1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
__X__ Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2000
____ Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period from ______________ to _______________
Commission file number: 1-11686
CYCOMM INTERNATIONAL INC.
(Exact name of small business issuer as specified in its charter)
Wyoming 54-1779046
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1420 Springhill Road, Suite 420
McLean, Virginia 22102
(Address of principal executive offices)
(703) 903-9548
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes x No ___
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court. Yes___ No___
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
As of April 30, 2000, the Registrant had 25,214,475 shares of Common Stock
outstanding.
Transitional Small Business Disclosure Format: Yes No X
2
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
PART I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets................ 3
Condensed Consolidated Statements of Operations...... 4
Condensed Consolidated Statements of Cash Flows...... 5
Condensed Consolidated Statement of Stockholders'
Equity............................................... 6
Notes to Condensed Consolidated Financial Statements. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation............................. 14
PART II - Other Information
Item 1. Legal Proceedings.................................... 17
Item 2. Changes in Securities................................ 17
Item 3. Default Upon Senior Securities....................... 17
Item 4. Submission of Matters to a Vote of Security Holders.. 17
Item 5. Other Information.................................... 17
Item 6. Exhibits and Reports on Form 8-K..................... 17
Signatures ..................................................... 19
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CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2000 AND DECEMBER 31, 1999
March 31, December 31
2000 1999
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $916,865 $22,867
Accounts receivable, less allowance for doubtful
accounts of $190,376 and 254,000, respectively 765,568 1,200,771
Inventories, net of allowance for obsolete
of $125,098 and $131,339, respectively 1,464,166 844,057
Deposits with suppliers 441,402
Other current assets 293,082 293,445
--------- ---------
Total current assets 3,881,083 2,644,589
Fixed assets, net 255,670 269,780
Other assets 7,993 30,648
$4,144,746 $2,945,017
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable- trade $2,166,963 $2,416,883
Accrued liabilities 485,990 692,324
Acquisition earn-out obligation 600,000 700,000
Deferred revenue 584,915 770,122
Dividends payable on preferred stock 20,932 33,575
Current portion of capital lease obligations 2,875 2,785
Revolving credit facility 558,049 915,104
--------- ---------
Total current liabilities 4,419,724 5,530,793
Capital lease obligations, less current portion 7,288 8,041
Convertible debentures --- 3,500,000
Stockholders' equity:
Series B Preferred Stock, $50,000 par value,
unlimited authorized shares, 2 shares issued
and outstanding at March 31, 2000 and
December 31, 1999 90,000 90,000
Series C Preferred Stock, $50,000 par value,
unlimited authorized shares, no shares
and 5 shares issued and outstanding at
March 31, 2000 and December 31, 1999 --- 206,250
Series E Preferred Stock, $100,000 par value,
unlimited authorized shares, 30 shares
and no shares issued and outstanding at
March 31, 2000 and December 31, 1999 3,000,000 ---
Common Stock, no par value, unlimited authorized
shares. 24,814,475 and 16,807,696 shares
issued and outstanding at March 31, 2000 and
December 31, 1999 58,277,963 54,315,402
Notes receivable - stockholders (62,405) (60,511)
Accumulated deficit (61,587,824) (60,644,958)
----------- -----------
Total stockholders' equity (282,267) (6,093,817)
----------- -----------
$4,144,746 $2,945,017
=========== ===========
See accompanying notes to condensed consolidated financial statements.
