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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission file number 000-29113
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.)
310 Dominion Road, Vienna, Virginia 22180
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (703) 281-9603
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [_] No [X]
The aggregate number of shares outstanding of the Issuer's Common Stock, its
sole class of common equity, was 22,695,022 as of October 13, 2000.
Transitional Small Business Issuer Disclosure Format: Yes [_] No [X]
Page 1 of 26; Exhibit Index is on Page 25
1
<PAGE>
SYCONET.COM
FORM 10QSB
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets ---- September 30, 2000 and December 31, 1999 .........3
Statements of Operations ---- Three Months and Nine Months Ended
September 30, 2000 and 1999 .....................................4
Statements of Cash Flows --- Nine Months Ended September 30, 2000
and 1999
Notes fo Financial Statements ........................................5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ...........................................9
PART II. OTHER INFORMATION
Item 2. Legal Proceedings ...................................................26
Item 4. Changes in Securities ...............................................26
Signature ...................................................................27
Exhibit Index ...............................................................28
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
SYCONET.COM, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
Sept 30, December 31,
2000 1999
Unaudited
----------- -----------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 98,743 $ 587,559
Accounts receivable, net of allowance for
doubtful accounts of $22,000 and $15,000 at
September 30, 2000 and December 31, 1999, 22,072 63,233
respectively
Due from officers -- 65,000
Prepaid expenses -- 4,324
Inventories 162,227 352,176
Other current assets 4,388 1,930
----------- -----------
Total current assets $ 287,430 $ 1,074,222
----------- -----------
Property and Equipment, at cost $ 322,550 $ 84,869
Less accumulated depreciation (51,359) (12,679)
----------- -----------
Total property and equipment $ 271,191 $ 72,190
----------- -----------
Other Assets -- 5,000
----------- -----------
Total assets $ 558,621 $ 1,151,412
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities
Current maturities of long-term debt $ 110,500 $ 31,974
Accounts payable and accrued expenses 879,932 1,020,428
Stock subscriptions refund payable 18,700 22,500
----------- -----------
Total current liabilities $ 1,009,131 $ 1,074,902
Long-Term Debt, less current maturities 134,166 --
----------- -----------
Total liabilities $ 1,143,297 $ 1,074,902
----------- -----------
Stockholders' Equity (Deficit)
Preferred stock, authorized, 1,000,000 shares; no shares
outstanding --
Common stock, $0.0001 par value, authorized 80,000,000
shares in 2000 and 1999; issued and outstanding 20,876,840
and 11,795,429 shares in 2000 and 1999, respectively $ 2,088 $ 1,180
Additional paid-in capital 6,854,349 7,245,967
Deferred compensation (339,610) (721,900)
Retained Deficit (7,101,504) (6,448,737)
----------- -----------
Total stockholders' equity (deficit) $ (584,677) $ 76,510
----------- -----------
Total liabilities and stockholders' equity (deficit) $ 558,621 $ 1,151,412
=========== ===========
</TABLE>
See Notes to Financial Statements.
<PAGE>
SYCONET.COM, INC.
Consolidated Statements of Operations (unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Sept 30, Three Months Ended Sept 30,
-------------------------- ---------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 580,606 $ 773,134 $ 102,774 $ 375,147
Cost of goods sold 476,304 598,527 60,249 305,611
------------ ------------ ------------ ------------
Gross profit $ 104,302 $ 174,607 $ 42,525 $ 69,536
Operating expenses:
Selling, general and
administrative expenses 3,357,057 586,521 482,235 162,000
Restructuring and other non-recurring charges 422,986 -- -- --
Reversal of stock compensation expense (3,040,000) -- -- --
------------ ------------ ------------ ------------
Operating (loss) $ (635,741) $ (411,913) $ (439,710) $ (92,463)
Nonoperating expense, net (17,025) (2,316) (2,556) (910)
------------ ------------ ------------ ------------
Net (loss) $ (652,766) $ (414,230) $ (442,266) $ (93,374)
============ ============ ============ ============
(Loss) per common share, basic and diluted $ (0.05) $ (0.05) $ (0.03) $ (0.01)
============ ============ ============ ============
Weighted average shares outstanding, basic
and diluted 14,294,967 9,136,543 17,122,526 10,711,429
============ ============ ============ ============
</TABLE>
See Notes to Unaudited Financial Statements
<PAGE>
Consolidated Statements of Cash Flows (unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities
Net loss $ (652,766) $ (414,229)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and amortization 63,429 3,854
Amortization of deferred compensation
related to stock options 382,290 --
Restructuring charges and other unusual items 422,986 --
Reversal of stock compensation (3,040,000) --
Changes in assets charges and liabilities:
(Increase) decrease in accounts receivable 41,161 (9,049)
Decrease in prepaid expenses 4,324 --
(Increase) decrease in inventory 189,949 (199,362)
(Decrease) in other assets 2,542 --
Increase (decrease) in accounts payable and accrued expenses (209,391) 2,726
Increase (decrease) in other liabilities (3,800) (65,597)
----------- -----------
Net cash (used in) operating activities $(2,799,276) $ (681,657)
----------- -----------
Cash Flows From Investing Activities,
purchase of property and equipment $ (380,330) $ --
----------- -----------
Cash Flows From Financing Activities
Proceeds from issuance of stock $ 1,751,790 $ 774,980
Repayment of loans to officers 65,000 (10,000)
Short-term loans to employees -- 2,000
Proceeds from Other Financing 875,000 --
Principal payments on long-term debt (1,000) (6,030)
----------- -----------
Net cash provided by financing activities 2,690,790 760,950
----------- -----------
Increase (decrease) in cash and cash
equivalents $ (488,816) $ 79,293
Cash and Cash Equivalents
Beginning 587,559 20,676
----------- -----------
Ending $ 98,743 $ 99,969
=========== ===========
Supplemental Disclosures of Cash Flow Information,
cash payments for interest $ 30,965 $ 2,034
=========== ===========
Supplemental Schedule of Noncash Investing and Financing Activities
Payment of long-term debt by issuance of stock $ 897,500 $ --
=========== ===========
Long-term debt incurred for the purchase of equipment $ 156,422 $ --
=========== ===========
</TABLE>
See Notes to Financial Statements.
