U.S. Securities and Exchange Commission
Washington, D.C. 20549
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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9105C Owens Drive, Manassas, Virginia 20111, (703) 366-3900
(Address and telephone number of principal executive offices)
9105C Owens Drive, Manassas, Virginia 20111, (703) 366-3900
(Address of principal place of business or intended principal place of business)
Sy R. Picon, President, SyCoNet.Com, Inc.,
9105C Owens Drive, Manassas, Virginia 20111, (703) 366-3900
(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. /_/ ___________
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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 3,550,588(1) $.72(2) $2,556,423.36 $ 674.90
Common Stock 181,562(3) $1.00 $ 181,562.00 $ 47.93
Common Stock 2,152,482(4) $.69687 $1,500,000.00 $ 396.00
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Total Registration Fee $1,118.83
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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,
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, 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. 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 38.
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 _____________________, 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 .................................................. 31
Legal proceedings ......................................................... 31
Management ................................................................ 31
Executive compensation .................................................... 35
Certain relationships and related transactions ............................ 36
Market for common equity and related stockholder matters .................. 36
Principal shareholders .................................................... 37
Selling security holders .................................................. 38
Description of securities ................................................. 41
Shares eligible for future sale ........................................... 43
Plan of distribution ...................................................... 43
Legal matters ............................................................. 44
Experts ................................................................... 44
Limited liability of directors ............................................ 44
Financial statements ...................................................... 45
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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 9105C Owens Drive, Manassas, Virginia
20111, and our telephone number is (703) 366-3900.
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. As a result, our cash on hand
is insufficient to allow us to meet our June 26, 2000 payroll, to pay our bills
as they come due and to continue our operations at the current level. We have
advised our employees of this situation and are not making any layoffs. However,
on June 26, 2000 John Santivasci, Jr., our vice president of distribution
services, departed voluntarily, and if other key or significant employees decide
now or in the future to quit or accept other employment, or are formally laid
off, we likely will be unable to complete 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. Allowing for final set-up and fine tuning of the configuration, we
expect to have a complete working model that could be shown to potential
customers by July 7, 2000.
In order to sustain our operations, we require an immediate cash infusion
of at least $1,000,000. Pursuant to our December 16, 1999 funding agreement,
Alliance Equities Inc. ("Alliance") is obligated to give us $500,000 on the
effective date of this prospectus, and we in turn will issue to it approximately
717,494 shares of our common stock, which Alliance may resell pursuant to this
prospectus. Alliance has advised us orally that it will provide us with this
money by June 30, 2000. Alliance also is obligated to give us $500,000 on each
of the 60th and 120th day after the effectiveness of this prospectus, in each
case in return for approximately 717,494 shares of our common stock which it may
resell pursuant to this prospectus. We intend to apply Alliance's monies to our
payroll and other current obligations, including the initial $150,000 quarterly
payment to USA Networks Interactive, a division of USA Networks Inc., under our
online advertising agreement relating to our exclusive sponsorship, via our
Animedepot.com website, of the "Anime Colony" dedicated online community which
USA launched on its Scifi.com website on June 20, 2000, and the approximately
$400,000 cost of computers, servers and related equipment and software needed
for our e-commerce/V-ISP platform, and working capital.
Although we continue to pursue private placements with potential investors
who have executed non-binding letters of intent, if we are unable to obtain the
additional capital we require we will have to layoff employees and completely
suspend our e-commerce and V-ISP initiatives, and we would 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.
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 Three Months Ended
January 31, 1997 Fiscal Year Ended March 31, 2000
(date of inception) to December 31, ------------------
December 31, 1997 1998 1999 (Unaudited)
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Statement of Operations Data:
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Net revenue 174,880 625,955 1,153,536 236,806
Cost of sales 246,222 512,024 851,478 143,648
Gross profit (loss) (71,342) 113,931 302,058 93,158
Total expenses 415,971 771,395 5,599,437 1,337,880
operating income (loss) (487,313) (657,464) (5,297,379) (1,244,722)
Net operating income (loss) (489,735) (661,029) (5,297,973) (1,252,171)
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March 31, 2000
December 31, ------------------
1998 1999 (Unaudited)
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Balance Sheet Data:
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Working capital (125,596) (680) (587,543)
Total assets 255,917 1,151,412 1,333,073
Total liabilities 372,143 1,074,902 1,649,535
Stockholders equity (deficit) (116,226) 76,510 (316,462)
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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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* * * * * * *
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
March 31, 2000, we had an accumulated deficit of $7.7 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 have a severe cash shortage, and we will delay, and may have 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. As
a result, our cash on hand is insufficient to allow us to meet our June 26, 2000
payroll, to pay our bills as they come due and to continue our operations at the
current level. We have advised our employees of this situation and are not
making any layoffs. However, on June 26, 2000 John Santivasci, Jr., our vice
president of distribution services, departed voluntarily, and if other key or
significant employees decide now or in the future to quit or accept other
employment, or are formally laid off, we likely will be unable to complete 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. Allowing for final set-up and fine tuning of
the configuration, we expect to have a complete working model that could be
shown to potential customers by July 7, 2000.
In order to sustain our operations, we require an immediate cash infusion
of at least $1,000,000. Pursuant to our December 16, 1999 funding agreement,
Alliance Equities Inc. ("Alliance") is obligated to give us $500,000 on the
effective date of this prospectus, and we in turn will issue to it approximately
717,494 shares of our common stock, which Alliance may resell pursuant to this
prospectus. Alliance has advised us orally that it will provide us with this
money by June 30, 2000. Alliance also is obligated to give us $500,000 on each
of the 60th and 120th day after the effectiveness of this prospectus, in each
case in return for approximately 717,494 shares of our common stock which it may
resell pursuant to this prospectus. We intend to apply Alliance's monies to our
payroll and other current obligations, including the initial $150,000 quarterly
payment to USA Networks Interactive, a division of USA Networks Inc., under our
online advertising agreement relating to our exclusive sponsorship, via our
Animedepot.com website, of the "Anime Colony" dedicated online community which
USA launched on its Scifi.com website on June 20, 2000, and the approximately
$400,000 cost of computers, servers and related equipment and software needed
for our e-commerce/V-ISP platform, and working capital.
Although we continue to pursue private placements with potential investors
who have executed non-binding letters of intent, if we are unable to obtain the
additional capital we require we will have to layoff employees and completely
suspend our e-commerce and V-ISP initiatives, and we would 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.
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. Although we
believe that existing and pending financing commitments under negotiation may be
sufficient to meet our cash needs during the next 12 months, there can be no
assurance to that effect.
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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.