4
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED MARCH 31, 2000 AND MARCH 31, 1999 (RESTATED)
(Unaudited)
Three Months Ended
March 31, March 31,
2000 1999
(Unaudited) (Restated)
Sales $1,297,248 $1,460,356
Cost of sales 1,104,744 1,094,706
--------- ---------
Gross profit 192,504 365,650
Expenses:
Selling, general and administrative 809,465 919,018
Research and product development 222,034 178,285
Depreciation and amortization 30,127 317,443
--------- ---------
1,061,626 1,414,746
--------- ---------
Loss from Operations (869,122) (1,049,096)
Other Income (Expense)
Interest income 19,060 4,937
Interest expense (113,771) (119,551)
Other income 28,172 ---
-------- ----------
(66,539) (114,614)
--------- ----------
Loss from continuing operations (935,661) (1,163,710)
Discontinued operations
Income from operations of discontinued
operation Val-Comm, Inc. --- 7,657
Loss from operations of discontinued
operation Cycomm Secure Solutions, Inc. --- (1,613,044)
Estimated loss on disposal of Cycomm
Secure Solutions --- (1,535,643)
--------- ----------
Net Loss ($935,661) ($4,304,740)
========= ===========
Earnings per share
Loss per share from continuing operations ($0.04) ($0.09)
Income per share from discontinued
operations: Val-Comm Inc. --- $0.00
Loss per share from discontinued operations:
Cycomm Secure Solutions --- ($0.13)
Loss per share on disposal of Cycomm Secure
Solutions --- ($0.12)
--- ------
Net loss per share ($0.04) ($0.35)
====== ======
Weighted average number of common shares 21,751,098 12,433,264
========== ==========
See accompanying notes to condensed consolidated financial statements.
5
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED MARCH 31, 2000 AND MARCH 31, 1999
(Unaudited)
Three Months Ended
March 31, March 31,
2000 1999
(Restated)
Operating activities
Net loss from continuing operations $(935,661) $(1,163,710)
Adjustments to reconcile net loss to
net cash (used in) provided by
operating activities:
Depreciation and amortization 30,127 317,445
Change in operating assets and
liabilities (970,999) 1,084,398
---------- ---------
Cash (used in) provided by operating
activities (1,876,533) 238,133
---------- ---------
Investing activities
Acquisition of fixed assets (6,750) ---
Increase in notes receivable --- (4,000)
Decrease in notes receivable --- 2,000
Other --- 26,120
------ ------
Cash (used in) provided by investing
activities (6,750) 24,120
------ ------
Financing activities
Issuance of common stock 3,060,000 ---
Exercise of stock options 74,999
Borrowings under revolving credit
facility (357,055) (289,677)
Repayment of notes payable --- (15,777)
Repayment of obligations under capital
leases (663) (9,686)
--------- --------
Cash provided by (used in) financing
activities 2,777,281 (315,140)
--------- --------
Discontinued operations
Cash used in discontinued operation:
Cycomm Secure Solutions Inc. --- (380,240)
Cash provided by discontinued operating:
Val-Comm --- 4,848
Increase (decrease) in cash and cash
equivalents during the period 893,998 (428,729)
Cash and cash equivalents, beginning of
period 22,867 567,977
-------- --------
Cash and cash equivalents, end of period $916,865 $139,698
======== ========
Supplemental cash flow information:
Interest paid $201,044 $194,050
Income taxes paid $ --- $ ---
Non-cash investing and financing
Conversion of convertible debentures to
common stock $517,452 $ ---
Conversion of preferred stock to common
stock $226,098 $381,356
Conversion of convertible debentures
to preferred stock $3,000,000 $ ---
See accompanying notes to condensed consolidated financial statements.
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CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE UNAUDITED PERIOD ENDED MARCH 31, 2000
AND THE YEAR ENDED DECEMBER 31, 1999
Preferred Preferred Common Common Accumulated
Shares Stock Shares Stock Deficit
Balance,
December 31, 1998 8 360,000 12,210,311 $51,674,618 $(51,600,647)
Net Loss --- --- --- --- (9,012,481)
Issuance of common
stock:
Private placement -
Common stock --- --- 3,626,907 1,765,987 ---
Value of options
issued to non-
employees --- --- --- 263,458 ---
Issuance of preferred
stock:
Issuance - Series C
preferred stock 6 247,500 --- --- ---
Issuance - Series D
preferred stock 6 268,500 --- --- ---
Reversal of conversion
of Series B preferred
stock 1 45,000 (21,745) (46,753) ---
Conversion of preferred
stock (14) (624,750) 992,223 658,092 ---
Dividends on preferred
stock --- --- --- --- (31,830)
--- -------- ---------- ----------- -----------
Balance,
December 31, 1999 7 $296,250 16,807,696 $54,315,402 $(60,644,958)
==== ======== ========== =========== ============
Net Loss (935,661)
Issuance of common stock:
Private placement -
Common stock --- --- 6,200,000 3,060,000 ---
Shares cancelled
related to vendor
obligation --- --- (205,717) (77,144) ---
Shares issued in settle-
ment of vendor
obligation --- --- 400,000 161,156 ---
Exercise of stock
options --- --- 145,833 74,999 ---
Conversion of
debenture into common
stock --- --- 1,034,904 517,452 ---
Issuance of preferred
stock:
Conversion of preferred
debentures into
preferred stock 30 3,000,000 --- --- ---
Conversion of preferred
stock (5) (206,250) 431,759 226,098
Dividends on preferred
stock --- --- --- --- (7,205)
--- --------- ---------- ---------- ------------
Balance,
March 31, 2000 32 3,090,000 24,814,475 58,277,963 $(61,587,824)
=== ========= ========== ========== ============
See accompanying notes to condensed consolidated financial statements.