<PAGE>
NOTE 1 - ACCOUNTING POLICIES
Unaudited Interim Financial Information
Syconet.com, Inc. ("the Company") has prepared its consolidated financial
statements as of September 30, 2000 and for the periods then ended 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 September 30,
2000 are not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 2000. These consolidated financial statements
should be read in conjunction with the audited financial statements and the
accompanying notes included in the Company's Form 10SB Registration Statement
declared effective March 25, 2000 and Form SB2, initially made effective on June
23, 2000, and all its related post-effective amendments.
GOING CONCERN
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of the
company as a going concern. However, the Company has sustained substantial
operating losses since inception and the Company has used substantial amounts of
working capital in its operations. In addition, there has been a loss of key
personnel which may cause a disruption to operations. The above conditions raise
substantial doubt about the entity's ability to continue as a going concern.
In view of these matters, the Company needs to obtain substantial
additional working capital and to replace certain key personnel. The Company is
actively engaged in pursuing financing and other arrangements. However, the
Company can not assure that it will be able to obtain the financing necessary to
continue to support its business.
CASH AND CASH EQUIVALENTS
All highly liquid investments with maturities of three months or less at
the date of purchase are considered to be cash equivalents and are carried at
cost plus accrued interest, which approximates fair value.
ACCOUNTS RECEIVABLE
Accounts receivable are shown net of related allowance for doubtful
accounts. The allowance for doubtful accounts were $ 22,000 and $ 15,000 as of
September 30, 2000 and December 31, 1999, respectively.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Inventories consisted of goods, primarily anime videos, purchased for
redistribution.
PROPERTY AND EQUIPMENT
Property and equipment, principally computer hardware and software, are
<PAGE>
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 $ 59,200 and $ 3,900 for
the nine months ended September 30, 2000 and 1999, respectively.
LOSS PER SHARE
Loss per share is computed on the weighted average number of shares
outstanding and excludes any dilutive effects of options, warrants and
convertible securities. Common equivalent shares are excluded from the
computation if their effect is antidilutive.
REVENUE RECOGNITION
Sales are recorded net of discounts, which range from 28% to 50% versus
manufacturer's suggested retail price (MSRP). Generally, web-based consumer
purchases are non-returnable, except for damaged products. For retailers, the
right of return is granted in exchange for a cash refund or merchandise exchange
contingent upon receipt of the returned inventory on a case-by-base basis.
Retailer returns are subject to a 15% restocking fee. In December, 1999, the
Securities and Exchange Commission issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB 101), which summarizes
guidelines for recognition, presentation and disclosure of revenue in the
financial statements. The Company has determined that it is in compliance with
the subject bulletin.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Syconet.com
and its non-operating subsidiaries. There are no inter-company balances and
transactions.
ADVERTISING COSTS
Advertising costs are expensed as incurred or if applicable, are amortized over
the contract term based on a guaranteed number of impressions for the period.
RESTRUCTURING CHARGES AND OTHER UNUSUAL ITEMS
Restructuring charges consist primarily of penalties associated with early
terminations of various leases on facilities and furniture which the Company is
unable to use as a result of downsizing and consolidation of operations. Other
unusual items consist of one-time writedowns for certain assets from which the
Company may never benefit. Following is a breakdown of these charges:
Losses from facility
exit and lease
cancellations 148,633
Asset Write-downs 274,353
-------
422,986
=======
INCOME TAXES
<PAGE>
Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating loss
and tax credit carryforwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences between
the reported amounts of asset and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In September, 2000, the Emerging Issues Task Force (EITF) issued its final
consensus on EITF Issue 00-10, "Accounting for Shipping and Handling Fees and
Costs." This consensus provided that all amounts billed for shipping and
handling in a sale transaction be classified as revenue. The Company currently
includes in cost of sales inbound shipping costs, but classifies warehousing,
order fulfillment, and outbound shipping costs under Selling, General and
Administrative Expense.
NOTE 2 -- REVERSAL OF STOCK COMPENSATION
During the first and second quarter of 2000, 13,599,750 outstanding stock
options were cancelled or forfeited, resulting in a reversal of $3,040,000 of
stock compensation expense.
NOTE 3 -- COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
In early August, 2000, the Company received notice of a motion for judgment
filed by Dominion Computer Systems ("Dominion") against it in the Circuit Court
of Rockingham County in the Comonwealth of Virginia, for alleged indebtedness in
the amount of $ 64,580, plus interest. The Company disputed the amount and filed
a counter-suit, alleging various defenses against Dominion. Subject to a
confidentiality agreement, the parties agreed to settle out of court for an
undisclosed amount which has no material impact to the financial statements.
