UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2 TO
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
SYCONET.COM, INC.
(Name of Small Business Issuer in its charter)
Delaware 54-1838089
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9208A Venture Court
Manassas, Virginia 20111
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (703) 366-3900
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
N/A N/A
Securities to be registered under Section 12(g) of the Act:
Common Stock
(Title of Class)
<PAGE>
PART I
Unless the context otherwise requires, all references in this registration
statement to "us," "we," "our" or "SyCo" mean SyCoNet.Com, Inc.
Item 1. Business.
A. Overview.
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 January 15, 1997, by Sy Robert Picon and William Spears, the co-
founders and principal shareholders of SyCoNet.Com. On February 17, 1999, SyCo
Comics and Distribution Inc. changed its name to SyCoNet.Com, Inc.
Our principal place of business is 9208A Venture Court, 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.
B. 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 could not offer them the comics published by Marvel
Entertainment Group, Inc. and the other principal comic book publishers, all of
which had entered into and were subject to exclusive distribution agreements
with Diamond Comic Distributors, Inc. 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 cannot assure you that our
growth will be sustained or that we will gain significant market share in the
future.
C. Description of Our 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 which range 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
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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 videos also have 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.
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.
Market
More than 2,500 Anime titles are now available in the United States,
principally through national chains selling or renting videocassettes. 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.
Product
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 cannot give any assurances. We distribute over 2,500 available video titles,
including Pokemon, Dragon Ball Z and Sailor Moon videos, as well as select
Anime-related toys and other merchandise. 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.
Approximately 85% of the videos we purchase from suppliers are returnable.
Marketing and Distribution
Initially our products were offered only through our own catalogs to small
retail customers that focused almost exclusively on Anime products. We plan to
continue providing wholesale services to retail stores that are interested in
the Anime product line. However, now we are focusing on direct marketing to the
individual consumer through the Internet. Currently, all of our products can be
ordered through our two web sites "www.animedepot.com" and "www.altvidwar.com".
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 believe that this medium will
significantly reduce our expenses. We also market our products to individuals
and retailers at trade shows and conventions, as well as through trade
publications and 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.
Competition
Anime producers have not granted exclusive distribution agreements to any
distributor, although we cannot assure you that this situation will continue.
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The four major wholesale distributors of Anime videos in the United States
are Bandai, Pioneer, Baker & Taylor, and Ingram Entertainment. They specialize
in providing products to large general retailers, toy retailers and video chains
that are interested primarily in selling only the 20 to 30 most popular Anime
titles. We do not sell to large retail accounts and therefore we do not compete
with these large distribution companies.
We focus on providing a high degree of service to smaller retailers. We
have our main competitors who, like us, are relatively small privately held
companies that serve the Anime niche market of small specialty retailers. These
companies are Central Park Media, Media Blasters, Animego, and AD Vision, and
they have greater financial, personnel, marketing and sales resources than we
do. We compete with these companies on the basis of price, service, selection,
availability and product knowledge. We also compete 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.
Intellectual Property
We have service mark applications pending for the following: "SYCO",
"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".
Employees
As of March 28, 2000, we had 44 employees, all of whom are full-time.
Item 2. Management's Discussion and Analysis or Plan of Operation.
Overview
The following is a discussion of certain factors affecting our results for
the three fiscal years ended December 31, 1997 and 1998, and 1999, and our
liquidity and capital resources. This discussion and analysis should be read
along with our financial statements and their notes, contained elsewhere in this
registration statement. 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 December 31, 1999, we
had an accumulated deficit of $6.4 million. We believe that 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 that will best reach our target customers;
(e) acquire and successfully market product licenses or alternatively, acquire
emerging companies that have specialized skills, particularly in gaming and web
entertainment technologies. We have entered into short-term (under six months)
on-line advertising agreements with World Wrestling Federation and Lycos,
renewable at the option of either party. In January, 2000, we entered into an
alliance with USA Network Interactive, which will enable us to launch an
integrated advertising and branding campaign for our Anime product line through
a site link between USA Networks Interactive's science fiction web site,
Scifi.com, and animedepot.com, our premier Anime website. In addition to
directly targeting Anime fans, the site link will provide 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. In addition, the
agreement also calls for the joint development of web content, print media
advertising, promotional events, and direct targeting through millions of banner
impressions.