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, our suppliers of Anime products do business with us on a
purchase order basis, and there can be no assurance that we will continue to
have access to Anime products in sufficient quantities, if at all, and on
payment, shipping, return and other terms we can afford. In addition, if our
current cash shortage continues, we may be unable to purchase the inventory we
need to satisfy our customers. Our inability to obtain access to a substantial
number of Anime products would have a material adverse effect on our sales and
results of operations. Moreover, in the event that one or more of our suppliers
becomes unable or unwilling to supply us with the products demanded by our
customers, 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 our co-founder, chairman and chief
executive officer, Sy Robert Picon. Other than our other co-founder William
Spears, executive vice president, most of our senior management have been with
us for less than a year, including our chief financial officer and chief
marketing officer. Our success is also dependent on these officers teaming
effectively with our founders. 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, in
June 2000, our chief operating and chief technical officers left our employ to
accept employment with a larger company and our vice-president of distribution
services left on June 26, 2000 because we couldn't make payroll. In addition, we
do not maintain any key man insurance on any of their lives. 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 continued ability
to attract and retain qualified management, marketing and sales personnel. We
will compete for personnel with other traditional distributors, and our
inability to successfully hire or retain qualified personnel could have a
material adverse effect on our business, financial condition or results of
operations.
Our inability to streamline and/or consolidate our distribution facility will
materially impact our operations.
We currently operate an 8,100 square foot distribution facility located in
Manassas, Virginia. If the facility is not able to accommodate expected
increases in demand and customer orders, our operating results would be
materially impacted. Although our management believes that our facility is
tightly controlled and efficiently managed, it may not adequately accommodate
significant changes or additions to our product line, thereby restricting our
growth in business to business order fulfillment initiatives. If we move the
distribution facility elsewhere, or are unable to find a facility warranted by
any such higher volume, we may experience a temporary disruption in our business
as well as unexpected costs.
We've executed lease commitments ranging from one to five years in anticipation
of growth which may never materialize.
We've entered into a five-year lease for a 15,120 square-foot office space,
subject to the issuance of an occupancy permit during the fourth quarter of
2000, to enable us to accommodate the growth in our staff. In addition we have
contracted for a co-location facility to house our ISP/e-commerce equipment and
to provide complex web hosting services for a minimum period of one year. Absent
our anticipated growth, we will have excess facilities, which we may or may not
be able to sublease at favorable terms, if at all, thereby negatively impacting
our cash flows.
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<PAGE>
We face significant inventory risk as a result of product stocking in
anticipation of sales growth that may not materialize.
We've expanded our Anime inventory to provide our customers variety and
greater access to popular as well as rare product titles. Certain of these
titles are stocked based on past demand and on our expectations of future
demand. We may not have accurately predicted changes in consumer tastes and may
temporarily overstock certain items. Although we're able to return most of our
stock, increased inventory levels subject us to additional inventory risks
associated with overstocking, including obsolescence and shrinkage. Although we
have tight security measures and systems in place at our distribution center and
at various convention sites where we sell directly to Anime fans, we may not be
able to prevent significant inventory loss. In addition, as a result of our cash
shortage, on June 26, 2000, our vice president of distribution services quit,
which may impair our ability to fulfill orders. All of these factors could have
a material adverse effect on our business, financial condition and results of
operations.
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. Notwithstanding
our state-of-the-art web development efforts, we can't assure you that we'll be
able to report or sustain sales growth to recover our capital investment.
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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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.
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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 March 31, 2000, we had approximately 3.8 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.
We're effectively controlled by management.
Absent any significant capital infusion into SyCoNet from a new investor,
our management has, and after completion of this offering will continue to
exercise, effective control over us. Accordingly, our management will be able
generally to direct our affairs and the use of all funds available to us, elect
a majority of our directors and cause us to declare or refrain from declaring
dividends, increase our authorized capital, issue additional shares of capital
stock or other corporate securities and determine the outcome of all matters
submitted to the stockholders for approval. Such concentration of control may
have the effect of delaying, deferring or preventing a third-party from
acquiring a majority of our outstanding voting stock, may discourage bids for
our common stock at a premium over the market price, if any, and may adversely
affect the other rights of the holders of common stock. Our current certificate
of incorporation allows our board of directors, without obtaining shareholder
approval, to issue shares of preferred stock having rights that could adversely
affect the voting power and
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economic rights of holders of our common stock. Although we have no present
intention to issue shares of preferred stock, there can be no assurance that we
won't do so in the future. Also, Section 203 of the Delaware General Corporation
Law restricts certain business combinations with any "interested stockholders"
as defined by this statute. Any of these factors may delay, defer or prevent a
change in control of us.
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.
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<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 ended March 31, 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-2 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 March 31, 2000, we had
an accumulated deficit of $ 7.7 million. A substantial portion of this deficit
arose during 1999, during which time we reported a loss of $ 5.3 million, of
which $ 3.8 million consisted of stock-based compensation costs.
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. As a result, our cash on hand
is insufficient to allow us to meet our June 26, 2000 payroll, to pay our bills
as they come due and to continue our operations at the current level. We have
advised our employees of this situation and are not making any layoffs. However,
on June 26, 2000 John Santivasci, Jr., our vice president of distribution
services, departed voluntarily, and if other key or significant employees decide
now or in the future to quit or accept other employment, or are formally laid
off, we likely will be unable to complete 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. Allowing for final set-up and fine tuning of the configuration, we
expect to have a complete working model that could be shown to potential
customers by July 7, 2000.
In order to sustain our operations, we require an immediate cash infusion
of at least $1,000,000. Pursuant to our December 16, 1999 funding agreement,
Alliance Equities Inc. ("Alliance") is obligated to give us $500,000 on the
effective date of this prospectus, and we in turn will issue to it approximately
717,494 shares of our common stock, which Alliance may resell pursuant to this
prospectus. Alliance has advised us orally that it will provide us with this
money by June 30, 2000. Alliance also is obligated to give us $500,000 on each
of the 60th and 120th day after the effectiveness of this prospectus, in each
case in return for approximately 717,494 shares of our common stock which it may
resell pursuant to this prospectus. We intend to apply Alliance's monies to our
payroll and other current obligations, including the initial $150,000 quarterly
payment to USA Networks Interactive, a division of USA Networks Inc., under our
online advertising agreement relating to our exclusive sponsorship, via our
Animedepot.com website, of the "Anime Colony" dedicated online community which
USA launched on its Scifi.com website on June 20, 2000, and the approximately
$400,000 cost of computers, servers and related equipment and software needed
for our e-commerce/V-ISP platform, and working capital.
Although we continue to pursue private placements with potential investors
who have executed non-binding letters of intent, if we are unable to obtain the
additional capital we require we will have to layoff employees and completely
suspend our e-commerce and V-ISP initiatives, and we would 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.