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.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
FORWARD-LOOKING STATEMENTS
This Item contains forward looking statements (as such term is defined in
the Private Securities Litigation Reform Act of 1995). Such statements involve
significant risks and uncertainties and are subject to change based on various
important factors. The following factors, among others, could affect our
performance and could cause actual results for fiscal 2000 and beyond to differ
materially from those expressed or implied in any such forward-looking
statements: loss of personnel associated with operating our core business, and
our inability to replace such personnel which may cause disruptions to
operations; failure to attract new customers or maintain repeat customers
inability to obtain, or delay in obtaining, the substantial additional capital
we need; changes in consumer spending patterns and debt levels; market
acceptance of Anime and e-commerce; technological obsolescence; and the impact
of competitive market factors. Imvestors are cautioned not to place undue
reliance on these forward looking statements which speak only as of the date of
this filing. Syconet is not obligated to release publicly any revisions to these
forward-looking statements as a result of events that transpire subsequent to
this filing.
BUSINESS OVERVIEW
SyCoNet.Com, Inc. has been funded since its inception through private
placements of its Common Stock. We currently need substantial additional
capital, and we can give no assurance that we will be able to obtain it in the
near future or at all, or on commercially reasonable terms.
A. Anime Business
We are engaged principally in the distribution and direct marketing of
Anime -- animated cartoons produced in Japan and shipped to the United States
where the licensee or master distributor inserts English subtitles or dialogue
prior to distribution on videocassettes. We sell directly to individuals over
the Internet at www.Animedepot.com and at Anime trade shows and other retail
events.
Our main product line consists primarily of video tapes and DVDs, and has
recently been expanded to include games, trading cards, apparel, and toys. We
are not focused on Anime as a niche market, but as an all- encompassing
mainstream phenomenon that can be easily monetized through aggressive and
creative marketing applications.
We began as a wholesaler of Anime products to small retail outlets, such as
Anime specialty stores, comic book specialty stores and video stores, that are
focused almost exclusively on being the resident experts on Anime in their
geographic area. We plan to continue providing wholesale services to retail
stores that would like us to provide their Anime product line.
<PAGE>
B. Technology Development and Business to Business Services
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 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 provide poor service and little flexibility or
attention to specific customer needs, and that the cost of building a platform
with the flexibility and scalability to allow us to service other businesses
would not be significantly greater than the cost of building a platform for our
own customers. The principal difference would be in ensuring that the database
design and equipment architecture would allow flexibility in as many ways as
possible. As a result we decided to build a technical team dedicated to creating
a business to business distribution and e-commerce platform that we could sell
to third parties. If successful, we would have been able to create an additional
source of ongoing revenue and profit. Over time, 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 late June 2000
when we announced that we would not be able to meet our payroll on time, we lost
substantially all of our technical staff to another internet company. Absent the
technical staff and the funding required to finish the platform, we currently
are not able to complete a working model of the e-commerce platform nor avail
ourselves of our first potential beta customer. We are in negotiation with
Selenetix, a key subcontractor on the e-commerce project to determine the
feasibility and the resources required to complete the platform which, if
launched at all, would be at a scaled back level.
Although we purchased and installed the Great Plains e-enterprise system to
run our front office and back office transactional processes, we lack the
technical capability to trouble-shoot, maintain and continue running this system
efficiently. Thus, we negotiated an agreement with Selenetix, to host this
application, in consideration for a promise to pay down our indebtedness.
<PAGE>
In addition to e-commerce and distribution services, our plan to develop a
virtual ISP (Internet Service Provider) service-in-a-box that would be
integrated into the e-commerce platform has been put on hold, pending
definitization of a technology agreement with Selenetix.
Business Strategy - Anime
A. Licenses & Proprietary Product
We believe that licensing proprietary product from Japanese Anime content
providers is critical for our future success. If we are able to raise financing
in excess of immediate working capital requirements, we plan to acquire
distribution rights which would enable us to offer Anime titles and associated
products that are only available from us. Acquiring proprietary product rights
would require us to translate Japanese language Anime tapes into English for
release and distribution as sub-titled and voice dubbed VHS tapes and DVDs, but
should also enable us to achieve greater revenues with higher, more stable
profit margins that could withstand the entry of larger wholesale players
(service and cost advantages are not effective barriers to entry) and
significantly increase our competitive advantage.
B. Marketing
We have recently scaled back marketing efforts but have remained focused on
new customer acquisition as well as recapture of former customers that might
have been lost to the competition as a result of product stock-outs during the
period of financial retrenchment. A new plan under development, through the
efforts of our marketing consultant, will incorporate the following principal
components:
Direct Sales to Customers. We plan to launch and design separate web sites
for the different audiences that enjoy various subgenera of Anime and
action oriented films (such as martial arts). We expect to rebuild our
customer service infrastructure and implement direct selling techniques,
including telemarketing for a limited period. We will continue to focus on
providing a full line of Anime product that appeals to the core Anime
<PAGE>
customer - Anime fans who buy 24 tapes or more per year. This includes both
consumers who buy from us directly and retailers who operate retail Anime
shops. We will continue to target these customers via Anime conventions and
through the sponsorship of events where Anime fans are expected to appear.
Web Based Advertising. We expect to resume web advertising via virtual
malls or participation in performance marketing and similar affinity
programs. Unless we are able to negotiate more favorable terms, it is
unlikely that we will be able to continue our advertising agreements with
USA Networks or the World Wrestling Federation.
