the
average of the bid and the asked prices of our common stock on May 30, 2000
as reported on the OTC Bulletin Board.
(3) Consists of shares issuable upon exercise of common stock purchase
warrants.
(4) Consists of shares issuable pursuant to said funding agreement.
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended or until the registration statement shall
become effective on such date as the Commission, acting pursuant to Section
8(a), may determine.
This registration statement relates to 5,884,632 shares of our common stock
owned by the persons named in this prospectus under the caption "selling
security holders" and includes shares of our common stock underlying common
stock purchase warrants and shares issuable pursuant to a funding agreement. The
shares were or will be acquired by the selling security holders in various
transactions, all of which were or will be exempt from registration under the
Securities Act of 1933. The shares registered by this prospectus may be offered
from time to time directly to purchasers in privately negotiated transactions
or they may offer the shares for sale in the over-the-counter market through or
to securities brokers or dealers that may receive compensation in the form of
discounts, concessions or commissions from the selling security holders. The
shares will be offered at prices prevailing at the time of sale or negotiated
prices.
We will receive no part of the proceeds of any sales of our common stock as
a result of this offering. We will bear all the costs and expenses associated
with the preparation and filing of this registration statement.
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<PAGE>
PROSPECTUS
for the sale of
5,884,632 shares of common stock
of
SYCONET.COM, INC.
by selling security holders
The shares in this offering are being sold by the selling security holders
named in the "Selling security holders" section on page 40.
Investing in SyCoNet's common stock involves a high degree of risk. See
"Risk factors" on page 7.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is June 27, 2000, as amended August 25, 2000.
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TABLE OF CONTENTS
Page
----
Summary ................................................................... 5
Forward looking statements ................................................ 6
Risk factors .............................................................. 7
Use of proceeds ........................................................... 14
Dividend policy ........................................................... 14
Management's discussion and analysis of
financial condition and results of operations ....................... 15
Business .................................................................. 24
Properties and equipment .................................................. 29
Legal proceedings ......................................................... 29
Management ................................................................ 29
Certain relationships and related transactions ............................ 38
Market for common equity and related stockholder matters .................. 38
Principal shareholders .................................................... 39
Selling security holders .................................................. 40
Description of securities ................................................. 43
Plan of distribution ...................................................... 45
Legal matters ............................................................. 45
Experts ................................................................... 46
Limited liability of directors ............................................ 46
Financial statements ...................................................... F-1
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<PAGE>
Summary
Unless the context otherwise requires, all references in this registration
statement to "us," "we," "our" or "SyCoNet" mean SyCoNet.Com, Inc., and its
subsidiary Animedepot.com, Inc.
The company
SyCoNet.Com, Inc. was formed in Delaware in June 1997 under the name SyCo
Comics and Distribution Inc. and is the successor to a limited partnership named
SyCo Comics and Distribution formed under the laws of the Commonwealth of
Virginia on February 1, 1997, by Sy Robert Picon and William Spears, our
co-founders and principal shareholders. On February 17, 1999, SyCo Comics and
Distribution Inc. changed its name to SyCoNet.Com, Inc.
Our principal place of business is 9208B Venture Court, Manassas, Virginia
20111, and our telephone number is (703) 366-2946.
Our common stock is listed on NASDAQ's Over-the-Counter Bulletin Board
under the symbol "SYCD".
As more fully described below, SyCoNet.Com, Inc. is engaged principally in
the distribution and direct marketing of Anime - animated cartoons produced in
Japan and shipped to the United States where English subtitles or dialogue are
inserted prior to distribution on videocassettes -- and Anime-related toys and
other merchandise. We sell directly to individuals over the internet and at
Anime conventions. We are also a wholesale distributor to small retail outlets
such as Anime specialty stores, comic book specialty stores, video stores, toy
stores and electronic stores. We have almost completed the development of our
web portal and product-based V-ISP service and our business-to-business
e-commerce services.
We currently have a severe cash shortage. We have not received the
additional funding we had expected to receive by now from various potential
investors who executed letters of intent with us, in particular, the $500,000 we
expected to receive from Alliance Equities, Inc. ("Alliance") on July 5, 2000.
As a result, we were unable to meet our June 26, 2000 payroll, to pay many of
our bills as they came due and to continue our operations at previous levels.
Between June 26, 2000 and August 14, 2000, most of our employees quit, accepted
other employment, or were formally laid off, and as a result, we have suspended
all work on our highly customized e-commerce and V-ISP hardware and software
platform, which is now installed and functional except for the credit card
(billing) portion which is also very close to completion. Assuming we receive
all of the additional funding we require, as to which no assurance can be given,
we could produce a complete working model that could be shown to potential
customers within two weeks.
Pursuant to the amendment to our December 16, 1999 funding agreement,
Alliance's funding obligation was reduced from $2,000,000 to $1,000,000, of
which we received $500,000 in December, 1999. Alliance also gave us $125,000 on
August 4, 2000, and we in turn issued to it 1,250,000 shares which Alliance may
resell pursuant to this prospectus. Alliance also is obligated to give us
additional payments of $125,000, $125,000, $100,000 and $25,000 in bi-weekly
installments commencing on August 29, 2000, and contingent upon the removal of
the "E" from our stock symbol, which removal we expect in the next few days, and
the effectiveness of this post-effective amendment to our Form SB-2. Each loan
will be repaid by us issuing to Alliance that number of shares of our common
stock valued at 50% of the closing bid price of our stock on the day immediately
preceding the date of our receipt of that loan payment. We intend to apply
Alliance's monies to our payroll and other current obligations, including
various vendors, legal and accounting fees, purchasing Anime inventory, and
working capital. The receipt of these funds is also contingent upon our
remaining current with our SEC reporting obligations. If we are not current, all
further loan payments will be suspended and Alliance shall not be required to
give us any further loan payments until after we become current, and thereafter
Alliance shall recommence the loan payments as of the date of suspension. Since
we filed our second quarter 10-Q on August 25, 2000 Alliance's funding
obligations were suspended from August 14, 2000 to August 25, 2000 and our
receipt of the next $125,000 was delayed from August 18, 2000 and is now due on
August 29, 2000, provided this post-effective amendment to our Form SB-2 has
been declared effective by the SEC and the "E" has been removed from our stock
symbol. This delay is not expected to have a material adverse effect on us,
however, these funds will not be sufficient for further development of our
e-commerce platform.
Although we continue to pursue private placements with potential investors,
if we are unable to obtain the additional capital we require we will have to
rely only on the limited cash flow from the sale of our Anime products to fund
our operating expenses, which might not be sufficient to enable us to remain in
business. In addition, due to the recent loss of key personnel, our substantial
operating losses since inception, and the fact that we have used substantial
amounts of working capital in our operations, our June 30, 2000 financial
statements (unaudited) contain an explanatory paragraph, footnote 1, to the
effect that our ability to continue as a going concern is dependent upon our
ability to obtain substantial additional working capital and to replace certain
key personnel, as to neither of which any assurance can be given.
The offering
Common stock offered by
the selling shareholders.......... 5,884,632 shares
We will not receive any of the proceeds of the shares sold by the selling
security holders.
Summary financial data
Our independent public accountants, Yount, Hyde & Barbour, P.C., have
audited our 1997, 1998 and 1999 financial statements. You should read the
information below along with all other
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financial information and analysis in this prospectus. Please don't assume that
the results below indicate results that we'll achieve in the future.
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Period from
January 31, 1997 Fiscal Year Ended Six Months Ended
(date of inception) to December 31, June 30, 2000
December 31, 1997 1998 1999 (Unaudited)
------------------ ---- ---- ----------------
Statement of Operations Data:
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Net revenue $ 174,880 $ 625,955 $ 1,153,536 $ 477,832
Cost of sales 246,222 512,024 851,478 416,055
Gross profit (loss) (71,342) 113,931 302,058 61,777
Total expenses 415,971 771,395 5,599,437 257,808
Operating income (loss) (487,313) (657,464) (5,297,379) (196,031)
Net operating income (loss) (489,735) (661,029) (5,297,973) (210,500)
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December 31, June 30, 2000
1998 1999 (Unaudited)
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Balance Sheet Data:
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Working capital $(125,596) $ (680) $ (876,551)
Total assets 255,917 1,151,412 810,424
Total liabilities 372,143 1,074,902 1,474,451
Stockholders equity (deficit) (116,226) 76,510 (664,027)
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FORWARD LOOKING STATEMENTS
This prospectus contains forward-looking statements. We intend to identify
forward-looking statements in this prospectus using words such as "believes,"
"intends," "expects," "may," "will," "should," "plan," "projected,"
"contemplates," "anticipates," or similar statements. These statements are based
on our beliefs as well as assumptions we made using information currently
available to us. Because these statements reflect our current views concerning
future events, these statements involve risks, uncertainties, and assumptions.
Actual future results may differ significantly from the results discussed in the
forward-looking statements. Some, but not all, of the factors that may cause
these differences include those discussed in the Risk factors section beginning
on page seven of this prospectus. You should not place undue reliance on these
forward-looking statements, which apply only as of the date of this prospectus.
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<PAGE>
Risk factors
Please carefully consider the following risk factors as well as the other
information set forth in this prospectus, including our financial statements
and the related notes, before deciding to invest in the common stock. Should
any of the following risks occur, in addition to risks and uncertainties not
presently known to us, the price of our stock, our financial condition, and
the results of our operations could be materially impacted, and you could
lose all or part of your investment.
We have a limited operating history which constrains our forecasting ability.
Since our inception in 1997 we have not attained profitability, and as of
June 30, 2000, we had an accumulated deficit (unaudited) of $6.6 million. We
have relied primarily on external financing, which during the past three years
consisted primarily of private placements of our common stock to fund our
operations and capital requirements, including our product line inventory
growth, and most recently, the development of our portal and product-based V-ISP
service and our business-to-business e-commerce services. If we receive the
additional financing we need to be able to continue such development, there can
be no assurance that we will succeed. In addition, there can be no assurance as
to when, if ever, we will be able to achieve profitability or that
profitability, if achieved, can be sustained.
In view of our limited operating history and our recent initiatives in
developing internet-related businesses, we are unable to identify an established
trend on which to base planned operating expenses. Consequently, we may not be
able to contain our costs in a timely manner to offset any unfavorable sales
trend nor improve our infrastructure to absorb unexpected development costs or
sales growth. As a result, during any quarter we may incur a net loss or cash
burn that may be greater than expected.
We currently have a severe cash shortage and, as a result, we have had to
suspend our e-commerce and V-ISP programs.
We have not received the additional funding we had expected to receive by
now from various potential investors who executed letters of intent with us, in
particular, the $500,000 we expected to receive from Alliance Equities, Inc.
("Alliance") on July 5, 2000. As a result, we were unable to meet our June 26,
2000 payroll, to pay many of our bills as they came due and to continue our
operations at previous levels. Between June 26, 2000 and August 14, 2000, most
of our employees quit, accepted other employment, or were formally laid off, and
as a result, we have suspended all work on our highly customized e-commerce and
V-ISP hardware and software platform, which is now installed and functional
except for the credit card (billing) portion which is also very close to
completion. Assuming we receive all of the additional funding we require, as to
which no assurance can be given, we could produce a complete working model that
could be shown to potential customers within two weeks.
Pursuant to the amendment to our December 16, 1999 funding agreement,
Alliance's funding obligation was reduced from $2,000,000 to $1,000,000, of
which we received $500,000 in December, 1999. Alliance also gave us $125,000 on
August 4, 2000, and we in turn issued to it 1,250,000 shares which Alliance may
resell pursuant to this prospectus. Alliance also is obligated to give us
additional payments of $125,000, $125,000, $100,000 and $25,000 in bi-weekly
installments commencing on August 29, 2000, and contingent upon the removal of
the "E" from our stock symbol, which removal we expect in the next few days, and
the effectiveness of this post-effective amendment to our Form SB-2. Each loan
will be repaid by us issuing to Alliance that number of shares of our common
stock valued at 50% of the closing bid price of our stock on the day immediately
preceding the date of our receipt of that loan payment. We intend to apply
Alliance's monies to our payroll and other current obligations, including
various vendors, legal and accounting fees, purchasing Anime inventory, and
working capital. The receipt of these funds is also contingent upon our
remaining current with our SEC reporting obligations. If we are not current, all
further loan payments will be suspended and Alliance shall not be required to
give us any further loan payments until after we become current, and thereafter
Alliance shall recommence the loan payments as of the date of suspension. Since
we filed our second quarter 10-Q on August 25, 2000 Alliance's funding
obligations were suspended from August 14, 2000 to August 25, 2000 and our
receipt of the next $125,000 was delayed from August 18, 2000 and is now due on
August 29, 2000, provided this post-effective amendment to our Form SB-2 has
been declared effective by the SEC and the "E" has been removed from our stock
symbol. This delay is not expected to have a material adverse effect on us,
however, these funds will not be sufficient for further development of our
e-commerce platform.
Although we continue to pursue private placements with potential investors,
if we are unable to obtain the additional capital we require we will have to
rely only on the limited cash flow from the sale of our Anime products to fund
our operating expenses, which might not be sufficient to enable us to remain in
business. In addition, due to the recent loss of key personnel, our substantial
operating losses since inception, and the fact that we have used substantial
amounts of working capital in our operations, our June 30, 2000 financial
statements (unaudited) contain an explanatory paragraph, footnote 4, to the
effect that our ability to continue as a going concern is dependent upon our
ability to obtain substantial additional working capital and to replace certain
key personnel, as to neither of which any assurance can be given.
We may not be able to raise the additional capital we currently require.
We can't assure you that the additional financing we require will be
available to us on favorable terms, or at all. Available debt financing will
require payment of interest at a significantly higher rate than prime. Funds
raised through equity issuances will result in shareholder dilution. Our recent
financing efforts were unsuccessful and there can be no assurance that our
current efforts will have favorable results.
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<PAGE>
We expect operating losses and negative cash flows to continue.
Assuming we receive the additional capital we require to continue our
business plan, as to which we can give no assurances, in order to expand our
market share and enhance branding we expect to incur significant marketing and
advertising expenses. Certain of these expenses include web-based targeted
advertising as well as partner/affiliate marketing programs to generate new
customers. We expect to hire additional personnel to enhance our sales force and
technology team which we will utilize to increase market penetration via
web-based and traditional selling methods. In connection with the recruitment
and retention of additional personnel, we expect to utilize stock options, which
may result in increased stock compensation costs. Recent increases in capital
investments will result in depreciation or lease amortization costs over these
capital assets' economic lives. Additionally, future acquisitions, if
undertaken, may result in the recognition of goodwill, the amortization of which
would not impact cash flows but could adversely impact results of operations.
Despite our competitive technology and marketing initiatives, we may not be able
to generate adequate sales to offset incurred or planned expenditures in the
foreseeable future.
We are dependent on third parties to supply our Anime products, and as a result
of our current cash shortage, our vendors will only send us products on a
C.O.D. basis.
Our success and viability as an Anime retailer and distributor primarily
depends on our ability to obtain a reliable source of products. We obtain our
Anime cassettes on a non-exclusive basis from multiple sources, and therefore,
although no assurance can be given, we believe that we have a secure source of
product. However, due to our recent cash shortage, many vendors refused to
supply us with videos until we satisfied our unpaid balances with them. We
recently worked out an arrangement with our largest supplier whereby they will
continue to provide us with videos provided we make modest monthly payments to
them to cover our accrued liabilities. For our other vendors we made payments to
them or returned many of the videos. Most of our vendors now will only send us
videos on a C.O.D. ("cash on delivery") basis. This has resulted in a
significant reduction in our videocassette inventory, which did affect our
ability to fulfill orders. It also means we are unable to receive advance
product, i.e., new videos which have not yet been offered to the public, since
these orders are placed in anticipation of future sales. Our inability to obtain
access to a substantial number of Anime products in a timely manner could have a
material adverse effect on our sales and results of operations. Moreover, we
could lose sales and marketing credibility, which could adversely affect our
reputation, financial condition and prospects in the Anime business.
We compete with well-capitalized companies in our existing as well as planned
business areas.
The distribution of Anime products is dominated primarily by five large
integrated distributors who supply the mass market retailers, and four
relatively small Anime distributors that, like us, serve the Anime niche market
of small specialty retailers. All of our competitors have vastly larger
marketing, financial, personnel and other resources than we do. We compete on
the basis of price, service and product knowledge, and there can be no assurance
that we will be able to compete effectively and expand our business. In the
e-commerce and ISP arenas, our competitors have access to capital markets or
strategic partners that can fund their growth and acquisition, thereby
facilitating the execution of their business plans.
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<PAGE>
If we lose the services of one or more of our key personnel, or fail to attract
or retain other management talent in the future, our business operations and our
stock price may suffer.
Our success is dependent upon the continued services and performance of a
number of our key personnel, including William Spears, our president and chief
executive officer, and Kathryn Jacobson, our secretary, treasurer and chief
financial officer. We do not have any employment agreements, and every member of
our senior management team is an employee at will and is therefore free to
terminate his employment with us at any time. For example, Mrs. Jacobson has
recently resigned, effective September 15, 2000, for family reasons. Although
she will be able to assist Mr. Spears part-time for the near future, our
inability to find a chief financial officer to replace her could have a material
adverse effect on our business operations. In addition, we do not maintain any
key man insurance on the lives of anyone in senior management. There can be no
assurance that we would be able to employ qualified person(s) on acceptable
terms to replace them. Our success also hinges largely on our ability to rebuild
our management infrastructure and our continued ability to attract and retain
qualified marketing and sales personnel. We will compete for personnel with
other traditional distributors, and our inability to successfully hire or retain
qualified personnel, especially in senior management, could have a material
adverse effect on our business, financial condition or results of operations.
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<PAGE>
Our growth is partly dependent upon our ability to develop our website and
employ the most recent e-commerce technology.
Commencing in late 1999, we have expended considerable resources in
enhancing our web site. Significant effort has been expended towards the
development of web content and graphics, as well as web maintenance, to include
timely product pricing and product availability information. Our inability to
update our website, facilitate on-line shopping, and cater to changing tastes,
trends and preferences could result in lost customers and sales. In order to
remain competitive and improve our internet sell-through rates, we must continue
to upgrade the functionality and features of our online stores. We can't assure
you that we'll be able to report or sustain sales growth to recover our capital
investment. Our current financial condition does not allow us to continue
further technology development and thus, we can't assure you of any sales growth
at this time, absent any new financing.