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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.
We have expanded our product lines from primarily comics in 1997 to
sub-titled and dubbed videos, DVDs, trading cards, toys and apparel during 1998
and 1999. Because of these changes in the product line mix and the recent
increase in our on-line customer sales, a historical comparative analysis may
not necessarily be meaningful or indicative of our future operating results.
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. 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. Although we expect to have sufficient
capital to make these expenditures and that our sales will grow as a result of
these expenditures, we cannot assure you that we will have the necessary funds
or 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; and (g) general economies of scale.
Results of Operations
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 the Company's presence at tradeshows and
conventions.
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The following table sets forth certain financial data for us as a
percentage of net sales for the indicated periods:
(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;
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.
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Pro Forma Results of Operations
Pro forma information regarding the Company's results, excluding
stock-based compensation (discussed above) and one-time stock-based consulting
fees are presented for informational purposes and are not in accordance with
generally accepted accounting principles. Also see Notes 8 and 11 of the
financial statements.
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Pro forma net loss
Excluding costs of stock-
Based compensation and one-time
Stock-based consulting fees $ (1,159,771) $ (661,029) $ (489,735)
============ ============ ===========
Pro forma basic and diluted loss
Per share, excluding costs of
Stock-based compensation and one-time
Stock-based consulting fees $ (.12) $ (.12) $ (.10)
============ ============ ===========
Shares used in computation of pro
Forma basic and diluted loss per
Share 9,682,754 5,625,507 5,153,058
============ ============ ===========
</TABLE>
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.
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 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
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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 will be effective for our fiscal year ending December 31, 1999. Projected
expenditures for our e-commerce infrastructure will be capitalized in compliance
with this pronouncement.
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. We do not expect adoption of the subject pronouncement to have a
material effect on the financial statements.
Liquidity and capital resources
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.
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. Our
primary sources of cash were funds raised through numerous private placements
during 1997, 1998, and 1999. During 1999, net cash provided by financing
included $1.6 million in private placement funds compared to $523,000 for all of
1998. The Company 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.
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For all comparative periods net cash used in investing activities consisted
primarily of purchases of PCs and peripheral equipment. Towards the end of 1999
and into the year 2000, we expect that we will incur significant capital
expenditures to enhance our technological capabilities in e-commerce and web
deployable order fulfillment solutions.
In December, 1999, we received a $2,000,000 funding commitment from a
venture capital firm that has funded numerous emerging growth companies. The
funds will be made available to us in four $500,000 tranches as follows: (a) the
date we file with the SEC a registration statement on Form 10; (b) the date on
which the SEC declares effective our Form SB-2; (c) 60 days following the
effectiveness of our SB-2, and (d) 120 days following the effectiveness of our
SB-2 registering that number of shares at a stated price equal to the principal
plus interest accrued to the payment date, and warrants entitling the venture
firm to purchase 600,000 shares of our common stock at a price of $ .01 per
share. On January 26, 2000, pursuant to the subject funding agreement, we
received an initial loan of $500,000.
During the first quarter of 2000, we entered into three new lease
agreements: (a) a 6-month lease commencing on January 2000, for a larger
warehouse, pending identification of a permanent distribution facility; (b) a
one-year lease for temporary corporate headquarters, commencing on April 1,
2000, pending the completion of a built-to-suit facility in Manassas, Virginia;
(c) a 5-year lease on a building with an expected completion date in the third
quarter of 2000. We expect to vacate our existing facility by April 1st, 2000.