FINANCIAL OVERVIEW
The following is a discussion of certain factors affecting our results for
the quarters and nine month periods ended September 30, 2000 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
Form 10QSB. Since they are significant in relation to costs of operations, we
present distribution and fulfillment costs on the financial statements as a
component of selling, general and administrative expenses pursuent to Emerging
Issues Task Force (EITF) Issue 00-10. 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 loss, or net
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 September 30, 2000, we
had an accumulated deficit in excess of $7 million. We expect losses to
continue, pending our achievement of growth in web sales or the acquisition of
targeted product licenses, which would allow us to realize higher profit
margins. We believe that Internet sales growth will be contingent on our ability
to (a) establish name recognition among fans of Anime and capitalize on
up-selling and cross-selling opportunities; (b) select and market product lines
that will gain popularity among Anime fans and will have cross-over potential to
mainstream animation fans; (c) provide our customers good value, in terms of
competitive pricing and order fulfillment; (d) identify and capitalize on
advertising media and search engine tools that will allow us to best reach our
target customers; and (e) acquire and successfully market product licenses. In
January, 2000, we entered into an alliance with USA Network Interactive, which
will enable us to launch an integrated advertising and branding campaign for our
Anime product line through an e-commerce area jointly developed by USA Networks'
Interactive science fiction web site, Scifi.com, and animedepot.com, our premier
Anime website. In addition to directly targeting Anime fans, the partnership
provides a venue for us to cross-sell to science fiction enthusiasts, build
brand awareness, and drive traffic to our web site, thereby potentially
increasing sales. The agreement also calls for the joint development of web
content, print media advertising, promotional events, and direct targeting
through millions of banner impressions. Our agreement with USA Networks is on
hold, pending its review of our proposed re-negotiated payment terms. A separate
advertising agreement with World Wrestling Federation ("WWF") has expired and
payment terms are currently being re-negotiated. We can't assure you that
renewals of advertising agreements with either USA or WWF will ever occur.
<PAGE>
During the second quarter, we lost most of our officers and senior
management, including our former CEO, Sy Picon. Our new CEO, William Spears, is
charged with the responsibility of re-establishing our operating structure and
re-focusing on our core business. Because of our recent downsizing, and our
limited resources including product on hand, our sales through the most recent
quarter have declined when compared with the same period last year.
Any improvement in sales during the fourth quarter and beyond will be
contingent on promotional discounts, convention marketing, recapture of lost
customers, customer loyalty demonstrated through repeat sales, current trends,
which influence the popularity of certain of our product lines, inventory levels
and/ or product availability, and seasonal demand. Historically, our quarterly
sales during a given year reflect seasonality, with the lowest and highest
volumes reported during the first quarter and fourth quarter, respectively,
except for this year, when the lowest sales occurred during the third quarter.
Other factors that may impact sales in the future include unforeseen
technological problems associated with web traffic and server availability,
government regulations on web transactions, and the general state of the
economy.
Operating margins will be, and have been, significantly impacted by (a) our
ability to maintain and satisfy our existing repeat customers, as well as
attract new customers with the same level of loyalty; (b) competitive pricing
pressures; (c) the effectiveness of advertising and marketing expenditures and
management's ability to measure and evaluate results; (d) the effectiveness of
our web design and content in attracting and leading consumers to consummate
on-line sales; (e) shipping efficiencies; (f) proportion of distributor sales in
relation to consumer sales; (g) general economies of scale; (h) overall
operating fficiencies as well as cost reduction measures and (i) overall sales
of high margin product which normally appeals to certain segments or niche
market; (j) effective inventory management techniques, including our ability to
select and market highly sellable titles.
Results of Operations
Comparison of the quarters ended September 30, 2000 and 1999
Net sales, consisting of the selling price of VHS and DVD products, trading
cards, toys and apparel, net of discounts and customer returns, were $ 102,800
for the quarter ended September 30, 2000, a 73% decrease over net sales of
$375,100 during the comparable quarter in 1999. Net sales for the nine months
ended September 30, 2000 were $ 580,600, which declined by 25% compared to
$773,100 for the same period last year. The sales reduction occurred primarily
during the third quarter of 2000, having been negatively impacted by the
continued loss of our wholesale and Internet customers, due to prolonged
stock-outs as well as a substantial decline in our web traffic.
Our limited cash resources and impaired credit terms prevented us from
restocking our inventory. Towards the end of the second quarter and continuing
on to the third quarter, we were not able to fulfill increased customer demand
for new product and back orders, resulting in foregone sales and lost customers.
It was not until August, 2000, when we received funding that we were able to buy
the inventory needed to meet customer demand. We have since renegotiated terms
with our key suppliers and arranged for the return of slow-moving or unsold
product in exchange for new or more popular titles. We have recently received
new product and have placed orders for new releases, in anticipation of robust
holiday demand. A sales rebound, if any, is likely to transpire mid-way through
the fourth quarter, but is not assured and is contingent on a successful
implementation of a limited but focused marketing and advertising program,
<PAGE>
direct sales campaign and promotion, and revamped customer service, along with a
streamlined order fulfillment and inventory management process in order to
recapture old customers and attract new ones.
Our sales were also negatively impacted by the absence of any significant
print and web advertising on our part. All our advertising commitments have
expired or terminated, resulting in a substantial slow-down in our web traffic
click-throughs and sell-throughs. We lack the financial wherewithal to fund any
major advertising effort, thereby further hampering our ability to attract new
customers and potential buyers to our website.