We cannot predict what regulations may be imposed on us as a provider of online
products and services.
We're subject to regulations applicable to businesses generally and laws or
regulations directly applicable to access to online commerce. Although there are
currently few laws and regulations directly applicable to the internet and
commercial online services, it is possible that a number of laws and regulations
may be adopted with respect to the internet or commercial online services
covering issues such as user privacy, pricing, content, copyrights,
distribution, antitrust and characteristics and quality of products and
services. Furthermore, the growth and development of the market for online
commerce may prompt calls for more stringent consumer protection laws that may
impose additional burdens on those companies conducting business online. The
adoption of any additional laws or regulations may decrease the growth of the
internet or commercial online services, which could, in turn, decrease the
demand for our products and services and increase our cost of doing business, or
otherwise have a material adverse effect on our business, financial condition
and results of operations.
Moreover, the applicability to the internet and commercial online services
of existing laws in various jurisdictions governing issues such as property
ownership, sales and other taxes, libel and personal privacy is uncertain and
may take years to resolve. For example, tax authorities in a number of states
are currently reviewing the appropriate tax treatment of companies engaged in
online commerce, and new state tax regulations may subject us to additional
state sales and income taxes. Any such new legislation or regulations, the
application of laws and regulations from jurisdictions whose laws do not
currently apply to our business, or the application of existing laws and
regulations to the internet and commercial online services,
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<PAGE>
could have a material adverse effect on our business, financial condition and
results of operations.
We may face potential liability for defamation, negligence, copyright, patent or
trademark infringement and other claims based on the nature and content of the
materials that appear on our websites.
Claims involving defamation, negligence, copyright, patent or trademark
infringement, as well as claims based on the nature and content of the materials
that appear on websites, have been brought, and sometimes successfully pressed,
against online services. Although we carry general liability as well as
directors and officers insurance, any imposition of liability could have a
material adverse effect on our reputation and our business, financial condition
and results of operations.
We're dependent on the increased usage and stability of the internet and the
web.
The usage of the web for products and services such as those offered by us
will depend in significant part on continued rapid growth in the number of
households and commercial, educational and government institutions with access
to the web, in the level of usage by individuals and in the number and quality
of products and services designed for use on the web. Because usage of the web
as a source for information, products and services is a relatively recent
phenomenon, it is difficult to predict whether the number of users drawn to the
web will continue to increase and whether any significant market for usage of
the web for such purposes will continue to develop and expand. There can be no
assurance that internet usage patterns will not decline as the novelty of the
medium recedes or that the quality of products and services offered online will
improve sufficiently to continue to support user interest. Failure of the web to
stimulate user interest and be accessible to a broad audience at moderate costs
would jeopardize the markets for our websites.
Moreover, issues regarding the stability of the internet's infrastructure
remain unresolved. The rapid rise in the number of internet users and increased
transmission of audio, video, graphical and other multimedia content over the
web has placed increasing strains on the internet's communications and
transmission infrastructures. Continuation of such trends could lead to
significant deterioration in transmission speeds and reliability of the web and
could reduce the usage of the web by businesses and individuals. In addition, to
the extent that the web continues to experience significant growth in the number
of users and level of use without corresponding increases and improvements in
the internet infrastructure, there can be no assurance that the internet will be
able to support the demands placed upon it by such continued growth. Any failure
of the internet to support an increasing number of users due to inadequate
infrastructure or otherwise would seriously limit the development of the web as
a viable source of e-commerce and e-commerce services, which could materially
and adversely affect the acceptance of our products and services, which would,
consequently, materially and adversely affect our business, financial condition
and results of operations.
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<PAGE>
Our websites are subject to capacity constraints and system disruptions.
The satisfactory performance, reliability and availability of our websites
and our network infrastructure are critical to attracting web users and
maintaining relationships with business customers and consumers. System
interruptions that result in the unavailability of our websites or slower
response times for consumers would reduce the attractiveness of our websites to
customers. Additionally, any substantial increase in traffic on our websites
would require us to expand and adapt our network infrastructure. Our inability
to add additional software and hardware to accommodate increased traffic on our
websites may cause unanticipated system disruptions and result in slower
response times. There can be no assurance that we would be able to expand our
network infrastructure on a timely basis to meet increased demand. Any increase
in system interruptions or slower response times resulting from the above
factors could have a material adverse effect on our business, financial
condition and results of operations.
Our websites are subject to security risks.
Programmers or hackers may attempt to penetrate our network security. If
successful, such actions could have a material adverse effect on our business,
financial condition and results of operations. A party who is able to penetrate
our network security could misappropriate proprietary information or cause
interruptions in our websites. We may be required to expend significant capital
and resources to protect against the threat of such security breaches or to
alleviate problems caused by such breaches. Concerns over the security of
internet transactions and the privacy of users may also inhibit the growth of
the internet generally, particularly as a means of conducting commercial
transactions. Security breaches or the inadvertent transmission of computer
viruses could expose us to a risk of loss or litigation and possible liability.
There can be no assurance that contractual provisions attempting to limit our
liability in these areas will be successful or enforceable, or that other
parties will accept such contractual provisions as part of our agreements, any
of which could have a material adverse effect on our business, results of
operations and financial condition.
There are risks associated with the use of our domain names.
We currently hold six web domain names, "animedistribution.com",
"animedistribution.net", "animedistribution.org", "sycodistribution.com",
"altvidwar.com," and "animedepot.com." The regulation of domain names in the
U.S. and in foreign countries is subject to change. Governing bodies may
establish additional top-level domains, appoint additional domain name
registrars or modify the requirements for holding domain names. As a result,
there can be no assurance that we will be able to acquire or maintain relevant
domain names in all countries in which we conduct business. Although we have
filed service mark applications for certain of these domain names, the
relationship between regulations governing domain names and laws protecting
trademarks and similar proprietary rights is unclear. Therefore, we may be
unable to prevent third parties from acquiring domain names that are similar to,
infringe upon or otherwise decrease the value of our proprietary rights. Any
such inability could have a material adverse effect on our business, financial
condition and results of operations.
-12-
<PAGE>
Investors' negative perceptions of dotcom companies could result in substantial
sales of our common stock, which could cause our stock price to fall and remain
low.
General market perceptions concerning comparative investment risk
associated with dotcom companies, as well as investors' reassessment of their
risk relative to investment in us, can influence their decision to hold or sell
shares of our stock. Additionally, shareholders who have passed their respective
restriction periods may sell their shares if there is some modest price
appreciation relative to the cost basis of their shares, which might have been
acquired at a discount. If enough stockholders at any one time sell substantial
amounts of our common stock, the market price of our stock could fall, thereby
making it more difficult for us to obtain equity-based financing on favorable
terms. As of August 21, 2000, we had approximately 8.6 million restricted
shares, principally held by management, which commencing June 23, 2000, are
saleable in accordance with the terms and conditions of Rule 144 of the
Securities Act.
Under Rule 144, a person who has beneficially owned restricted securities
for at least one year would be entitled to sell within any three-month period
that number of shares which doesn't exceed the greater of (a) one percent of the
number of shares of common stock then outstanding or (b) the average weekly
trading volume of the common stock during the four calendar weeks preceding the
sale. Sales under Rule 144 are also governed by certain requirements with
respect to manner of sale, notice, and the availability of current public
information about us. Under Rule 144(k), a person who is not deemed to have been
our affiliate at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years, is
entitled to sell such shares without compliance with the manner of sale, public
information, volume limitation and notice provisions prescribed by Rule 144.
Sales by our stockholders of a substantial amount of our common stock could
adversely affect the market price of our common stock.
-13-
<PAGE>
We could issue substantial amounts of additional shares without shareholder
approval.
We have a substantial number of shares of common stock unissued and not
reserved for specific issuances which could be issued without any action or
approval by our shareholders, thus substantially diluting the percentage
ownership of SyCoNet held by purchasers of the securities and potentially
adversely affecting the market price of our common stock.
We haven't paid any dividends.
We've never paid any dividends on our common stock and we don't intend to
pay any in the foreseeable future.
Since our common stock is being quoted only on the Bulletin Board, the price of
our common stock could be very volatile.
Under the criteria of the National Association of Securities Dealers, Inc.,
which administers the NASDAQ system, our common stock does not now qualify for
inclusion in the NASDAQ system and is quoted only on the Bulletin Board. In
addition, the trading volume in our common stock is relatively low. Therefore,
the market for our stock may not be able to efficiently accommodate significant
trades on any given day. Consequently, sizable trades of our common stock may
cause volatility in the market price of our common stock to a greater extent
than in more actively traded securities. These broad fluctuations, in addition
to generally unfavorable stock market conditions, have adversely affected, and
may continue to affect, the market price of our common stock.
Use of proceeds
We will not receive any of the proceeds from the sale of shares of common
stock by the selling security holders.
Dividend policy
We currently intend to retain earnings for use in the operation and
expansion of our business and therefore don't anticipate paying any cash
dividends in the foreseeable future. Cash dividends, if any, that may be paid in
the future to holders of our common stock will be payable when, as, and if
declared by our board of directors, based upon our assessment of our financial
condition, our earnings, need for funds, capital requirements and other factors.
-14-
<PAGE>
Management's discussion and analysis of
financial condition and results of operations
Overview
The following is a discussion of certain factors affecting our results for
the quarters and six month periods ended June 30, 2000 and 1999 and the three
fiscal years ended December 31, 1997, 1998 and 1999, and our liquidity and
capital resources. This discussion and analysis should be read along with our
financial statements and their notes, which begin on page F-1 of this
prospectus, and the preceding risk factors. The SEC is currently reviewing the
financial classification of distribution and fulfillment costs as reported by
e-commerce companies. Concurrent with industry practice, we present these costs
on the financial statements as a component of selling, general and
administrative expenses. The SEC may later decide to require the classification
of certain distribution costs as cost of sales. If this occurs, we will
reclassify these costs pursuant to the new SEC requirements, and our gross
profit will be negatively impacted accordingly. However, such reclassification
will not have any impact on our sales, operating profit or loss, or net profit
or loss.
As a reminder, our fiscal year ends on December 31. The years mentioned
throughout are fiscal years.
Since inception, we have incurred losses, and as of June 30, 2000, we had
an accumulated deficit of $ 6.6 million.
We currently have a severe cash shortage. We have not received the
additional funding we had expected to receive by now from various potential
investors who executed letters of intent with us, in particular, the $500,000 we
expected to receive from Alliance Equities, Inc. ("Alliance") on July 5, 2000.
As a result, we were unable to meet our June 26, 2000 payroll, to pay many of
our bills as they came due and to continue our operations at previous levels.
Between June 26, 2000 and August 14, 2000, most of our employees quit, accepted
other employment, or were formally laid off, and as a result, we have suspended
all work on our highly customized e-commerce and V-ISP hardware and software
platform, which is now installed and functional except for the credit card
(billing) portion which is also very close to completion. Assuming we receive
all of the additional funding we require, as to which no assurance can be given,
we could produce a complete working model that could be shown to potential
customers within two weeks.
Pursuant to the amendment to our December 16, 1999 funding agreement,
Alliance's funding obligation was reduced from $2,000,000 to $1,000,000, of
which we received $500,000 in December, 1999. Alliance also gave us $125,000 on
August 4, 2000, and we in turn issued to it 1,250,000 shares which Alliance may
resell pursuant to this prospectus. Alliance also is obligated to give us
additional payments of $125,000, $125,000, $100,000 and $25,000 in bi-weekly
installments commencing on August 29, 2000, and contingent upon the removal of
the "E" from our stock symbol, which removal we expect in the next few days, and
the effectiveness of this post-effective amendment to our Form SB-2. Each loan
will be repaid by us issuing to Alliance that number of shares of our common
stock valued at 50% of the closing bid price of our stock on the day immediately
preceding the date of our receipt of that loan payment. We intend to apply
Alliance's monies to our payroll and other current obligations, including
various vendors, legal and accounting fees, purchasing Anime inventory, and
working capital. The receipt of these funds is also contingent upon our
remaining current with our SEC reporting obligations. If we are not current, all
further loan payments will be suspended and Alliance shall not be required to
give us any further loan payments until after we become current, and thereafter
Alliance shall recommence the loan payments as of the date of suspension. Since
we filed our second quarter 10-Q on August 25, 2000 Alliance's funding
obligations were suspended from August 14, 2000 to August 25, 2000 and our
receipt of the next $125,000 was delayed from August 18, 2000 and is now due on
August 29, 2000, provided this post-effective amendment to our Form SB-2 has
been declared effective by the SEC and the "E" has been removed from our stock
symbol. This delay is not expected to have a material adverse effect on us,
however, these funds will not be sufficient for further development of our
e-commerce platform.
Although we continue to pursue private placements with potential investors,
if we are unable to obtain the additional capital we require we will have to
rely only on the limited cash flow from the sale of our Anime products to fund
our operating expenses, which might not be sufficient to enable us to remain in
business. In addition, due to the recent loss of key personnel, our substantial
operating losses since inception, and the fact that we have used substantial
amounts of working capital in our operations, our June 30, 2000 financial
statements (unaudited) contain an explanatory paragraph, footnote 4, to the
effect that our ability to continue as a going concern is dependent upon our
ability to obtain substantial additional working capital and to replace certain
key personnel, as to neither of which any assurance can be given.
The following assumes we receive the additional financing we require to
continue our business plan, as to which we can give no assurances.
We expect losses to continue, pending our achievement of growth in
e-commerce based sales or the acquisition of targeted product licenses, which
would allow us to realize higher profit margins. We believe that internet sales
growth will be contingent on our ability to (a) establish name recognition among
fans of Anime and capitalize on up-selling and cross-selling opportunities; (b)
select and market product lines that will gain popularity among Anime fans and
will have cross-over potential to mainstream animation fans; (c) provide our
customers good value, in terms of competitive pricing and order fulfillment; (d)
identify and capitalize on advertising media and search engine tools that will
allow us to best reach our target customers; and (e) acquire and successfully
market product licenses. In January, 2000, we entered into an alliance with USA
Network Interactive, which will enable us to launch an integrated advertising
and branding campaign for our Anime product line through an e-commerce area
jointly developed by USA Networks' Interactive science fiction web site,
Scifi.com, and animedepot.com, our premier Anime website. In addition to
directly targeting Anime fans, the partnership provides a venue for us to
cross-sell to science fiction enthusiasts, build brand awareness, and drive
traffic to our web site, thereby potentially increasing sales. Furthermore, the
agreement also calls for the joint development of web content, print media
advertising, promotional events, and direct targeting through millions of banner
impressions. Our agreement with USA Networks is on hold, pending its review of
our proposed re-negotiated payment terms. A separate advertising agreement with
World Wrestling Federation ("WWF") has expired and payment terms are currently
being negotiated. We can't assure you that advertising agreements with either
USA or WWF will ever occur.
-15-
<PAGE>
As of June 30, 2000, we lost most of our officers and senior management,
including our former CEO, Sy Picon. Our new CEO, William Spears, is charged with
the responsibility of re-establishing our operating structure and re-focusing on
our core business. Because of our recent downsizing, we expect the sales growth
to flatten, or even decline temporarily through the end of the third quarter.
Any growth in sales during the fourth quarter and beyond will be contingent
on promotional discounts, convention marketing, recapture of lost customers,
customer loyalty demonstrated through repeat sales, current trends, which
influence the popularity of certain of our product lines, inventory levels and/
or product availability, and seasonal demand. Although we continue to experience
sales growth relative to the same periods in prior years, our quarterly sales
during a given year reflect seasonality, with the lowest and highest volumes
reported during the first quarter and fourth quarter, respectively. Other
factors that may impact sales in the future include unforeseen technological
problems associated with web traffic and server availability, government
regulations on web transactions, and the general state of the economy.
Operating margins will be, and have been, significantly impacted by (a) our
ability to maintain and satisfy our existing repeat customers, as well as
attract new customers with the same level of loyalty; (b) competitive pricing
pressures; (c) the effectiveness of advertising and marketing expenditures and
management's ability to measure and evaluate results; (d) the effectiveness of
our web design and content in attracting and leading consumers to consummate
on-line sales; (e) shipping efficiencies; (f) proportion of distributor sales in
relation to consumer sales; (g) general economies of scale; (h) overall
operating
Results of Operations
Comparison of the quarters ended June 30, 2000 and 1999
Net sales, consisting of the selling price of VHS and DVD products, trading
cards, toys and apparel, net of discounts and customer returns, were $241,000
for the quarter ended June 30, 2000, a 16% increase over net sales of $ 207,400
during the comparable quarter in 1999. Net sales for the six months ended June
30, 2000 were $ 477,800, up 20% compared to $ 398,000 for the same period last
year, indicating a more robust sales growth in the first quarter. The second
quarter sales performance reflects steady growth in our Internet and convention
sales, despite a continued decline in our wholesale sales. Towards the end of
the second quarter and continuing on to the third quarter, we were not able to
fulfill increased customer demand for new product and back orders, resulting in
foregone sales and lost customers. Because of cash constraints, which were not
alleviated until late August, 2000, we were unable to buy the inventory needed
to meet our customer demand. We have since renegotiated terms with our key
suppliers and arranged for product returns in exchange for new product. However,
we have lost sales momentum during the third quarter and believe that we
probably will not realize any sales improvement, if any, until the fourth
quarter, provided that, along with the inventory restocking, we are able to
successfully implement a limited but focused marketing program, direct sales
campaign and promotion, and streamline our order fulfillment and inventory
management process in order to recapture old customers and attract new ones.
The following table sets forth certain financial data for us as a
percentage of net sales for the indicated periods:
<TABLE>
<CAPTION>
Six Months Ended June 30, Three Months Ended June 30,
-------------------------- ----------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales 100.00% 100.00% 100.00% 100.00%
Cost of Goods Sold 87.07% 73.60% 113.02% 72.59%
------ ----- ------ -----
Gross Profit (Loss) 12.93% 26.40% (13.02%) 27.41%
Operating Expenses:
Selling General and Administrative Expenses 601.64% 106.67% 637.67% 106.22%
Restructuring Charges and Other Unusual Items 88.52% -- 175.49% --
Reversal of Stock Compensation Expense (636.21%) -- (1261.27%) --
------ ----- ------- -----
Operating Income (Loss) (41.02%) (80.27%) 435.09% (78.81%)
Non-operating Expense-Net 3.03% 0.35% 2.91% 0.34%
------ ----- ------ -----
Net Income (Loss) (44.05%) (80.62%) 432.18% (79.15%)
</TABLE>
Gross profit is defined as sales less cost of sales, which consists of the
cost of product sold to the customers and inbound shipping costs. Our gross
margin during the second quarter was affected by the increasing proportion of
consumer sales relative to retail sales, the former generally yielding higher
margins than sales from our distribution business. Our gross profit was $61,777
for the quarter ended June 30, 2000, a 42% decline over the gross profit during
1999. We expect gross margins to fluctuate from period to period based on any
shift in the customer base (wholesaler/retailer versus consumer), mix of
products sold, or change in shipping and handling costs. Specifically, during
the second quarter, our gross margins were negatively impacted by significant
inventory shrinkage and disposal, as a result of an inordinate amount of
inventory in transit, amidst the loss and turnover of personnel, resulting in
the erosion of our gross margin.