We believe that we will require additional financing, credit facilities and
cash to be generated from operations to build our e-commerce infrastructure and
undertake a major up-selling and cross-selling marketing campaign to help boost
our sales during 2000 and beyond. Working capital and other capital needs may
also increase as result of changes in corporate strategy, product
diversification, and order fulfillment process improvements. Accordingly, we may
seek such capital through additional bank borrowings, debt or private
placements, equity offerings or other sources. The sale of equity or
equity-related securities could result in additional dilution to shareholders.
Subject to shareholder approval, we will increase 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 provide greater financing
flexibility and capability for us. From time to time, we will consider the
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
and thus have not entered into any definitive acquisition agreements, and we may
never do so. We have been in discussions with a number of parties regarding
obtaining additional financing; however, we cannot assure you that our financing
requirements can be met by current available facilities or that additional
facilities will be available on terms and conditions favorable to us, if at all.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS.
The "Overview" and the "Liquidity and Capital Resources" section of the
Management's Discussion and Analysis cover risk factors that may impact the
Company's operating results. We have identified additional risk factors as
listed below.
WE HAVE A LIMITED OPERATING HISTORY WHICH CONSTRAINS OUR FORECASTING ABILITY.
Because of limited historical financial data, changes in the product line during
the last two years along with changes in consumer trends and preferences, and a
recent growth in web-based consumer sales, 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, or ramp up our infrastructure to absorb unexpected
sales growth. As a result, we may incur a net loss during any quarter that may
be greater than expected.
WE ANTICIPATE OPERATING LOSSES TO CONTINUE.
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. In connection with the recruitment and
retention of additional key personnel, we expect to utilize stock options, which
may result in increased stock compensation costs. Additionally, future
acquisitions
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may result in the recognition of goodwill, the amortization of which will not
impact cash flows, but will adversely impact results of operations.
ANY INABILITY TO STREAMLINE AND/ OR CONSOLIDATE OUR DISTRIBUTION FACILITY WILL
MATERIALLY IMPACT OUR OPERATIONS.
We currently operate an 8,100 square foot distribution facility based in
Manassas, VA which we are leasing over an 8- month period. If the current
facility during this time period is not able to accommodate increases in demand
and customer orders, our operating results will be materially impacted. In the
event that we move the distribution facility elsewhere, we may expect a
temporary disruption in our business as well as unexpected costs during the
transition period pending connection of the new location to our automated order
fulfillment system.
WE HAVE EXPOSURE TO INVENTORY RISK.
We have expanded our 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 accurately predict changes in consumer tastes and may temporarily overstock
on certain items. Although we are able to return most of our stock, increased
inventory levels would subject us to additional inventory risks, including
shrinkage. Although we have tight security measures and systems in place at our
distribution center, we may not successfully prevent inventory shrinkage in
future periods.
OUR SALES GROWTH IS PARTLY DEPENDENT ON OUR ABILITY TO DEVELOP OUR WEBSITE AND
EMPLOY THE MOST RECENT E-COMMERCE TECHNOLOGY.
Commencing in late 1999 through the present time, we have expended considerable
resources in enhancing our web site and leveraging unique e-commerce
capabilities. Significant effort has been expended towards the development of
web content, graphics, as well as web maintenance to include timely product
pricing and product availability information. Our inability to update our web
site, facilitate on-line shopping, and cater to changing tastes and preferences
will 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.
Item 3. Description of Property
The Company leases from an unaffiliated landlord approximately 6,000 square
feet of office and warehouse space in Manassas, Virginia for $2,325 per month,
pursuant to an eight month lease extension that expires in September 2000. We
terminated this lease subject to a two-month cancellation penalty, and effective
April 1, 2000, we entered into a one-year lease agreement for temporary offices,
pending completion of the construction of our new office headquarters described
below.
The Company has entered into a lease agreement with an unaffiliated
landlord of approximately 15,120 square feet of office and warehouse space at
10390 Central Park Drive, Manassas, Virginia. The lease is for a five year term,
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. The Company
expects to take occupancy of these premises by April 1, 2000.