The following table sets forth certain financial data for us as a
percentage of net sales for the indicated periods:
Syconet.com
<TABLE>
<CAPTION>
Nine Months Ended Sept 30 Three Months Ended Sept 30
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.00% 100.00% 100.00% 100.00%
Cost of goods sold 82.04% 77.42% 58.62% 81.46%
---------- ---------- ---------- ----------
Gross profit (loss) 17.96% 22.58% 41.38% 18.54%
Operating expenses:
Selling, general and 578.20% 75.86% 469.22% 43.18%
administrative expenses
Restructuring & other non-recurring charges 72.85% 0.00% 0.00% 0.00%
Reversal of stock compensation exp -523.59% 0.00% 0.00% 0.00%
---------- ---------- ---------- ----------
Operating (loss) (109.50%) -53.28% -427.84% -24.64%
Nonoperating expense, net -2.93% -0.30% -2.49% -0.24%
---------- ---------- ---------- ----------
Net (loss) -112.43% -53.58% -430.33% -24.88%
========== ========== ========== ==========
</TABLE>
Gross profit is defined as sales less cost of sales, which consists of the
cost of product sold to the customers and inbound shipping costs. Our gross
margin percentage is affected by the proportion of consumer sales relative to
retail sales, the former generally yielding higher margins than sales from our
distribution business. Our gross profit was $42,500 and $104,300 for the quarter
and the nine months ended September 30, 2000, a 39% and 40% decline,
respectively. over the gross profit for the same periods in 1999. Our gross
profit declined in terms of absolute
<PAGE>
dollars, primarily due to reduced sales. 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. Our gross margins have also been negatively
impacted by significant inventory shrinkage and disposal, as a result of an
inordinate amount of inventory in transit, amidst the loss and turnover of
personnel.
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. Although a significant amount of these costs have been
curtailed, we have continued to incur legal and accounting costs necessary for
regulatory compliance in order to enable us to continue as a reporting company.
Including the costs of post-effective amendments associated with a recent
registration statement, these costs comprised approximately 30% of our SG&A
during the third quarter. SG&A expenses were $ 482,200 and $ 162,000 for the
quarters ended September 30, 2000 and 1999, respectively, and $3.4 million and
$586,500 for the nine months ended September 30, 2000 and 1999.
Prior to the third quarter, the factors accounting for the increased SG&A
costs during 2000 include: hiring of key personnel in management, information
technology, customer service, and warehousing/distribution to establish our
infrastructure and facilitate order fulfillment; travel related to financing
efforts and trade conventions; grass roots marketing and on-line advertising;
and professional services required in connection with regulatory compliance. We
also charged to SG&A development costs (labor and non-labor) associated with our
e-commerce platform, which in the aggregate amounted to $400,000.
As part of our cost containment effort, we have outsourced the order
fulfillment function to Independent Software Services Inc. ("ISSI") of
Frederick, Maryland, but have retained certain of our warehousing personnel to
support in-house customer service. Absent the requirement for a warehouse, we
did not renew the warehouse lease, which expires November 15, 2000. The rental
for our new office space, which has commenced in early November, will be at no
cost to us, provided by Selenetix, one of our major vendors, in consideration
for debt repayment and a technology letter of agreement, the terms for which are
subject to be incorporated in a definitive contract.
Operating expenses during the nine-month period for 2000 were mitigated by
the reversal of previously recognized stock compensation costs as a result of
the cancellation of 13,599,750 options previously granted to our two co-founders
and other employees that were awarded last year and cancelled in 2000.
Subsequent stock option awards to Spears and certain of the remaining
employees were noncompensatory, owing to the exercise price being set at the
price of the stock as of the date of award and cancelled in 2000.
Without any immediate cash infusion available to us and in the wake of
unfavorable sales, we undertook significant cost-cutting measures in order to
reduce our SG&A expenses. Our year-to-date payroll, which totaled over $ 1
million through September 30, 2000, has been cut by 70%, as a result of an
across-the-board reduction in force, as well as attrition. We deferred further
development on our e-commerce and V-ISP platform, on which approximately
$300,000 of internal labor costs had been spent through the second quarter.
However, we are in discussion with Selenetix, one of our major ecommerce
subcontractors, to launch the technology platform in consideration for stock,
repayment of existing debt, and revenue sharing
<PAGE>
arrangements, which will be incorporated in a more definitive agreement. We
cancelled most of our advertising contracts and terminated all consulting
agreements, except for retainer agreements necessary to maintain our reporting
status. We consolidated our operations into our warehouse, and negotiated early
termination of other facility leases, with no significant penalties, enabling us
to realize immediate cost savings in rent, telecommunications and utility costs.
Since we have limited financial resources, we are able to focus only on our
core business at this time. We are re-assessing our technology project and
believe that even if we were to resume development, it would be scaled back
considerably, and we would not be able to use certain of the enhanced system
features. As a result of the restructuring and downsizing of our operations, as
well as our technology plans, we have decided to write off certain prepayments
and assets acquired from vendors that we may not recover or from which we may
never benefit in the future. Examples of these restructuring and unusual items
include forfeitures due to early lease terminations and payments made towards
partially utilized software, equipment and licenses that have since been
returned or cancelled. In the aggregate, these restructuring and unusual items
amounted to $423,000.
Although we have significantly reduced our cash burn arising from expenses
in excess of sales, we believe that our existing lean cost infrastructure and
staffing are well below the optimum level, and will not be conducive to
improving sales significantly any time soon. We have outsourced our order
fulfillment function in an attempt to focus our limited resources to increasing
sales, rebuilding customer and other business relationships, and capital-raising
initiatives. Despite a tighter rein on our operations, we cannot assure you that
we will achieve a level of sales commensurate with our efforts. Nor do we claim
that we will have the financial capability, through external financing or cash
flows from operations, despite our efforts, to continue or to sustain operations
beyond December, 2000.
