-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HlHup02gtAunDuLZhd/rsgnRdIAScjRzUaHRTCEG+l4FFk2kR7SA4TK+EnW14KbQ DCD4xCERx11cjr5I7hFPIA== 0000891554-00-000747.txt : 20000322 0000891554-00-000747.hdr.sgml : 20000322 ACCESSION NUMBER: 0000891554-00-000747 CONFORMED SUBMISSION TYPE: 10SB12G PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 20000321 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYCONET COM INC CENTRAL INDEX KEY: 0001099234 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE & VIDEO TAPE PRODUCTION [7812] IRS NUMBER: 541838089 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10SB12G SEC ACT: SEC FILE NUMBER: 000-29113 FILM NUMBER: 574452 BUSINESS ADDRESS: STREET 1: 9208A VENTURE CT CITY: MANASSAS STATE: VA ZIP: 20111 BUSINESS PHONE: 7033663900 10SB12G 1 FORM 10-SB UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 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) 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 2 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. 3 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 17, 2000, we had 42 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 4 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. 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. The following table sets forth certain financial data for us as a percentage of net sales for the indicated periods: 5 (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 152.00 123.23 Stock Compensation Costs 333.41 -- ---------------------- 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, 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. 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. During 1999, we recognized $ 3.8 million in 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. 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. Pro Forma Results of Operations Pro forma information regarding the Company's results, excluding stock-based compensation (discussed 6 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.
Year Ended December 31, 1999 1998 1997 ----------- ----------- ----------- 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 =========== =========== ===========
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 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 7 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. The use of cash was due primarily to a pro forma loss from operations which was $ 1.2 million during 1999 (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 8 offerings to ensure product availability has required us to increase our inventory levels, thereby causing an additional strain on our cash flows during 1999 and 1998. For all comparative periods net cash used in investing activities consisted primarily of purchases of PCs and peripheral equipment. 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. 9 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 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 17, 2000: 10 Name and address No. of of beneficial owner Shares Owned Percentage of Class - --------------- ------------ ------------------- Sy Robert Picon 7,540,300(1) 42% c/o SyCoNet.Com, Inc. 9208A Venture Court Manassas, VA 20111 William Spears 5,816,706(2) 33 c/o SyCoNet.Com, Inc. 9208A Venture Court Manassas, VA 20111 J. Larry Hineline 650,753 5 9266 Oak Hammock Lane Jupiter, FL 33478 - ---------- (1) Includes options to purchase 5,285,000 shares and 250,000 shares owned by Mr. Picon's wife, as to which he disclaims beneficial ownership. (2) Includes options to purchase 5,115,000 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 Mrch 17, 2000:
No. of Name and Address Office Shares Owned Percentage of Class - ---------------- -------------------- ------------ ------------------- Sy Robert Picon President, Chief 7,540,300(1) 42% c/o SyCoNet.Com, Inc. Executive Officer, 9208A Venture Court Treasurer and Manassas, VA 20111 Director William Spears Executive Vice 5,816,706(2) 33 c/o SyCoNet.Com, Inc. President, 9208A Venture Court and Director Manassas, VA 20111 J. Larry Hineline Secretary and 650,753 5 9266 Oak Hammock Lane Director Jupiter, FL 33478 Edward E. Kramer Director 245,000(3) 2 2480 Honeycomb Way Duluth, GA 30096 Philip Jacobson Executive 60,500(4) (5) 9029 Edgepark Road Vice President Vienna, Virginia 22182 Kathryn Jacobson Chief Financial 60,500(6) (5) 9029 Edgepark Road Officer Vienna, Virginia 22182 Francis H. Yano Director 144,600(7) 1 1466 Pule Place Honolulu, HI 96816 All Officers and 14,457,859 62 Directors as a Group (7 individuals)
11 - ---------- (1) Includes options to purchase 5,285,000 shares and 250,000 shares owned by Mr. Picon's wife, as to which he disclaims beneficial ownership. (2) Includes options to purchase 5,115,000 shares. (3) Includes options to purchase 215,000 shares. (4) Includes options to purchase 25,000 shares owned by his wife Kathryn Jacobson, as to which Mr. Jacobson disclaims beneficial ownership. (5) Less than one percent. (6) Includes options to purchase 25,000 shares and includes 35,500 shares owned by her husband, Philip Jacobson, as to which Mrs. Jacobson disclaims beneficial ownership. (7) Includes 1,500 shares owned by his son, 700 shares held by his daughter, and 6,900 shares held by his wife, as trustee for her mother. 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 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 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 2,000,000 1998 $58,231 $0 0 1997 $42,058 $0 2,285,000 14 Option/SAR Grants in Last Fiscal Year Individual Grants ------------------------------------------------------------------ Number of % of Total Securities Options/SARS Underlying Granted to Exercise or Market Price Options/SARS Employees Base Price Expiration on Date of Name Granted (#) in Fiscal Year ($/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 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 12,697,458 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 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 (b) Holders As of March 17, 2000, there were 89 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 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 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 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 SYCONET.COM, INC. Balance Sheets December 31, 1999 and 1998
December 31, -------------------------- Assets 1999 1998 ----------- ----------- 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 =========== ===========
See Notes to Financial Statements. 2 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
Period from January 15, 1997 Year Ended Year Ended (Date of Inception) December 31, December 31, to December 31, 1999 1998 1997 ----------- ----------- ----------- 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 1,753,423 771,395 415,971 Stock-based compensation expense 3,846,014 -- -- ----------- ----------- ----------- 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 =========== =========== ===========
See Notes to Financial Statements. 3 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
Additional Retained Common Paid-In Deferred Earnings Stock Capital Compensation (Deficit) ----------- ----------- ------------ ----------- 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) =========== =========== =========== ===========
See Notes to Financial Statements. 4 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
Period from January 15, 1997 Year Ended Year Ended (Date of Inception) December 31, December 31, to December 31, 1999 1998 1997 --------------- --------------- --------------- 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 =============== =============== ===============
See Notes to Financial Statements. 5 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 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 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 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 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 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:
December 31, 1999 December 31, 1998 December 31, 1997 ----------------------------- ---------------------------- ---------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ---------- ------------- ---------- ------------- ---------- ------------- 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
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 Notes to Financial Statements The following table summarizes information about options outstanding at December 31, 1999:
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 - ---------------------- ----------------- ---------------- ---------------- ------------------ ------------- $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 ========== =========
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 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:
Period from January 15, 1997 Years Ended December 31, through ---------------------------- December 31, 1999 1998 1997 ----------- ----------- ----------- 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 ----------- ----------- ----------- $ -- $ -- $ -- =========== =========== ===========