Item 4. Security Ownership of Certain Beneficial Owners and Management.
Unless otherwise indicated, we believe that the individuals listed in this
Item have the sole power to vote and dispose of the number of shares listed
opposite their respective names.
(a) Security ownership of certain beneficial owners
The following table contains information regarding ownership of our common
stock, which are our only voting securities, which are deemed under the current
rules of the Securities and Exchange Commission to be beneficially owned by any
person -- including any "group" as that term is used in Instruction No. 4 to S-B
Item 403 -- known by us to be the beneficial owner of more than five percent
(5%) of our common stock as of March 28, 2000:
Name and address No. of
of beneficial owner Shares Owned Percentage of Class
- --------------- ------------ -------------------
Sy Robert Picon 6,756,967(1) 40%
c/o SyCoNet.Com, Inc.
9208A Venture Court
Manassas, VA 20111
William Spears 5,900,039(2) 33
c/o SyCoNet.Com, Inc.
9208A Venture Court
Manassas, VA 20111
J. Larry Hineline 679,503(3) 5
9266 Oak Hammock Lane
Jupiter, FL 33478
10
<PAGE>
- ----------
(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.
(b) Security Ownership of Management.
The following table contains information regarding ownership of our common
stock, which are our only voting securities, which are deemed under the current
rules of the Securities and Exchange Commission to be beneficially owned by our
directors, our executive officers named in Item 5 below, and our directors and
executive officers as a group, as of March 28, 2000:
<TABLE>
<CAPTION>
No. of
Name and Address Office Shares Owned Percentage of Class
- ------------- --------------- ------------- -------------------
<S> <C> <C> <C>
Sy Robert Picon President, Chief 6,756,967(1) 40%
c/o SyCoNet.Com, Inc. Executive Officer,
9208A Venture Court Treasurer and
Manassas, VA 20111 Director
William Spears Executive Vice 5,900,039(2) 33
c/o SyCoNet.Com, Inc. President,
9208A Venture Court and Director
Manassas, VA 20111
J. Larry Hineline Secretary and 679,503(3) 5
9266 Oak Hammock Lane Director
Jupiter, FL 33478
Edward E. Kramer Director 288,750(4) 2
2480 Honeycomb Way
Duluth, GA 30096
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 144,850(8) 1
1466 Pule Place
Honolulu, HI 96816
Jean-Claude Geha Chief Operating 100,000(9) (6)
3615 Devilwood Ct. Officer
Fairfax, Virginia 22030
All Officers and 13,993,109 61
Directors as a Group
(8 individuals)
</TABLE>
11
<PAGE>
- ----------
(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.
(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.
(9) Consists of options to purchase 100,000 shares.
Item 5. Directors and Executive Officers, Promoters and Control Persons.
(a) Officers and directors: The following table provides information
concerning each of our executive officers and directors. 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.
Name Age Position
- ----- ----- -------
Sy Robert Picon 41 President, Chief Executive Officer,
Treasurer and Director
William Spears 37 Executive Vice President and Director
Jean-Claude Geha 36 Executive Vice President and Chief
Operating Officer
Philip Jacobson 39 Executive Vice President
Kathryn T. Jacobson 43 Chief Financial Officer
J. Larry Hineline 54 Secretary and Director
Edward E. Kramer 39 Director
Francis H. Yano 52 Director
Sy Robert Picon: Mr. Picon is one of our co-founders along with William
Spears. He has been our Chairman
12
<PAGE>
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. 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.
Jean-Claude Geha: Mr. Geha has been an Executive Vice President and our
Chief Operating Officer since January 2000. He has more than 10 years of senior
management experience and has worked in the fields of engineering, operating and
marketing at MCI. From 1998 until he joined us, Mr. Geha was the Director of
Product Management and Market Communications for Apex Global Internet Services,
a Tier 1 Internet backbone company, where his responsibilities included the
design and implementation of AGIS' domestic and international Internet and data
products and services. From 1996 to 1999, he was the Senior Marketing Manager
and Consultant for Broadband Marketing at Bell Canada/Stentor. From 1991 to 1996
he worked at MCI, first as a Special Services Engineer, then as a Manager of
Global Data Engineering and Provisioning, and later of Internet MCI Services
and, finally, as a Senior Sales Support Manager in Customer Business Solutions.