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CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2000
NOTE 1: GENERAL
The interim financial information furnished herein was prepared from the
books and records of Cycomm International Inc. and its subsidiaries
("Cycomm") as of March 31, 2000 and for the periods ended March 31, 2000 and
1999, without audit; however, such information reflects all normal and
recurring accruals and adjustments which are, in the opinion of management,
necessary for a fair presentation of financial position and of the statements
of operations and cash flows for the interim period presented. The interim
financial information furnished herein should be read in conjunction with the
consolidated financial statements included in this report and the
consolidated financial statements and notes contained in the Cycomm's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1999. The
interim financial information presented is not necessarily indicative of the
results from operations expected for the full fiscal year.
The results for the quarter ended March 31, 1999 have been restated to
reflect certain adjustments that were made during Cycomm's year-end audit.
The restatements caused a decrease in revenue of $105,426, an increase in
gross margins of $91,626, an increase in operating expenses of $167,385, and
an increase in net loss from continuing operations of $75,759. Loss from
operations of discontinued operation: Cycomm Secure Solutions Inc. decreased
by $138,833, and the estimated loss on disposal of Cycomm Secure Solutions
Inc. decreased by $62,766. Net loss for Cycomm decreased by $125,840.
Earnings per share has changed as follows:
Earnings per share Restated Originally
3/31/99 Reported 3/31/99
Loss from continuing operations ($0.09) ($0.09)
Income per share from discontinued
operations: Val-Comm Inc. $0.00 $0.00
Loss per share from discontinued
operatons: Cycomm Secure Solutions
Inc. ($0.13) ($0.14)
Estimated loss per share on disposal
of Cycomm Secure Solutions Inc. ($0.12) ($0.13)
------ ------
Net loss per sharE ($0.35) ($0.36)
====== ======
Cycomm intends to file an amended report on Form 10-QSB/A for the period
ended March 31, 1999 to further discuss these changes. Cycomm also intends
to file amended reports on Form 10-QSB/A for the periods ended June 30, 1999
and September 30, 1999.
NOTE 2: DISCONTINUED OPERATIONS
Cycomm Secure Solutions Inc.
On March 4, 1999, the Company signed a letter of intent for the sale of the
assets of its secure computing subsidiary, Cycomm Secure Solutions Inc.
("CSS"), in a management buy out ("MBO") transaction to a group of investors
led by CSS management. On May 3, 1999, prior to the closing of the sale, the
MBO group signed an agreement with Cycomm allowing the MBO group to operate
the business for the period prior to the closing of the sale. The agreement
8
allowed the MBO group to operate the assets of CSS and generate revenues for
the benefit of the MBO group, and made the MBO group responsible for all
expenses incurred and liabilities generated on and after May 3, 1999.
In May of 1999, the MBO group informed Cycomm that it would be unable to
complete the purchase of the assets of CSS. The MBO group identified a
company called Cortron Inc. ("Cortron") as another potential buyer for the
assets of CSS. Cycomm signed a letter of intent for the sale of the assets
of CSS to Cortron Inc. for a purchase price of $800,000. On June 21, 1999
Cycomm's secured lender foreclosed on the assets of CSS and sold the assets
to Cortron.