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. The program, launched on June 20, 2000, should 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. Another cross-over marketing initiative
includes a short-term on-line advertising agreement with World Wrestling
Federation, renewable at the option of either party.
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<PAGE>
We intend to complete the development of a purchase-driven virtual ISP
("Internet Service Provider") service to our customers and to affiliate groups
associated with our strategic partners and launch our ISP program in the 3rd or
4th quarter of 2000. In addition, we are marketing the ISP program and
e-commerce business services to leverage our existing e-commerce infrastructure
and related competencies in front-office and back-office business solutions.
We plan to expand our consumer oriented e-commerce business, and we expect
that additional spending will occur in this area. We believe that achieving
profitability will be highly dependent on our ability to grow this segment of
the business, in addition to increasing our licensing and advertising revenues.
Overall, our sales may fluctuate as a result of promotional discounts,
convention marketing, current trends, which influence the popularity of certain
of our product lines, inventory levels, 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.
Subsequent to March 31, 2000, we have experienced an increase in
international sales orders due to the strong growth in demand overseas for anime
products that are dubbed or subtitled in English. We intend to leverage this
increase in demand by actively advertising our anime web outlets,
www.animedepot.com, and www.sycodistribution.com, on popular Latin American and
European web portals, plus selected venues in Asia. We expect international
sales to continue to grow during the remaining quarters of this year. In order
to carve a significant niche in the largely untapped Anime market, which has
grown significantly based on the success of Anime entertainment like Pokemon and
Princess Mononoke, we will incur additional expenditures in marketing costs, web
technology, business-to-consumer and business-to-business e-commerce solutions,
enhancing our web presence, establishing a highly automated order fulfillment
system, and upgrading back-office and infrastructure support. We can't assure
you that the anticipated level of growth will occur or will offset the planned
expenditures.
Operating margins will be 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; and (h) overall efficiencies
achieved from the full implementation of our e-commerce platform.
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<PAGE>
Results of Operations
Comparison of the quarters ended March 31, 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 $236,800
for the quarter ended March 31, 2000, a 24% growth over net sales of $190,600
during the comparable quarter in 1999. The growth in our first quarter sales for
2000 was driven primarily by consumer purchases through the internet and
fan-based convention sales. Higher gross margin consumer sales increased in
relation to total sales. Despite the year-over-year growth in sales, our results
were impacted by the temporary loss of a major retail customer that was subject
to an acquisition during the first quarter. This situation was remedied and
sales from this customer are expected to return to normal levels in the second
quarter of this year. Based on historical trends, the first quarter generally
reflects the lowest sales volume for the entire year, due to most retailers'
decision to deplete inventories built up during the holidays prior to restocking
more product. We had no significant international sales during the first quarter
of 2000.
The following table sets forth certain financial data for us as a
percentage of net sales for the indicated periods:
(Unaudited)
Quarter ended March 31
2000 1999
------- -------
Net Sales 100.00% 100.00%
Cost of Goods Sold 60.66 74.70
Gross Margin 39.34 25.30
Selling, General and Administrative
Expenses 564.97 107.15
------- -------
Operating Loss (525.63) (81.85)
Other Expense (3.15) (.37)
------- -------
Net Loss (528.78) (82.22)
======= =======
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. Our gross
margin during the first quarter of 2000 was more favorable than the previous
year as a result of a higher percentage of consumer sales which generally yield
higher margins than sales from our distribution business. Our gross profit was
$93,200 for the quarter ended March 31, 2000, a 93% increase 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.
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<PAGE>
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 the first quarter of 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 and letters of
intent. SG&A expenses for 2000 also included stock compensation costs associated
with the compensatory effect of non-qualified stock option grants awarded last
year, which vested in part during the first quarter. Most of the stock options
that were awarded during the first quarter were granted at the fair market value
of the stock at the date of award and hence had no impact on the financial
statements. During the remainder of the year 2000, we expect our operating costs
to continue to increase as a result of our targeted marketing, branding and
advertising campaign to facilitate the ramp-up of sales; warehouse and office
expansion as well as co-location facility for our e-commerce equipment;
additional customer service, order fulfillment, and warehouse personnel to
process an anticipated increase in on-line sales; amortization of software
costs, capitalized labor, and capitalized leases associated with e-commerce
solutions; depreciation of newly purchased PCs and computer peripherals;
recurring network engineering and telecommunications to maintain and
continuously secure our various web sites; and the build-out of more web sites
to increase Anime market penetration and to cater to cross-over market segments.
Our advertising agreements are short-term and generally cancelable. In the event
that we are not satisfied with click-through and estimated sell-through rates,
we terminate the agreements as soon as practicable. Despite our tight focus on
our operations, we cannot assure you that we will achieve a level of sales
commensurate with our efforts.
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:
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(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 include 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. Projected stock compensation costs for existing non-qualifed stock
option grants outstanding as of December 31, 1999 include $510,000, $190,300,
and $22,000 for the years ended December 31, 2000, 2001 and 2002, respectively.
During the year 2000, we expect our operating costs to continue to escalate
as a result of our wide-scale marketing and advertising campaign; warehouse and
office expansion; additional customer service, order fulfillment, and warehouse
personnel to process an anticipated increase in on-line sales; amortization of
software costs and capitalized labor associated with e-commerce solutions;
depreciation of newly purchased PCs and computer peripherals; network
engineering and telecommunications to continuously secure our various web sites;
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and the build-out of more web sites to increase Anime market penetration and to
cater to specific market segments. Despite our focused efforts, we cannot assure
you that we will achieve a level of sales commensurate with the increase in
expenditures.
We expect to continue to utilize stock options as compensation as part of
our strategy to attract and retain key personnel, as well as reward key
management personnel. However, because the vesting periods for recently issued
stock options are now generally longer, we do not expect recognizable expenses
arising from compensatory stock option grants to be made in 2000 and in the
immediate foreseeable future to be of the same magnitude as stock compensation
costs incurred in 1999.
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 $ 127,500 during the first
quarter of 2000, in connection with the amortization of compensatory stock
options granted late last year. We had no recognizable deferred compensation
costs during the first 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. Since inception, we have
experienced operating losses, which have recently been declining in relation to
sales. Although management expects the improved trend to continue, we cannot
provide any assurance as to when profits will materialize. 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
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<PAGE>
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.
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.
Impact of Recently Issued Accounting Standards
As of January 1, 1998, we adopted Statement of Financial Accounting
Standards No. 130 ("SFAS No. 130") entitled "Reporting Comprehensive Income,"
which establishes standards for the reporting and display of comprehensive
income and its components in the financial statements. Currently, there are no
reportable items of comprehensive income (loss).
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-1 ("SOP 98-1"), entitled "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which requires all
costs related to the development of internal use software other than those
incurred during the application development stage to be expensed as incurred.