13 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 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 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 20, 2000 By: /s/ Sy R. Picon --------------------------- Sy R. Picon Chief Executive Officer EX-4 2 SPECIMEN COMMON STOCK CERTIFICATE Number Shares - ----------- ------------ SyCoNet.Com, Inc. AUTHORIZED COMMON STOCK: 14,500,000 SHARES par value: $.0001 THIS CERTIFIES THAT ____________________________ IS THE RECORD HOLDER OF __________________________________________________ Shares of SYCONET.COM, INC. Common Stock transferable on the books of the Corporation in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar. Witness the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: ___________________ [Corporate Seal] - ------------------------------ ------------------------------ SECRETARY PRESIDENT EX-10.4 3 COMMERCIAL LEASE COMMERCIAL LEASE between BROADWATER INVESTMENTS, II and SYCONET.COM, INC. COMMERCIAL LEASE LEASE BROADWATER INVESTMENTS II, Landlord SYCONET.COM, INC., Tenant Page Table of Contents ARTICLE 1. Lease 1 ARTICLE 2. Initial Term and Renewal Option 2 ARTICLE 3. Rent 2 ARTICLE 4. Maintenance and Repairs 3 ARTICLE 5. Alterations 4 ARTICLE 6. Insurance 5 ARTICLE 7. Personal Property and Fixtures; Tenant's Right of Removal 6 ARTICLE 8. Signs 7 ARTICLE 9. Damage by Fire or Other Casualty 7 ARTICLE 10. Eminent Domain 8 ARTICLE 11. Default 9 ARTICLE 12. Funds Expended by Landlord 10 ARTICLE 13. Use of Demised Premises 11 ARTICLE 14. Landlord's Warranties and Representations 16 ARTICLE 15. Waiver of Landlord's Lien 16 ARTICLE 16. Subordination, Nondisturbance and Attornment 16 ARTICLE 17. Inspection 17 ARTICLE 18. Indemnity 17 2 ARTICLE 19. Tender of Possession and Possession Date 18 ARTICLE 20. Estoppel Certificates 19 ARTICLE 21. Assignment and Subletting 19 ARTICLE 22. Holding Over 19 ARTICLE 23. Notices 20 ARTICLE 24. General 20 ARTICLE 25. Authority 22 ARTICLE 26. Attorneys' Fees 23 ARTICLE 27. Brokerage Commission 24 EXHIBIT A EXHIBIT C ARTICLE 28. Lease Addendum; Purchase Option 3 LEASE THIS LEASE, made and entered into this 1st day of March, 2000, by and between BROADWATER INVESTMENTS II, a Virginia general partnership ("Landlord"), and SYCONET.COM, INC., a Delaware corporation ("Tenant"). W I T N E S S E T H : In consideration of the mutual covenants herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties intending to be legally bound hereby agree as follows: ARTICLE 1. Lease. 1.1. Date of Execution. This Lease shall not be binding upon the parties until fully executed by each party hereto. When fully executed, the "Date of Execution" of the Lease shall be the date upon which the last party to sign this Lease executed the same. 1.2. Demised Premises. Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord the land and premises located at 10390 Central Park Drive, Manassas, Virginia 20110, part of a larger tract described more particularly in Exhibit A, attached hereto and made a part hereof, together with all Landlord's rights, privileges, easements, and appurtenances in, over and upon adjoining and adjacent public and private land, highways, roads and streets reasonably required for ingress and egress to and from such premises. Such land, premises and the improvements to be constructed by Landlord, including approximately fifteen thousand one hundred twenty (15,120) square feet of buildings, thereon and appurtenances are referred to in this Lease as the "Demised Premises." ARTICLE 2. Initial Term and Renewal Option. 2.1. Initial Term. The initial term of this Lease (the "Initial Term") shall be five (5) years commencing at 12:01 a.m. on the Possession Date as defined in Article 19 hereof (the "Commencement Date") and terminating at 12:00 midnight on the fifth (5th) anniversary of the Commencement Date, unless extended pursuant to Article 2.2. Landlord and Tenant agree to sign on or before the Possession Date a document titled "Commencement Date Agreement," reciting the Commencement Date and termination date of the Initial Term and the commencement of Tenant's liability for the payment of rent and other charges specified herein, and this document shall be conclusive as to the Lease term. 4 2.2. Renewal Option. Tenant may, at its option, renew this Lease for two (2) additional five (5) year terms. Tenant may exercise its right to extend the Lease for the first additional five-year term ("First Renewal Term") by giving written notice to Landlord of Tenant's election, not later than sixty (60) calendar days prior to the date of termination of the Initial Term. If the Tenant fails to exercise its right to extend for the First Renewal Term within the time provided herein, all of Tenant's rights to extend this Lease shall automatically terminate. If Tenant elects to extend the Lease for the First Renewal Term, the First Renewal Term shall commence on the fifth anniversary of the Commencement Date and continue for a period of five (5) years thereafter, unless sooner terminated in accordance with the terms of this Lease. Tenant may exercise its right to extend the Lease for the second additional five-year term ("Second Renewal Term") by giving written notice to Landlord of Tenant's election, not later than sixty (60) calendar days prior to the date of termination of the First Renewal Term. If the Tenant fails to exercise its right to extend for the Second Renewal Term within the time provided herein, all of Tenant's rights to extend this Lease shall automatically terminate. If Tenant elects to extend the Lease for the Second Renewal Term, the Second Renewal Term shall commence on the tenth (10th) anniversary of the Commencement Date and continue for a period of five (5) years thereafter, unless sooner terminated in accordance with the terms of this Lease. The First Renewal Term and the Second Renewal Term shall be upon the same terms and conditions as the Initial Term, except as otherwise specifically set forth herein. ARTICLE 3. Rent. 3.1. Initial Term. For the Initial Term of this Lease, Tenant shall pay Landlord base rent at the rate of TWO HUNDRED TEN THOUSAND DOLLARS ($210,000.00) per annum payable in equal monthly installments of SEVENTEEN THOUSAND FIVE HUNDRED DOLLARS ($17,500.00) per month on the first (1st) day of each month, in advance. Landlord hereby acknowledges the receipt of THIRTY-FIVE THOUSAND DOLLARS ($35,000.00) from Tenant ("Tenant's Rent Deposit"), which amount shall be applied against the monthly installments of rent due for the twelfth and twenty-fourth months thereunder. 3.2. Renewal Term. If Tenant elects to extend the Lease for the First Renewal Term, for each year during the First Renewal Term, Tenant shall pay Landlord base rent of TWO HUNDRED FORTY-SIX THOUSAND DOLLARS ($246,000.00) per annum, payable in equal 5 monthly installments of TWENTY THOUSAND FIVE HUNDRED DOLLARS ($20,500.00) per month on the first day of each month, in advance. If Tenant elects to extend the Lease for the Second Renewal Term, for each year during the Second Renewal Term, Tenant shall pay Landlord base rent of TWO HUNDRED EIGHTY-EIGHT THOUSAND DOLLARS ($288,000.00) per annum, in equal monthly installments of TWENTY-FOUR THOUSAND DOLLARS ($24,000.00) per month on the first day of each month, in advance. 3.3. Costs other than Rent. 3.3.1. During the term of this Lease, including any Renewal Term, Landlord shall pay all real properly taxes on the Demised Premises, before the date on which such taxes become delinquent. During the term of this Lease, including any Renewal Term, Tenant shall promptly pay all charges for water, trash and waste removal service, electricity, gas, telephone service, sewerage service and any and all utilities furnished to the Demised Premises, before the date on which such charges become delinquent. During the term of this Lease Landlord shall pay hazard insurance upon all improvements on the Demised Premises as provided in Article 6.1 hereof. 3.3.2. Landlord shall not be liable for any interruption or failure whatsoever in utility services, except to the extent such interruption or failure occurs in a part of a utility line the maintenance of which is Landlord's responsibility. 3.3.3. Landlord shall pay and discharge all special assessments for local improvements levied on the Demised Premises. 3.3.4. Tenant shall pay and discharge all taxes imposed upon any of its property located upon the Demised Premises. 3.4. Proration of Rent Payments and Late Rent Payments. 3.4.1. If the Commencement Date of the Initial Term or any Renewal Term of this Lease is other than the first day of a calendar month, or the termination date of any term is other than the last day of a calendar month, the rent to be paid to Landlord on a monthly basis shall be prorated on a per diem basis. 3.4.2. Tenant shall have a ten (10) day grace period from the first day of a calendar month during which rent payment(s) can be made without incurring a late penalty charge of 6 five percent (5%) of the monthly base rent. ARTICLE 4. Maintenance and Repairs. 