The results of operations for CSS are reported as discontinued operations for
all periods presented. For the period ended March 4, 1999, the results of
CSS included a write-off of goodwill of $1,220,190. The results of
operations for Cycomm Secure Solutions Inc. for the period ended March 4,
1999 are summarized as follows:
January 1,
1999 to March
4, 1999
Revenue $1,837,889
Cost of Sales 1,354,200
---------
Gross profit (loss) 483,689
Operating Expenses 2,096,733
------------
Net loss ($1,613,044)
===========
Net loss per share ($0.12)
======
The assets sold included inventory, fixed assets and various intangibles and
other assets and had a carrying value of $2,333,779 as of June 21, 1999.
Proceeds on the sale of CSS's assets were used to repay a portion of CSS'
bank debt and to satisfy CSS' lease and property tax obligations. The
Company recognized a net loss on disposal of $1,535,643 on the sale of CSS'
assets. Included in the net loss is a gain of $278,297 on the settlement of
an operating lease obligation. Included in our accounts payable at March 31,
2000 are $1,310,837 of unpaid amounts due to vendors of CSS.
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Val-Comm Inc.
In April 1999, the Company entered into an agreement to sell its secure
telecommunications subsidiary, Val-Comm Inc. to an individual investor in
Val-Comm's geographical area. The transaction was structured as a stock
purchase, and was completed on August 21,1999. The results of operations for
Val-Comm are reported as discontinued operations for the quarter ended March
31, 1999, and are summarized as follows:
March 31,
1999
Revenue $331,508
Cost of Sales 211,383
-------
Gross profit (loss) 120,125
Operating Expenses 112,468
-------
Net income $ 7,657
=======
Net income per share $0.00
=====
The net book value of Val-Comm's assets on August 21, 1999 was $484,254. The
selling price of Val-Comm consisted of an initial payment of $750,000 and a
contingent promissory note of $1.5 million. The promissory note is
contingent upon Val-Comm getting a follow-on award to an existing contract.
Val-Comm's management is optimistic that they will receive this award. The
contingent promissory note bears interest at 7%, and is payable over two
years should payment be required, with 50% of the note due on August 21, 2000
and the balance of the note due on August 21, 2001. The Company recognized a
gain on the sale of Val-Comm of $265,746.
The initial payment of $750,000 was made with $188,000 in cash and with stock
in the purchaser's company that was valued at $900,000 at the time of the
purchase. The stock was to be sold by an independent third party, and the
proceeds were to be paid to Cycomm. As of March 31, 2000 the Company had
received proceeds of $496,034 from the sale of the purchaser's stock. The
total amount due from the purchaser on the initial payment is $65,966 as of
March 31, 2000 and is included in other current assets.
NOTE 3: ACQUISITION EARN-OUT
In connection with the purchase price paid for the Company's acquisition of
its Cycomm Mobile Solutions subsidiary, the Company entered into an
acquisition earn-out agreement with the seller, M3i Technologies Inc. and M3i
Systems Inc. (collectively the "Seller"). The earn-out provision of the
purchase price was to be paid in Cycomm common stock, up to a maximum value
of $4,000,000, subject to provisions based on the achievement of certain unit
sales volumes for a five year period. Common stock issued under the earn-out
provisions was to be issued at the average current market price of the last
month for the quarter in which it was earned. As of March 31, 2000, Cycomm
had paid $1,354,796 of contingent consideration, which was paid in 444,862
shares of common stock.
The Company and the seller were parties to a lawsuit regarding the
interpretation of the earn-out agreement. On May 24, 1999, the Company and
the seller entered into a complete settlement of the litigation. Under the
terms of the agreement, the Company could fulfil its obligation to the Seller
10
if payments were made before certain dates as specified in the agreement.
The Company could elect to pay $700,000 by April 30, 2000, $1,100,000 by
April 30, 2001 or $1,500,000 prior to April 30, 2002. The settlement
agreement was amended on February 3, 2000 to allow Cycomm until December 31,
2000 to pay $700,000 in full and final settlement of the obligation, to be
paid in accordance with a payment schedule. Management anticipates that the
liability to the Seller will be paid prior to December 31, 2000 in accordance
with the payment schedule. The first scheduled payment of $100,000 was made
on February 7, 2000. Cycomm has recorded an accrued liability of $600,000 as
of March 31, 2000. In conjunction with the settlement, the Company issued
200,000 warrants to the seller with a fair value on the date of issuance of
$88,000. It was considered part of the purchase price and subsequently
written off in conjunction with goodwill impairment charge (See Note 6:
Impairment of Goodwill).