Costs incurred during the application development stage are required to be
capitalized and amortized over the estimated useful life of the software. SOP
98-1 was effective for our fiscal year ending December 31, 1999. Projected
expenditures for our e-commerce infrastructure will be capitalized in compliance
with this pronouncement.
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In April 1998, the American Institute of Certified Public Accountants
issued SOP 98-5, entitled "Reporting on the Costs of Start-Up Activities." SOP
98-5 is effective for our fiscal year ending December 31, 1999. SOP 98-5
requires costs of start-up activities and organization costs to be expensed as
incurred. The adoption of the subject pronouncement did not have a material
effect on the financial statements, and we do not expect it to have a material
effect in the future.
Recent Developments
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. Accordingly, it is
premature to conclude the Zocchi acquisition is probable.
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. As a result, our cash on hand
is insufficient to allow us to meet our June 26, 2000 payroll, to pay our bills
as they come due and to continue our operations at the current level. We have
advised our employees of this situation and are not making any layoffs. However,
on June 26, 2000 John Santivasci, Jr., our vice president of distribution
services, departed voluntarily, and if other key or significant employees decide
now or in the future to quit or accept other employment, or are formally laid
off, we likely will be unable to complete 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. Allowing for final set-up and fine tuning of the configuration, we
expect to have a complete working model that could be shown to potential
customers by July 7, 2000.
In order to sustain our operations, we require an immediate cash infusion
of at least $1,000,000. Pursuant to our December 16, 1999 funding agreement,
Alliance Equities Inc. ("Alliance") is obligated to give us $500,000 on the
effective date of this prospectus, and we in turn will issue to it approximately
717,494 shares of our common stock, which Alliance may resell pursuant to this
prospectus. Alliance has advised us orally that it will provide us with this
money by June 30, 2000. Alliance also is obligated to give us $500,000 on each
of the 60th and 120th day after the effectiveness of this prospectus, in each
case in return for approximately 717,494 shares of our common stock which it may
resell pursuant to this prospectus. We intend to apply Alliance's monies to our
payroll and other current obligations, including the initial $150,000 quarterly
payment to USA Networks Interactive, a division of USA Networks Inc., under our
online advertising agreement relating to our exclusive sponsorship, via our
Animedepot.com website, of the "Anime Colony" dedicated online community which
USA launched on its Scifi.com website on June 20, 2000, and the approximately
$400,000 cost of computers, servers and related equipment and software needed
for our e-commerce/V-ISP platform, and working capital.
Although we continue to pursue private placements with potential investors
who have executed non-binding letters of intent, if we are unable to obtain the
additional capital we require we will have to layoff employees and completely
suspend our e-commerce and V-ISP initiatives, and we would 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.
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 quarter of 2000, net cash provided by financing included $ 731,700 in
private placement funds compared to $ 380,000 for the same period in 1999. As of
March 31, 2000, our cash position consisted of $410,400 in cash compared to
$587,600 in cash as of December 31, 1999. In April, and June 2000, we raised an
additional $696,000 in two private placement offerings.
Net cash used in operations were $ 1.3 million during the first quarter of
2000 compared to $328,600 during the same period in 1999. The use of cash was
due primarily to a loss from operations which was $ 1.2 million and $ 156,700
for the subject periods in 2000 and 1999, respectively. The expansion of our
product offerings to ensure product availability has required us to increase our
inventory levels, thereby causing an additional strain on our cash flows. We
have been ramping up our inventory with new titles in anticipation of a joint
branding and marketing campaign with USA Network Interactive to be launched in
late June, 2000.
During the first quarter 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. As an added incentive to
promote sales, we plan to provide virtual ISP ("Internet Service Provider")
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service to our customers that maintain a minimum level of monthly sales. We are
also packaging and branding the service for sale to business customers who will
be able to offer the service to their clientele with customized content and at a
price that is tied to product sale. Towards this end, we expended $ 174,000
during the first quarter and expect our capital commitment for the year to reach
$1 million, which will be funded through capital leases and equity financing.
During 1999, there were no capital expenditures for the comparative period.
In December 1999 we received a $2,000,000 funding commitment from Alliance
Equities, Inc., which has funded numerous emerging growth companies. Pursuant to
the funding agreement, we received an initial loan of $500,000 upon our filing
of our Form 10SB 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. Alliance agreed to give us three other $500,000 payments on the effective
date of this prospectus and on the 60th and 120th days thereafter. In
consideration of each $500,000 payment we will issue to Alliance 2,152,482
shares of our common stock valued at $.70 each. The shares issued and issuable
to Alliance Equities pursuant to the funding agreement may be resold by Alliance
pursuant to this prospectus.
During the first quarter of 2000, we entered into a new lease for a larger
warehouse, pending identification of a permanent distribution facility. We also
executed a 5-year lease on a build-to-suit facility in Manassas, Virginia, with
an expected completion date in the third quarter of 2000. In late April, 2000,
we relocated our corporate headquarters to an interim location in Manassas,
Virginia, pending the completion of our new facility. We will require additional
financing to provide for our working capital and for bringing our technology and
marketing plans to fruition. 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. On June 21, 2000, we increased the number of authorized common
shares from 14,500,000 to 85,000,000 and the number of authorized preferred
shares from 500,000 to 1,000,000, to allow us greater flexibility to finance our
working capital and growth. We plan to issue shares to fund the costs of future
acquisition of, or a strategic partnership with, complementary businesses which
might further impact our liquidity position or require the issuance of equity or
debt securities. Although we have entered into letters of intent with certain
companies, we have not completed our due diligence review of their operations
nor have we obtained the required financing, and we may never do so.
As of December 31, 1999, our cash position consisted of $588,000 in cash
compared to $21,000 in cash for the same period in 1998.
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During 1999, net cash provided by financing included $1.6 million in
private placement funds compared to $523,000 for all of 1998. We raised $512,000
through private placements during 1997.
Net cash used in operations were $939,000 during 1999 compared to $587,000
and $448,000 for 1998 and 1997, respectively. During 1999, the use of cash was
due primarily to a loss from operations which was $5.3 million (which on a pro
forma basis was a loss of $1.2 million prior to the recognition of stock-based
compensation and consulting expenses) compared to $661,000 and $490,000 during
1998 and 1997, respectively. The expansion of our product offerings to ensure
product availability has required us to increase our inventory levels, thereby
causing an additional strain on our cash flows during 1999 and 1998.
For all comparative periods net cash used in investing activities consisted
primarily of purchases of PCs and peripheral equipment.
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 are 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 will be used to service
customers of our core business. However, the completion of this plan could be
adversely affected by our current severe cash shortage, as described below.
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.