Deferred Compensation
We recorded total deferred stock compensation of $382,300 during the first
nine months of 2000, in connection with the amortization of compensatory stock
options granted late last year. We had no recognizable deferred compensation
costs during the corresponding quarter of 1999. Deferred stock compensation is
amortized to expense over the vesting periods of the applicable options. The
amortization cost represents the vested portion of the difference between the
exercise price of stock option grants and the deemed fair value of our common
stock at the time of such grants.
Income Taxes
We made no provision for any current or deferred U.S. federal, state income
tax or benefit for any of the periods presented. We cannot provide any assurance
as to when profits will materialize, if at all. Therefore, we cannot predict
when we can use the net operating loss carry-forwards, which begin to expire in
2017, and which may be subject to certain limitations imposed under Section 382
of the Internal Revenue Code of 1986. Due to the uncertainty concerning our
ability to realize the related tax benefit, we have provided a full valuation
allowance on the deferred tax asset, which consists primarily of net operating
loss carry-forwards.
Year 2000
<PAGE>
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.
Liquidity and capital resources
As of September 30, 2000, our cash position consisted of $ 98,700 in cash
compared to $ 587,600 in cash as of December 31, 1999.
We have funded our operations primarily through private equity financing
from accredited investors pursuant to Regulation D, which is a limited offer and
sale of securities without registration under the Securities Act of 1933. During
the first nine months of 2000, net cash provided by financing included $1.8
million in private placement funds compared to $ 775,000 for the same period in
1999.
Net cash used in operations were $2.8 million during the first nine months
of 2000, compared to $681,700 during the same period in 1999. The use of cash
was due primarily to a loss from operations which was $(652,800) and $(414,200)
for the subject periods in 2000 and 1999, respectively. On a pro forma basis,
the loss during 2000, before the effect of the cancellation of stock options,
was approximately $3.7 million. For the most part, our working capital was tied
up in inventory, which did not turn over as needed. As part of our
restructuring, we have
<PAGE>
negotiated the return of approximately $ 200,000 of our inventory, which has
alleviated our debt load and provided us supplier credit that was applied
towards the purchase of new product in demand by our customers.
Subsequent to September 30, 2000, we have made some progress in reducing
and restructuring debt, through return of equipment or product; cancellation
and/ or non-renewal of advertising, subscription, software and license
agreements; termination of most consulting and leasing agreements; partial
forgiveness of certain indebtedness; barter arrangements; and renegotiation of
extended payment terms. We are current with our payroll obligations, but will
not be able to increase staff, or rebuild our infrastructure, absent any
significant improvement in sales or fresh infusion of cash.
Through September 30, 2000, net cash used in investing activities consisted
primarily of purchases geared towards the enhancement of our e-commerce
platform. We deployed our technical staff to develop a fully integrated
end-to-end order fulfillment and inventory management system, which is initially
for internal use but can be packaged and customized for resale as a
business-to-business or business-to-consumer solution. Capital expenditures,
which did not include development costs, consisted only of equipment and
software necessary to complete the platform and amounted to $380,000. During
1999, there were no capital expenditures for the comparative period.
Prior to September 30, we entered into various financing letters of intent
(LOI) and agreements to finance our core business and the development of our
e-commerce and ISP platform. The anticipated funding from these LOIs never
materialized and we no longer expect them to result in additional financing to
us.
Alliance Equities recently re-negotiated its funding commitment with us,
from $2 million to $1 million, of which we have already received, as of this
filing, $ 975,000 in tranches. The funding was paid off upon our delivery of
stock equivalent to that number of shares valued at 50% of the closing bid price
of our stock on the day immediately preceding the date of our receipt of each
tranche.
During the first quarter of 2000, we entered into a new lease for a larger
warehouse, which is currently on month-to-month terms, expiring on November 15,
2000. We will not renew this lease, as we have outsourced inventory storage and
order fulfillment to ISSI Inc. in Frederick, Maryland.
We also executed a 5-year, $1 million lease on a build-to-suit facility in
Manassas, Virginia, and relocated our corporate headquarters to an interim
location in Manassas, Virginia. Because of corporate downsizing, we are unable
to utilize these facilities and have negotiated one lease cancellation, subject
to the execution of a promissory note in the amount of approximately $17,000 and
a second lease cancellation, subject to the issuance of redeemable warrants to
purchase 36,563 shares of our common stock at a price of $0.16 per share until
August 14, 2005.
In anticipation of a growth in our staff, we entered into a 3-year capital
lease for furniture at our corporate headquarters. We have been released from
the lease, but forfeited a security deposit in the amount of $40,000 which was
used by the lessor to cover his loss from the resale of our furniture.
We have drastically reduced our cash burn as a result of our restructuring
and the deferment of our technology plans. However, we will need to raise
<PAGE>
additional financing to enable us to meet working capital requirements; rebuild
our core business; ramp back up the inventory to enable us to remain competitive
and to attract and recapture new and old customers alike; and to launch a
controlled but focused performance-based marketing program. Accordingly, we are
seeking such capital through debt or private placements, equity offerings or
other sources. The sale of equity or equity-related securities could result in
additional dilution to shareholders. We hope to be able to plan to issue shares
to fund the costs of future acquisition of, or a strategic partnership with,
complementary businesses which may be better capitalized than us, and
accordingly, require the issuance of equity or debt securities.