NOTE 4: DELISTING FROM THE AMERICAN STOCK EXCHANGE
On January 21, 1999, Cycomm was notified by the American Stock Exchange that
it no longer met continued listing criteria and would be delisted.
Specifically, Cycomm had incurred losses in its last five fiscal years and
therefore failed to meet the American Stock Exchange listing requirement of
pre-tax income of at least $750,000 in its last fiscal year, or in two of its
last three fiscal years. Additionally, Cycomm failed to satisfy the minimum
stockholders' equity requirement of $4 million. Trading of Cycomm's stock
was suspended on April 13, 1999 and Cycomm was delisted from the AMEX on
April 30, 1999. The Company began trading on the Over-the-Counter Bulletin
Board (OTCBB) on May 5, 1999 under the symbol "CYII".
NOTE 5: DEFERRED REVENUE
The Company recorded deferred revenue related to sales in which customers
were shipped PCMobiles with 586 processors (the "586s") to be used until
PCMobiles with Pentium processors (the "Pentiums") became available. At the
time the shipments were made, Cycomm was still in the process of developing
the Pentium PCMobile, however the customers agreed to take 586s until Cycomm
was able to deliver Pentiums. The customers paid the full price for Pentiums
at the time of the shipment, which was recorded as deferred revenue. When
the Pentiums became available, the customers could trade in the 586s for
Pentiums at no additional charge. The customers retained the right to return
the 586s at any time before they received the Pentiums. Upon the return of
the 586s, the customers would be entitled to a full refund, and the entire
sale would be cancelled.
The 586s were classified as demonstration units, and were recorded in
inventory and depreciated over a one year period. All demonstration units
were fully depreciated during the year ended December 31, 1999. Depreciation
expense on the demonstration units was $218,212 for the quarter ended March
31, 1999.
Revenue on the sales is recognized when the Pentium units are shipped to the
customers. Cycomm recognized revenue of $185,207 and $207,299 related to the
shipment of Pentium units to customers in exchange for the 586 units for the
quarters ended March 31, 2000 and March 31, 1999, respectively. See Note 10:
Subsequent Events for further discussion of deferred revenue.
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NOTE 6: IMPAIRMENT OF GOODWILL
In 1999, Cycomm made the determination that the value of goodwill related to
the acquisition of Cycomm Mobile Solutions ("CMS") was impaired under SFAS
121. CMS has a history of losses and negative cash flows from operations.
Cycomm recorded an impairment charge of $838,202 in the year ended December
31, 1999 to fully write down goodwill related to CMS due to the fact that the
carrying value of that asset was in excess of its fair value.
NOTE 7: INVENTORIES
The following is a summary of inventories at March 31, 2000 and December 31,
1999:
March 31, December 31,
2000 1999
Raw materials $971,535 $841,910
Work in process and sub-assemblies 394,809 122,160
Finished goods 222,919 11,326
Allowance for obsolete inventory (125,098) (131,339)
---------- --------
$1,464,166 $844,057
========== ========
Cycomm continually evaluates inventory for obsolescence or impairment in
value. The impairment loss is measured by comparing the carrying amount of
the inventory to its fair value with any excess of carrying value over fair
value reserved. Fair value is based on market prices where available, or on
an estimate of market value, or determined by various valuation techniques
including discounted cash flow.