In addition to e-commerce and distribution services, we are also building a
virtual Internet Service Provider service-in-a-box that will be integrated into
the e-commerce platform. This would allow e-commerce customers to provide ISP
services to their end-users without having to purchase infrastructure. A well
integrated package of content, commerce, and access capabilities, if
successfully developed by us, should create an extremely powerful set of
products for which we expect there to be high demand, although we can give no
assurances in this regard.
An internal proof of concept testbed for our e-commerce and V-ISP platform
is now installed and functional. A complete working model that could be shown to
customers is approximately two weeks from completion. However, due to our
current severe cash shortage we are unable to meet our current payroll. If this
situation results in the loss of a significant number of employees, we likely
will be unable to complete the platform. Subject to the receipt of the
additional funding we require, development should be completed by 3rd or 4th
quarter 2000, with rollout of functionality in stages.
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, which may impair our ability to fulfill orders. If our cash shortage
continues, we also may be unable to purchase the inventory we need to satisfy
our customers, which would jeopardize our ability to conduct our business.
We maintain an inventory of products in high demand so as to offer prompt
service and fast delivery, and we obtain other products to fulfill orders we
receive. Between October 31 and December 30, 1999, we fulfilled 98.7% of over
4000 orders within our stated delivery time frame of two days and 100% of our
orders were filled in time for Christmas. In the last three months we also have
significantly upgraded our distribution systems and processes so that we can now
pick, pack, and ship a typical order in approximately one-third of the time
previously required. However, as a result of our cash shortage, on June 26, 2000
our vice president of distribution services quit, which may impair our ability
to fulfill orders. If our cash shortage continues, we also may be unable to
purchase the inventory we need to satisfy our customers, which would 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 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 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 also conduct internet banner advertising campaigns on
websites that attract consumers who have a high degree of interest in Anime. In
addition we have entered into an agreement with USA Networks Interactive to be
the exclusive sponsor of Anime products on Sci-Fi.com's Anime Colony. In
addition to the exclusive site sponsorship, this agreement includes a wide-
ranging multimedia advertising campaign promoting Anime Colony and
Animedepot.com that encompasses the Internet, print media, and television
advertising on the Sci-Fi Channel. We currently do not have the funds necessary
to make the payments to USA Networks that are required under this agreement.
However, pursuant to our December 16, 1999 funding agreement with Alliance
Equities, Inc., Alliance is obligated to give us $500,000 after the effective
date of this prospectus. Alliance has advised us orally that it will provide us
with this money by June 30, 2000. We intend to apply this $500,000 to the
initial $150,000 quarterly payment to USA Networks, as required under our
agreement with them. We also market our products at approximately 25
Anime-oriented conventions and retail shows each year,
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through trade publications, Anime fan magazine, and via headers on selected
internet search engines.
We rely on agreements with United Parcel Service to deliver products from
suppliers as well as to customers. 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.
We've signed a three-year agreement to be the title sponsor of Dragon*Con,
North America's largest Science Fiction and Popular Arts convention, to be held
in Atlanta from June 29 through July 2, 2000. Attendance at 1999's event was
over 38,000 people.
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.
Strategy for Growth
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. As a result, we require an
immediate cash infusion of $1,000,000 in order to sustain our operations. The
following assumes we receive the additional financing we require, as to which we
can give no assurances.
Licensing proprietary product. We need to license our own proprietary
product through the development of relationships with key Anime content
providers. Having proprietary product should enable us to obtain access to
content that can compete on a mass-market level and realize higher, more stable
margins that can withstand the entry of larger wholesalers since service and
cost advantages aren't effective barriers to entry.
Acquisitions. Our acquisition strategy is directed toward the attainment of
critical mass through the acquisition of customers, infrastructure, licenses,
and employees. This could enable us to compete for top licensing names for
titles that have potential mass appeal similar to the appeal attained by
Pokemon, Dragonball Z, and Princess Mononoke. Although we haven't entered into
any acquisition agreements, in December 1999 we entered into a letter of intent
to acquire Zocchi Distributing Inc., a distributor of games and science fiction
and 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. Accordingly, it is premature to conclude the Zocchi
acquisition is probable.
Genre-specific websites. We're in the process of designing and rolling out
several separate websites for the different audiences that enjoy various
subgenera of Anime and action oriented films (such as martial arts). We'll
review the success of the first two subgenera that should be launched by
mid-summer 2000 and, if successful, we intend to create additional targeted and
branded sites that would cover the majority of the marketplace. Our marketing
messages are intended to drive people to our websites, which themselves will be
built to satisfy the needs of individual segments of the Anime market.
Television advertising. Subject to having the necessary capital resources,
we plan to advertise on television networks and shows that are focused on Anime,
in particular, on the SciFi
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Channel in conjunction with our joint venture with Sci-Fi.com, and on Cartoon
Network's Toonami segment.
Web-based advertising. Anime is a very popular entertainment topic on the
internet, consistently appearing in the list of top words used in search
engines. Because the target audience is easily identified, web-based banner ads
have proven to be cost-effective when properly targeted and when they utilize
dynamic artwork. Subject to having the necessary capital resources, we plan to
use an extensive program of web-based advertising and sponsorships of Anime
content sites and sites that represent significant cross-over markets that
provide similar demographics to our core client base: individuals aged 16 to 33
who are educated and computer savvy. We are working to implement an affiliate
marketing program that will assist us in this effort.
Cross-selling into additional markets. Several markets are closely aligned
with Anime in terms of demographics, entertainment concept, and cultural impact:
Animation (Cartoon Network, Science Fiction (Sci-Fi Channel, Sci-Fi conventions,
television, games, movies, video); video games (major television shows and movie
rights derived from popular games); and martial arts (movies, television, games,
video). We believe companies involved in these markets will see us as a natural
partner who can add value to the products they offer.
Up-selling. We are implementing a customer communications program to
actively upsell additional products to our customers to solidify our
relationship with them, create mindshare of our brand, and generate additional
revenue. In addition to our main Anime product line of video tapes and DVDs we
have started expanding our product line to games, trading cards, apparel, and
toys. In addition, our e-commerce and one-to-one marketing systems will have the
capability to detect a customer's favorite products and recommend items that are
directly related to items purchased previously. We intend to make attractive
offers to generate upsell transactions, including event and product specific
promotions, tiered pricing, and additional ISP services such as free broadband
service to the top 10% of our customer base.
Subject to the receipt of the additional financing we require, in the 3rd
or 4th quarter of 2000 we plan to launch a branded Anime web portal and complete
product-based ISP service for consumer customers that includes nationwide
dial-up access, hosted e-mail, personal web pages, and 24/7/365 customer
service. We'll be using the same V-ISP and e-commerce service platform that we
plan to sell as an added value service to business customers. Our intention is
to offer customers who purchase Anime product in a given month special ISP
pricing and services potentially providing the ISP service for these customers
for free. Customers who decide not to purchase our merchandise products in a
given month will be charged a higher but still nominal fee for the ISP service.