However, we cannot assure you that our financing requirements can be met by
current, available or potential facilities or that additional facilities will be
available on terms and conditions favorable to us, if at all. Currently, we do
not have access to sufficient committed capital that will enable us to maintain
operations beyond December, 2000.
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.
Since our inception in 1997 we have not attained profitability, and as of
September 30, 2000, we had an accumulated deficit (unaudited) of approximately
$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 CURRENTLY HAVE A SEVERE CASH SHORTAGE AND, AS A RESULT, WE HAVE HAD TO
SUSPEND OUR E-COMMERCE AND V-ISP PROGRAMS.
Pursuant to the amendment to our December 16, 1999 funding agreement,
Alliance's funding obligation was reduced from $2,000,000 to $1,000,000. We have
received $ 975,000 of this amount in tranches. Each tranch was repaid by us
issuing to Alliance that number of shares of our common stock valued at 50% of
the closing bid price of our stock on the day immediately preceding the date of
our receipt of that loan payment. We applied Alliance's monies to our payroll
and other current obligations, including various vendors, legal and accounting
fees, purchasing Anime
<PAGE>
inventory, and working capital. None of the funds were allocated towards the
development of our technology platform.
Although we continue to pursue private placements with potential investors,
if we are unable to obtain the additional capital we require we will have to
rely only on the limited cash flow from the sale of our Anime products to fund
our operating expenses, which would not be sufficient to enable us to remain in
business. In addition, due to the recent loss of key personnel, our substantial
operating losses since inception, and the fact that we have used substantial
amounts of working capital in our operations, our September 30, 2000 financial
statements (unaudited) contain an explanatory paragraph, footnote 4, to the
effect that our ability to continue as a going concern is dependent upon our
ability to obtain substantial additional working capital and to replace certain
key personnel, as to neither of which any assurance can be given.
WE MAY NOT BE ABLE TO RAISE THE ADDITIONAL CAPITAL WE CURRENTLY REQUIRE.
We cannot assure you that the additional financing we require will be
available to us on favorable terms, or at all. Available debt financing will
require payment of interest at a significantly higher rate than prime. Funds
raised through equity issuances will result in shareholder dilution. Our recent
financing efforts were unsuccessful and there can be no assurance that our
current efforts will have favorable results. Absent any immediate infusion of
cash or significant sales rebound, we will not be able to continue operations
beyond December, 2000.
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.
WE ARE DEPENDENT ON THIRD PARTIES TO SUPPLY OUR ANIME PRODUCTS, AND AS A RESULT
OF OUR CURRENT CASH SHORTAGE, OUR VENDORS WILL ONLY SEND US PRODUCTS ON A C.O.D.
BASIS.
Our success and viability as an Anime retailer and distributor primarily
depends on our ability to obtain a reliable source of products. We have no
supply agreements and obtain our Anime tapes and DVDs on a non-exclusive,
purchase order basis from multiple sources. If our suppliers would be unwilling
to continue to provide us product in required volumes at acceptable terms and
costs, or in a timely manner, our business would be seriously harmed. Although
no assurance can be given, we believe that we currently have a secure source of
product. However, due to our recent cash shortage, many vendors refused to
supply us with videos until we satisfied our unpaid balances with them. We
recently worked out an arrangement with
<PAGE>
our largest supplier whereby they will continue to provide us with videos
provided we make modest monthly payments to them to cover our accrued
liabilities. For our other suppliers, we made payments to them or returned many
of the videos; most of our vendors now will only send us videos on a C.O.D.
("cash on delivery") basis. This has resulted in significant delays in
restocking our inventory, which did affect our ability to fulfill orders. We
also were not able to preorder advance product, i.e., new videos which have not
yet been offered to the public, to enable us to stay ahead of our competition.
Our inability to obtain access to a substantial number of Anime products in a
timely manner, along with our lack of control over our suppliers' delivery
schedules and lack of guaranteed product availability, had a material adverse
effect on our sales and results of operations. Additionally, we have lost sales
and marketing credibility, which was detrimental to our reputation, financial
condition and prospects in the Anime business, as evidenced by our financial
results during the third quarter of 2000. Although we have undertaken
significant efforts to rebuild our business, we can provide no assurance that we
will succeed, or that the business will survive.
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.
THE LOSS OF OUR KEY PERSONNEL AND OUR FAILURE TO ATTRACT OR RETAIN OTHER
MANAGEMENT TALENT IN THE FUTURE, HAVE NEGATIVELY IMPACTED OUR BUSINESS
OPERATIONS AND OUR STOCK PRICE HAS SUFFERED.
We have lost significant management and technical talent, following
deterioration of our financial condition. Our viability is dependent upon the
continued services and performance of a number of our remaining key personnel,
including William Spears, our president and chief executive officer, and Kathryn
Jacobson, our secretary, treasurer and chief financial officer. We do not have
any employment agreements, and every member of our senior management team is an
employee at will and is therefore free to terminate his employment with us at
any time. For example, Mrs. Jacobson has recently resigned, effective September
15, 2000, for family reasons. Although she will be able to assist Mr. Spears in
a limited capacity for the near future, our inability to find a chief financial
officer to replace her could have a material adverse effect on our business
operations. In addition, we do not maintain any key man insurance on the lives
of anyone in senior management. There can be no assurance that we would be able
to employ qualified person(s) on acceptable terms to replace them. Our success
also hinges largely on our ability to rebuild our management infrastructure and
our continued ability to attract and retain qualified marketing and sales
personnel. We will compete for personnel with other traditional distributors,
and our inability to successfully hire or retain qualified personnel, especially
in senior management, could have a material adverse effect on our business,
capital-raising initiatives, financial condition or results of operations.