4.1. By Landlord. Landlord shall keep the foundations, exterior walls, all utility service lines not repaired or maintained by public or private utility companies, roof and all structural portions of all improvements on the Demised Premises in good condition and repair throughout the term of this Lease and any extensions thereof. In the event that the Demised Premises should become in need of repairs to be made by Landlord hereunder, Tenant shall give prompt notice thereof to Landlord. Except as otherwise specifically provided herein, Tenant shall be responsible for maintaining the heating, air-conditioning and plumbing, interior finishes, fixtures and premises in good condition throughout the term of this Lease and any extension thereof in at least as good condition as the same were at the Commencement Date, reasonable wear and tear excepted. Tenant shall pay the cost incurred during the term of this Lease or any extension thereof in repairing and maintaining the air- conditioning units serving the Demised Premises. Landlord shall pay the cost of replacing any air-conditioning unit or major component of any unit, if replacement is required during the term of this Lease or any extension thereof. 4.2. By Tenant. Tenant shall keep the Demised Premises in good, clean condition and shall at its expense, make all needed repairs and replacements, except for repairs and replacements required to be made by Landlord under the provisions of Article 4.1. At the expiration of this Lease, Tenant shall surrender the Demised Premises in good condition, except for reasonable wear and tear, loss by fire or other casualty, or any repairs or replacements required to be made by Landlord; and shall surrender all keys for the Demised Premises to Landlord. 4.3. Landlord shall maintain and repair parking lots, sidewalks and common areas including landscaping areas; provided, however, that Tenant shall be responsible for snow and ice removal from sidewalks and entry ways to the Demised Premises. Landlord will be responsible for snow removal from parking lots. ARTICLE 5. Alterations. 5.1. Non-Structural. Tenant shall have the right, at its expense, from time to time, to redecorate the Demised Premises and to make such non-structural alterations and changes thereto as Tenant may desire. 7 5.2. Structural. Upon consent of Landlord, which consent shall not be unreasonably withheld or delayed, Tenant shall have the right, at its expense, from time to time, to make structural alterations and additions to the Demised Premises if such structural alterations do not impair the structural soundness or diminish the value of the Demised Premises. In its request to the Landlord for such consent, Tenant shall include proposed plans for such alterations. 5.3. Licenses and Permits. Tenant shall at its expense procure all necessary licenses and permits for any alterations permitted under this Article 5. Landlord, at Tenant's request and expense, shall execute such documents as may be required by any public or quasi public authority for the purpose of obtaining any such license or permit. 5.4. Ownership. All alterations or improvements made by Tenant to the Demised Premises, other than trade fixtures or Tenant's personal property, shall become the property of Landlord upon termination of this Lease, unless required to be removed at the direction of Landlord as provided below. It is expressly understood and agreed that any aboveground storage tank or wastewater filtration equipment installed by Tenant pursuant to Article 5.5 shall be considered Tenant's trade fixtures or personal property. Landlord, at its option, may require Tenant to remove any and all alterations or improvements installed or made by Tenant upon termination of the Lease, in which event Tenant shall repair any damage caused by such removal to restore Landlord's property to substantially the condition as on the Commencement Date, reasonable wear and tear excepted. 5.5. Tenant's Improvements. Landlord does hereby consent and approve the installation of all aboveground storage tanks or systems necessary for the operation of the Tenant's business, including an equipment wash concrete pad, spill containment pad, and related or associated equipment, sumps and piping, the installation of which shall be in accordance with existing city, parish, state and federal statutes, ordinances, regulations, and conditions of any permits legally required therefor. Prior to commencement of any such installation, Tenant shall present to Landlord plans for such alterations for Landlord's approval, which shall not be unreasonably withheld or delayed. ARTICLE 6. Insurance. 6.1. Hazard Insurance. Landlord, at its expense, shall keep all improvements on the Demised Premises, including all buildings and other improvements currently or hereafter in 8 existence, insured against loss or damage by fire and the hazards covered by extended coverage insurance in an amount equal to not less than the full replacement value of such improvements without offset for depreciations. 6.2. Liability Insurance. Tenant, at its expense, shall maintain comprehensive general liability insurance insuring Landlord and Tenant against death, injury to persons or damage to property on or about the Demised Premises, with minimum limits of $1,000,000 for injuries to or death of one person as a result of any one accident or disaster, $2,000,000 for injuries to or death of more than one person as a result of any one accident or disaster, and $2,000,000 for property damage. 6.3. Proof of Insurance. Upon the written request of either Landlord or Tenant to the other, each party shall furnish to the requesting party a complete copy of the insurance policy(ies) required by this Article. 6.4. Indemnity, Release. and Waiver. Landlord and Tenant hereby agree to indemnify the other against, and hold the other harmless from, all claims, liabilities, demands, or causes of action, including all reasonable expenses of the indemnified party incidental thereto, for injury to or death of any employee, agent or customer of the indemnifying party arising within or on the Demised Premises and caused by the indemnifying party's negligent act or omission or negligent act or omission of any employee, agent or customer of the indemnifying party. The liability of the indemnifying party to indemnify as set forth above, however, shall not extend to any matter against which the indemnified party shall be effectively protected by insurance; provided, however, that if any such liability shall exceed the amount of the effective and collectible insurance in question, the liability of the indemnifying party pursuant to this Article shall apply to such excess. Landlord and Tenant further waive and release each other of and from any and all rights of recovery, claims, action or causes of action against each other, their respective agents, servants and employees, for any loss or damage that may occur to the Demised Premises or property on or within the Demised Premises, by reason of fire or the elements of nature, regardless of cause or origin, including the fault or negligence or strict liability of the other party or their agents, servants or employees. Because this Article will preclude the assignment of any claim mentioned in it by way of subrogation or otherwise to any insurance company or any other person, Landlord and Tenant agree immediately to give to each insurance company which has issued to it policies of insurance covering all risk of direct physical loss, written notice of the 9 terms of the mutual waivers contained in this Article, and, if required, to have the insurance policies properly endorsed to prevent the invalidation of such insurance coverage by reason of these waivers. ARTICLE 7. Personal Property and Fixtures; Tenant's Right of Removal. Trade fixtures, equipment, machinery or other personal property installed in or attached to the Demised Premises by or at the expense of Tenant shall remain the property of Tenant. Tenant shall have the right at any time to remove any or all such trade fixtures, equipment, machinery and other property, provided such removal does not cause irreparable or unreasonable harm to the Demised Premises. In any event Tenant, at its expense, shall repair any and all damage caused by such removal. ARTICLE 8. Signs. Tenant may, at its expense, utilize or remove any existing sign or install new signs on the Demised Premises as may be reasonable and which shall not damage or impair the attractiveness of the Demised Premises. Tenant shall be entitled to remove any or all such signs at any time during the term of this Lease, or within fifteen (15) calendar days after termination of this Lease, provided such removal does not cause irreparable or unreasonable harm to the Demised Premises. In any event Tenant, at its expense, shall repair any damage caused by such removal. ARTICLE 9. Damage by Fire or Other Casualty. 9.1. Substantial or Total Destruction. If the improvements erected upon the Demised Premises are totally destroyed by fire or other casualty, or thirty percent (30%) or more of the value of the improvements is so destroyed, then: 9.1.1. Either party may terminate this Lease by written notice to the other party within thirty (30) calendar days after such destruction. 9.1.2. If neither party terminates this Lease pursuant to the above clause (a), Landlord shall repair and restore such improvements as soon as is reasonably practicable to substantially the same condition as they were in immediately prior to such destruction. Landlord shall be entitled to use the proceeds of all applicable casualty insurance on the Demised Premises for purposes of such repair and restoration. In the 10 event the insurance funds are insufficient to cover the costs of the repairs or Landlord does not elect to use all or a portion of such proceeds, the excess costs shall be borne by Landlord. 