NOTE 8: NOTES PAYABLE AND CONVERTIBLE DEBENTURES
Notes payable and convertible debentures are as follows:
March 31, December 31,
2000 1999
7% convertible debentures,
due May 1, 2000 $ --- $3,000,000
7% convertible debenture,
due September 20, 2004 --- 500,000
Revolving credit facility, prime + 3% 558,049 915,104
- ------- -------
558,049 4,415,104
Less current portion 558,049 915,104
-------- ----------
$ --- $3,500,000
========= ==========
On February 28, 1997, the Company issued $3,000,000 of 10% convertible
debentures due February 28, 1999 which were convertible at the option of the
holders into common stock of the Company at a 10% discount of the average
closing bid price of the Company's common stock prior to conversion, provided
the conversion price was not greater than $6.00 per share nor less than $3.00
12
per share. On June 15, 1998, the Company entered into an agreement with the
holders of these debentures, under which the holders agreed to waive their
conversion rights in exchange for an increase in the interest rate of the
debentures from 10% to 12%. On March 31, 1999, the Company entered into a
new agreement with the holders of the debentures that amended the terms of
the note and extended the maturity date to May 1, 2000. Pursuant to the
terms of the new agreement, the interest rate on the convertible debentures
was lowered from 12% per annum to 7% per annum and the debentures were
convertible at the market price of Cycomm's common stock, provided that the
market price is not below $0.50 per share at the time of conversion. On
March 31, 2000, Cycomm entered into an agreement with the holders of the
$3,000,000 7% convertible debentures under which the debentures were sold to
a third party, who was assigned all rights privileges and obligations of the
original holders. Concurrent with the sale, Cycomm entered into an agreement
with the new holders under which the debentures were converted into preferred
stock of the Company. The debentures were converted into 30 shares of Series
E convertible redeemable preferred stock ("Series E preferred stock") with a
conversion value of $100,000 per share. The Series E preferred stock is
convertible at any time at the option of the holder. The conversion price is
equal to the average closing bid price of the Company's stock for the 20 days
prior to the date of conversion. The Series E preferred stock cannot be
converted for less than $2.00 per share. The Series E preferred stock
accrues dividends at 7% per annum, which can be paid in cash or in common
stock at the option of the Company. The Series E preferred stock is
redeemable at the option of the Company at a price equal to conversion price
on the date of redemption. The Series E preferred stock has no mandatory
redemption provisions. See Note 10: Subsequent Events for further discussion
of the Series E preferred stock.
On September 20, 1999, the Company issued a $500,000 7% convertible debenture
due September 20, 2004 which was convertible at the option of the holder into
common stock of the Company at the lesser of $0.50 per share or the average
closing bid price of the Company's common stock for the 5 days prior to
conversion. On March 30, 2000, the debenture was converted into common stock
of the Company. At the time of conversion, the debenture had earned accrued
interest of $17,452. The principal and accrued interest were converted into
1,034,904 shares of common stock.
The Company has a revolving credit facility from a lender under which the
Company may, at its option, borrow and repay amounts up to a maximum of
$4,000,000. As of March 31, 2000, the available borrowing base on the
revolving credit facility was $508,763. Borrowings under this credit
facility bear interest at prime plus 3%. The credit facility is
collateralized by the trade accounts receivable, inventory and other assets
of Cycomm Mobile Solutions. As of March 31, 2000, the amount outstanding on
the credit facility was $558,049, which exceeded the available borrowing base
of the collateral by $49,286. As a result, Cycomm was not in compliance with
the terms of its loan agreement as of March 31, 2000. As of May 15, 2000,
the amount outstanding was within the available borrowing base, and Cycomm
was in compliance with the terms of its loan agreement.
NOTE 9: CAPITAL STOCK
Common Stock
In January 2000, Cycomm raised capital through three separate private equity
placements of its common stock. The equity placements were priced at the
market price of Cycomm's common stock on the date of the letter intent. The
market price of Cycomm's common stock increased prior to the date of
issuance, causing the private equity placements to be issued at a discount to
13
the market price. In total, the Company issued 6,200,000 shares of common
stock for gross proceeds of $3,170,000. Cash proceeds, after commissions and
issue costs were $3,060,000. In conjunction with these private placements,
the Company issued 5,000,000 warrants to the purchasers, with a fair value on
the date of issuance of approximately $8,736,500.
Five shares of convertible preferred shares and related accrued dividends
were converted into 431,759 shares of common stock during the quarter ended
March 31, 2000.