<PAGE>
WE CARRY A SIGNIFICANT AMOUNT OF DEBT, AND ABSENT ANY FRESH INFUSION OF CASH,
ARE UNABLE TO PAY OFF OUR SUPPLIERS AND VENDORS IN THE SHORT TERM.
We are actively in discussion with our various vendors with respect to
either barter, debt alleviation, forgiveness, COD or extended payment terms.
However, we cannot provide assurance that we will be successful in most of these
efforts, and thus, may not be able to ward off litigation or a court-supervised
proceeding.
OUR BUSINESS MAY BE SUBJECT TO ADDITIONAL RISKS AND UNCERTAINTIES NOT PRSENTLY
KNOWN TO US.
In addition to the risk factors identified in this filing, we may face
additional risks which we perceive to be immaterial currently, or which we may
not be aware of currently, which when they materialize, may adversely impact our
financial condition or 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. We can't assure
you that we'll be able to report or sustain sales growth to recover our capital
investment. Our current financial condition does not allow us to continue
further technology development and thus, we can't assure you of any sales growth
at this time, absent any new financing.
WE CANNOT PREDICT WHAT REGULATIONS MAY BE IMPOSED ON US AS A PROVIDER OF ONLINE
PRODUCTS AND SERVICES.
We're subject to regulations applicable to businesses generally and laws or
regulations directly applicable to access to online commerce. Although there are
currently few laws and regulations directly applicable to the internet and
commercial online services, it is possible that a number of laws and regulations
may be adopted with respect to the internet or commercial online services
covering issues such as user privacy, pricing, content, copyrights,
distribution, antitrust and characteristics and quality of products and
services. Furthermore, the growth and development of the market for online
commerce may prompt calls for more stringent consumer protection laws that may
impose additional burdens on those companies conducting business online. The
adoption of any additional laws or regulations may decrease the growth of the
internet or commercial online services, which could, in turn, decrease the
demand for our products and services and increase our cost of doing business, or
otherwise have a material adverse effect on our business, financial condition
and results of operations.
Moreover, the applicability to the internet and commercial online services
of existing laws in various jurisdictions governing issues such as property
ownership, sales and other taxes, libel and personal privacy is uncertain and
may take years to resolve. For example, tax authorities in a number of states
are currently reviewing the appropriate tax treatment of companies engaged in
online commerce, and new state tax regulations may subject us to additional
<PAGE>
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, 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 ARE 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.
OUR WEBSITES ARE SUBJECT TO CAPACITY CONSTRAINTS AND SYSTEM DISRUPTIONS.
<PAGE>
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.
OUR CONTINUED OTC BULLETIN BOARD LISTING IS NOT ASSURED.
Absent any financing in the immediate term, we will not be able to afford
professional experts required for SEC regulatory compliance, thereby
jeopardizing
<PAGE>
our ability to file our SEC reports on a timely basis and impairing our
eligibility for continued listing on the OTC Bulletin Board. If we lose our OTC
Bulletin Board status, our common stock would trade as pink sheets on the
National Quotation System, which will be viewed by most investors as a less
liquid market for trading purposes. The loss of our OTC BB status will further
impede our ability to raise any financing.
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 October 13, 2000, we had approximately 14.3 million restricted
shares, principally held by Alliance and management, and 8.4 million shares in
free trading stock. Certain of the restricted stock will be saleable in
accordance with the terms and conditions of Rule 144 of the Securities Act, and
the remainder, based on a resale prospectus as amended and re-issued in
November, 2000.
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 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 HAVE NOT PAID ANY DIVIDENDS.
We have 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
<PAGE>
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.
PART II - OTHER INFORMATION
Item 2. Legal Proceedings
In early August, 2000, the Company received notice of a motion for
judgement filed by Dominion Computer Systems ("Dominion") against it in the
Circuit Court of Rockingham County in the Commonwealth of Virginia, for alleged
indebtedness in the amount of $64,500, plus interest. The Company disputed the
amount and filed a counter-suit, alleging various defenses against Dominion.
Subject to a confidentially agreement, the parties agreed to settle out of court
for an undisclosed amount which has no material impact to the financial
statements.
From time to time, the Company may be subject to legal proceedings and
claims in the ordinary course of business, including terminations, employment
related claims and claims of alleged infringement of trademarks, copyrights, and
other intellectual property rights. The Company is currently 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.
Item 4. Changes in Securities
As of September 30, 2000, pursuant to a funding agreement dated December
16, 1999, as amended in August, 2000, we issued to Alliance Equities Inc.
("Alliance") 1,250,000, 1,923,077, and 1,923,077 shares of our common stock as
repayment for the cash tranches provided to us. All issuances were made in
reliance on the exemption from registration provided by Sections 4(2) and 4(6)
of the Securities Act of 1933 (the "1933 Act").
In September, 2000, we issued 204,546 shares of our common stock at an
average price of $ .14 per share in consideration for cancellation of
indebtedness to certain shareholders. Such issuance was made in reliance on the
exemptions from registration provided by Sections 4(2) and 4(6) of the 1933 Act
and Rule 506 of Regulation D promulgated thereunder.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibit is filed with this report:
Page
27. Financial Data Schedule 27
(b) Reports on Form 8-K
None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: November 14,2000 SYCONET.COM, INC.
By: /s/ William Spears
--------------------------------
Name: William Spears
Title: President and Chief Executive Officer
By /s/ Michael Smith
--------------------------------
Name: Michael Smith
Title: Executive Vice President of Finance