9.1.3. No rent (including but not limited to taxes and other items of additional rent) shall be payable from the date of such destruction to the date of completion of such repair or restoration. 9.1.4. If Landlord has not commenced such repair or restoration within sixty (60) calendar days after the date of such destruction, or has not completed such repair or restoration within a reasonable time thereafter, which in any event shall not exceed one hundred twenty (120) calendar days from the date of commencement of such repairs, Tenant may terminate this Lease by notice to Landlord at any time prior to completion of such repair or restoration. 9.2. Partial Destruction. If the improvements erected upon the Demised Premises are damaged by fire or other casualty, but less than thirty percent (30%) of the value of the improvements is so destroyed, then: 9.2.1. Landlord shall repair and restore such improvements as soon as it is reasonably practicable to substantially the same condition as they were in immediately prior to such damage. Landlord shall be entitled to use the proceeds of all applicable casualty insurance on the Demised Premises for purposes of such repair or restoration. In the event the insurance funds are insufficient to cover the costs of the repairs or Landlord does not elect to use all or a portion of such proceeds, the excess costs shall be borne by Landlord. 9.2.2. There shall be a reduction in base rent payable from the date of such destruction to the date of completion of such repair or restoration, which reduction shall be equal to current base rent, multiplied by a fraction, the numerator of which shall be the value of the improvements so destroyed and the denominator of which shall be the value of improvements immediately prior to such destruction. 9.2.3. If Landlord has not commenced such repair or restoration within sixty (60) calendar days after the date of such damage, or has not completed such repair or restoration within a reasonable time thereafter, which in any event shall not exceed one hundred twenty (120) calendar days from the date of commencement of such repairs, Tenant may terminate this Lease by notice to Landlord at any time until completion of such repair or restoration. 11 ARTICLE 10. Eminent Domain. Landlord shall deliver to Tenant within ten (10) days after receipt thereof any notice of a governmental entity's intent to exercise its power of eminent domain with respect to all or a portion of the Demised Premises. 10.1. Substantial or Total Taking. In the event that all of the Demised Premises are to be acquired by exercise of the power of eminent domain, or a portion of the Demised Premises are to be so acquired and the remaining portion of the Demised Premises cannot, in Tenant's judgment, reasonably be used by Tenant for the general purposes for which it was used prior to such acquisition, this Lease may be terminated by either party upon thirty (30) calendar days' written notice to the other. 10.2. Partial Taking. In the event that a portion of the Demised Premises is acquired by exercise of the power of eminent domain, and the remaining portions of the Demised Premises can, in Tenant's judgment, reasonably be used by Tenant for the same general purposes for which they were used prior to such acquisition, or all or a portion of the Demised Premises are so acquired and neither party exercises any right to terminate this Lease pursuant to Article 10.1, then this Lease shall remain in effect. If the Lease remains in effect, there shall be a reduction in base rent payable from and after the date of such acquisition, which reduction shall be equal to current base rent, multiplied by a fraction, the numerator of which shall be the value of the improvements so acquired and the denominator of which shall be the value of improvements immediately prior to such acquisition. 10.3. Damages. Tenant will not participate in the condemnation proceedings, and shall be entitled to no compensation or any right of action against the Landlord for such damage or taking. All awards, damages and other compensation paid by such authority on account of such condemnation shall belong to Landlord and Tenant assigns to Landlord all rights to such awards, damages and compensation. Tenant shall not make any claim against Landlord or the condemning authority for any portion of such award, damages or compensation attributable to damage to the Premises, value of the unexpired portion of the Lease Term, damage to the purchase option, loss of profits or goodwill, or severance damages. Nothing contained herein, however, shall prevent Tenant from pursuing a separate claim against the authority for the value of furnishings and trade fixtures or 12 leasehold improvements installed in the premises at Tenant's expense and for relocation expenses, provided that such claim shall in no way diminish the award, damages or compensation payable to Landlord in connection with such condemnation. ARTICLE 11. Default. 11.1. Tenant's Default. If Tenant defaults in the payment of any rent due hereunder, and if after written notice from Landlord to Tenant such default continues for a period of ten (10) calendar days; or if Tenant defaults in any other covenant or agreement to be performed by it under this Lease, and if after written notice from Landlord to Tenant, such default continues for a period of thirty (30) calendar days unless the default is of a nature that cannot be cured within thirty (30) days in which case Tenant shall not be in default so long as Tenant has commenced the cure of such default within such thirty (30) day period and diligently continues such cure to completion; or if the leasehold interest of Tenant is taken on execution or by other process of law; or if any proceeding is commenced by or against Tenant seeking any reorganization, arrangement, composition, liquidation or other similar relief under any applicable federal or state bankruptcy or other similar statute and such proceeding is not dismissed within sixty (60) calendar days after its commencement (except that non-dismissal of any such proceeding shall not be a default so long as all of Tenant's covenants and obligations under this Lease are being performed by or on behalf of Tenant); then, and in any of such cases, Landlord may immediately or at any time thereafter so long as such default continues, upon ten (10) days written notice, either terminate this Lease and sue Tenant for damages for breach of Tenant's obligations to Landlord under this Lease or, without terminating this Lease, enter into and upon the Demised Premises or any part thereof and take possession of the same fully and absolutely without such re-entry working a forfeiture of the rents to be paid and the obligations to be performed by Tenant for the full term of this Lease, and Landlord may, at its election, lease or sublet the Demised Premises or any part thereof on such terms and conditions, for such rents, and for such time as Landlord may elect, and after crediting the rent actually collected by Landlord from such reletting against the rentals stipulated to be paid under this Lease by Tenant, collect from Tenant any balance remaining due on the rent reserved under this Lease. 11.2. Landlord's Default. If Landlord defaults in any covenant or agreement to be performed by it under this Lease and if after written notice from Tenant to Landlord, default continues for a period of thirty (30) calendar days unless the 13 default is of a nature that cannot be cured within thirty (30) days in which case Landlord shall not be in default so long as Landlord has commenced the cure of such default within such thirty (30) day period and diligently continues such cure to completion, Tenant may immediately terminate this Lease upon written notice to Landlord, or Tenant may provide written notice of its intent to cure such default. If Tenant gives notice of its intent to cure, Tenant shall provide to Landlord support for any applicable cost, including a written repair estimate or governmental notice, as applicable. If Landlord disputes any such estimate, Tenant shall obtain a second estimate from a third party agreeable to Landlord and Tenant (the "Third Party Estimate"). Landlord and Tenant agree to be bound by such Third Party Estimate, and if Tenant cures such default prior to Landlord curing such default, Tenant may deduct the amount of the Third Party Estimate, including interest at the rate of one percent (1%) per month on such amount, from rentals due or to become due to Landlord. 11.3. Default Notices. Any default notice given pursuant to this Article shall specify the nature and extent of the default. ARTICLE 12. Funds Expended by Landlord. 12.1. Repayment by Tenant. In the event Tenant shall fail to pay any sum required to be paid by it under the term of this Lease, including (without limitation) insurance premiums, Landlord shall be entitled to pay such sums. Tenant shall repay the same to Landlord upon demand, together with all interest, costs and damages, or Landlord, at its' option, may add any sum so paid as additional rent to the next installment of rent coming due, but payment by Landlord of any such sum shall not be deemed to waive or release the default in payment thereof by Tenant, or the right of Landlord to recover possession, at its election, of the Demised Premises by reason of Tenant's default. ARTICLE 13. Use of Demised Premises. 