A key motive for the rollout of this web portal and ISP service is to enhance
customer loyalty. We expect the service to be extremely attractive to our core
customer base of consumers who purchase a large amount of Anime product and will
find value in a high-quality free ISP service that provides value-added features
targeted to the Anime market.
We intend to private-label the free ISP service for our wholesale customers
and partners while also branding this service to generate sales via our own
product line and websites. As we
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believe will be true for us, we believe that our ISP service will be attractive
to our wholesale customers and partners as an inexpensive private label service
for them to achieve customer growth and loyalty. We'll manage the service and
back office functions in exchange for a fee per user or for other reasonable
consideration. This service, if popular with business accounts, could well be
the entry point for us to develop and implement an affiliate marketing program
of our own, or to sell the service as a value-added component to existing
affiliate marketing companies such as Be Free, Inc.
In addition to the profits we expect from direct use of the service by
consumers, partners, and retailers, we also expect to generate advertising
revenue. We plan to place Anime or related advertising in several visible areas
of the service including the CD-ROM, the home page, the e- mail service, and the
personal web pages. To enhance the service for our partners, we plan to allow
them to piggyback on the service and have their own branding shown for any
accounts they sign up on our behalf. We'll benefit from these by handling any
merchandise transactions related to the service.
Cross-cultural and international expansion. An untapped but potentially
lucrative market segment for Anime products is the non-English speaking market.
The unique nature of Anime, which makes a Japanese product sell well in the US,
also has great appeal to other markets and cultures. We believe this is
especially true of the Latin American market and the related domestic Hispanic
market as well as the European market. We plan to work first with internet
portals targeting ethnic groups, young adults and retail companies to determine
the size of this potential market. We plan to test and, if successful, develop
products translated from Japanese and dubbed or subtitled in the language of
certain target groups to which we will market. We also plan to analyze the
market opportunity in the Middle East and Asian markets.
Advanced e-commerce technology platform. We're currently in the process of
implementing architecture that will allow us to sell an e-commerce platform of
the same caliber as those offered by the best internet consulting and business
to business e-commerce companies. This would allow us to develop multiple
websites that function with a single underlying business operations database
that includes site-specific catalog information, pricing, customer data, and
content, such as a list of the top 5 most requested videos for a particular
site. In addition to supporting new products, promotions, and websites, the
platform should allow tracking internet traffic and sales in great detail in
real time. We plan to have this system fully operational by August 2000, subject
to the receipt of the additional funding we require, at which point we believe
we'll be positioned to rollout genre-specific sites such as sites for children,
teenage girls, and live action videos. We intend to sell this platform to Anime
and game retailers who need help getting their catalogs online.
Business-to-business e-commerce. In addition to helping to improve our
consumer services, we plan to sell our e-commerce technology platform through
commercial ISPs and systems integrators to large corporate clients. Development
should be completed by 3rd or 4th quarter 2000, subject to the receipt of the
additional funding we require, with rollout of functionality in stages.
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Intellectual Property
We have filed with the U.S. Patent and Trademark office applications for
the following service marks: "SYCONET", "ANIMEDEPOT.COM", "YUGI-OH"
"YUGI-OH.COM", "YUGI-OH DEPOT", "OHUGI-OH DEPOT.COM", "OTAKU", "OTAKU USA",
"OTAKU USA.COM", "ANIME USA", "ANIME USA.COM", "SYCONET", "SYCONET.COM",
"SYCOZONE", "SYCOZONE.COM", "KID ANIME", and "KIDANIME.COM". In addition, we
have filed "intent to use" service mark applications for "ANIMECOLONY" and
"ANIMECOLONY.COM."
Employees
As of June 26, 2000, we had 34 employees, all of whom are full-time.
Properties and equipment
Effective April 1, 2000, we entered into a one-year lease agreement for
temporary offices at 9105C and 9105A Owens Drive, Manassas, Virginia, pending
completion of the construction of our new office headquarters described below.
This lease is for $2,650 per month, with two one-year renewal options.
Pursuant to a lease agreement with an unaffiliated landlord dated March 1,
2000, we have leased approximately 15,120 square feet of office space at 10390
Central Park Drive, Manassas, Virginia. The lease is for a five year term,
commencing on the date following the issuance of an occupancy permit, with two
five-year renewal options plus an option to purchase the premises during the
initial lease term. The annual base rent is $210,000.
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 expires July 15,
2000 at which point we will rent this warehouse space on a month to month basis.
In April 2000 we entered into a one-year co-location and complex web
hosting service agreement with a data center based in Herndon, Virginia. The
annual base rent is $60,000, with indefinite one-year renewal options.
We've recently taken delivery of $500,000 worth of computers, servers and
related equipment and software needed for our e-commerce/V-ISP platform, of
which we currently owe the vendors approximately $400,000. 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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Name Age Position
---- --- --------
Sy Robert Picon 41 president, chief executive officer, treasurer
and director
William Spears 38 executive vice president, secretary and
director
Philip Jacobson 39 executive vice president
Kathryn T. Jacobson 43 chief financial officer
J. Larry Hineline 54 director
Edward E. Kramer 39 director
Francis H. Yano 52 director
Michael A. Knoll 57 vice president, business development and
legal affairs
Sy Robert Picon: Mr. Picon is one of our co-founders along with William Spears.
He has been our chairman of the board, chief executive officer and treasurer
since our inception and was elected our president in June 1998. 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 is one of our co-founders along with Mr. Picon. 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. In
November 1999, he became our secretary. 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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Philip Jacobson: Mr. Jacobson joined us as executive vice president in January
2000. From July 1999 to January 2000, he was the founder and president of a
financial planning and partner marketing consulting firm called Network
Conceptions LLC. From April 1998 to July 1999, he was director of business
development for Apex Global Internet Services and from January 1984 to January
1998 he worked for MCI Communications managing a series of financial and
marketing departments, with an emphasis on internet services and advanced
products, most recently as Senior manager, partner marketing. Mr. Jacobson has a
B.A. in Accounting from the University of Massachusetts and he is a certified
public accountant. He is the husband of Kathryn Jacobson.
Kathryn T. Jacobson: Mrs. Jacobson has been our chief financial officer since
November 1999. 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. She is the wife of Philip Jacobson.
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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<PAGE>
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.
Michael A. Knoll: Mr. Knoll joined us in June 2000 as our vice president of
business development and legal affairs. Mr. Knoll is our primary contact for
shareholders, portfolio managers and analysts. He has 25 years of experience in
the brokerage and financial services industry. From November 1993 to June 1995
he founded and served as chief executive officer and director of Asia Equity
Inc., the U.S. subsidiary of Asia Equity Group, Hong Kong. From July 1995 until
June 2000, Mr. Knoll was an attorney in private practice. Mr. Knoll received a
BBA in Finance from the University of Toledo, and a J.D. from Loyola University
of Chicago. He is admitted to practice law in New York State.