Selling, general and administrative (SG&A) expenses include the costs of
personnel involved in product distribution, customer service, financial
administrative and executive functions, in addition to travel, advertising,
-16-
<PAGE>
investor relations, legal and professional services, stock compensation, and
other operating costs. SG&A were $1.5 million and $220,300 for the quarters
ended June 30, 2000 and 1999, respectively, and $2.8 million and $424,500 for
the six months ended June 30, 2000 and 1999.
Factors accounting for the increased SG&A costs during 2000 include: hiring
of key personnel in management, information technology, customer service, and
warehousing/distribution to establish our infrastructure and facilitate order
fulfillment; travel related to financing efforts and trade conventions; grass
roots marketing and on-line advertising; and professional services required in
connection with regulatory compliance. We also charged to SG&A the development
costs (labor and non-labor) associated with our e-commerce platform, which in
the aggregate amounted to $400,000.
Operating expenses during the second quarter for 2000 were reduced by the
reversal of previously recognized stock compensation costs as a result of the
cancellation of 13,599,750 options previously granted to our two co-founders and
other employees that were awarded last year and cancelled in 2000.
Subsequent stock option awards to Spears and certain of the remaining
employees were noncompensatory, owing to the exercise price being set at the
price of the stock as of the date of award and cancelled in 2000.
Towards the end of the second quarter, several financing deals that were in
negotiation were not successfully completed (see discussion under "Liquidity and
Capital Resources"). Without any immediate cash infusion available to us, we
undertook significant cost-cutting measures. Our year-to-date payroll, which
totaled over $ 1 million through June 30, 2000, has been cut by 70%, as a result
of an across-the-board reduction in force, as well as attrition. We deferred
further development on our e-commerce and V-ISP platform, on which approximately
$ 300,000 of internal labor costs had been spent through the second quarter. We
cancelled most of our advertising contracts and terminated all consulting
agreements, except for retainer agreements necessary to maintain our reporting
status. We consolidated our operations into our warehouse, and negotiated early
termination of other facility leases, with no significant penalties, enabling us
to realize immediate cost savings in rent, telecommunications and utility costs.
Since we have limited financial resources, we are able to focus only on our
core business at this time. We are re-assessing our technology project and
believe that even if we were to resume development, it would be scaled back
considerably, and we would not be able to use certain of the enhanced system
features. As a result of the restructuring and downsizing of our operations, as
well as our technology plans, we have decided to write off certain prepayments
and assets acquired from vendors that we may not recover or from which we may
never benefit in the future. Examples of these restructuring and unusual items
include forfeitures due to early lease terminations and payments made towards
partially utilized software, equipment and licenses that have since been
returned or cancelled. In the aggregate, these restructuring and unusual items
amounted to $423,000.
We believe that the remaining funding from Alliance may enable us to meet
our working capital requirements through year-end but will not be sufficient to
meet our payment obligations. We are actively renegotiating terms of our
payables with our major suppliers and vendors. We are pursuing third party
financing or a strategic merger transaction but cannot assure you that we will
be successful.
Although we have significantly reduced our cash burn arising from expenses
in excess of sales, we believe that our existing lean cost infrastructure and
staffing is well below the optimum level, and will not enable us to improve
sales. By the fourth quarter, subject to our receipt of the remaining funding
from Alliance, we expect our operating costs to increase, as we launch a limited
advertising campaign to facilitate the ramp-up of sales and to rebuild our staff
and operating infrastructure, particularly in the areas of sales and order
fulfillment. Despite a tighter rein on our operations, we cannot assure you that
we will achieve a level of sales commensurate with our efforts. Nor do we claim
that we will have the financial capability, through external financing or cash
flows from operations, despite our efforts, to continue or to sustain
operations.
-17-
<PAGE>
Comparison of the years ended December 31, 1999 and 1998
Net sales, consisting of the selling price of VHS and DVD products, trading
cards, toys and apparel, net of discounts and customer returns, were $1.2
million for the twelve months ended December 31, 1999, an increase of 84% from
net sales of $626,000 during 1998. We attribute the growth in 1999 to the
effectiveness of on-line advertising in generating on-line customer sales, the
popularity of certain video titles in the product line, an increased customer
base, and continued repeat sales, in addition to seasonal peak holiday shopping.
Increased sales also arose from our presence at tradeshows and conventions.
The following table sets forth certain financial data for us as a
percentage of net sales for the indicated periods:
-18-
<PAGE>
(Audited)
Years ended December 31
1999 1998
------- -------
Net Sales 100.00% 100.00%
Cost of Goods Sold 73.81 81.80
Gross Margin 26.19 18.20
Selling, General and Administrative
Expenses 485.41 123.23
------- -------
Operating Loss (459.22) (105.03)
Other Expense (.05) (0.57)
------- -------
Net Loss (459.27) (105.60)
======= =======
Gross profit is defined as sales less cost of sales, which consists of the
cost of product sold to the customers and related shipping costs. The growth in
our gross margin arose from increased on-line consumer sales, which generally
yield higher margins than sales to retailers. Our gross profit was $302,000 for
the year ended December 31, 1999, a 165% increase over the gross profit during
1998. We expect gross margins to fluctuate from period to period based on any
shift in the customer base (wholesaler/retailer versus consumer), mix of
products sold, or change in shipping and handling costs.
Selling, general and administrative (SG&A) expenses include the costs of
personnel involved in product distribution, customer service, financial
administrative and executive functions, in addition to travel, advertising,
investor relations, legal and professional services, stock compensation, and
other operating costs.
Factors accounting for the increased costs during 1999 included greater
requirements for additional in-house order fulfillment personnel to service
on-line customers; casual labor support and travel related to trade conventions;
grass roots marketing and on-line advertising; and development of web content,
primarily on our animedepot.com web site. We believe that these costs will
continue to increase as a result of our commitment to build and enhance our
infrastructure. SG&A expenses for 1999 also included a one-time charge for fees
payable to a consultant in stock for investor relations, research and press
coverage services, which upon contract termination had a fair value of $292,188
and a $3.8 million charge for stock compensation costs associated with
non-qualified stock option grants during the fourth quarter which vested as of
year-end.
-19-
<PAGE>
Comparison of the fiscal years ended December 31, 1998 and 1997
No meaningful comparison can be made between 1998 and 1997 sales because
during 1998 we changed our product line to consist primarily of Anime videos and
DVDs. In 1997, sales consisted primarily of comic books. Our decision to change
our product line resulted in a 258% increase in net sales, from $175,000 in 1997
to $626,000 in 1998.
The negative profit margin for 1997 reflects a provision for the write-off
of the remaining inventory, consisting primarily of comic books, at the end of
that year. As a result, the 1997 fiscal year's negative gross margin of
$(71,000) is not comparable with the gross margin of $114,000 for the full 1998
fiscal year, which did not reflect a similar write-off.
Selling, general and administrative expenses were $771,000 for the fiscal
year ended December 31, 1998 compared to $416,000 for the fiscal year ended
December 31, 1997. We attribute the increase to additional personnel necessary
to service and warehouse greater inventory as a result of the new product line.
Deferred Compensation
We recorded total deferred stock compensation of $258,200 during the first
six months of 2000, in connection with the amortization of compensatory stock
options granted late last year. We had no recognizable deferred compensation
costs during the corresponding quarter of 1999. Deferred stock compensation is
amortized to expense over the vesting periods of the applicable options. The
amortization cost represents the vested portion of the difference between the
exercise price of stock option grants and the deemed fair value of our common
stock at the time of such grants.
Income Taxes
We made no provision for any current or deferred U.S. federal, state income
tax or benefit for any of the periods presented. We cannot provide any assurance
as to when profits will materialize, if at all. Therefore, we cannot predict
when we can use the net operating loss carry-forwards, which begin to expire in
2017, and which may be subject to certain limitations imposed under Section 382
of the Internal Revenue Code of 1986. Due to the uncertainty concerning our
ability to realize the related tax benefit, we have provided a full valuation
allowance on the deferred tax asset, which consists primarily of net operating
loss carry-forwards.
-20-
<PAGE>
Year 2000
As of the end of 1999, we substantially replaced disparate financial,
purchasing, and customer order databases with a fully integrated Y2K-compliant
enterprise-wide platform of front office, back office, financial and e-business
solutions. We have made an assessment of our internal systems, software,
computer technology and other services internally developed by third party
vendors and have not detected any malfunctions or any system failures at or
beyond the year 2000. These systems include the software to run our financial
accounting system, search engines, sales order fulfillment, inventory control,
transaction-processing, as well as monitoring and back-up capabilities. Failure
of these systems to be Year 2000 compliant could adversely impact the accounting
operations, order fulfillment and other operations of our web site. Based upon
our assessment to date, we believe that our systems are year 2000 compliant,
although there can be no unconditional assurance in this regard. In connection
with our assessment, we have partially relied on assurances from our vendors,
including financial institutions to process credit card payments for Internet
sales, telecommunications and Internet Service Providers. Currently, we do not
believe that it will be necessary to implement a remediation plan for our
third-party software, third-party vendors and computer technology and services
with respect to year 2000 compliance. The costs of the year 2000 readiness
internal review incurred prior to and during the year 2000 were not material and
were charged to operations in the respective periods that they occurred.
Although we do not expect to experience, nor have we experienced, business
disruptions associated with Year 2000-related problems, we cannot assure you
that all potential Year 2000 defects have been uncovered or corrected in our
internal systems, including third party software and related products.
Letter of Intent for an Acquisition
We entered into a Letter of Intent to acquire Zocchi Distributing Inc., a
distributor of games and science fiction/fantasy products. The letter of intent
expressly provides that a condition to the Zocchi acquisition is Syconet causing
the sole Zocchi shareholder to be relieved its personal guarantee of Zocchi's
bank debt. Given our current financial condition, we think it unlikely that such
condition can be satisfied absent our receipt of substantial additional
financing or improvement in our results of operations. There has not been any
progress with the subject transaction.
-21-
<PAGE>
Liquidity and capital resources
We currently have a severe cash shortage. We have not received the
additional funding we had expected to receive by now from various potential
investors who executed letters of intent with us, in particular, the $500,000 we
expected to receive from Alliance Equities, Inc. ("Alliance") on July 5, 2000.
As a result, we were unable to meet our June 26, 2000 payroll, to pay many of
our bills as they came due and to continue our operations at previous levels.
Between June 26, 2000 and August 14, 2000, most of our employees quit, accepted
other employment, or were formally laid off, and as a result, we have suspended
all work on our highly customized e-commerce and V-ISP hardware and software
platform, which is now installed and functional except for the credit card
(billing) portion which is also very close to completion. Assuming we receive
all of the additional funding we require, as to which no assurance can be given,
we could produce a complete working model that could be shown to potential
customers within two weeks.
Pursuant to the amendment to our December 16, 1999 funding agreement,
Alliance's funding obligation was reduced from $2,000,000 to $1,000,000, of
which we received $500,000 in December, 1999. Alliance also gave us $125,000 on
August 4, 2000, and we in turn issued to it 1,250,000 shares which Alliance may
resell pursuant to this prospectus. Alliance also is obligated to give us
additional payments of $125,000, $125,000, $100,000 and $25,000 in bi-weekly
installments commencing on August 29, 2000, and contingent upon the removal of
the "E" from our stock symbol, which removal we expect in the next few days, and
the effectiveness of this post-effective amendment to our Form SB-2. Each loan
will be repaid by us issuing to Alliance that number of shares of our common
stock valued at 50% of the closing bid price of our stock on the day immediately
preceding the date of our receipt of that loan payment. We intend to apply
Alliance's monies to our payroll and other current obligations, including
various vendors, legal and accounting fees, purchasing Anime inventory, and
working capital. The receipt of these funds is also contingent upon our
remaining current with our SEC reporting obligations. If we are not current, all
further loan payments will be suspended and Alliance shall not be required to
give us any further loan payments until after we become current, and thereafter
Alliance shall recommence the loan payments as of the date of suspension. Since
we filed our second quarter 10-Q on August 25, 2000 Alliance's funding
obligations were suspended from August 14, 2000 to August 25, 2000 and our
receipt of the next $125,000 was delayed from August 18, 2000 and is now due on
August 29, 2000, provided this post-effective amendment to our Form SB-2 has
been declared effective by the SEC and the "E" is removed from our stock symbol.
This delay is not expected to have a material adverse effect on us, however,
these funds will not be sufficient for further development of our e-commerce
platform.
Although we continue to pursue private placements with potential investors,
if we are unable to obtain the additional capital we require we will have to
rely only on the limited cash flow from the sale of our Anime products to fund
our operating expenses, which might not be sufficient to enable us to remain in
business. In addition, due to the recent loss of key personnel, our substantial
operating losses since inception, and the fact that we have used substantial
amounts of working capital in our operations, our June 30, 2000 financial
statements (unaudited) contain an explanatory paragraph, footnote 4, to the
effect that our ability to continue as a going concern is dependent upon our
ability to obtain substantial additional working capital and to replace certain
key personnel, as to neither of which any assurance can be given.
As of June 30, 2000, our cash position consisted of $ 56,400 in cash
compared to $ 587,600 in cash as of December 31, 1999.
We have funded our operations primarily through private equity financing
from accredited investors pursuant to Regulation D, which is a limited offer and
sale of securities without registration under the Securities Act of 1933. During
the first six months of 2000, net cash provided by financing included $1.8
million in private placement funds compared to $679,000 for the same period in
1999.
Net cash used in operations were $2.4 million during the first half of 2000
compared to $592,100 during the same period in 1999. The use of cash was due
primarily to a loss from operations which was $(210,500) and $(320,900)
for the subject periods in 2000 and 1999, respectively. The loss during 2000 on
a pro forma basis, before the effect of the cancellation of stock options, was
approximately $3.2 million. Additionally, our working capital was tied up in
inventory, which did not turn over as needed. As part of our restructuring, we
have negotiated the return of up to $ 200,000 of our inventory, that has
alleviated our debt load and provided us supplier credit that could be applied
towards the purchase of new product in demand by our customers.
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<PAGE>
Subsequent to June 30, 2000, we have made some progress in reducing and
controlling debt, through return of equipment or product; cancellation and/ or
suspension of advertising, subscription, software and license agreements;
termination of consulting and leasing agreements; and renegotiation of payment
terms. We are current with our payroll obligations, and may soon be able to
increase staff, in order to rebuild our infrastructure, contingent upon improved
sales and future financing.
During the first half of 2000, net cash used in investing activities
consisted primarily of purchases geared towards the enhancement of our
e-commerce platform. We deployed our technical staff to develop a fully
integrated end-to-end order fulfillment and inventory management system, which
is initially for internal use but can be packaged and customized for resale as a
business-to-business or business-to-consumer solution. Capital expenditures did
not include development costs, which were charged to operations, and consisted
only of equipment and software necessary to complete the platform. Towards this
end, we expended $380,000 through the second quarter but have recently halted
further capital expenditures because of financial constraints. During 1999,
there were no capital expenditures for the comparative period.
During the second quarter of 2000, we entered into various financing
letters of intent (LOI) and agreements to finance our core business and the
development of our e-commerce and ISP platform. The anticipated funding from
these LOIs never materialized and we no longer expect them to result in
additional financing to us.
Alliance Equities recently re-negotiated its funding commitment with us,
from $2 million to $1 million, of which we have already received $625,000
($500,000 in the first quarter and $125,000 in August, 2000), and the balance
to be advanced in bi-weekly installments, commencing four days after the filing
of our second quarter 10QSB and contingent upon the effectiveness of the
post-effective amendment to our SB2. The funding will be paid off upon our
delivery of stock equivalent to that number of shares valued at 50% of the
closing bid price of our stock on the day immediately preceding the date of our
receipt of that loan payment.
During the first quarter of 2000, we entered into a new lease for a larger
warehouse, which is currently on month-to-month terms. We also executed a
5-year, $1 million lease on a build-to-suit facility in Manassas, Virginia, with
an expected completion date in late 2000. Because of corporate downsizing, we
are unable to utilize this facility and have negotiated one lease cancellation,
subject to the execution of a promissory note in the amount of approximately
$17,000 and a second lease cancellation, subject to the issuance of redeemable
warrants to purchase 36,563 shares of our common stock at a price of $0.16 per
share until August 14, 2005. In late April, 2000, we relocated our corporate
headquarters to an interim location in Manassas, Virginia and have also recently
been released from that lease, in consideration for nominal options issuable to
the landlord and his named beneficiary.
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In anticipation of a growth in our staff, we entered into a 3-year capital
lease for furniture at our corporate headquarters. We have been released from
the lease, but forfeited a security deposit in the amount of $33,360 which was
used by the lessor to cover his loss from the resale of our furniture.
We have drastically reduced our cash burn as a result of our restructuring
and the deferment of our technology plans. However, we will need to raise
additional financing to enable us to rebuild our core business; ramp back up the
inventory to enable us to remain competitive and to attract and recapture new
and old customers alike; and to launch a controlled but focused
performance-based marketing program. Accordingly, we are seeking such capital
through debt or private placements, equity offerings or other sources. The sale
of equity or equity-related securities could result in additional dilution to
shareholders. We hope to be able to plan to issue shares to fund the costs of
future acquisition of, or a strategic partnership with, complementary businesses
which may be better capitalized than us, and accordingly, require the issuance
of equity or debt securities.
However, we cannot assure you that our financing requirements can be met by
current, available or potential facilities or that additional facilities will be
available on terms and conditions favorable to us, if at all.