13.1. Tenant shall not use the Demised Premises in any manner contrary to the applicable zoning, health, fire or safety regulations, ordinances or statutes, civil or criminal, (whether now in effect or hereafter enacted) of the City of Manassas or the Commonwealth of Virginia. 13.2. Environmental Matters. 13.2.1. Hazardous Materials. Landlord represents and warrants that no Hazardous Materials (as hereinafter defined) are 14 presently deposited, stored or otherwise located on, under or in the Demised Premises. Tenant covenants that it shall not deposit, store or otherwise locate Hazardous Materials on, under or in the Demised Premises; provided, however, Tenant may store, handle and use the following chemicals, substances or materials if they are used, stored, handled and disposed of in material compliance with Environmental Requirements: (a) chemicals, substances or materials routinely used in office areas, (b) janitorial supplies, cleaning fluids or other chemicals, substances or materials reasonably necessary for the day-to-day operation or maintenance of the Demised Premises by Tenant, (c) chemicals, substances or materials reasonably necessary for the construction or repair of improvements on the Demised Premises, (d) pesticides, fertilizers and other chemicals, substances or materials reasonably used for agricultural, horticultural, landscaping or pest control purposes on the Demised Premises, (e) gasoline, motor oil or other chemicals, substances or materials resulting from the operation, parking, cleaning and routine maintenance of motor vehicles and equipment on the Demised Premises, (f) petroleum products stored in above ground fuel storage tanks installed and maintained by Tenant or (g) chemicals, substances or materials stored on the Demised Premises or included in products stored on the Demised Premises for sale to customers typically used in the ordinary course of the Tenant's business. 13.2.2. Notice of Violations. Any notice given by Landlord pursuant to this Article 13 shall specify such violations to the extent known by Landlord at the time of the giving of said Notice. All notices shall comply with the requirements of Article 23 of this Lease. 13.2.3. Underground Inspection and Storage Tanks. Except as set forth in Article 5.5, Tenant shall locate no underground improvement on the Demised Premises. Notwithstanding any other provision of this Lease, Tenant shall not locate an underground gas, diesel or oil storage tank on or under the Demised Premises. 13.2.4. Definitions. For the purposes of this Agreement: (i) "Hazardous Materials"' means any substance: (A) the presence of which requires investigation or remediation under any applicable federal, state or local statute, regulation, ordinance, order, action or policy or common law; (B) that is defined as a "hazardous waste" or "hazardous substance" under any applicable federal, state or local statute, regulation 15 or ordinance, including without limitation any statute referred to in Article 13.2.4(iv) hereof; (C) that is toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic or otherwise hazardous and is regulated by any applicable governmental authority, agency, department, commission, board, agency or instrumentality; (D) the presence of which on the Demised Premises causes or threatens to cause a nuisance upon the Demised Premises or to adjacent properties or poses or threatens to pose a hazard to the health or safety of persons on or about the Demised Premises; (E) the presence of which on adjacent properties could constitute a trespass by Landlord, or by Tenant after occupancy: (F) that contains gasoline, diesel fuel or other petroleum hydrocarbons in any unconfined manner; or (G) that contains PCBs, asbestos, or urea formaldehyde foam insulation. (ii) "Environmental Damages Caused by Tenant" shall mean all claims, judgments, damages, losses, costs, penalties, fines, liabilities (including strict liability), encumbrances, liens, costs and expenses of investigation and defense of any claim, whether or not such claim is ultimately defeated, and of any good faith settlement or judgment, of whatever kind or nature, contingent or otherwise, matured or unmatured, foreseeable or unforeseeable, including without limitation reasonable attorneys' fees and disbursements and consultants' fees, any of which are incurred at any time as a result of the existence on or after the Commencement Date of Hazardous Materials which Tenant has deposited, stored or otherwise located on, under or in the Demised Premises, or the migration or threatened migration from the Demised Premises of Hazardous Materials which Tenant has deposited, stored or otherwise located on, under or in the Demised Premises, the transport or disposal of any Hazardous Materials which Tenant has deposited, stored or otherwise located on, under or in the Demised Premises from the Demised Premises, or the existence of a 16 violation of Environmental Requirements pertaining to the business of Tenant, and including without limitation: (A) damages for personal injury, or injury to property or natural resources occurring on or off the Demised Premises, including, without limitation, lost profits, consequential damages, the cost of demolition and rebuilding of any improvements on Demised Premises, interest and penalties including but not limited to claims brought by or on behalf of employees of the business of the Tenant or of the Landlord; (B) reasonable fees incurred for the services of attorneys, consultants, contractors, experts, laboratories and all other costs, including without limitation costs for material and equipment, incurred in connection with the investigation or remediation of such Hazardous Materials or violation of Environmental Requirements including, but not limited to, the preparation of any feasibility studies, or reports or the performance of any cleanup, remedial, removal, response, abatement, containment, closure, restoration, reclamation or monitoring work required by any federal, state or local governmental agency or political subdivision, or reasonably necessary to make full economic use of the Demised Premises or any other property or otherwise expended in connection with such conditions, and including without limitation any reasonable attorneys' fees, costs, and expenses incurred in enforcing this Agreement or collecting any sums due hereunder; (C) liability to any third person or governmental agency to indemnify such person or agency for costs expended in connection with the items referenced in subparagraph (B) herein; and 17 (D) diminution in the value of the interest of Landlord in the Demised Premises and damages for the restriction on the use of or adverse impact on the usable space or of any amenity of the Demised Premises. (iii) "Environmental Damages Caused by Landlord" shall mean all claims, judgments, damages, losses, costs, penalties, fines, liabilities (including strict liability), encumbrances, liens, costs and expenses of investigation and defense of any claim, whether or not such claim is ultimately defeated, and of any good faith settlement or judgment, of whatever kind or nature, contingent or otherwise, matured or unmatured, foreseeable or unforeseeable, including without limitation reasonable attorneys' fees and disbursements and consultants' fees, any of which are incurred at any time as a result of the existence of Hazardous Materials upon or beneath the Demised Premises or migrating or threatening to migrate to or from the Demised Premises, the transport or disposal of any Hazardous Materials to or from the Demised Premises, or the existence of a violation of Environmental Requirements pertaining to the Demised Premises, regardless of whether the existence of such Hazardous Materials, such disposal or transport, or such violation of Environmental Requirements arose prior to the present ownership or operation of the Demised Premises, but expressly excluding all Environmental Damages Caused by Tenant, and otherwise including without limitation: (A) damages for personal injury, or injury to property or natural resources occurring on or off the Demised Premises, including, without limitation, lost profits, consequential damages, the cost of demolition and rebuilding of any improvements on Demised Premises, interest and penalties including but not limited to claims brought by or on behalf of employees of the business; (B) reasonable fees incurred for the services of attorneys, consultants, contractors, experts, laboratories and all other costs, including without limitation costs for material and equipment, incurred in connection with the investigation or remediation of such Hazardous Materials or violation of 18 Environmental Requirements including, but not limited to, the preparation of any feasibility studies or reports or the performance of any cleanup, remedial, removal, response, abatement, containment, closure, restoration, reclamation or monitoring work required by any federal, state or local governmental agency or political subdivision, or reasonably necessary to make full economic use of the Demised Premises or any other property or otherwise expended in