On March 30, 2000, the $500,000 7% convertible debenture due September 20,
2004 was converted into common stock of the Company. At the time of
conversion, the debenture had earned accrued interest of $17,452. The
principal and accrued interest were converted into 1,034,904 shares of common
stock.
On January 21, 2000, Cycomm cancelled 205,717 shares of its common stock that
had been issued in settlement of a vendor obligation of $77,144, and issued
400,000 shares in full settlement of an obligation of $161,223.
On January 13, 2000, Cycomm issued 145,833 shares of common stock upon the
exercise of non-employee stock options for proceeds of $74,999.
Preferred Stock
On March 31, 2000, Cycomm issued 30 shares of Series E convertible redeemable
preferred stock ("Series E preferred stock") with a conversion value of
$100,000 in conjunction with the conversion of the $3,000,000 7% convertible
debentures due May 1, 2000 (See Note 8: Notes Payable and Convertible
Debentures). The conversion price is equal to the average closing bid price
of the Company's stock for the 20 days prior to the date of conversion. The
Series E preferred stock cannot be converted for less than $2.00 per share.
The Series E preferred stock accrues dividends at 7% per annum, which can be
paid in cash or in common stock at the option of the Company. The Series E
preferred stock is redeemable at the option of the Company at a price equal
to conversion price on the date of redemption. The Series E preferred stock
has no mandatory redemption provisions.
NOTE 10: SUBSEQUENT EVENTS
On May 8, 2000, Cycomm raised capital through a private equity placement of
its common stock. The stock was issued at a discount to the market price on
the date of the issuance. In total, the Company issued 1,200,000 shares of
common stock for gross proceeds of $1,200,000. Cash proceeds, after
commissions and issue costs were $1,080,000.
On April 4, 2000, 2 shares of Series E preferred stock were converted into
100,000 shares of common stock. On April 25, 2000 6 shares of Series E
preferred stock were converted into 300,000 shares of common stock.
On April 3, 2000, Cycomm entered into an agreement with the remaining
customer eligible to receive Pentium units upon the return of the 586 units
(See Note 5: Deferred Revenue). Under this agreement, the customer agreed to
forego the right to swap 586 units for Pentiums in exchange for the
forgiveness of an obligation and an extension of the warranty period. As of
April 3, 2000, the Company has no future obligations related to the 586 for
Pentium exchange agreements.
14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation.
Results of Continuing Operations
Quarter Ended March 31, 2000 and March 31, 1999
In the quarter ended March 31, 1999 the Company made the determination that
it could no longer fund the operations of its secure computing segment,
Cycomm Secure Solutions, Inc. ("CSS"), and on March 4, 1999 signed a letter
of intent to sell the assets of CSS. The assets of CSS were sold on June 21,
1999. The operating results of CSS for the quarter ended March 31, 1999 are
not included in results from continuing operations, and are classified on a
separate line item on the income statement.
The Company also entered into an agreement to sell its secure communications
equipment subsidiary, Val-Comm Inc., in order to generate additional working
capital, and to concentrate fully on the Company's core business, the
PCMobile line of rugged computers. Val-Comm was sold to an investor located
within its geographic region on August 21, 1999. Results of operations from
Val-Comm have also been excluded from results from continuing operations, and
are classified separately on the income statement.
The results of continuing operations for the quarters ended March 31, 2000
and March 31, 1999 reflect only the results of the Company's PCMobile product
line and the results of the parent company.
Revenues for the three months ended March 31, 2000 were $1,297,248 as
compared to revenues of $1,460,356 for the prior period. The decrease in
revenue is a result of beginning the quarter with limited financial resources
and the lead time required to increase production after financing was
obtained. Cycomm raised over $3 million in private equity placements in
January of 2000. This funding allowed Cycomm to resume normal purchasing
patterns with vendors, however the timing of the private placements and the
lead times required for certain components resulted in lower sales volumes
for January and February of 2000.
Cost of sales for the quarter ended March 31, 2000 were $1,104,744 as
compared to cost of sales of $1,094,706 for the prior period. Gross margins
for the quarter ended March 31, 2000 were 15%, which represents a decrease
from 25% in the prior period. The decrease in gross margins is a result of
the decrease in sales volume from the prior period. Cycomm's targeted range
for its gross margins is between 30% and 40%. However, lower levels of
production cause manufacturing overhead to be spread over fewer products,
which increases the cost of production per unit and lowers margins.