Business
Overview
As more fully described below, SyCoNet is engaged principally in the
distribution and direct marketing of Anime -- animated cartoons produced in
Japan and shipped to the United States where English subtitles or dialogue are
inserted prior to distribution on videocassettes -- and Anime-related toys and
other merchandise. We sell directly to individuals over the internet and at
Anime conventions. We are also a wholesale distributor to small retail outlets
such as Anime specialty stores, comic book specialty stores, video stores, toy
stores and electronic stores. In addition, we were in the process of completing
our plan to offer e-commerce services to our strategic partners and to other
businesses based on the technology platform that we had hoped would be used to
service customers of our core business. However, the completion of this plan has
been adversely affected by our current severe cash shortage, as described below,
and no assurance can be given as to when, if ever, our plan for e-commerce
services will be completed.
Business development
Our original plan of operation was to distribute comic books and comic book
character-based trading cards and t-shirts to comic book specialty stores and
traditional outlets. The response from the comic book retailers to our efforts
was minimal because we couldn't offer them the comics published by certain
principal comic book publishers, all of which had entered into and were subject
to exclusive distribution agreements. Accordingly, we incurred substantial
losses in the first three quarters of 1997. In the fourth quarter of 1997, we
refocused our operations on the distribution of Anime. We are no longer involved
in comic-book distribution. Distribution of Anime currently accounts for
approximately 90% of our revenues, and Anime-related merchandise, including toys
and trading cards, accounts for approximately 10%. 85% of our catalog is devoted
to VCR tapes, 10% to DVD, and 5% to toys and trading cards. Our VHS products are
priced from 28% to 50% less than the manufacturer's suggested retail price and
our DVD products are priced 28% to 30% less than the manufacturer's suggested
retail price. Notwithstanding our rapid growth, we can't assure you that our
growth will be sustained or that we'll gain significant market share in the
future.
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In the latter half of 1999 we began to develop plans to create a full
service e-commerce and distribution platform to better serve our wholesale and
retail Anime customers. In completing these plans it became apparent that the
cost of building a platform with the flexibility and scalability to allow us to
service other businesses wouldn't be significantly greater than the cost of
building a platform for our own customers. The difference would be in ensuring
that the database design and equipment architecture would allow flexibility in
as many ways as possible. We determined that a real need existed for internet
companies to have a cost-effective and flexible alternative to the current set
of third party distribution outsourcing companies, many of which provided poor
service and little flexibility or attention to specific customer needs. As a
result we decided to build a technical team dedicated to creating a
business-to-business distribution and e-commerce platform that could be marketed
and sold to other companies. If successful, the effect would be to create a
source of ongoing revenue and profit in its own right. In addition, we expect
that the cost per sale for distribution of our own products would decrease
dramatically due to better overall utilization of infrastructure and back office
systems. Although we recently lost the majority of our technical team due to our
inability to meet payroll, the platform is sustantially complete. However, in
late June 2000, when we announced that we would not be able to meet our payroll
on time, we lost substantially all of our technical staff to an internet
company. Absent the technical staff and the funding required to finish the
platform, we currently are not able to complete a working model of the
e-commerce platform nor avail ourselves of our first potential beta customer. We
are in negotiation with a key subcontractor on the e-commerce project to
determine the feasibility and the resources required to complete the platform,
which, if launched at all, would be at a scaled back level.
Our platform's accounting system is fully operational to track real-time
inventory levels. Purchasing/ ordering/ shipping/ receiving transactions plus
customer information processing have been simplified and integrated into the
Great Plains system. This greatly increased the level of service we provide to
our customers. However, we lack the technical capability to maintain and
continue running this system efficiently. Thus, we are exploring the possibility
of outsourcing this process to a vendor that can host the application.
In addition to e-commerce and distribution services, our plan to develop a
virtual Internet Service Provider service-in-a-box that will be integrated into
the e-commerce platform has been put on hold.
Description of our Anime business
Anime
Anime differs from American animation in several important ways. Unlike
American animation, which is created mainly for children, Anime is targeted for
specific age groups ranging from young children to adults. Therefore, Anime has
more developed storylines and more lifelike characters, which grow emotionally
and socially throughout the story. The storylines and characters can be as
varied and detailed as in a feature-length movie or long-running television
series. In addition, the characters' actions and characteristics drive stories
more than they do with American animation. Characters learn how to obtain help
from their friends and overcome their own weaknesses. That internal growth is
the focus of the story, which makes the overall plot far more compelling,
believable and relevant to the audience.
Anime has a high degree of sensory appeal, due to the high-quality music
and graphics. Also, the graphic style of most Anime is focused more on the
visual context and use of backgrounds and less on the simulations of fluid body
movements and other action. This method provides more information about the
overall impression of the scene than with American cartoons, while the lower
priority assigned to life-like body movement enables Anime to be produced at a
far lower cost per frame.
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Unlike American animation, Anime appeals to both males and females. Anime
makes liberal use of romantic themes, and 60% of all Anime films and series have
female leads as either the hero or the love interest.
Product
More than 2,500 Anime titles are now available in the United States. We
distribute virtually the entire line of Anime videos, as well as ancillary
products such as toys and trading cards based on the Anime movies. Anime
producers haven't granted exclusive distribution agreements to any distributor,
although we can't assure you that this situation will continue. Our product line
includes Pokemon, Dragon Ball Z and Sailor Moon videos, as well as select Anime-
related toys and other merchandise. Approximately 85% of the videos we purchase
from suppliers are returnable. We obtain product on a non-exclusive basis from
15 Anime suppliers, including Central Park Media, Pioneer, A.D. Vision, Viz
Communications, Irwin Toys, ADV Films and MGM's Orion Pictures. Since we obtain
our Anime cassettes from multiple sources, we believe we have a secure source of
product, although we can't give any assurances. However, as a result of our cash
shortage, on June 26, 2000 our vice president of distribution services quit. In
addition, due to our recent cash shortage, we currently purchase videos from
most of our suppliers on a C.O.D. basis and we have worked out an arrangement
with our largest supplier whereby they will continue to provide us with videos
provided we make modest monthly payments to them to cover our accrued
liabilities. This means that we are unable to receive any advance product, i.e.
new, previously unreleased product lines, which we stock in anticipation of
future sales. The foregoing may impair our ability to fulfill orders. In
addition, if our cash shortage continues, it could jeopardize our ability to
conduct our business.
Marketing and distribution
Initially our products were offered only through our own catalogs to small
retail customers that focused almost exclusively on Anime products and to
individuals and retailers at trade shows and conventions. We intend to make the
internet our primary distribution channel to consumers since Anime buyers are
opting for this method of buying over traditional shopping malls and specialty
shops. We plan to continue providing wholesale services to retail stores that
are interested in the Anime product line. However, now we're focusing on direct
marketing to the individual consumer through the internet and we believe that
this medium will significantly reduce our marketing expenses. Currently, all of
our products can be ordered through our e-commerce websites, www.animedepot.com
and www.sycodistribution.com. The former is our e-commerce vehicle for consumers
who want to purchase online while the latter is for wholesale customers enabling
them to use a business-to-business password protected site.
We have modified our marketing program to focus on new customer acquisition
as well as recapture of former customers that might have been lost to the
competition as a result of product stock-outs during the period of financial
retrenchment. The new program will incorporate the following principal
components:
Direct Sales to Customers. We had put on hold plans to design several
separate web sites for the different audiences that enjoy various subgenera
of Anime and action oriented films (such as martial arts). Upon receipt of
the next tranch of financing from Alliance, we expect to rebuild our
customer service infrastructure and implement direct selling techniques,
including telemarketing for a limited period. We will continue to focus on
providing a full line of Anime product that appeals to the core Anime
customer - Anime fans who buy 24 tapes or more per year. This includes both
consumers who buy from us directly and retailers who operate retail Anime
shops. We will continue to target these customers via Anime conventions and
through the sponsorship of events where Anime fans are expected to appear.
Web Based Advertising. Upon receipt of the next tranch of financing from
Alliance, we expect to resume web advertising via virtual malls or
participation in performance marketing and similar affinity programs.
Unless we are able to negotiate more favorable terms, it is unlikely that
we will be able to continue our advertising agreements with USA Networks or
the World Wrestling Federation.
Title Sponsorship of Dragon*Con and Conventions in General. We have a
three-year agreement to be the title sponsor of Dragon*Con. Dragon*Con is
North America's largest Science Fiction and Popular Arts convention and one
of Atlanta's largest annual events. Due in part to limited resources,
including product availability, our sales at the Dragon*Con convention,
which occurred in the beginning of the third quarter of 2000, fell below
expectations. However, we expect to be able to restock our inventory in
time to perform at our usual levels at the remaining conventions for this
year.
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Generally, we rely on agreements with United Parcel Service to deliver
products from suppliers as well as to customers although we often ship smaller
orders via the U.S. Postal Service. Charges associated with delivery of products
to us are frequently borne by our suppliers. We intend to establish facilities
in various regions of the United States to allow for faster receipt and
distribution of our products if warranted by new business and subject to the
availability of the necessary capital.
Competition
There are three types of companies that sell Anime products in the United
States:
o large integrated distributors of a wide variety of entertainment
products targeted to a very wide range of demographics,
o small distributors and licensors of a narrow range of Anime-oriented
product targeted to the core Anime market, and
o licensors and web-based retailers of a wide range of entertainment
products with a narrow demographic target market of youth and young
adults.
The five major distributors of Anime videos in the United States are Bandai
Entertainment, Pioneer Entertainment, Baker & Taylor, Inc., Ingram
Entertainment, Inc. and Wizards of the Coast. These companies specialize in
providing products to mass market retail chains, toy retailers and video chains
that are interested primarily in selling only the 20 to 30 most popular Anime
titles. We don't sell to large retail accounts and therefore we don't compete
with these large distribution companies.
We focus on providing a high degree of service to smaller retailers. The
following companies, all privately held, are our main competitors because, like
us, they are relatively small, primarily Anime distribution companies that serve
the Anime niche market of small specialty retailers: Central Park Media, A.D.
Vision, Animeigo and Media Blasters. Animeigo also has production facilities
that allow it to provide subtitling and dubbing of original Anime product. These
smaller distribution companies have greater financial, personnel, marketing and
sales
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resources than we do. We compete with them on the basis of price, service,
selection, availability and product knowledge.
We also compete for the ultimate consumer purchaser of Anime products with
mass market retailers of music and movies, most of which now sell Anime, and
with many smaller retail outlets that sell Anime either by itself or as part of
a product line that includes role playing games, video games, and other hobbyist
activities.
We also compete with non-Anime specific youth and young adult consumer
websites, and they also perform their own customer fulfillment: The Right Stuf,
Action Ace, Fandom, Next Planet Over, and Animenation. Although these websites
offer more product lines than we do, we compete principally on the basis of
price and we sell Anime videos generally at a 20-30% lower price.
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<PAGE>
Employees
As of August 11, 2000, we had 10 employees, of whom 2 are part-time, which
may not be enough to sustain our operations.
Properties and equipment
Effective January 11, 2000, we entered into a lease agreement for 8,100
square feet of warehouse space at 9208B Venture Court, Manassas, Virginia at a
monthly rental of $4,387.50 per month. This lease agreement expired July 15,
2000 and now we rent the space on a month to month basis. In July 2000 due to
our cash shortage and loss of personnel, we moved our executive offices to this
location.
We've recently taken delivery of $500,000 worth of computers and servers
needed for our e-commerce/V-ISP platform, of which we currently owe the vendors
approximately $310,000. Due to our severe cash shortage, we will be unable to
pay these vendors absent our receipt of additional funding.
Legal proceedings
We're not a party to any pending legal proceedings.
Management
(a) Officers and directors: The following table provides information
concerning each executive officer and director of SyCoNet. All directors hold
office until the next annual meeting of shareholders or until their successors
have been elected and qualified, or until a director's death, resignation or
removal.
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<PAGE>
Name Age Position
---- --- --------
Sy Robert Picon 41 chairman of the board
William Spears 38 president, chief executive officer and
director
Kathryn T. Jacobson 43 chief financial officer, secretary and
treasurer
J. Larry Hineline 54 director
Edward E. Kramer 39 director
Francis H. Yano 52 director
Sy Robert Picon: Mr. Picon, our chairman, is one of our co-founders along with
William Spears. He was our chief executive officer and treasurer since our
inception, and our president since June 1998, until June 2000 when he resigned
for health reasons. He was a co-founder of the Virginia limited partnership
formed on February 1, 1997 which is our predecessor. He has been involved in the
comic book industry for over ten years. In 1991, he founded SyCo Comics, a
supplier of comic books and related media to disabled individuals, which he sold
in 1996. Mr. Picon has also worked as a chief administrator for a major
telecommunications firm.
William Spears: Mr. Spears, our co-founder along with Mr. Picon, has been our
president and chief executive officer since June 2000 when Mr. Picon resigned.
He has been one of our directors since our inception. He was our president from
inception until June 1998, when he became our executive vice president, and our
secretary from November 1999 until June 2000. He was a co-founder of the
Virginia limited partnership formed on February 1, 1997 which is our
predecessor. He has been in the comic book industry since 1989 when he created a
comic book title which he published. In 1995, he opened a retail comic book
specialty store in San Carlos, California and expanded onto the internet in
1996. Since 1982, he has owned and operated the Perfect Shirt & Sign Company, a
promotional screen printing facility which in 1990 expanded into supplying
computer accessories.
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Kathryn T. Jacobson: Mrs. Jacobson has been our chief financial officer since
November 1999 and she became secretary and treasurer in June 2000. Her
background includes controllership, enterprise resource planning systems
conversions, treasury functions, financing and acquisitions. From July 1998 to
September 1999, she was Controller at Information Systems Support Inc. From
October 1987 to July 1998, she worked at CACI Technologies, Inc., a division of
CACI, Inc., formerly QuesTech, Inc., where she last held the position of
director of accounting and financial reporting, managing that company's
accounting and SEC reporting functions. Prior to joining CACI, she worked in
various professional capacities in finance and accounting at Computer Sciences
Corporation, and MCI Worldcom formerly MCI . Mrs. Jacobson is a certified public
accountant and received her M.B.A. in finance and a masters in accounting from
George Washington University. She is a member of the American Institute of
Certified Public Accountants and the Institute of Management Accountants. Mrs.
Jacobson recently notified us that she will be resigning in all capacities
effective September 15, 2000, although she will assist Mr. Spears on a part-time
basis for the near future.
J. Larry Hineline: Mr. Hineline has been one of our directors since January
1998. He was our secretary from June 1998 until November 1999. From 1978 to 1991
he was employed at U.S. Surgical, most recently as senior director of
operations, a position he held for seven years. From 1991 to 1992, he was the
vice- president of product operations for Joint Medical Products Corporation.
Since October 1993 he has been the owner of JVR Systems Inc. and Bear Services
Inc., computer and consulting companies, respectively. Since February 1997 he
also has been the owner of DavDez Arts Inc., a publisher of comic books, short
stories and graphic novels. Mr. Hineline received his undergraduate degree from
Troy State University in 1976 and his M.B.A from California Coast University in
1999. He is currently working towards a Ph.D. in business administration.
Edward E. Kramer: Mr. Kramer has been one of our directors since October 1997.
He has been in the comic book industry since 1987, when he became a co-owner of
Titan Games and Comics, a position that he currently holds. Since 1992, Mr.
Kramer also has been a technology associate at Metropolitan Regional Educational
Service Agency, a division of the Georgia Department of Education, in Atlanta,
Georgia. Mr. Kramer is also an award-winning writer and editor of nearly two
dozen books in the science fiction and horror genres. He received his
undergraduate degree in
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psychology from Emory University and a master's degree in administration and
planning from Emory University School of Medicine.
Francis H. Yano: Mr. Yano has been one of our directors since February, 2000.
Since April 1973 Mr. Yano has been an attorney in private practice. From 1984 to
the present, Mr. Yano has been president, director and co-owner of TVF, Inc., a
suntan lotion company in Honolulu, Hawaii. Mr. Yano received his B.A. in biology
from the University of Hawaii and his J.D. from the University of Colorado Law
School.
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(b) Key employee:
Michael Smith: Mr. Smith, age 38, joined us in May 2000 as our corporate
controller. From January 1999 to March 2000, Mr. Smith was accounting manager at
Richmond American Homes, a top 10 national homebuilder. From October 1997 to
November 1998, he was manager of financial reporting at First Centrum
Corporation. He spent most of the period from December 1986 to September 1997
working as a certified public accountant at various firms, including Murray
Johnson White; Holsinger Stemler Hook & Associates; Reznick, Fedder and
Silverman; and Touche Ross & Company. Mr. Smith holds a B.S. in business
administration in accounting from Duquesne University. He is a certified public
accountant in the commonwealth of Virginia and is a member of the American
Institute of Certified Public Accountants and the Virginia Society of Certified
Public Accountants.
Executive compensation
The following table summarizes the compensation for the fiscal year ended
December 31, 1999 and the prior two fiscal years earned by or paid to our then
chief executive officer. No other executive officer earned over $100,000 per
year during those years.
<TABLE>
<CAPTION>
Annual compensation Awards
------------------- securities
Name and underlying
principal position Year Salary Bonus Options(#)/SARS
------------------ ---- ------ ----- ---------------
<S> <C> <C> <C> <C>
Sy R. Picon, CEO 1999 $103,955 $0 4,600,000
1998 $58,231 $0 0
1997 $42,058 $0 2,285,000
</TABLE>
Option/SAR grants in last fiscal year
<TABLE>
<CAPTION>
Individual grants
------------------------------------------------------------------------------------------------------
Number of % of Total
securities options/SARS
underlying granted to Exercise or Market price
options/SARS employees base price Expiration on date of
Name granted (#) in fiscal year ($/share) date of grant ($)
---- ---------------- --------------- ------------ --------------- -------------
<S> <C> <C> <C> <C> <C>
Sy R. Picon 1,000,000 10% $0.51 01/03/10 $2.03
1,000,000 10% $2.03 01/03/10 $2.03
2,600,000 27% $1.23 12/31/12 $1.23
</TABLE>
1997 Incentive Compensation Program
The following is a summary of the material terms of our 1997 Incentive
Compensation Program.
General
The purpose of the program is to increase stockholder value and to advance
our interests by providing a variety of economic incentives designed to attract,
retain and motivate our employees and other individuals providing services to
us. Incentives may consist of the following:
(a) stock options;
(b) restricted stock;
(c) stock awards;
(d) performance shares; and
(e) other incentives, including cash.
Incentives may be granted to any employee, director, consultant or other
independent contractor of ours (eligible participants) as selected from time to
time by the Compensation Committee.