connection with such conditions, and including without limitation any attorneys' fees, costs and expenses incurred in enforcing this Agreement or collecting any sums due hereunder; (C) liability to any third person or governmental agency to indemnify such person or agency for costs expended in connection with the items referenced in subparagraph (B) herein; and (D) diminution in the value of the leasehold interest of Tenant in the Demised Premises and damages for the restriction on the use of or adverse impact on the usable space or of any amenity of the Demised Premises. (iv) "Environmental Requirements" shall mean all applicable present statutes, regulations, rules, ordinances, codes, licenses, permits, orders, approvals, plans, authorizations and similar items, of all governmental agencies, departments, commissions, boards, bureaus or instrumentalities of the United States, the states and political subdivisions thereof and all applicable judicial and administrative and regulatory decrees, judgments and orders relating to the protection of human health or the environment, including, without limitation: all requirements pertaining to emissions, discharges, releases or threatened releases of any Hazardous Materials into the air, surface water, groundwater or land, or relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of any Hazardous Materials: all requirements pertaining to the protection of the health and safety of employees or the public (including, without limitation, 19 all requirements under the Occupational Safety and Health Act and all rules and regulations promulgated thereunder); all requirements pertaining to the reclamation or restoration of land; and all requirements pertaining to underground storage tanks. (v) "Tenant" for purposes of this Article shall include their respective invitees, licensees and customers. 13.2.5. Remediation. Tenant shall indemnify and hold Landlord harmless from any and all Environmental Damages Caused by Tenant and the Tenant shall provide such soil or water remediation as the appropriate governmental authorities may require in the event of any Environmental Damages Caused by Tenant or of Tenant's violation of Article 13.2. Landlord shall hold Tenant harmless from any and all Environmental Damages Caused by Landlord and the Landlord shall provide such soil or water remediation as the appropriate governmental authorities may require in the event of any Environmental Damages Caused by Landlord or of Landlord's violation of Article 13.2. ARTICLE 14. Landlord's Warranties and Representations. Landlord hereby covenants, warrants and represents to Tenant as follows: 14.1. that Landlord is the sole owner of the Demised Premises in fee simple absolute, free and clear of all liens or security interests other than the parties holding security interests in the Demised Property and disclosed on Exhibit C attached hereto (if any) and has full right and authority to enter this Lease for the full term hereof, including any renewal term; 14.2. that Landlord will put Tenant in possession of the Demised Premises on the Possession Date (as defined below); 14.3. that Tenant, on paying the rental and performing the covenants herein agreed by it to be performed, shall and may peaceably and quietly have, hold, occupy and enjoy the Demised Premises for the term of this Lease, including all renewal terms; and 14.4. that there are no environmental liens against the Demised Premises. 20 ARTICLE 15. Waiver of Landlord's Lien. Landlord shall not have, and hereby expressly waives, any lien granted to Landlord, whether statutory or otherwise, upon Tenant's personal property, fixtures, inventory, or stock-in- trade on the Demised Premises for non-payment of rent, default by Tenant, or any other reason whatsoever. ARTICLE 16. Subordination, Nondisturbance and Attornment. Provided the mortgagee or beneficiary enters into a valid and effective nondisturbance and attornment agreement with Tenant in form and substance reasonably acceptable to Tenant, which among other things shall provide that (a) Tenant shall not be named or joined in any action or proceeding to foreclose or enforce a mortgage or deed of trust, and in the event of foreclosure or other action taken under the mortgage or deed of trust by the holder thereof, this Lease and the rights of Tenant hereunder shall not be disturbed but shall continue in full force and effect so long as Tenant shall not be in default hereunder, and (b) such holder shall permit insurance proceeds and condemnation proceeds to be used for any restoration and repair in the manner provided for this Lease, Tenant shall subordinate this Lease to the lien of any mortgage of deed of trust upon the Demised Premises. In the event of delivery of such agreement, this provision shall be self-operative. If the holder of the mortgage or deed of trust or any person claiming under him shall succeed to the interest of Landlord in this Lease, Tenant shall recognize such holder or person as its Landlord, provided that such holder or person shall assume all of the obligations of Landlord hereunder. ARTICLE 17. Inspection. 17.1. During Lease Term. During the term of this Lease, including any Renewal Term, Landlord shall have the right from time to time to conduct further inspections of the Demised Premises, at Landlord's sole cost and expense, including without limitation environmental sampling of soil, surface water, ground water and building materials, in order to assess the condition of the Demised Premises. Landlord's inspections shall be conducted upon reasonable notice and at reasonable times. Landlord shall repair any damage caused by or a result of said inspections, provided that Landlord's obligation is strictly limited to repairs made necessary by the act(s) of inspection. 17.2. Tenant's Obligations. Tenant shall repair any damage to the Demised Premises caused by Tenant or its consultant discovered by or through any inspection contemplated by this Article 17 and shall not cause any liens to be filed against the 21 Demised Premises as a result of such damage. A breach by Tenant of this provision (17.2.) shall be deemed by Landlord to be a material breach of this Lease Agreement. ARTICLE 18. Indemnity. 18.1. Indemnification by Landlord. Notwithstanding any other Article of this Lease, Landlord shall and hereby does agree to indemnify, protect, defend and hold harmless Tenant and its partners, directors, officers, employees, shareholders, lenders, agents, contractors, and each of their respective successors and assigns (individually and collectively "Indemnitees") from and against any and all claims, judgments, damages, penalties, fines, taxes, costs, liabilities, losses, and expenses arising at any time during or after the term of this Lease as a result of or in connection with the following, regardless of potential strict liability of Tenant or the other Indemnitees therefor: Landlord's breach of any representation, covenant or warranty contained in this Agreement, other than to the extent covered under Article 13.2. This obligation by Landlord to indemnify, protect, defend, and hold harmless Indemnitees includes, without limitation: all foreseeable and unforeseeable consequential damages; damages for the loss or restriction on use of rentable or useable space or of any amenity of the Demised Premises: all sums paid in settlement of claims; reasonable attorneys' fees; and litigation, arbitration and administrative proceeding costs. 18.2. Indemnification by Tenant. Notwithstanding any other Article of this Lease, Tenant shall and hereby does agree to indemnify, protect, defend and hold harmless Landlord and its partners, directors, officers, employees, shareholders, lenders, agents, contractors, and each of their respective successors and assigns (individually and collectively "Landlord Indemnitee~") from and against any and all claims, judgments, damages, penalties, fines, taxes, costs, liabilities, losses, and expenses arising at any time during or after the term of this Lease as a result of or in connection with the following, regardless of potential strict liability of Landlord or the other Landlord Indemnitees therefore; Tenant's breach of any representation, covenant or warranty contained in this Agreement other than as covered by Article 13.2. This obligation by Tenant to indemnify, protect, defend, and hold harmless Landlord's Indemnitees includes, without limitation: all foreseeable and unforeseeable consequential damages; damages for the loss or restriction on use of rentable or useable space or of any amenity of the Demised Premises; all sums paid in settlement of claims; reasonable attorneys fees; and litigation, arbitration and administrative proceeding costs. 22 18.3. Survival. The obligations under this Article 18 shall survive the expiration or termination of the Lease for any reason whatsoever. ARTICLE 19. Tender of Possession and Possession Date. 19.1. Notwithstanding anything to the contrary contained herein, Landlord and Tenant agree Tenant shall take (or be deemed to take) and Landlord shall tender to Tenant, possession of the Demised Premises, on the date following the issuance of an Occupancy Permit. Landlord shall give Tenant no less than five (5) days notice of the date upon which Landlord will tender possession. Construction of the Demised Premises is projected to be completed on or about September 30th, 2000. 