Mr. Geha has an M.S. in Telecommunications Management from Southern Methodist
University and a B.S. in Electrical Engineering from the University of Maryland.
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. (NASDAQ: CACI), formerly QuesTech, Inc., first as
a Senior Accountant, then Manager of Financial Reporting, then Assistant
Controller and finally as 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 and our Secretary since June 1998. 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
13
<PAGE>
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 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.
(b) Key employees:
R. Scott Murphy: Mr. Murphy, age 39, joined us in January 2000 as the
Director of Technical Services and Web Design. From September 1999 to January
2000, he was a Senior Systems Programmer at Command Technologies, Inc. From June
1998 to September 1999, he held a management position at KPMG where he led a
project to create an intranet portal service that allows KPMG employees
worldwide to access a complete library of tax services. Mr. Murphy was employed
by West Virginia University since February 1997 as its coordinator of all user
access and systems security. He received a B.A. in Computer Art from Davis and
Elkins College and is working on the requirements for an M.S. in Computer
Science from West Virginia University.
Keith Impink: Mr. Impink, age 35, joined us in January 2000 as our Creative
Director and Webmaster. Mr. Impink is a professional artist and web designer who
is responsible for the design of our corporate and e- commerce websites, as well
as all of our marketing and convention materials. For the last five years Mr.
Impink has worked as a free-lance web developer and graphic designer based in
California. During those five years, he worked as Webmaster for companies such
as M.P. Mountanos, Inc. and Oscar Knows, which runs the www.oscarknows.com site.
From 1981 to 1995, Mr. Impink was a free-lance commercial artist designing
t-shirts, album covers, convention materials and marketing literature for
clients such as Hewlett-Packard, BMW, the American Heart Association, Capitol
Records and rock bands such as The Grateful Dead and Lynryd Skynryd.
Item 6. Executive Compensation.
(a) Summary Compensation: The following table summarizes the compensation
for the fiscal year ended December 31, 1999 and the prior two fiscal years
earned by or paid to our chief executive officer. No other executive officer
earned more than $100,000 for these years.
Long Term Compensation
----------------------
Annual Compensation Awards
------------------- Securities
Name and Underlying
principal position Year Salary Bonus Options(#)/SARS
- ------------------ ----- --------- ----- ---------------
Sy R. Picon, CEO 1999 $103,955 $0 4,600,000
1998 $58,231 $0 0
1997 $42,058 $0 2,285,000
14
<PAGE>
Option/SAR Grants in Last Fiscal Year
Individual Grants
------------------------------------------------------------------
Number of % of Total
Securities Options/SARS
Underlying Granted to Exercise or Market Price
Options/SARS Employees Base Price Expiration on Date of
Name Granted (#) in Fiscal Year ($/share) Date of Grant ($)
- --- ------------ -------------- ----------- ---------- ------------
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
Item 7. Certain Relationships and Related Transactions.
In the fourth quarter of 1999, we loaned to our Chief Executive Officer Sy
Picon, an aggregate of $65,000 as follows: $20,000 on October 28, 1999, $15,000
on November 8, 1999 and $30,000 on November 30, 1999. The $65,000 was repaid in
full in early 2000.
Item 8. Description of Securities.
Authorized Capitalization
Our authorized capital stock consists of 15,000,000 shares, of which
14,500,000 shares are common stock, par value $.0001, and 500,000 shares are
preferred stock, par value $.0001. Subject to pending shareholder approval, our
authorized capitalization will be increased to 85,000,000 shares of common stock
and 1,000,000 shares of preferred stock.