The program is administered by the Compensation Committee of the Board of
Directors. The committee must consist of two or more directors who qualify as
disinterested persons under Rule 16b-3 of the Securities Exchange Act of 1934
and as outside directors under Section 162(m) of the Internal Revenue Code, as
amended. Section 162(m) prevents a publicly-traded corporation from taking a tax
deduction for certain compensation in excess of $1 million per year which it or
any subsidiary pays to specified executives. Those specified executives or
covered employees are the chief executive officer and the four next most highly
compensated executive officers for whom proxy disclosure is required. Certain
compensation, including compensation based on the attainment of performance
goals, is excluded from the deduction limit and, therefore, is deductible even
if it exceeds $1 million per year. To qualify for this performance-based
exemption, the material terms pursuant to which the compensation is to be paid,
including the performance goals and the maximum amount payable to the covered
employees, must be approved by the stockholders before payments are made.
The number of shares of our common stock which may be issued under the
program may not exceed 2,500,000 shares. This represents approximately 15 % of
the outstanding shares of common stock on June 30, 2000.
Stock Options
Under the program, the committee may grant non-qualified and incentive
stock options to eligible participants to purchase shares of common stock from
us. The program gives the committee discretion, with respect to any such stock
option, to determine the number and
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purchase price of the shares subject to the option, the term of each option and
the time or times during its term when the option becomes exercisable, subject
to the following limitations. No stock option may be granted with a purchase
price less than the fair market value of the shares subject to the option on the
date of grant. The term of a non-qualified option may not exceed 10 years and
one day from the date of grant. The term of an incentive stock option may not
exceed ten years from the date of the grant, and no incentive stock option may
be transferred other than by will or the laws of descent and distribution.
Payment of the option price will be made in such form and manner as the
committee may approve.
Restricted Stock
Restricted stock consists of the sale or transfer by us to an employee of
one or more shares of common stock which are subject to restrictions on their
sale or other transfer by the participant. The price, if any, at which
restricted stock will be sold or granted will be determined by the committee,
and it may vary from time to time and among participants and may require no
payment or be less than the fair market value of the shares at the date of sale
or grant. All shares of restricted stock granted to executive officers of us and
our principal subsidiaries will be subject to the attainment of performance
goals designed to satisfy the requirements under Section 162(m) of the code and
other restrictions as the committee may determine. Subject to these restrictions
and the other requirements of the program, a participant receiving restricted
stock will have the rights of a stockholder (including voting and dividend
rights) as to those shares only to the extent the committee designates such
rights at the time of the grant. No person may receive, in any calendar year,
more than 50,000 shares of restricted stock. The committee, in its sole
discretion, may substitute cash for shares of common stock otherwise required to
be distributed.
Stock Awards
Stock awards consist of the transfer by us to an employee of shares of
common stock, without payment, as additional compensation for his or her
services to us or a subsidiary of us. Stock awards are subject to the following
limitations. No person subject to Section 16(a) of the Securities Exchange Act
of 1934 may receive a stock award, and no person eligible to receive a stock
award may receive a stock award representing more than 2,500 shares of common
stock in any calendar year.
Performance Shares
Performance shares consist of the grant by us to an employee of a
contingent right to receive payment of shares of common stock. Each performance
share entitles the participant to one share of common stock, subject to the
attainment of performance goals and other terms and conditions specified by the
committee. The performance shares will be paid in shares of common stock (or
cash, in the discretion of the committee) to the extent performance goals set
forth in the grant are achieved. All performance shares granted to executive
officers of us and our principal subsidiaries will be subject to the attainment
of performance goals designed to satisfy the
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requirements under Section 162(m) of the code. The number of shares granted and
the performance goals will be determined by the committee.
Other Incentives
Other incentives may consist of a payment in cash or in kind by us to an
eligible participant as additional compensation for his or her services to us or
a subsidiary ours. The form, amount and the terms and conditions of other
incentives will be determined by the committee. All other incentives granted to
executive officers of us and our principal subsidiaries will be subject to the
attainment of performance goals designed to satisfy the requirements under
Section 162(m) of the code.
Section 162(m) Performance Goals
Under the program, all grants of restricted stock, performance shares, and
other incentives granted to executive officers of us and our principal
subsidiaries will be subject to the attainment of performance goals in
compliance with the provisions of Section 162(m) of the code. The specific
performance goals applicable to such an award shall be established by the
committee within the first 90 days of the applicable performance period, based
on one or more of the following business criteria: stock price, market share,
sales, earnings per share, return on equity, costs and cash flow.
Non-transferability of Most Incentives
No restricted stock, performance share or other incentive granted under the
program will be transferable by its holder, except in the event of the holder's
death, by will or the laws of descent and distribution. Non-qualified stock
options may be transferred by the holder to the limited extent authorized by the
rules and procedures established by the Compensation Committee from time to time
or by will or by the laws of descent and distribution.
Amendment of the Program
The Board of Directors may amend or discontinue the program at any time.
However, no amendment or discontinuance may (a) alter or impair, without the
consent of the recipient, an incentive previously granted or (b) result in a
change which would disqualify awards made under the program from the exemption
provided by Rule 16b-3 of the Exchange Act. In addition, the Board of Directors
may not amend the program without approval of our stockholders to the extent
such approval is required by law, agreement or any exchange on which the common
stock is traded.
Acceleration of Incentives
In the event of a change in control of the Company (as specified in the
program), the restrictions on all outstanding shares of restricted stock will
lapse immediately, all outstanding
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<PAGE>
stock options will become exercisable immediately and all performance goals will
be deemed to be met and payment made immediately.
Federal Income Tax Consequences
Under existing federal income tax provisions, a participant who receives a
stock option or performance shares under the program or who purchases or
receives shares of restricted stock under the program will not normally realize
any income, nor will we normally receive any deduction for federal income tax
purposes in the year such incentive is granted. A participant who receives a
stock award under the program consisting of shares of common stock will realize
ordinary income in the year of the award in an amount equal to the fair market
value of the shares of common stock covered by the award on the date it is made,
and we will be entitled to a deduction equal to the amount the employee is
required to treat as ordinary income. A participant who receives a cash award
will realize ordinary income at the time the award is paid equal to the amount
received, and the amount of the cash is expected to be deductible by us.
When a non-qualified stock option granted pursuant to the program is
exercised, the employee will realize ordinary income measured by the difference
between the aggregate purchase price of the shares of common stock as to which
the option is exercised and the aggregate fair market value of shares of the
common stock on the exercise date, and we will be entitled to a deduction in the
year the option is exercised equal to the amount the employee is required to
treat as ordinary income.
Options which qualify as incentive stock options are entitled to special
tax treatment. Because the capital gains rate is currently lower than the
highest individual rate, there are income tax advantages to receiving incentive
stock options rather than non-qualified options. Incentive stock options must be
exercised within ten years after the grant date or they expire. Incentive stock
options are not transferable, other than by will or the laws of descent and
distribution, and are exercisable, during the optionee's lifetime, only by the
optionee. Under existing federal income tax law, if shares purchased pursuant to
the exercise of an incentive stock option are not disposed of by the optionee
within two years from the date of the option grant or within one year after the
transfer of the shares to the optionee, whichever is longer, then:
o the optionee recognizes no income upon the exercise of the option;
o any gain or loss will be recognized by the optionee only upon ultimate
disposition of the shares and, assuming the shares constitute capital
assets in the optionee's hands, will be treated as a long-term capital
gain or loss;
o the optionee's basis in the shares purchased will equal the amount of
cash paid for such shares; and
o we will not be entitled to a federal income tax deduction in
connection with the exercise of the option.
-36-
<PAGE>
We understand that the difference between the option price and the fair
market value of the shares acquired upon exercise of an incentive stock option
will be treated as an "item of tax preference" for purposes of the alternative
minimum tax. In addition, incentive stock options exercised more than three
months after retirement are treated as non-qualified options.
We further understand that if the optionee disposes of the shares acquired
by exercise of an incentive stock option before expiration of the holding period
described above, the optionee must treat as ordinary income in the year of that
disposition an amount equal to the difference between the optionee's basis in
the shares and the lesser of the fair market value of the shares on the date of
exercise or the selling price. In addition, we will be entitled to a deduction
equal to the amount the employee is required to treat as ordinary income.
If the exercise price of an option is paid by surrender of previously owned
shares, the basis of the shares received in replacement of the previously owned
shares is carried over. If the option is a non-qualified option, the gain
recognized on exercise is added to the basis. If the option is an incentive
stock option, the optionee will recognize gain if the shares surrendered were
acquired through the exercise of an incentive stock option and have not been
held for the applicable holding period. This gain will be added to the basis of
the shares received in replacement of the previously owned shares.
A participant who receives restricted stock or performance shares will
normally realize taxable income on the date the shares become transferable or no
longer subject to a substantial risk of forfeiture or on the date of their
earlier disposition. The amount of such taxable income will equal the amount by
which the fair market value of the shares of common stock on the date such
restrictions lapse (or any earlier date on which the shares are disposed of)
exceeds their purchase price, if any. A participant may elect, however, to
include in income in the year of purchase or grant the excess of the fair market
value of the shares of common stock (without regard to any restrictions) on the
date of purchase or grant over its purchase price. We expect to be entitled to a
deduction for compensation paid in the same year and in the same amount as
income is realized by the employee.
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<PAGE>
Certain relationships and related transactions
Since December 31, 1998, we purchased approximately $93,250 worth of
computer equipment and software from JVR Systems, of which our director J. Larry
Hineline is president. To date we have paid $73,250 of the purchase price.
Market for common equity and related stockholder matters
Market information
Our common stock is listed on the Over-the-Counter Bulletin Board under the
symbol "SYCD".
The following table sets forth the range of high and low bid closing
quotations for our common stock for each quarter within the last two fiscal
years since quotation commenced. These quotes were provided by Pink Sheets
LLC and reflect inter-dealer prices without retail mark-up, mark-down or
commission and may not represent actual transactions.
Period Closing Bid
------ -----------
High Low
---- ---
October 13 (first
availability) through
December 31, 1998 $.62 $.01
January 4 through
March 31, 1999 .56 .19
April 1 through
June 30, 1999 .73 .22
July 1 through
September 30, 1999 2.40 .42
October 1 through
December 31, 1999 2.69 1.19
January 3 through
March 31, 2000 2.91 1.44
April 3 through
June 30, 2000 1.94 .16
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<PAGE>
Holders of Record
As of August 16, 2000, there were 106 holders of record of our common
stock.
Dividends
Since our inception, we have not declared any dividends on our common stock
and, since we currently intend to retain earnings for use in operations and the
expansion of our business, we do not anticipate paying any cash dividends in the
foreseeable future.
Principal shareholders
The following table contains information regarding ownership of our common
stock, which are our only voting securities, as of August 16, 2000 for:
o each person who beneficially owns more than 5% of our common stock,
o each of our directors and executive officers, and
o all of our directors and executive officers as a group.
Unless otherwise indicated, we believe that the individuals listed below
have the sole power to vote and dispose of the number of shares listed opposite
their respective names.
Shares beneficially owned
<TABLE>
<CAPTION>
Name and Address Office Shares owned Percentage of class
---------------- ------ ------------ -------------------
<S> <C> <C> <C>
Sy Robert Picon chairman of the 2,505,300(1) 15%
c/o SyCoNet.Com, Inc. board
9208B Venture Court
Manassas, VA 20111
William Spears president, chief 951,706(2) 6
c/o SyCoNet.Com, Inc. executive officer
9208B Venture Court and director
Manassas, VA 20111
J. Larry Hineline director 708,253(3) 4
9266 Oak Hammock Lane
Jupiter, FL 33478
Edward E. Kramer director 331,293(4) 2
2480 Honeycomb Way
Duluth, GA 30096
</TABLE>
-39-
<PAGE>
<TABLE>
<S> <C> <C> <C>
Kathryn Jacobson chief financial 135,500(5) (6)
9029 Edgepark Road officer, secretary
Vienna, Virginia 22182 and treasurer
Francis H. Yano director 191,100(7) (6)
1466 Pule Place
Honolulu, HI 96816
All officers and 4,823,152 27
directors as a group
(8 individuals)
Alliance Equities, Inc. 4,222,474(9) 24
12147 N.W. 9th Drive
Coral Springs, FL 33071
</TABLE>
----------
(1) Includes options to purchase 250,000 shares and 250,000 shares owned by
Mr. Picon's wife, as to which he disclaims beneficial ownership.
(2) Includes options to purchase 250,000 shares.
(3) Includes options to purchase 57,500 shares.
(4) Includes options to purchase 287,500 shares and 13,793 shares owned by
Dragon*com, Inc., of which Mr. Kramer is president and chief executive
officer.
(5) Includes options to purchase 100,000 shares and includes 35,500 shares
owned by her husband, as to which Mrs. Jacobson disclaims beneficial
ownership. Mrs. Jacobson recently notified us that she will be resigning in
all capacities effective September 15, 2000.
(6) Less than one percent.
(7) Includes 1,750 shares owned by his son, 700 shares held by his daughter,
and 6,900 shares held by his wife, as trustee for her mother, as to which
Mr. Yano disclaims beneficial ownership. Also includes 6,250 shares
issuable upon the exercise of common stock purchase warrants purchased in
the January 2000 private placement offering and options to purchase 15,000
shares.
(9) Includes 902,482 shares that may be issuable to Alliance under the funding
agreement, as amended, within the next 60 days.
Selling security holders
The following table sets forth certain information, as of the date of this
prospectus, with respect to the selling security holders and their shares of
common stock covered by this prospectus.
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<PAGE>
The table assumes that all shares which will be registered based on the
filing of this prospectus will be sold. Except as we have described below, the
selling security holders have never held any position or office with us or had
any other material relationship with us.
The shares listed in this table as owned by Keith Impink prior to the
offering include options to purchase 2,000 shares. The shares listed in this
table as owned by John and Cheryl Lynn Kelly prior to the offering include a
redeemable warrant owned by John Kelly to purchase 25,000 shares of common
stock. The shares listed in the table as owned by Philip Jacobson prior to the
offering include options to purchase 100,000 shares owned by his wife Kathryn
Jacobson, as to which Mr. Jacobson disclaims beneficial ownership. The shares
listed in the table as owned by William Spears prior to the offering include
options to purchase 250,000 shares. The shares listed in the table as owned by
Francis H. Yano prior to the offering include 1,750 shares owned by his son, 700
shares held by his daughter, and 6,900 shares held by his wife, as trustee for
her mother, as to all of which he disclaims beneficial ownership. Also includes
6,250 shares issuable to Mr. Yano upon the exercise of common stock purchase
warrants purchased in the January 2000 private placement offering, and options
to purchase 15,000 shares.
<TABLE>
<CAPTION>
Shares Shares Percentage
owned owned owned
before Shares after after
Selling stockholder offering registered offering offering
------------------- -------- ---------- -------- --------
<S> <C> <C> <C> <C>
Alliance Equities, Inc. 4,222,474 4,021,974 200,500 1%
Baldwin, Robert & Scott 35,000 30,000 5,000 *
Barrus, David K. 50,000 35,000 15,000 *
Culp, Paul 1,000 1,000 0 0
Davis, William M. 12,000 12,000 0 0
Dinh, Karen 11,765 11,765 0 0
Dragon*con, Inc. 13,793 13,793 0 0
Fisk, Richard W. & Keelia 89,882 5,882 84,000 *
Flynn, William F. 11,765 11,765 0 0
Foster, Jr., James H. 10,000 10,000 0 0
Foster, Jr., James H. and Ellen G. 110,000 110,000 0 0
Freitag, Kim & Paul 27,000 20,000 7,000 *
Green, Stewart A. 250,000 250,000 0 0
Gross, Douglas 10,000 10,000 0 0
Gross, Norman 10,000 10,000 0 0
Hawaii Transfer Co., Ltd. 125,000 125,000 0 0
Hoang, Derek & Liane 11,765 11,765 0 0
Hoang, Rex 18,647 17,647 1,000 *
Henry, Camille M. 23,200 21,200 2,000 *
Impink, Diane 30,500 30,000 500 *
Impink, Keith 15,300 13,000 2,300 *
Jacobson, Philip A. 135,500 35,500 100,000 *
Kelly, John and Cheryl Lynn 54,412 29,412 25,000 *
Kostelis, Angeliki 70,000 70,000 0 0
Levy, Randy 3,000 3,000 0 0
Lieberburg, Dr. Ivan 100,000 45,000 55,000 *
Loukas, Maria M. 81,000 50,000 31,000 *
Mylonakis, Anthony 154,950 70,000 84,950 *
</TABLE>
-41-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Nakashima, Peter I. 93,750 93,750 0 0
Odo, Grant K. 62,500 62,500 0 0
Okumura, Elizabeth K. 62,500 62,500 0 0
Okumura, Gordon A. 62,500 62,500 0 0
Poon, Curtis & Mar, Kathryn 27,973 23,529 4,444 *
Ross, Neil 6,000 6,000 0 0
Sanjoto, Suzie H. 5,882 5,882 0 0
Shemaria, Barry 16,000 16,000 0 0
Shiraki, Adrienne Y. 31,250 31,250 0 0
Shiraki, Iwao W. 62,500 62,500 0 0
Smith, Lawrence 10,000 10,000 0 0
Sohn, Louis 75,000 50,000 25,000 *
Spears, William, president, chief executive 951,706 4,706 947,000 6
officer and director
Takiguchi, Walter T. 62,500 62,500 0 0
Thurlow, Simon Piers 1,562 1,562 0 0
Tocci, Joseph M. 65,500 62,500 3,000 *
Waterfield, Jeffrey R. 35,000 15,000 20,000 *
Yano, Francis H., director 191,100 151,250 39,850 *
Young, Mitchell E. 109,000 25,000 84,000 *
Zimmer, Sharon M. 1,000 1,000 0 0
</TABLE>
* Less than one percent.
The selling shareholders, other than Keith Impink, Paul Culp, Dragon*con,
Inc. and Alliance Equities, Inc. acquired restricted shares through our November
1999 amd January 2000 private placement offerings, both of which were offered
under the exemptions from registration under Sections 4(2) and 4(6) of the
Securities Act of 1933 and Section 506 of Regulation D promulgated thereunder.
The shares in the private placements were offered at a price of $.85 and $1.00
per share, respectively. The shares of investors in the January 2000 private
placement offering include an aggregate of 181,562 shares issuable upon the
exercise of common stock purchase warrants at a price of $1.00 per share until
December 31, 2001.