19.2. In the event that Landlord has not tendered possession of the Demised Premise by December 31, 2000, Tenant shall have the right to terminate this Lease upon written notice delivered to Landlord of Tenant's intent to terminate given not less than 10 days prior to its intended termination date. 19.3. Upon either parties request, a "Commencement Date Agreement" shall be prepared by Landlord and executed by both parties which shall set forth the exact commencement date and the date of expiration of the initial term. Said commencement date agreement shall become an additional addendum to the Lease Agreement dated March 1 , 2000, and shall be incorporated fully into this Lease Agreement notwithstanding the provisions of Article 24.1. 19.4. Tenant shall be given vacant possession of the Demised Premises in broom-clean condition, free of rubbish and debris, and free of tenants, tenancies and parties in possession. ARTICLE 20. Estoppel Certificates. At any time and from time to time Landlord and Tenant each shall, within 15 days after receipt of a request in writing, from the other, execute, acknowledge and deliver to the other or to any person designated by the other, a statement in writing certifying that the Lease is unmodified and is in full force and effect, or if there have been modifications, that the Lease is in full force and effect as modified (stating the modifications); that the other party is not in default in the performance of its covenants hereunder, or if there have been such defaults, specifying the same; and the dates to which the rent and other charges have been paid. 23 ARTICLE 21. Assignment and Subletting. Tenant shall not assign this Lease or Sublet the whole or any portion of the Demised Premises without the consent of Landlord, which consent shall not be unreasonably withheld or delayed; except that such consent shall not be required for any assignment or subletting to any person controlling, controlled by or under common control with Tenant, or in connection with Tenant's sale of substantially all of the assets of the business of Syconet.com, Inc., conducted by it in the Demised Premises. This provision shall not be construed to require Landlord's consent for any financing transaction in which Tenant grants to the lender as collateral a security interest in the Lease or Tenant's property at the Demised Premises; provided that Landlord shall not be required to permit any lender to assume this Lease without Landlord's express written consent, which consent may be conditioned upon lender's or lender's designate's assumption of the liabilities of Tenant hereunder. ARTICLE 22. Holding Over. In the event that Tenant or anyone claiming under Tenant shall continue occupancy of the Demised Premises after the expiration of the original term of this Lease or any renewal or extension thereof without any agreement in writing between Landlord and Tenant with respect thereto, such occupancy shall not be deemed to extend or renew the term of this Lease, but such occupancy shall continue as a tenancy from month to month upon the covenants, provisions and conditions herein contained and at a monthly rent amount equal to one hundred and fifty percent (150%) of the rent in effect during the last month of the term of this Lease, as extended or renewed, prorated and payable for the period of such occupancy. ARTICLE 23. Notices. 23.1. Address for Notices. All notices, requests, demands and other communications required or permitted to be given hereunder shall be deemed to have been duly given if in writing and sent by certified mail, return receipt requested, postage prepaid, or delivered by an overnight courier service, as follows: If to Tenant: Until date of occupancy to: 9208-A Venture Court Manassas, VA 20111 24 After date of occupancy to: 10390 Central Park Drive Manassas, VA 20110 With copy to: Richard Klein, Esq. Hofheimer Gartlir & Gross, LLP 530 Fifth Avenue New York, NY 10036 If to Landlord: Broadwater Investments II 12039 Wright Lane Bristow, VA 20136-1613 With copy to: Robert D. Wittenauer, Esq. 9401 Battle Street Manassas, VA 20110 Communications shall be deemed received upon the earlier of (a) actual receipt or (b) three (3) days after deposit in the U.S. Mail in accordance with the foregoing. 23.2. Change of Address. Landlord or Tenant may change the address to which such communications are to be directed to it by giving notice to the other in the manner provided in Article 24.1 ARTICLE 24. General. 24.1. Entire Agreement. This Lease sets forth the entire agreement and understanding of the parties regarding the transactions contemplated hereby and supersedes all prior agreements, arrangements and understandings relating to the subject matter hereof, except that the parties hereto may provide by separate instrument (i) their agreement regarding Tenant's build-out and fixtures construction, final plans and specifications, work change procedure, and correction procedures for work defect(s) and (ii) their agreement regarding lease commencement as provided in Article 2. 24.2. Binding Agreement. All of the terms, covenants, representations, warranties and conditions of this Lease shall be binding upon, and inure to the benefit of and be enforceable by, the parties hereto and their respective permitted successors and assigns. 24.3. Amendments. This Lease may be amended only by a written instrument, duly executed by Landlord and Tenant, which specifically refers to this Lease and states that it amends this Lease. 25 24.4. Waiver. The failure of any party at any time or times to require performance of any provision hereof shall in no manner affect the right at a later time to enforce the same. No waiver by any party of any condition, or of any breach of any term, covenant, representation or warranty, contained in this Lease, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such condition or breach, or a waiver of any other condition or of any breach of any other term, covenant, representation or warranty. 24.5. Headings. The article headings contained in this Lease are for convenient reference only, and shall not in any way affect the meaning of interpretation of this Lease. 24.6. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Virginia, without regard to the conflicts of laws principles thereof. 24.7. Force Majeure. Neither Landlord nor Tenant shall be required to perform any non-monetary term, condition, or covenant in this Lease so long as such performance is delayed or prevented by force majeure, which shall mean acts of God, strikes, lockouts, material or labor restrictions by any governmental authority, civil riot, floods, and any other cause not reasonably within the control of Landlord or Tenant and which by the exercise of due diligence Landlord or Tenant is unable, wholly or in part to prevent or overcome. 24.8. Time of Essence. Time is expressly declared and agreed to be of the essence in this Lease with respect to any and all terms, covenants, conditions, agreements, provisions, options, rights of termination and all other matters relating to this Lease. 24.9. Cumulative Effect. The rights and remedies by this Lease are cumulative and the use of any one right or remedy by either party shall not preclude or waive its right to use any or all other remedies. Said rights and remedies are given in addition to any other rights the parties may have by law, statute, ordinance or otherwise. 24.10. Severability. In case of any one or more of the provisions contained in this Lease shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not effect any 26 other provision hereof and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. ARTICLE 25. Authority. Except as otherwise provided herein, each individual executing this Lease in a representative capacity warrants and represents to the other party that he has all requisite authority to execute the same on behalf of the entity represented, in the capacity in which he has executed the same. Upon request by either party to the other, any party signing on behalf of a corporation will provide to the other a Certificate of Good Standing of the corporation and a certified copy of a Corporate Resolution authorizing signature of this document by the individuals signing the same on behalf of the corporation. Any parties signing this Lease as trustee or personal representative of one or more of the record owners thereof, shall provide evidence reasonably satisfactory to the other party that he is authorized to bind the record owners of the Demised Premises (including, with respect to a trust, a certified copy of the trust agreement and all amendments thereto and, with respect to a personal representative of a decedent's estate, a copy certified to be true and correct of a decedent's last will and testament and a certified copy of the letters of administration of the probate court appointing the personal representative). Each party signing on behalf of a partnership or limited partnership shall furnish a certified copy of the Partnership Agreement or the Certificate of Limited Partnership. Where a general or limited partnership has more than one general partner, evidence shall be provided to the other party on request evidencing that the general partner executing this Lease, or any document