Common Stock
We currently have 12,834,958 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.
Preferred Stock
We currently have no shares of preferred stock outstanding. However, our
board of directors is authorized to issue up to 500,000 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.
Delaware anti-takeover law
15
<PAGE>
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:
(1) 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
(2) upon becoming an interested stockholder, the stockholder then owns at
least 85% of the voting securities, as defined in Section 203; or
(3) 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.
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Equity and
Related Stockholder Matters.
(a) 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 Closing Ask
------ -------------------- --------------------
High Low High Low
----- ----- ----- ------
October 13 (first
availability) through
December 31, 1998 $ .62 $ .01 $1.25 $ .44
January 4 through
March 31, 1999 .56 .19 .62 .25
April 1 through
June 30, 1999 .73 .22 .78 .25
July 1 through
September 30, 1999 2.40 .42 2.45 .45
October 1 through
December 31, 1999 2.69 1.19 2.75 1.22
16
<PAGE>
(b) Holders
As of March 28, 2000, there were 90 holders of record of our common stock.
(c) 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.
Item 2. Legal Proceedings.
None.
Item 3. Changes in and Disagreements with Accountants.
None.
Item 4. 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
"Securities Act"), for transactions not involving a public offering.
In September, November and December 1997, we sold to 40 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 Securities Act and Rule 504 of Regulation D promulgated
under the Securities Act. The investors paid cash for their shares.
In March, April, May and June 1998, we sold to 39 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 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 12 private investors at a price
of $.20 per share, for an aggregate price of $402,500 in cash, and (b) issued
180,000 shares to five consultants for services rendered valued at $36,000.
In March and April 1999, we sold to three 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 Securities Act and Section 203(t) of the
Pennsylvania Securities Act of 1972.
17
<PAGE>
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 Securities Act and Section 203(t) of the
Pennsylvania Securities Act of 1972.
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 Securities Act.
From November 1999 through February 2000, we sold to 32 accredited
investors 879,406 shares of common stock at a price of $.85 per share, for an
aggregate price of $747,495, in a private placement made pursuant to the
exemption from registration provided by Section 4(2) and 4(6) of the Securities
Act and Rule 506 of Regulation D promulgated under the Securities 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 Securities Act.
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 Securities 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
Securities Act.
Item 5. 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.
18
<PAGE>
FINANCIAL STATEMENTS
C O N T E N T S
Page
REPORT OF INDEPENDENT ACCOUNTANTS
ON THE FINANCIAL STATEMENTS 1
FINANCIAL STATEMENTS
Balance sheets 2
Statements of operations 3
Statements of stockholders' equity 4
Statements of cash flows 5
Notes to financial statements 6-14
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Syconet.com, Inc.
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
<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 $ 76,510 $ (116,226)
----------- -----------
Total liabilities and stockholders' equity $ 1,151,412 $ 255,917
=========== ===========
</TABLE>
See Notes to Financial Statements.
2
<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.
3
<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.
4
<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.
5
<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
Picone, Chief Executive Officer of Syconet.com, Inc. ("SyCo" or the
"Corporation"), and William Spears, President of SyCo. 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 Company 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.
6
<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.
7
<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
========== ==========
8
<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.
9
<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. Prior to October,
1998, the Corporation's stock was not readily marketable and had no
determinable fair value. 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.
10
<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.
11
<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)
--------- ---------
$ -- $ --
========= =========
12
<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>
13
<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.
14
<PAGE>
PART III
Item 1. Index to 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*
3.2 By-Laws*
4 Specimen Common Stock Certificate**
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**
27 Financial Data Schedule**
- ----------
*Previously filed in Form 10-SB, January 25, 2000
**Previously filed in Form 10-SB, Amendment No. 1, March 21, 2000
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
SYCONET.COM, INC.
Date: March 30, 2000 By: /s/ Sy R. Picon
---------------------------
Sy R. Picon
Chief Executive Officer