Pursuant to our funding agreement with Alliance Equities dated December 16,
1999 we received an initial loan of $500,000 upon our filing of our Form 10-SB
registration statement with the SEC which we repaid at a 12% annual interest
rate in June 2000 by issuing to it 1,269,492 shares of common stock. We also
issued to it 600,000 shares upon the exercise of Alliance's related common stock
purchase warrants. Pursuant to an amendment to the December 16, 1999 funding
agreement, Alliance's funding obligation was reduced from $2,000,000 to
$1,000,000 and Alliance gave us $125,000 on August 4, 2000, and we in turn
issued to it 1,250,000 shares of our common stock. Alliance is also obligated to
give us additional payments of $125,000, $125,000, $100,000 and $25,000 in
bi-weekly installments, commencing on August 29, 2000 and contingent upon the
removal of the "E" from our stock symbol, which removal we expect in the next
few days, and the effectiveness of this post-effective amendment to our Form
SB-2. Each loan will be repaid by us issuing to Alliance that number of shares
of our common stock valued at 50% of the closing bid price of our stock on the
day immediately preceding the date of our receipt of that loan payment. The
receipt of these funds is also contingent upon our remaining current with our
SEC reporting obligations. If we are not current, all further loan payments will
be suspended and Alliance shall not be required to give us any further loan
payments until after we become current, and thereafter Alliance shall recommence
the loan payments as of the date of suspension. Since we filed our second
quarter 10-Q on August 25, 2000, Alliance's funding obligations were suspended
from August 14, 2000 to August 25, 2000 and our receipt of the next $125,000 was
delayed from August 18, 2000 and is now due on August 29, 2000 provided this
post-effective amendment has been declared effective by the SEC and the "E" has
been removed from our stock symbol.
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<PAGE>
The shares listed in the table as owned by Alliance prior to the offering
include shares issued to and issuable to Alliance as repayment of our
indebtedness under the funding agreement as well as shares that were issued upon
exercise of the common stock purchase warrants.
On October 6, 1999, as amended, we entered into a consulting agreement
with Keith Impink in which Mr. Impink agreed to perform web design, consulting
and graphics services in exchange for cash compensation and 13,000 shares of our
common stock, all of which are being registered in this offering. In January
2000, Mr. Impink was hired by us as our creative designer and webmaster.
In 1999, we entered into a consulting agreement with Paul Culp in which Mr.
Culp performed consulting services on our "animedepot.com" website in exchange
for cash compensation and 1,000 shares of our common stock.
In March 2000 we entered into a sponsorship agreement with Dragon*con, Inc.
in which we agreed to be the title sponsor of Dragon*con, a science fiction and
popular arts convention, in exchange for cash and 13,793 shares of our common
stock.
Description of securities
Authorized stock
Our authorized capital stock consists of 85,000,000 shares of common stock,
par value $.0001, and 1,000,000 shares of preferred stock, par value $.0001.
Common stock
We currently have 16,766,140 shares of common stock outstanding. All
outstanding shares of common stock are duly authorized, validly issued, fully
paid and nonassessable.
Holders of common stock are entitled to receive dividends, when and if
declared by the board of directors, out of funds legally available for that
purpose and to share ratably in our net assets upon liquidation, after provision
has been made for each class of stock, if any, having preference over the common
stock.
Holders of common stock are entitled to one vote per share on all matters
requiring a vote of shareholders. Since the common stock does not have
cumulative voting rights in electing directors, the holders of more than a
majority of the outstanding shares of common stock voting for the election of
directors can elect all of the directors whose terms expire that year, if they
choose to do so.
Holders of common stock do not have preemptive or other rights to subscribe
for additional shares, nor are there any redemption or sinking fund provisions
associated with the common stock.
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<PAGE>
Preferred stock
We currently have no shares of preferred stock outstanding. However, our
board of directors is authorized to issue all of our authorized shares of
preferred stock in series and to establish from time to time the number of
shares to be included in each series and to fix the designations, powers and
other rights and preferences of the shares of each series as may be determined
from time to time by our board of directors, as well as any qualifications,
limitations or restrictions. Accordingly, our board of directors, without
stockholder approval, may issue preferred stock with dividend, liquidation,
conversion, voting, redemption or other rights which could adversely affect the
voting power or other rights of the subscribers for our common stock. The
preferred stock thus could be utilized, under certain circumstances, as a method
of discouraging, delaying or preventing a change in control of us, which could
have the effect of discouraging hostile bids for control of us in which
stockholders may receive premiums for their shares of common stock or otherwise
dilute the rights of holders of common stock and the market price of the common
stock. Although we have no present intention to issue any shares of our
preferred stock, we may do so in the future.
Warrants
Each of the 181,562 warrants held by investors in the January 2000 private
placement offering entitles the holder of record to purchase one share of our
common stock at a price of $1.00 per share until December 31, 2001.
The warrant held by Diversified Leasing, Inc. ("Diversified") entitles
Diversified to purchase 94,554 shares of our common stock at a price of
$1.21875. The warrant may not be exercised until after the closing price of our
common stock shall have been equal to or greater than $10.00 for 15 consecutive
trading days, and only until December 31, 2003.
For both of the above warrants, the exercise price and the number of shares
of common stock purchased upon the exercise of the warrants are subject to
adjustment if events such as stock dividends, stock splits, combinations or
reclassifications of the common stock occur. Additionally an adjustment would be
made in the case of a reclassification or exchange of common stock, or if we
were to consolidate or merge, in order to enable warrant holders to acquire the
kind and number of shares of stock or other securities or property receivable in
such event by a holder of the number of shares of common stock that might have
been purchased upon the exercise of the warrant. A warrant holder may exercise
by surrendering the warrant certificate to us, with the fully completed and
executed subscription form, together with payment of the exercise price. The
warrants may be exercised at any time in whole or in part at the applicable
exercise price until the warrants expire. We will not issue fractional shares
when the warrants are exercised.
Delaware anti-takeover law
We are subject to the General Corporation Law of the State of Delaware,
including Section 203, an anti-takeover law enacted in 1988. In general, the law
prohibits a public Delaware corporation from engaging in a business combination
with an interested stockholder for a period of three years after the date of the
transaction in which the person became an interested stockholder unless:
o prior to the date of the transaction, the board of directors approved
the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder; or
o upon becoming an interested stockholder, the stockholder then owns at
least 85% of the voting securities, as defined in Section 203; or
o after the date of the transaction, the business combination is
approved by both the board of directors and the stockholders.
Business combination generally is defined to include mergers, asset sales
and certain other transactions with an interested stockholder. An interested
stockholder generally is defined as a person who, together with affiliates and
associates, owns, or within the prior three years did own, 15% or more of a
corporation's voting stock. Although Section 203 permits us to elect not to be
governed by its provisions, to date we have not made this election. As a result
of the application of section 203, potential acquirers of the company may be
discouraged from attempting to effect an acquisition transaction with us,
thereby possibly depriving holders of our securities of certain opportunities to
sell or otherwise dispose of their securities at above-market prices in these
transactions.
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<PAGE>
Transfer agent
The transfer agent and registrar for our stock is Interwest Transfer
Company, Salt Lake City, Utah.
Plan of distribution
We have been advised by the selling security holders that they may sell
their shares of common stock from time to time directly to purchasers in
privately negotiated transactions or, from time to time, they may offer the
shares for sale in the over-the-counter market through or to securities brokers
or dealers that may receive compensation in the form of discounts, concessions
or commissions from the selling security holders. We will not receive any of the
proceeds from the sale of our common stock by the selling security holders. The
selling security holders, and any dealers or brokers that participate in the
distribution of the shares of common stock, may be deemed to be "underwriters"
as that term is defined by the Securities Act, and any profit on the sale of
shares of common stock by them, and any discounts, commissions, or concessions
received by any such dealers or brokers, may be deemed to be underwriting
discounts and commissions under the Securities Act.
We are paying the costs, expenses and fees of registering the shares
offered by the selling security holders, not including any brokerage commissions
or similar selling expenses related to the sale of the shares of the common
stock. The selling security holders shall have the sole and absolute discretion
not to accept any purchase offer or make any sale of shares if they deem the
purchase price to be unsatisfactory at any particular time. We can't assure you
that all or any of the shares offered in this prospectus will be sold by the
selling security holders.
Legal Matters
The legality of our common stock has been passed upon on our behalf by
Hofheimer Gartlir & Gross, LLP, New York, New York (the "Firm"). The Firm and
its individual partners own an aggregate of 46,000 shares of our common stock
and options to purchase 150,000 shares of common stock at a price of $0.187
per share.
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<PAGE>
Experts
Our financial statements for each of the fiscal years ended December 31,
1999, 1998, and 1997 appearing in this prospectus and elsewhere in the
registration statement have been included in reliance on the reports of Yount
Hyde & Barbour, P.C., Winchester, Virginia, our independent auditors, and on the
authority of that firm as experts in accounting and auditing.
Limited liability of directors
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to our directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the 1933 Act and is, therefore,
unenforceable.
In the event that a claim for indemnification against such liabilities -
other than the payment by us of expenses incurred or paid by one of our
directors, officers or controlling persons in the successful defense of any
action, suit or proceeding - is asserted by such director, officer or
controlling person in connection with the securities being registered, we will,
unless in the opinion of our counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by us is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
As permitted by Section 102(b)(7) of the General Corporation Law of the
State of Delaware (the "DGCL"), article tenth of our certificate of
incorporation provides that our directors can't be held liable to us or our
stockholders for monetary damages for breach of fiduciary duty as a director
other than (i) for any breach of the director's duty of loyalty to us or our
stockholders, (ii) for acts or omissions not in good faith or which involved
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the DGCL, or (iv) for any transaction from which the director derived an
improper personal benefit.
Section 145 of the DGCL provides that a corporation may, under certain
circumstances, indemnify its directors and officers against expenses, judgments,
fines, and amounts paid in settlement, provided that these expenses have been
actually and reasonably incurred by the directors and officers by reason of
their capacity as such. Article tenth of our certificate of incorporation
requires us to indemnify, to the fullest extent permitted by the DGCL, as
amended from time to time, any person who is, was, or has agreed to become a
director or officer of the company against expenses, judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person.
-46-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Consolidated Balance Sheets as of June 30, 2000 (unaudited)
and December 31,1999 F-1
Consolidated Statements of Operations for the quarters and six months
ended June 30, 2000 and 1999 (unaudited) F-3
Consolidated Statements of Cash Flows for the six months ended
June 30, 2000 and 1999 (unaudited) F-4
Notes to Unaudited Consolidated Financial Statements F-5
Report of Independent Auditors F-7
Balance Sheets as of December 31, 1999 and 1998 F-8
Statements of Operations for the years ended December 31, 1999 and 1998, and
for the period from January 15, 1997 (date of inception) to
December 31, 1997 F-9
Statements of Stockholders' Equity for the years ended December 31, 1999 and
1998 and for the period from January 15, 1997 (date of inception)
to December 31, 1997 F-10
Statements of Cash Flows for the years ended December 31, 1999 and 1998 and for
the period from January 15, 1997 (date of inception) to
December 31, 1997 F-11
Notes to Financial Statements F-12
</TABLE>
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<PAGE>
SYCONET.COM, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
Unaudited
----------- -----------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 56,350 $ 587,559
Accounts receivable, net of allowance for
doubtful accounts of $22,000 and $15,000 at
June 30, 2000 and December 31, 1999, respectively 106,501 63,233
Due from officers -- 65,000
Prepaid expenses 8,274 4,324
Inventories 352,234 352,176
Other current assets 2,534 1,930
----------- -----------
Total current assets $ 525,893 $ 1,074,222
----------- -----------
Property and Equipment, at cost $ 324,410 $ 84,869
Less accumulated depreciation (44,267) (12,679)
----------- -----------
Total property and equipment $ 280,143 $ 72,190
----------- -----------
Other Assets 4,388 5,000
----------- -----------
Total assets $ 810,424 $ 1,151,412
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities
Current maturities of long-term debt $ 110,533 $ 31,974
Accounts payable and accrued expenses 1,250,711 1,020,428
Stock subscriptions refund payable 41,200 22,500
----------- -----------
Total current liabilities $ 1,402,444 $ 1,074,902
</TABLE>
F-1
See Notes to Unaudited Financial Statements
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Long-Term Debt, less current maturities 72,007 --
----------- -----------
Total liabilities $ 1,474,451 $ 1,074,902
----------- -----------
Stockholders' Equity (Deficit)
Preferred stock, authorized, 1,000,000 shares; no shares
outstanding $ -- $ --
Common stock, $0.0001 par value, authorized 85,000,000
shares in 2000 and 1999; issued and outstanding 15,516,140
and 11,795,429 shares in 2000 and 1999, respectively $ 1,552 $ 1,180
Additional paid-in capital 6,457,385 7,245,967
Deferred compensation (463,727) (721,900)
Retained Deficit (6,659,237) (6,448,737)
----------- -----------
Total stockholders' equity (deficit) $ (664,027) $ 76,510
----------- -----------
Total liabilities and stockholders' equity (deficit) $ 810,424 $ 1,151,412
=========== ===========
</TABLE>
F-2
See Notes to Unaudited Financial Statements
<PAGE>
SYCONET.COM, INC.
Consolidated Statements of Operations (unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30, Three Months Ended June 30,
------------------------- ---------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 477,832 $ 397,987 $ 241,026 $ 207,422
Cost of goods sold 416,055 292,916 272,407 150,565
----------- ----------- ----------- -----------
Gross profit (loss) $ 61,777 $ 105,071 $ (31,381) $ 56,857
Operating expenses:
Selling, general and
administrative expenses 2,874,822 424,521 1,536,942 220,328
Restructuring charges and other unusual items 422,986 -- 422,986 --
Reversal of stock compensation expense (3,040,000) -- (3,040,000) --
----------- ----------- ----------- -----------
Operating income (loss) $ (196,031) $ (319,450) $ 1,048,691 $ (163,471)
Nonoperating expense, net 14,469 1,406 7,020 700
----------- ----------- ----------- -----------
Net income (loss) $ (210,500) $ (320,856) $ 1,041,671 $ (164,171)
=========== =========== =========== ===========
Earnings (loss) per common share, basic and diluted $ (0.02) $ (0.04) $ .08 $ (0.02)
=========== =========== =========== ===========
Weighted average shares outstanding, basic and diluted 12,865,651 9,104,478 13,535,250 8,336,048
=========== =========== =========== ===========
</TABLE>
F-3
See Notes to Unaudited Financial Statements
<PAGE>
SYCONET.COM, INC.
Consolidated Statements of Cash Flows (unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities
Net loss $ (210,500) $ (320,856)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and amortization 54,447 2,839
Amortization of deferred compensation
related to stock options 258,173 --
Restructuring charges and other unusual items 422,986 --
Reversal of stock compensation (3,040,000) --
Changes in assets charges and liabilities:
(Increase) decrease in accounts receivable (43,268) 1,417
(Increase) in prepaid expenses (3,950) --
(Increase) in inventory (58) (215,685)
(Increase) in other assets (148,626) --
Increase (decrease) in accounts payable and accrued expenses 230,283 (64,776)
Increase in stock subscription refund payable 18,700 5,000
----------- -----------
Net cash (used in) operating activities $(2,461,813) $ (592,061)
----------- -----------
Cash Flows From Investing Activities,
purchase of property and equipment $ (380,330) $ --
----------- -----------
Cash Flows From Financing Activities
Proceeds from issuance of stock $ 1,751,790 $ 679,000
Short-term loans from officers -- (10,000)
Repayments of loans to officers 65,000 --
Short-term loans to employees -- 1,200
Proceeds from other financing 500,000 --
Principal payments on long-term debt (5,856) (2,009)
----------- -----------
Net cash provided by financing activities $ 2,310,934 $ 668,191
----------- -----------
Increase (decrease) in cash and cash
equivalents $ (531,209) 76,130
Cash and Cash Equivalents
Beginning 587,559 20,676
----------- -----------
Ending $ 56,350 96,806
=========== ===========
Supplemental Disclosures of Cash Flow Information,
cash payments for interest $ 334 $ 491
=========== ===========
Supplemental Schedule of Noncash Investing and Financing Activities
Payment of long-term debt by issuance of stock $ 500,000 $ --
=========== ===========
Long-term debt incurred for the purchase of equipment $ 156,422 $ --
=========== ===========
</TABLE>
F-4
See Notes to Unaudited Financial Statements
<PAGE>
NOTE 1 - ACCOUNTING POLICIES
Unaudited Interim Financial Information
Syconet.com, Inc. ("the Company") has prepared its consolidated financial
statements as of June 30, 2000 in accordance with the rules and regulations of
the Securities and Exchange Commission ("SEC"). These statements are unaudited
and, in the opinion of management, include all adjustments (consisting of normal
recurring adjustments and accruals) necessary to present fairly the financial
condition and results of operations for the periods presented. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to such SEC rules and regulations. Operating results for the
quarter ended June 30, 2000 are not necessarily indicative of the results that
may be expected for the fiscal year ending December 31, 2000. These consolidated
financial statements should be read in conjunction with the audited financial
statements and the accompanying notes included in the Company's Form 10SB
Registration Statement declared effective March 25, 2000 and Form SB2, initially
made effective on June 23, 2000, and all its related post-effective amendments.
GOING CONCERN
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern. However, the Company has sustained substantial
operating losses since inception and the Company has used substantial amounts of
working capital in its operations. In addition, there has been a loss of key
personnel which may cause a disruption to operations. The above conditions raise
substantial doubt about the entity's ability to continue as a going concern.
In view of these matters, the Company needs to obtain substantial
additional working capital and to replace certain key personnel. The Company is
actively engaged in pursuing financing and other arrangements. However, the
Company can not assure that it will be able to obtain the financing necessary to
continue to support its business.
CASH AND CASH EQUIVALENTS
All highly liquid investments with maturities of three months or less at
the date of purchase are considered to be cash equivalents and are carried at
cost plus accrued interest, which approximates fair value.
ACCOUNTS RECEIVABLE
Accounts receivable are shown net of related allowance for doubtful
accounts. The allowance for doubtful accounts were $ 22,000 and $ 15,000 as of
June 30, 2000 and December 31, 1999, respectively.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Inventories consisted of goods, primarily anime videos, purchased for
redistribution.
PROPERTY AND EQUIPMENT
Property and equipment, principally computer hardware and software, are
stated at historical cost less accumulated depreciation. The costs of additions
and improvements are capitalized, while maintenance and repairs are charged to
expense. Depreciation is provided using the straight-line method over a three to
five-year estimated life. Depreciation expense totaled $ 54,400 and $ 2,800 for
the quarters ended June 30, 2000 and 1999, respectively.