pursuant to this Lease, has authority to bind the partnership. Such evidence shall be deemed satisfactory if it would be sufficient to a title insurance company authorized to do business in the state in which the Demised Premises are located, for the purpose of issuing a policy of title insurance insuring the leasehold interest created by this Lease. ARTICLE 26. Attorneys' Fees. In the event of any litigation involving the parties to this Lease to enforce any provision of this Lease, to enforce any remedy available upon default under this Lease, or seeking a declaration of the rights of either party under this Lease, the prevailing party shall be entitled to recover from the other such attorneys' fees and costs as may be reasonably incurred, including the costs of reasonable investigation, preparation and 27 professional or expert consultation incurred by reason of such litigation. All other attorneys' fees and costs relating to this Lease and the transactions contemplated hereby shall be borne by the party incurring the same. ARTICLE 27. Brokerage Commission. Landlord and Tenant do hereby warrant and represent to each other that all brokerage fees relating to this Lease shall be settled by previous agreements between Landlord and Selling Broker. IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the day and year written adjacent to the signature of the parties or their duly authorized representative. LANDLORD: BROADWATER INVESTMENTS II a Virginia general partnership By: /s/ David L. Broadwater ----------------------- Name: David L. Broadwater Title: General Partner Date: 3/1/00 TENANT: ATTEST: SYCONET.COM, INC., a Delaware corporation /s/ Jack P. Kelly By: /s/Kathryn T. Jacobson ---------------- -------------------------- Name: Jack P. Kelly Name: Kathryn T. Jacobson Title: Chief Financial Officer Date: 3/3/00 Exhibit A - Demised Premises Exhibit C - Lien-Holders of Landlord 28 EXHIBIT A LEGAL DESCRIPTION All that certain lot or parcel of land and all improvements thereton located in the City of Manassas, Virginia, being more particularly described as follows: Lot 1A, Central Park Business and Industrial Center, as dedicated, subdivided and platted by Deed of subdivision recorded in Deed Book 2495 at Page 1170 of the land records of Prince William County, Virginia. And being the same property conveyed to Broadwater Investments II, a Virginia general partnership, by Deed dated March 1, 1999, and recorded March 2, 1999, at Deed Book 2707, Page 1025, among the land records of Prince William County, Virginia. EXHIBIT C CURRENT MORTGAGEES OR LIENHOLDERS None EX-10.5 4 LEASE ADDENDUM NO. 1 LEASE ADDENDUM NO. 1 This Addendum to Lease is entered into by and between BROADWATER INVESTMENTS II, a Virginia partnership ("Landlord"), and SYCONET.COM, INC. ("Tenant"), who are the parties to a certain lease agreement ("Lease") dated March 1 , 2000. The terms and conditions contained in this Lease Addendum shall become part of the aforementioned lease and fully incorporated therein. ARTICLE 28. OPTION TO PURCHASE. Lessor grants to Tenant the option to purchase the Demised Premises and any additional buildings then constructed on the land parcel currently owned by Broadwater Investments II upon which the Demised Premises is situated more particularly described as: Lot 1A, Central Park Business and Industrial Center, containing 3.1 acres, more or less, during the Initial Term of this Lease. The afore-described land parcel shall be referred to herein as the "Project Site". 28.1 General Terms. Tenant shall exercise the option to purchase by notifying Landlord in writing not less than 120 days prior to the day upon which Tenant desires to acquire title to the Project Site, which notice shall be given to Broadwater Investments II in accordance with the provisions of the Lease, and based upon the following conditions, to wit: 28.1.1. That Tenant agrees to purchase the Demised Premises and all additional buildings constructed during the term of this Lease, and this purchase option shall extend to the entire square footage of buildings thereon at the time this option is exercised. The proposed building plan shows that approximately 32,520 square feet of building area, including the Demised Premises, will be completed on the Project Site. 28.1.2. Tenant agrees that this Option shall terminate at the end of the Initial Term of the Lease. Landlord and Tenant contemplate that a new Option to Purchase may be desirable and that said new Option to Purchase shall be made in a separate written instrument on or before the commencement of the First Renewal Term. 28.1.3. The purchase price shall be those sums stipulated below so long as the Landlord receives Tenant's notice to exercise the purchase option by the anniversary dates stated, to-wit: 1 (i) On or before the first anniversary date of the Commencement Date, $3,550,000.00; (ii) On or before the second anniversary date of the Commencement Date, $3,660,000.00; (iii) On or before the third anniversary of the Commencement Date, $3,770,000.00; (iv) On or before the fourth anniversary of the Commencement Date, $3,880,000.00; (v) On or before the fifth anniversary date (subject to the limitation in Article 28.1), $3,990,000.00. 28.1.4. The Lease shall not have been terminated previously. 28.1.5. Tenant shall have observed and complied with all material terms and conditions of the Lease required of Tenant, up to the time of the exercise of this option and the payment of the purchase price, in the manner provided. 28.2. Landlord Duties. Landlord shall convey the Demised Premises to Tenant on the date specified in Tenant's notice of exercise of the option, and additional lands contained within the Project Site and buildings thereon, by general warranty deed, free and clear of all liens and encumbrances (exclusive of easements held by the City of Manassas for any utility purpose now held or hereafter acquired), except those that Tenant may have created or suffered. The deed shall be accompanied by an abstract of title, showing good and unencumbered title, passing under and by the resulting conveyance. Landlord will be responsible for payment of the Grantor's Tax pursuant to ss.58.1- 802 of the Code of Virginia (as amended). 28.3. Purchase Price Reduction. The total purchase price Tenant must pay upon acquisition of the Project Site shall be reduced by a sum equivalent to 33% of rent paid by Tenant on the Demised Premises only during the Initial Term of this Lease. The parties understand and agree that the purchase price reduction shall pertain only to those rents paid by Tenant pursuant to this Lease on the Demised Premises, and do not pertain to any additional buildings which may become subject to a separate lease agreement between the parties after the date of execution of this Lease. 2 28.3.1. In the event that the Tenant fails to exercise the option to purchase the Demised Premises and additional lands and buildings contained in the Project Site and the term of this Lease expires, all annual rent paid by the Tenant during the term of the Lease shall be considered rent and the Landlord shall be entitled to retain the entire amount without any accounting to Tenant. 28.4 Miscellaneous Terms. In the event that Tenant exercises this option in accordance with the terms and conditions contained in this addendum prior to the expiration of the Lease, the parties agree that the Tenant will reimburse at the closing of title to Landlord any and all prepayment penalties incurred by Landlord under the terms of Landlord's existing deed of trust or mortgage encumbering the Project Site requiring the payment of same for the prepayment of the encumbering debt obligation provided that, Tenant shall not become liable to reimburse Landlord for prepayment penalties in excess of the sum of $25,000.00. In the event that Tenant exercises this option to purchase, a closing of title shall occur at the office of Tenant's lender, attorney, or lender's attorney at the date specified in Tenant's notice to Landlord but in no event shall the closing take place within thirty (30) days of the date of Landlord's receipt of such notice. A closing of title shall be extended for a reasonable time to cure any title defects. BROADWATER INVESTMENTS II, a partnership DATED: 3/1/00 BY: /s/ David L. Broadwater ----------------------- NAME: David L. Broadwater TITLE: General Partner SYCONET.COM, INC. DATED: 3/3/00 BY: /s/ Kathryn T. Jacobson -------------------------- NAME: Kathryn T. Jacobson TITLE: Chief Financial Officer ATTEST: /s/ Jack P. Kelly - ----------------------- Name: Jack P. Kelly 3 EX-21 5 SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES 1. Animedepot.com, Inc., a Delaware corporation. 2. SyCo Comics and Distribution, Inc., a Virginia corporation. EX-27 6 FDS -- SYCONET.COM, INC.
5 This schedule contains summary financial information extracted from Syconet.com, Inc. financial statements for the twelve months ended December 31, 1999 and is qualified in its entirety by reference to such financial statements. 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 587,559 0 78,333 15,000 352,176 1,074,222 84,869 12,679 1,151,412 1,074,902 0 0 0 1,180 75,330 1,151,412 1,153,536 1,153,536 851,478 6,450,915 0 0 (594) (5,297,973) 0 (5,297,973) 0 0 0 (5,297,973) (0.55) (0.55)
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