(b) Key employees:
Anneliese Chang: Ms. Chang, age 30, joined us in January 2000, as director of
marketing. Ms. Chang is responsible for our sales and marketing. Prior to
joining us Ms. Chang held a management position at Disney Consumer
Products-Licensing, where she managed the product development for over 20 toy
licensees on various Disney properties including Toy Story 2, Dinosaur, Mickey
Mouse and Winnie the Pooh. From October 1997 to May 1999 Ms. Chang managed the
execution of sales collateral materials for over 160 magazines and 60 events in
the Creative Services Department at Emap Petersen, Inc., formerly The Petersen
Publishing Company. From December 1995 to October 1997, she also coordinated
trade shows and events for Variety, Inc. including Variety's ShowBiz Expo. Ms.
Chang holds a B.S. in marketing and an M.P.A. in public administration from the
University of Southern California.
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<PAGE>
Technology Systems. From June 1990 to November 1997, he held the position of
regional operations manager for Mead Paper and was a logistics manager for Apple
Computer. In addition, for 18 years he held the position of director of material
management for Air Force One, the Presidential airplane. Mr. Santivasci holds an
A.A. in material management, a B.S. in business, and is a certified production
inventory manager.
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 the chief
executive officer. No other executive officer earned over $100,000 per year
during those years.
Long term compensation
<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>
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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 $70,750 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 the National
Quotation Bureau, Inc. 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
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<PAGE>
Holders of Record
As of June 27, 2000, there were 109 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 June 27, 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 president, chief 6,756,967(1) 34%
c/o SyCoNet.Com, Inc. executive officer,
9105C Owens Drive treasurer and
Manassas, VA 20111 director
William Spears executive vice 5,900,039(2) 28
c/o SyCoNet.Com, Inc. president, secretary
9105C Owens Drive and director
Manassas, VA 20111
J. Larry Hineline director 679,503(3) 4
9266 Oak Hammock Lane
Jupiter, FL 33478
Edward E. Kramer director 302,543(4) 2
2480 Honeycomb Way
Duluth, GA 30096
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C>
Philip Jacobson executive 123,000(5) (6)
9029 Edgepark Road vice president
Vienna, Virginia 22182
Kathryn Jacobson chief financial 123,000(7) (6)
9029 Edgepark Road officer
Vienna, Virginia 22182
Francis H. Yano director 191,100(8) 1
1466 Pule Place
Honolulu, HI 96816
Michael A. Knoll vice president, business 225,000(9) 1
14 Eldridge Ave. development and
Ossining, NY 10562 legal affairs
All officers and 14,139,359(10) 55
directors as a group
(8 individuals)
Alliance Equities, Inc. 4,222,474(11) 24
12147 N.W. 9th Drive
Coral Springs, FL 33071
</TABLE>
----------
(1) Includes options to purchase 4,501,667 shares and 250,000 shares owned by
Mr. Picon's wife, as to which he disclaims beneficial ownership.
(2) Includes options to purchase 5,198,333 shares.
(3) Includes options to purchase 28,750 shares.
(4) Includes options to purchase 258,750 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 25,000 shares and includes options to purchase
62,500 shares owned by his wife Kathryn Jacobson, as to which Mr. Jacobson
disclaims beneficial ownership.
(6) Less than one percent.
(7) Includes options to purchase 62,500 shares and includes 35,500 shares and
options to purchase 25,000 shares owned by her husband, Philip Jacobson, as
to which Mrs. Jacobson disclaims beneficial ownership.
(8) 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) Consists of options to purchase 225,000 shares.
(10) Includes options to purchase 10,315,000 shares.
(11) Includes 2,152,482 shares that are issuable to Alliance under the funding
agreement 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 the table as owned by Philip Jacobson prior to the
offering include options to purchase 25,000 shares and includes options to
purchase 62,500 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 5,198,333
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 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 13,300 13,000 300 *
Jacobson, Philip A., executive vice-president 123,000 35,500 87,500 *
Kelly, John and Cheryl Lynn 29,412 29,412 0 0
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. 60,000 50,000 10,000 *
Mylonakis, Anthony 154,950 70,000 84,950 *
</TABLE>
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<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, executive vice-president, 5,900,039 4,706 5,895,333 26
secretary 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 registered 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. Alliance agreed to give us three other $500,000 payments on
the effective date of this prospectus and on the 60th and 120th days thereafter.
In consideration of each $500,000 payment we will issue to Alliance 2,152,482
shares of our common stock valued at $.70 each.
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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 15,516,140 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.
In June 2000, we agreed to grant a potential institutional investor a
warrant to purchase 1,290,000 shares of our common stock, as compensation for
its letter of intent to enter into a $20 million funding agreement. The
potential investor would return the warrant to us if we give it timely notice of
our rejection of the definitive funding agreement and related closing documents.
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.
Shares eligible for future sale
The future sale of a substantial number of shares of our common stock, or
the perception that these sales could occur, could adversely affect prevailing
market prices for the common stock, if any. In addition, any future sale or
perception of a future sale could make it more difficult for us to sell equity,
or equity-related, securities in the future at a time and price that we deem
appropriate.
Upon completion of this offering, we will have 17,668,622 shares of common
stock outstanding. Of that amount, 3,904,346 shares principally owned by our
officers and directors are restricted securities within the meaning of Rule 144
under the Securities Act. These shares became eligible under Rule 144 for public
sale on June 23, 2000. In addition an aggregate of 1,384,554 shares are or may
be issuable under certain warrants and 15,088,500 shares under outstanding
options.
In general, under Rule 144, as currently in effect, a person, or persons
whose sales are aggregated, who has beneficially owned restricted shares for at
least a year is entitled to sell within any three-month period a number of
shares that does not exceed the greater of 1% of the then outstanding shares of
our common stock or the average weekly trading volume in our common stock during
the four calendar weeks preceding such sale. Sales under Rule 144 are also
subject to certain manner-of-sale provisions, notice requirements and the
availability of current public information about us.
Although we can't predict the effect, if any, that future sales of
restricted securities under Rule 144 will have on the market price of our common
stock, we expect that these sales could depress the market price and,
consequently, limit our ability to raise additional capital through an offering
of our equity securities.
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
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<PAGE>
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.
Experts
Our financial statements for the three months ended March 31, 2000, and 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.