LOSS PER SHARE
Loss per share is computed on the weighted average number of shares
outstanding and excludes any dilutive effects of options, warrants and
convertible securities. Common equivalent shares are excluded from the
computation if their effect is antidilutive.
REVENUE RECOGNITION
Sales are recorded net of discounts, which range from 28% to 50% versus
manufacturer's suggested retail price (MSRP). Generally, web-based consumer
purchases are non-returnable, except for damaged products. For retailers, the
right of return is granted in exchange for a cash refund or merchandise exchange
contingent upon receipt of the returned inventory on a case-by-base basis.
Retailer returns are subject to a 15% restocking fee. In December, 1999, the
Securities and Exchange Commission issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB 101), which summarizes
guidelines for recognition, presentation and disclosure of revenue in the
financial statements. The Company has determined that it is in compliance with
the subject bulletin.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Syconet.com
and its non-operating subsidiaries. There are no inter-company balances and
transactions.
F-5
<PAGE>
ADVERTISING COSTS
Advertising costs are expensed as incurred or if applicable, are amortized over
the contract term based on a guaranteed number of impressions for the period.
RESTRUCTURING CHARGES AND OTHER UNUSUAL ITEMS
Restructuring charges consist primarily of penalties associated with early
terminations of various leases on facilities and furniture which the Company is
unable to use as a result of downsizing and consolidation of operations. Other
unusual items consist of one-time writedowns for certain assets from which the
Company may never benefit. Following is a breakdown of these charges:
Losses from facility
exit and lease
cancellations 148,633
Asset Write-downs 274,353
-------
422,986
=======
INCOME TAXES
Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating loss
and tax credit carryforwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences between
the reported amounts of asset and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
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 of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In July, 2000, the Emerging Issues Task Force (EITF) issued its consensus
on EITF Issue 00-10, "Accounting for Shipping and Handling Fees and Costs." This
consensus provided that all amounts billed for shipping and handling in a sale
transaction be classified as revenue. However, the EITF did not reach consensus
on the accounting for shipping and handling costs incurred by the seller. The
Company currently includes in cost of sales inbound shipping costs, but
classifies warehousing, order fulfillment, and outbound shipping costs under
Selling, General and Administrative Expense.
NOTE 2 -- REVERSAL OF STOCK COMPENSATION
During the first and second quarter of 2000, 13,599,750 outstanding stock
options were cancelled or forfeited, resulting in a reversal of $3,040,000 of
stock compensation expense.
NOTE 3 -- COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
From time to time, the Company may be subject to legal proceedings and
claims in the ordinary course of business, including contract terminations,
employment related claims and claims of alleged infringement of trademarks,
copyrights and other intellectual property rights. The Company currently is not
aware of any such legal proceedings or claims that it believes will have,
individually or in the aggregate, a material adverse effect on its business,
prospects, financial condition and operating results.
F-6
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Syconet.com, Inc.
Manassas, Virginia
We have audited the accompanying balance sheets of Syconet.com, Inc. as of
December 31, 1999 and 1998, and the related statements of operations,
stockholders' equity and cash flows for the years ended December 31, 1999 and
1998 and for the period from January 15, 1997 (date of inception) to December
31, 1997. These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Syconet.com, Inc. as of
December 31, 1999 and 1998 and the results of its operations and its cash flows
for the years ended December 31, 1999 and 1998 and for the period from January
15, 1997 (date of inception) to December 31, 1997 in conformity with generally
accepted accounting principles.
YOUNT, HYDE & BARBOUR, P.C.
Winchester, Virginia
March 14, 2000
F-7
<PAGE>
SYCONET.COM, INC.
Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
December 31,
--------------------------
Assets 1999 1998
----------- -----------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 587,559 $ 20,676
Accounts receivable, net of allowance for
doubtful accounts of $15,000 and $8,202 at
December 31, 1999 and 1998, respectively 63,233 40,506
Due from employee -- 2,000
Due from officers 65,000 --
Prepaid expenses 4,324 --
Inventories 352,176 167,507
Other current assets 1,930 --
----------- -----------
Total current assets $ 1,074,222 $ 230,689
----------- -----------
Property and Equipment, at cost $ 84,869 $ 25,703
Less accumulated depreciation (12,679) (5,475)
----------- -----------
Total property and equipment $ 72,190 $ 20,228
----------- -----------
Other Assets $ 5,000 $ 5,000
----------- -----------
Total assets $ 1,151,412 $ 255,917
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities
Current maturities of long-term debt $ 31,974 $ 22,483
Accounts payable and accrued expenses 1,020,428 301,302
Stock subscriptions refund payable 22,500 22,500
Loans from officers -- 10,000
----------- -----------
Total current liabilities $ 1,074,902 $ 356,285
Long-Term Debt, less current maturities -- 15,858
----------- -----------
Total liabilities $ 1,074,902 $ 372,143
----------- -----------
Stockholders' Equity
Preferred stock, authorized, 500,000 shares; no shares
outstanding $ -- $ --
Common stock, $0.0001 par value, authorized 14,500,000
shares in 1999 and 1998; issued and outstanding 11,795,429
and 6,500,053 shares in 1999 and 1998, respectively 1,180 650
Additional paid-in capital 7,245,967 1,033,888
Deferred compensation (721,900) --
Retained earnings (deficit) (6,448,737) (1,150,764)
----------- -----------
Total stockholders' equity (deficit) $ 76,510 $ (116,226)
----------- -----------
Total liabilities and stockholders' equity (deficit) $ 1,151,412 $ 255,917
=========== ===========
</TABLE>
See Notes to Financial Statements.
F-8
<PAGE>
SYCONET.COM, INC.
Statements of Operations
For the Years Ended December 31, 1999 and 1998 and
for the Period from January 15, 1997 (Date of Inception)
to December 31, 1997
<TABLE>
<CAPTION>
Period from
January 15, 1997
Year Ended Year Ended (Date of Inception)
December 31, December 31, to December 31,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $ 1,153,536 $ 625,955 $ 174,880
Cost of goods sold 851,478 512,024 246,222
----------- ----------- -----------
Gross profit (loss) $ 302,058 $ 113,931 $ (71,342)
Operating expenses:
Selling, general and administrative expenses 5,599,437 771,395 415,971
----------- ----------- -----------
Operating (loss) $(5,297,379) $ (657,464) $ (487,313)
Nonoperating expense, net (594) (3,565) (2,422)
----------- ----------- -----------
Net (loss) $(5,297,973) $ (661,029) $ (489,735)
=========== =========== ===========
Loss per common share, basic and diluted $ (0.55) $ (0.12) $ (0.10)
=========== =========== ===========
Weighted average shares outstanding, basic and diluted 9,682,754 5,625,507 5,153,058
=========== =========== ===========
</TABLE>
See Notes to Financial Statements.
F-9
<PAGE>
SYCONET.COM, INC.
Statements of Stockholders' Equity
For the Years Ended December 31, 1999 and 1998 and
the Period from January 15, 1997 (Date of Inception)
to December 31, 1997
<TABLE>
<CAPTION>
Additional Retained
Common Paid-In Deferred Earnings
Stock Capital Compensation (Deficit)
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Balance, January 15, 1997 (date of inception) $ -- $ -- $ -- $ --
Net (loss) -- -- -- (489,735)
Issuance of 5,153,053 shares of common stock 515 511,273 -- --
----------- ----------- ----------- -----------
Balance, December 31, 1997 $ 515 $ 511,273 $ -- $ (489,735)
Net (loss) -- -- -- (661,029)
Issuance of 1,347,000 shares of common stock 135 522,615 -- --
----------- ----------- ----------- -----------
Balance, December 31, 1998 $ 650 $ 1,033,888 $ -- $(1,150,764)
Net (loss) -- -- -- (5,297,973)
Issuance of 5,290,376 shares of common stock 529 1,643,915 -- --
Exercise of 5,000 common stock options 1 250 -- --
Deferred compensation related
to common stock options -- 4,567,914 (4,567,914) --
Amortization of deferred compensation
related to common stock options -- -- 3,846,014 --
----------- ----------- ----------- -----------
Balance, December 31, 1999 $ 1,180 $ 7,245,967 $ (721,900) $(6,448,737)
=========== =========== =========== ===========
</TABLE>
See Notes to Financial Statements.
F-10
<PAGE>
SYCONET.COM, INC.
Statements of Cash Flows
For the Years Ended December 31, 1999 and 1998 and
the Period from January 15, 1997 (Date of Inception)
to December 31, 1997
<TABLE>
<CAPTION>
Period from
January 15, 1997
Year Ended Year Ended (Date of Inception)
December 31, December 31, to December 31,
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net loss $ (5,297,973) $ (661,029) $ (489,735)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation 7,204 4,552 923
Amortization of deferred compensation
related to stock options 3,846,014 -- --
Changes in assets and liabilities:
(Increase) in accounts receivable (22,727) (22,494) (18,012)
(Increase) decrease in prepaid expenses (4,324) 5,000 (5,000)
(Increase) in inventory (184,669) (167,507) --
(Increase) in other assets (1,930) -- (5,000)
Increase in accounts payable and accrued expenses 719,126 232,401 68,901
Increase in stock subscription refund payable -- 22,500 --
--------------- --------------- ---------------
Net cash (used in) operating activities $ (939,279) $ (586,577) $ (447,923)
--------------- --------------- ---------------
Cash Flows From Investing Activities,
purchase of property and equipment $ (59,166) $ (16,473) $ (9,230)
--------------- --------------- ---------------
Cash Flows From Financing Activities
Proceeds from issuance of stock $ 1,644,695 $ 522,750 $ 511,788
Short-term loans from officers (10,000) 10,000 --
Short-term loans to officers (65,000) -- --
Short-term loans to employees 2,000 (2,000) --
Proceeds from long-term borrowing -- -- 50,000
Principal payments on long-term debt (6,367) (10,289) (1,370)
--------------- --------------- ---------------
Net cash provided by financing activities $ 1,565,328 $ 520,461 $ 560,418
--------------- --------------- ---------------
Increase (decrease) in cash and cash
equivalents $ 566,883 $ (82,589) $ 103,265
Cash and Cash Equivalents
Beginning 20,676 103,265 --
--------------- --------------- ---------------
Ending $ 587,559 $ 20,676 $ 103,265
=============== =============== ===============
Supplemental Disclosures of Cash Flow Information,
cash payments for interest $ 1,173 $ 2,712 $ 1,630
=============== =============== ===============
</TABLE>
See Notes to Financial Statements.
F-11
<PAGE>
SYCONET.COM, INC.
Notes to Financial Statements
Note 1. Nature of Business and Significant Accounting Policies
From January 15, 1997, date of inception, to February 1, 1997, the
Corporation operated as a general partnership between Sy Robert Picon,
Chairman of the Board of SyCoNet.Com, Inc. ("SyCoNet" or the
"Corporation"), and William Spears, President and Chief Executive
Officer of SyCoNet. From February 1, 1997 to June 30, 1997, the
Corporation operated as a limited partnership which included nine
separate partners and on June 30, 1997, the Corporation was
incorporated in the State of Delaware under the name Syco Comics &
Distribution. The Corporation changed its name in early 1999 to
Syconet.com, Inc.
From the date of inception to December 31, 1997, the Corporation
primarily operated as a distributor of comic books, trading cards and
collectible toys to independent retailers nationwide. Subsequent to
1997, the Corporation replaced the distribution of comic books with
the distribution of Japanese anime videos. Sales are made in the
United States and internationally through several websites on the
internet, the publication of a catalog and attendance at conventions
across the United States.
A summary of the Corporation's accounting policies are as follows:
Cash and Cash Equivalents
For purposes of reporting the statements of cash flows, the
Corporation includes all cash accounts, which are not
subject to withdrawal restrictions or penalties, and all
highly liquid debt instruments purchased with a maturity of
three months or less as cash and cash equivalents.
Certificates of deposit, regardless of maturities, are
included as cash and cash equivalents on the accompanying
balance sheets.
Accounts Receivable
Accounts receivable are shown net of related allowance for
doubtful accounts. The allowance for doubtful accounts is
$15,000 and $8,202 for December 31, 1999 and 1998,
respectively.
Inventories
Inventories are stated at the lower of cost (first-in,
first-out method) or market. Inventories at December 31,
1999 and 1998 consisted of goods, primarily anime videos,
purchased for redistribution.
F-12
<PAGE>
Notes to Financial Statements
Property and Equipment
Property and equipment, principally computer hardware and
software, are stated at historical cost less accumulated
depreciation. The costs of additions and improvements are
capitalized, while maintenance and repairs are charged to
expense. Depreciation is provided using the straight-line
method over a three to five-year estimated life.
Depreciation expense totaled $7,204, $4,552 and $923 for the
years ended December 31, 1999 and 1998 and the period from
January 15, 1997, date of inception, through December 31,
1997, respectively.
Earnings Per Share
Per Financial Accounting Standards Board Statement No. 128,
"Earnings Per Share," basic earnings per share is computed
on the weighted average number of shares outstanding and
excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is
computed in a manner similar to basic EPS, except for
certain adjustments to the numerator and the denominator.
Diluted EPS gives effect to all dilutive potential common
shares that were outstanding during the period. Dilution
reduces EPS and results from the assumption that convertible
securities were converted, that options or warrants were
exercised, or that other shares were issued upon the
satisfaction of certain conditions. Common equivalent shares
are excluded from the computation if their effect is
antidilutive.
Revenue Recognition
The Corporation recognizes revenue from product sales, net
of any discounts which range from 28% to 50%, when the
products are shipped to customers. Outbound shipping and
handling charges are included in net sales. The Corporation
provides an allowance for sales returns, which has been
insignificant, based on historical experience.
Advertising Costs
Advertising costs are expensed as incurred. Advertising
costs were $72,762, $17,030 and $12,012 for the years ended
December 31, 1999 and 1998 and the period from January 15,
1997, date of inception, through December 31, 1997,
respectively.
The Corporation has also entered into certain advertising
agreements, which include fixed fees through 2000. The costs
associated with these agreements are recognized on a
systematic basis over the term of the related agreements as
services are received.
F-13
<PAGE>
Notes to Financial Statements
Software Development Costs
In accordance with Statement of Position No. 98-1,
"Accounting for Costs of Computer Software Developed or
Obtained for Internal Use," the Corporation capitalizes
software development costs in the application development
stage of the software development project. To date, all of
the Corporation's costs for research and development of
software development have been expensed as incurred since
the amount of software development costs incurred subsequent
to the preliminary product stage has been immaterial.
Income Taxes
Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary
differences and operating loss and tax credit carryforwards
and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the
differences between the reported amounts of asset and
liabilities and their tax bases. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of
enactment.
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 of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
Note 2. Accounts Payable and Accrued Expenses
The Corporation's accounts payable and accrued expenses consist of the
following:
December 31,
---------------------------
1999 1998
---------- ----------
Accounts payable $ 330,151 $ 160,686
Professional services 461,103 54,813
Salaries 123,480 1,630
Payroll taxes 74,052 82,368
Other 31,642 1,805
---------- ----------
$1,020,428 $ 301,302
========== ==========
F-14
<PAGE>
Notes to Financial Statements
Note 3. Long-Term Debt
The Corporation's long-term debt is as follows:
December 31,
-------------------
1999 1998
------- -------
Note payable, due in monthly
installments of $1,517, interest
at 9.25%, uncollateralized,
due September 2000 $31,975 $38,341
Less current maturities 31,975 22,483
------- -------
$ -- $15,858
======= =======
Aggregate maturities of long-term debt due in 2000 are $31,975.
Note 4. Payroll Taxes Payable
During 1997 and the first three quarters of 1998, the Corporation was
in compliance with payroll tax reporting requirements but was not able
to remit the related tax amounts. Consequently, the Corporation
entered into an installment payment agreement with the IRS and began
making payments to cover the back taxes and penalties. The payroll tax
liability was $64,768, plus penalties and interest of $17,600 at
December 31, 1998. The Corporation paid off its back taxes in 1999,
and is now current with its payroll tax obligations.
Note 5. Credit Risk
The Corporation maintains its cash accounts and certificates of
deposit at various commercial banks. At December 31, 1999 and 1998,
all deposits were covered by the FDIC.
Note 6. Related Party Transactions
The amounts due from employees and loans due to stockholders represent
short-term cash advances. At December 31, 1998, the Corporation had
$2,000 due from an employee and $10,000 due to officers, which were
collected and remitted in 1999, respectively. At December 31, 1999,
the Corporation had $65,000 due from an officer, which was collected
in early 2000.
F-15
<PAGE>
Notes to Financial Statements
Note 7. Loss Per Share
The effect on weighted average number of shares of diluted potential
common stock are not included in the computation if their inclusion
would have an antidilutive effect (reduce the loss per common share)
applicable to the loss from operations for the years ended December
31, 1999 and 1998 and the period from January 15, 1997, date of
inception, through December 31, 1997.
Options of 14,916,000, 5,471,000 and 5,400,000 shares were not
included in computing loss per share assuming dilution for the years
ended December 31, 1999 and 1998 and the period from January 15, 1997,
date of inception, through December 31, 1997, respectively, because
their effects were antidilutive. The potential common stock did not
have an effect on net loss.
Note 8. Stock Options
The Corporation authorized the grant of 3,320,000 non-qualified and
6,130,000 qualified stock options in 1999, 86,000 non-qualified stock
options in 1998 and 5,400,000 non-qualified stock options in 1997 to
key employees or directors of the Corporation. The vesting period
ranges from one month to three years for the options granted in 1999,
immediately to one year for those granted in 1998 and immediately for
all stock options granted in 1997. Financial Accounting Standards
Board ("SFAS") Statement No. 123, "Accounting for Stock Based
Compensation," provides for a fair value method of accounting for
employee options and measures compensation expense using an option
valuation model that takes into account, as of the grant date, the
exercise price and expected life of the options, the current price of
the underlying stock, and the risk-free interest rate for the expected
term of the option. The Corporation has elected to continue accounting
for employee stock-based compensation under Accounting Principles
Board Opinion ("APB") No. 25 and related interpretations, which
generally requires that compensation cost be recognized for the
difference, if any, between the quoted market price of the stock and
the amount an employee must pay to acquire the stock.