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<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Balance Sheets as of March 31, 2000 (unaudited) and December 31,1999 F-1
Statements of Operations for the quarters ended March 31, 2000 and
1999 (unaudited) F-2
Statements of Cash Flows for the quarters ended March 31, 2000 and 1999 F-3
(unaudited)
Notes to Unaudited Financial Statements F-4
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>
-45-
<PAGE>
SYCONET.COM, INC.
Balance Sheets
March 31, 2000 and December 31, 1999
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
Unaudited
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 410,377 $ 587,559
Accounts receivable, net of allowance for
doubtful accounts of $15,000 at March 31, 2000 and
December 31, 1999, respectively 51,373 63,233
Due from officers -- 65,000
Prepaid expenses 21,924 4,324
Inventories 578,318 352,176
Other current assets -- 1,930
----------- -----------
Total current assets $ 1,061, 992 $ 1,074,222
----------- -----------
Property and Equipment, at cost $ 258,257 $ 84,869
Less accumulated depreciation (25,951) (12,679)
----------- -----------
Total property and equipment $ 232,306 $ 72,190
----------- -----------
Other Assets $ 38,775 $ 5,000
----------- -----------
Total assets $ 1,333,073 $ 1,151,412
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities
Current maturities of long-term debt $ 529,153 $ 31,974
Accounts payable and accrued expenses $ 1,097,882 1,020,428
Stock subscriptions refund payable $ 22,500 22,500
----------- -----------
Total current liabilities $ 1,649,535 $ 1,074,902
----------- -----------
Long-Term Debt, less current maturities $ -- $ --
----------- -----------
Total liabilities $ 1,649,535 $ 1,074,902
----------- -----------
Stockholders' Equity (Deficit)
Preferred stock, authorized, 500,000 shares; no shares
outstanding $ -- $ --
Common stock, $0.0001 par value, authorized 14,500,000
shares in 2000 and 1999; issued and outstanding 12,834,958
and 11,795,429 shares in 2000 and 1999, respectively 1,271 1,180
Additional paid-in capital 7,977,576 7,245,967
Deferred compensation (594,400) (721,900)
Retained earnings (deficit) (7,700,909) (6,448,737)
----------- -----------
Total stockholders' equity (deficit) $ (316,462) $ 76,510
----------- -----------
Total liabilities and stockholders' equity (deficit) $ 1,333,073 $ 1,151,412
=========== ===========
</TABLE>
See Notes to Unaudited Financial Statements.
F-1
<PAGE>
SYCONET.COM, INC.
Statements of Operations
For the Quarters Ended March 31, 2000 and 1999 (unaudited)
<TABLE>
<CAPTION>
March 31 March 31
2000 1999
<S> <C> <C>
Net sales $ 236,806 $ 190,565
Cost of goods sold 143,648 142,351
------------ ------------
Gross profit $ 93,158 $ 48,214
Operating expenses:
Selling, general and
administrative expenses 1,337,880 204,193
------------ ------------
Operating (loss) $ (1,244,722) $ (155,979)
Nonoperating expense, net 7,449 706
------------ ------------
Net (loss) $ (1,252,171) $ (156,685)
============ ============
Loss per common share, basic and diluted $ (0.10) $ (0.02)
============ ============
Weighted average shares outstanding, basic and diluted 12,517,087 7,791,798
============ ============
</TABLE>
See Notes to Unaudited Financial Statements.
F-2
<PAGE>
SYCONET.COM, INC
Statements of Cash Flows
For the Quarters Ended
March 31, 2000 and 1999 (unaudited)
<TABLE>
<CAPTION>
March 31 March 31
2000 1999
<S> <C> <C>
Cash Flows From Operating Activities
Net loss $(1,252,171) $ (156,685)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation 13,272 1,419
Amortization of deferred compensation
related to stock options 127,500 --
Change in assets and liabilities
(Increase) decrease in accounts receivable 11,860 (14,055)
(Increase) in prepaid expenses (17,600) --
(Increase) in inventory (226,142) (142,842)
(Increase) in other assets (31,845) --
Increase (decrease) in accounts payable and accrued expenses 77,454 (16,406)
----------- -----------
Net cash (used in) operating activities $(1,297,672) $ (328,569)
----------- -----------
Cash Flows From Investing Activities
purchase of property and equipment $ (173,388) $ --
----------- -----------
Cash Flows From Financing Activities
Proceeds from issuance of stock $ 731,700 $ 380,000
Short-term loans from officers -- (10,000)
Short-term loans to employees 65,000 600
Proceeds from Other Financing 500,000 --
Principal payments on long-term debt (2,822) (2,008)
----------- -----------
Net cash provided by financing activities $ 1,293,878 $ 368,592
----------- -----------
Increase (decrease) in cash and cash
equivalents $ (177,182) $ 40,023
Cash and Cash Equivalents
Beginning 587,559 20,676
----------- -----------
Ending $ 410,377 $ 60,669
=========== ===========
Supplement Disclosures of Cash Flow Information,
cash payments for interest $ 334 $ 491
=========== ===========
See Notes to Unaudited Financial Statements.
</TABLE>
F-3
<PAGE>
NOTE 1 - ACCOUNTING POLICIES
Unaudited Interim Financial Information
Syconet.com, Inc. ("the Company") has prepared its consolidated financial
statements as of March 31, 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 March 31, 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.
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 remained at $15,000 as of March
31, 2000 and December 31, 1999.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Inventories consisted of goods,
F-4
<PAGE>
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 $ 13,272 and $ 1,419 for
the quarters ended March 31, 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.
ADVERTISING COSTS
Advertising costs are expensed as incurred.
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
F-5
<PAGE>
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 -- 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,
Chief Executive Officer of Syconet.com, Inc. ("SyConet" or the
"Corporation"), and William Spears, President 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
Years Ended December 31, through
---------------------------- 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>
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 $ 1,118.83
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 $101,118.83
===========
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.
-46-
<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.
-47-
<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. Both 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.
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 the
issuances to Alliance under the funding agreement, and to Diversified under the
lease agreement.
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***
-48-
<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.***
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**
21 Subsidiaries**
23.1 Consent of Yount, Hyde & Barbour, P.C.
23.2 Consent of Yount, Hyde & Barbour, P.C. to SB-2/A***
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.
-49-
<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.
-50-
<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 June 27, 2000.
SYCONET.COM, INC.
By: /s/ Sy R. Picon
------------------------------
Sy R. Picon
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: June 27, 2000
By: /s/ William Spears
---------------------------------
William Spears
Director
Date: June 27, 2000
-51-
<PAGE>
By: /s/ J. Larry Hineline
---------------------------------
J. Larry Hineline
Director
Date: June 27, 2000
By: /s/ Edward E. Kramer
---------------------------------
Edward E. Kramer
Director
Date: June 27, 2000
By: /s/ Francis H. Yano
---------------------------------
Francis H. Yano
Director
Date: June 27, 2000
-52-