The Corporation recorded aggregate deferred compensation of $4,567,914
in 1999. The amount represents the difference between the grant price
and the deemed fair value of the Corporation's common stock for shares
subject to options granted in 1999. The amortization of deferred
compensation will be charged to operations over the vesting period of
the options, which range from one month to three years. Total
amortization recognized was $3,846,014 for the year ended December 31,
1999. The underlying stock options were granted in the fourth quarter
of 1999 and substantially vested as of year end. Under APB No. 25,
because the exercise price of all outstanding options was equal to or
greater than the fair value of the underlying stock on the date of
grant, no compensation expense was recognized during the year ended
December 31, 1998 and for the period from January 15, 1997 to December
31, 1997.
F-16
<PAGE>
Notes to Financial Statements
If the fair value method of accounting for stock options under SFAS
123 had been applied there would have been no expense relating to the
stock options for 1998 and 1997 since there was no determinable fair
value for the related stock at the grant date of the stock options.
Net income would have been reduced in 1999 as follows:
1999
-----------
Net loss
As reported $(5,297,973)
Pro forma (8,511,679)
In determining the pro forma amounts above, the fair value of each
employee-related grant is estimated at the grant date using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for grants in 1999: Price volatility of 85%, risk-free
interest rate of 6.5%, dividend rate of 0% and expected lives of 7
years. Loss per share would remain unchanged in 1999 because including
the stock options would have an antidilutive effect.
A summary of the status of the outstanding options at December 31,
1999, 1998 and 1997 and changes during the periods ended on those
dates is as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998 December 31, 1997
----------------------------- ---------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ------------- ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 5,471,000 $ 0.01 5,400,000 $ 0.01 -- $ --
Granted 9,450,000 1.16 86,000 0.03 5,400,000 0.01
Exercised 5,000 0.05 15,000 0.01 -- --
---------- ---------- ----------
Outstanding at end of year 14,916,000 5,471,000 5,400,000 0.01
========== ========== ==========
Exercisable at end of year 5,916,000 5,446,000 5,400,000
</TABLE>
The weighted-average fair value of options granted during the year
ended December 31, 1999 was $1.18 and $1.76 for options granted at
fair market value and for options granted at below fair market value,
respectively. The weighted-average exercise price of options granted
during the year ended December 31, 1999 was $1.49 and $0.53 for
options granted at fair market value and for options granted at below
fair market value, respectively.
F-17
<PAGE>
Notes to Financial Statements
The following table summarizes information about options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------- -----------------------------------
Weighted-
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Outstanding Price
---------------------- ----------------- ---------------- ---------------- ------------------ -------------
<S> <C> <C> <C> <C> <C>
$0.01 - 0.50 5,466,000 3.41 $ 0.01 5,466,000 $ 0.01
0.51 - 2.03 9,450,000 9.92 0.16 450,000 0.51
---------- ---------
14,916,000 5,916,000
========== =========
</TABLE>
Note 9. Operating Leases
The Corporation leases certain office equipment and automobiles under
various operating leases. Scheduled payments under these leases are as
follows:
Year ended December 31,
2000 $ 14,680
2001 7,152
2002 3,037
--------
$ 24,869
========
The total rental expense included in the statements of operations for
the years ended December 31, 1999 and 1998 and the period from January
15, 1997, date of inception, through December 31, 1997 was $50,566,
$53,314 and $8,857, respectively.
Note 10. Income Tax Matters
Net deferred tax assets consist of the following components as of
December 31, 1999 and 1998:
1999 1998
--------- ---------
Deferred tax assets:
Loss carryforwards $ 867,000 $ 377,400
Less valuation allowance (867,000) (377,400)
--------- ---------
$ -- $ --
========= =========
F-18
<PAGE>
Notes to Financial Statements
During the years ended December 31, 1999 and 1998, the Corporation
recorded a valuation allowance of $867,000 and $377,400 on the
deferred tax assets to reduce the total to an amount that management
believes will ultimately be realized. Realization of deferred tax
assets is dependent upon sufficient future taxable income during the
period that deductible temporary differences and carryforwards are
expected to be available to reduce taxable income. There was no other
activity in the valuation allowance account during 1999 or 1998.
Loss carryforwards for tax purposes as of December 31, 1999 have the
following expiration dates:
Expiration Date Amount
--------------- -----------
2017 $ 480,000
2018 630,000
2019 1,440,000
-----------
$ 2,550,000
===========
The income tax provision is less than would be obtained by applying
the statutory Federal corporate income tax rate to pre-tax accounting
income as a result of the following items:
<TABLE>
<CAPTION>
Period from
January 15,
1997
through
Years Ended December 31, December 31,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Income tax (benefit) computed at
federal statutory rates $(1,801,311) $ (224,750) $ (166,510)
Increase (decrease) in income taxes
resulting from:
Nondeductible stock-based
compensation expense 1,307,645 -- --
Valuation allowance 499,600 214,200 163,200
Other (5,934) 10,550 3,310
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
</TABLE>
F-19
<PAGE>
Notes to Financial Statements
Note 11. Commitments and Contingencies
The Corporation entered into a consulting agreement in early 1999,
which specified both payments of cash and the issuance of common stock
of the Corporation. The stock was not issued in 1999, and
subsequently, the two parties have agreed to a payment of 137,500
shares of the Corporation's common stock in 2000.
The Corporation entered into various advertising contracts in late
1999 and early 2000 which commit the Corporation to expenses of
$316,906 in 2000.
Note 12. Subsequent Events
Additional Sources of Capital
The Corporation has funded its operations primarily through
private equity financing pursuant to Regulation D, which is a
limited offer and sale of securities without registration under
the Securities Act of 1933. Additional funds were raised through
various private placements through March 2000 totaling in excess
of $450,000.
New Line of Credit
The Corporation has signed a Letter of Intent for a $5 million
line of credit with a venture capital firm that has funded
numerous emerging growth companies. The Letter of Intent expires
at the end of 2000.
Funding Agreement
The Corporation entered into a $2 million funding agreement with
a venture capital firm in late 1999. The funding will occur in
four separate installments in 2000 and is contingent upon the
Corporation meeting certain filing deadlines. The Corporation
received $500,000 in early 2000. The obligations bear interest at
12% per annum and are repayable in shares of common stock equal
to the principal plus interest accrued to the payment date.
Lease Commitments
The Corporation has entered into three new lease commitments in
early 2000 for the rental of office and warehouse space. The
lease commitments over the next six years are: 2000, $266,175;
2001, $296,349; 2002, $288,000; 2003, $288,000; 2004, $288,000
and 2005, $72,000.
F-20
<PAGE>
SyCoNet.Com, Inc.
5,884,632 shares
--------------------
PROSPECTUS
--------------------
We have not authorized anyone to give any information or to make any
representations other than those contained in this prospectus. No other
information should be relied upon. The information contained in this prospectus
is current only to the date of this prospectus. This prospectus does not offer
to sell any securities in any jurisdiction where to do so would be unlawful.
-------------
All dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a prospectus.
This is in addition to the obligations of dealers to deliver a prospectus when
acting as underwriters.
June 27, 2000, as amended August 25, 2000
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of directors and officers.
As permitted by Section 102(b)(7) of the General Corporation Law of the
State of Delaware (the "DGCL"), article tenth of our certificate of
incorporation provides that our directors can't be held liable to us or our
stockholders for monetary damages for breach of fiduciary duty as a director
other than (i) for any breach of the director's duty of loyalty to us or our
stockholders, (ii) for acts or omissions not in good faith or which involved
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the DGCL, or (iv) for any transaction from which the director derived an
improper personal benefit.
Section 145 of the DGCL provides that a corporation may, under certain
circumstances, indemnify its directors and officers against expenses, judgments,
fines, and amounts paid in settlement, provided that these expenses have been
actually and reasonably incurred by the directors and officers by reason of
their capacity as such. Article tenth of our certificate of incorporation
requires us to indemnify, to the fullest extent permitted by the DGCL, as
amended from time to time, any person who is, was, or has agreed to become a
director or officer of the company against expenses, judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person.
Item 25. Other expenses of issuance and distribution
The expenses payable by us in connection with the issuance and distribution
of the securities being registered are estimated as follows:
SEC Registration Fee $ 1,126.46
Printing and duplication expenses 10,000.00
Legal fees and expenses 75,000.00
Accounting fees and expenses 10,000.00
State "blue sky" fees 5,000.00
Other 0.00
-----------
Total $101,126.46
===========
All expenses, except for the SEC registration fee, are estimates.
The selling security holders will not bear any portion of the foregoing
expenses, but will pay fees in connection with the resale of the shares of
common stock effected to or through securities brokers and/or dealers in the
form of markups, markdowns, or commissions, as well as the fees and
disbursements of counsel and accountants, if any, retained by them and any other
fees and expenses not expressly agreed to be borne by us.
-48-
<PAGE>
Item 26. Recent sales of unregistered securities
In June 1997, we sold our 31 founders 4,592,053 shares for an aggregate
price of $457 ($.0001 per share) in reliance on the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended (the "1933
Act"), for transactions not involving a public offering.
In September, November and December 1997, we sold to 24 non-accredited and
16 accredited investors 686,000 shares of common stock for an aggregate price of
$343,000 ($.50 per share) in a private placement made pursuant to the exemption
from registration provided by Section 3(b) of the 1933 Act and Rule 504 of
Regulation D promulgated under the 1933 Act. The investors paid cash for their
shares.
In March, April, May and June 1998, we sold to 23 non-accredited and 16
accredited investors 728,000 shares of common stock for an aggregate price of
$364,000 ($.50 per share) in a private placement made pursuant to the exemption
from registration provided by Section 3(b) and Rule 504.
In October 1998 we issued 400,000 shares of common stock to two accredited
investor consultants for services rendered aggregating $200,000. This issuance
was in reliance on the exemption from registration provided by Section 3(b) and
Rule 504.
From November 1998 through February 1999, in connection with a private
placement made pursuant to the exemption from registration provided by Rule 504,
we (a) sold 2,012,500 shares of common stock to four non-accredited and eight
accredited investors at a price of $.20 per share, for an aggregate price of
$402,500 in cash, and (b) issued 180,000 shares to two non-accredited and three
accredited investors for services rendered valued at $36,000.
In March and April 1999, we sold to three accredited investors 667,500
shares of common stock at a price of $.20 per share, for an aggregate price of
$133,500, in cash, in a private placement made pursuant to the exemption from
registration provided by Section 3(b) and Rule 504.
In June 1999, we sold to two accredited investors 1,520,000 shares of
common stock at a price of $.15 per share, for an aggregate price of $228,000,
in a private placement made pursuant to the exemption from registration provided
by Section 3(b) and Rule 504 of the 1933 Act and Section 203(t) of the
Pennsylvania Securities Act of 1972.
In October 1999, we sold to one accredited investor 394,000 shares of
common stock at a price of $.75 per share, for an aggregate price of $295,500,
in a private placement made pursuant to the exemption from registration provided
by Section 3(b) and Rule 504 of the 1933 Act and Section 203(t) of the
Pennsylvania Securities Act of 1972.
-49-
<PAGE>
In November 1999, we issued 5,000 shares at a price of $.05 per share for
an aggregate price of $250 to an employee who exercised stock options. This
issuance was in reliance on the exemption from registration provided by Section
4(2) of the 1933 Act.
From November 1999 through February 2000, we sold to 34 accredited
investors 927,053 shares of common stock at a price of $.85 per share, for an
aggregate price of $787,995, in a private placement made pursuant to the
exemption from registration provided by Section 4(2) and 4(6) of the 1933 Act
and Rule 506 of Regulation D promulgated under the 1933 Act.
In January 2000 we issued 10,000 shares to Jamie Graham in connection with
his 1998 appointment as a director in reliance on the exemption from
registration under Section 4(2) of the 1933 Act.
In January 2000 we sold to 12 accredited investors units consisting of
726,250 shares of our common stock and 181,562 redeemable warrants at a price of
$1.00 per unit,for an aggregate price of $726,250, in a private placement made
pursuant to the exemption from registration provided by Section 4(2) and 4(6) of
the 1933 Act and Rule 506 of Regulation D promulgated under the 1933 Act. Each
redeemable warrant entitles the holder to purchase one share of our common stock
at a price of $1.00 per share until December 31, 2001.
In February 2000, we sold to one accredited investor 343,000 shares of
common stock at a price of $1.00 per share for an aggregate price of $343,000,
in a private placement made pursuant to the exemption from registration provided
by Section 3(b) and Rule 504 of the 1933 Act and Section 203(t) of the
Pennsylvania Securities Act of 1972.
In February 2000, we issued 280,000 shares of common stock to a director,
J. Larry Hineline, who exercised certain stock options at a price of $.51 per
share for 250,000 shares, $1.02 per share for 15,000 shares and $.01 per share
for 15,000 shares, for an aggregate price of $142,950. This issuance was in
reliance on the exemption from registration under Section 4(2) and 4(6) of the
1933 Act.
In June 2000, pursuant to a funding agreement dated December 16, 1999, we
issued to Alliance Equities, Inc. ("Alliance") 1,869,492 shares of our common
stock, of which 600,000 were issued upon the exercise of Alliance's common stock
purchase warrant and 1,269,492 shares were issued as repayment of the first
$500,000 due to Alliance by us under the agreement. In August 2000, pursuant to
an amendment to the funding agreement, we issued to Alliance 1,250,000 shares of
common stock as repayment of $125,000 due to Alliance by us under the amended
funding agreement. All issuances were made in reliance on the exemption from
registration provided by Sections 4(2) and 4(6) of the 1933 Act.
In June 2000, we sold to two accredited investors 60,000 shares of common
stock at a price of $.35 per share for an aggregate price of $21,000, in a
private placement made pursuant to the exemption from registration provided by
Sections 4(2) and 4(6) of the 1933 Act.
In June, 2000 pursuant to a lease agreement with Diversified Leasing, Inc.
("Diversified") we granted Diversified a warrant to purchase 94,554 shares of
our common stock at a price of $1.21875. The warrant may not be exercised until
after the closing price of our common stock shall been equal to or greater than
$10.00 for 15 consecutive trading days and only until December 31, 2003.
In June 2000, pursuant to a sponsorship agreement dated March 3, 2000, we
issued 13,793 shares of our common stock to Dragon*con, Inc. This issuance was
made in reliance on the exemption from registration provided by Sections 4(2)
and 4(6) of the 1933 Act.
In August 2000, in connection with services rendered to us related to the
closing on our facilities leases, we granted a certain individual a redeemable
warrant to purchase 25,000 shares of our common stock at a price of $0.12 per
share until August 14, 2005.
In August 2000, in consideration for the cancellation of the lease for our
property at 9105A and 9105C Owens Drive, we granted two individuals redeemable
warrants to purchase an aggregate of 36,563 shares of our common stock at a
price of $0.16 per share until August 14, 2005.
A notice on Form D was filed with the Commission with respect to each of
the above issuances of securities under Regulation D, with the exception of all
of the issuances to Alliance under the funding agreement, and the issuances of
the warrants in June and August 2000.
Item 27. Exhibits
Exhibit No. Description
----------- -----------
3.1 Certificate of Incorporation*
3.1a Certificate of Amendment of the Certificate of
Incorporation, dated March 11, 1998*
3.1b Certificate of Amendment of Certificate of
Incorporation, dated February 17, 1999*
3.1c Certificate of Amendment of Certificate of
Incorporation, dated June 21, 2000
-50-
<PAGE>
3.2 By-Laws*
4 Specimen Common Stock Certificate**
4.1 Class A Redeemable Common Stock Purchase Warrant for
Alliance Equities, Inc.
4.2 Form of Redeemable Common Stock Purchase Warrant
for investors in the Private Placement Offering
dated January 27, 2000, as amended
4.3 Redeemable Common Stock Purchase Warrant for Diversified
Leasing Inc.
4.4 Redeemable Common Stock Purchase Warrant for John P.
Kelly***
4.5 Redeemable Common Stock Purchase Warrant for Frank N.
Jenkins***
4.6 Redeemable Common Stock Purchase Warrant for Ronald
Jenkins***
5.1 Opinion of Hofheimer Gartlir & Gross, LLP
10.1 Funding Agreement with Alliance Equities, Inc., dated
December 16, 1999*
10.2 Lease Agreement with John G. and Mary Immer, dated
November 15, 1997*
10.3 Amendment, dated January 4, 2000, to the Lease Agreement
with John G. and Mary Immer*
10.4 Commercial Lease Agreement with Broadwater Investments,
II, dated March 1, 2000**
10.5 Addendum No. 1, dated March 1, 2000, to Commercial Lease
Agreement with Broadwater Investments, II**
10.6 Addendum to the Funding Agreement with Alliance
Equities Inc., dated August 4, 2000***
10.7 1997 Incentive Compensation Program, as amended***
21 Subsidiaries**
23.1 Consent of Yount, Hyde & Barbour, P.C.
23.2 Consent of Yount, Hyde & Barbour, P.C. to SB-2/A
23.3 Consent of Yount, Hyde & Barbour, P.C. to the Post-
Effective Amendment***
27 Financial Data Schedule***
----------
*Incorporated by reference in Form 10-SB, January 25, 2000
**Incorporated by reference in Form 10-SB, Amendment No. 1, March 21, 2000
***Filed herewith.
Item 28. Undertakings
Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.
-51-
<PAGE>
The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the 1933
Act,
(ii) to reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement, and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement
or any material change to such information in this Registration
Statement; provided, however, that clauses (1)(i) and (1)(ii) shall
not apply if the information required to be included in a
post-effective amendment by those clauses is contained in periodic
reports filed by the Registrant pursuant to Section 13 or Section
15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference into this Registration Statement;
(2) that, for the purpose of determining any liability under the 1933 Act
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof; and
(3) to remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
-52-
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of
Manassas, State of Virginia on August 25, 2000.
SYCONET.COM, INC.
By: /s/ William Spears
------------------------------
William Spears
Principal Executive Officer
By: /s/ Kathryn Jacobson
---------------------------------
Kathryn Jacobson
Principal Financial Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated:
By: /s/ Sy R. Picon
---------------------------------
Sy R. Picon
Director
Date: August 25, 2000
By: /s/ William Spears
---------------------------------
William Spears
Director
Date: August 25, 2000
-53-
<PAGE>
By:
---------------------------------
J. Larry Hineline
Director
Date: August __, 2000
By: /s/ Edward E. Kramer
---------------------------------
Edward E. Kramer
Director
Date: August __, 2000
By: /s/ Francis H. Yano
---------------------------------
Francis H. Yano
Director
Date: August 25, 2000
-54-