Operating expenses decreased to $1,061,626 for the period ended March 31,
2000 as compared to $1,414,746 in the prior period. Selling, general and
administrative expenses decreased $109,553 to $809,465 for the current
period. This decrease is mainly the result of reductions in management
headcount and facilities costs. Research and development costs increased to
$222,034 as compared to $178,285 in the prior period. Cycomm increased its
research and development efforts in the period ended March 31, 2000 to
15
accelerate the release of the Pentium II and Pentium III models of the
PCMobile and to complete development of a multi-media docking station.
Depreciation and amortization decreased to $30,127 for the quarter ended
March 31, 2000 as compared to $317,443 in the prior period. Depreciation and
amortization for the three months ended March 31, 1999 included $48,568
related to the amortization of goodwill, which was not included in the
results for the three months ended March 31, 2000 as all of the goodwill was
subsequently written off. In addition, depreciation and amortization for the
three months ended March 31, 1999 included $218,212 related to the
depreciation of demonstration units, which were fully depreciated prior to
December 31, 1999.
Interest expense for the quarter ended March 31, 1999 was $113,771 as
compared to $119,551 for the prior period. The decrease is a result of the
change in the interest rate on the $3,000,000 convertible debentures from 12%
to 7%, which was partially offset by interest expense on the $500,000 7%
convertible debenture.
Net loss from continuing operations decreased to $935,661, or $0.04 per
share, for the quarter ended March 31, 2000 from $1,163,710, or $0.09 per
share for the quarter ended March 31, 1999. The decrease in net loss from
continuing operations is a result of reduced operating expenses, offset by
the decrease in the Company's gross margins.
Cycomm completed the sale of its CSS subsidiary on June 21, 1999. For the
quarter ended March 31, 1999, CSS lost $1,613,044 from operations. Cycomm
recorded a loss on the disposal of CSS of $1,535,643.
Cycomm completed the sale of its Val-Comm subsidiary on August 21, 1999.
Income from discontinued operations from Val-Comm was $7,657 for the quarter
ended March 31, 1999.
Liquidity and Capital Resources
The Company has satisfied working capital requirements through cash on hand,
available lines of credit and various equity related financings. At March
31, 2000, the Company had cash and cash equivalents of $916,685.
In the three months ended March 31, 2000, cash used in operations amounted to
$1,876,533, as Cycomm reduced outstanding payables and increased inventory.
Cash used in investing activities during the three months ended March 31,
2000 totaled $6,750. Cash provided by financing activities was $2,777,281
for the three months ended March 31, 2000. Cycomm completed three private
placements for net proceeds of $3,060,000, and received proceeds from the
exercise of options of $74,999. Cycomm decreased the amounts drawn on its
bank credit lines in an amount of $357,055 during the three months ended
March 31, 2000.
The Company's net working capital at March 31, 2000 was ($538,641) as
compared to ($2,886,204) at December 31, 1999. The change in net working
capital is primarily the result of Cycomm raising $3,060,000 in private
equity placements. Proceeds from the private placements were used primarily
for production, research and development and sales and marketing efforts.
Inventory increased by $620,109 to $1,464,166 at March 31, 2000 as Cycomm
increased purchasing to fill customer orders. Accounts payable decreased
from $2,416,883 at December 31, 1999 to $2,166,963 at March 31, 2000, and
deposits with suppliers increased from $283,449 at December 31, 1999 to
$441,402 at March 31, 2000.
16
Cycomm's auditors have issued a going concern qualification to their opinion
on the Company. Management is addressing the going concern issue with
several actions, including expanding its sales force, adding resellers,
evaluating potential acquisitions and strategic partnerships, and further
capitalizing the Company through borrowings and private equity placements.
17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
On May 24, 1999 the Company entered into a settlement agreement with the
trustee in bankruptcy of M3i Technologies, Inc., a Quebec corporation. The
Company was the defendant in a case alleging breach of contract and
misrepresentation in connection with the "earn out" provision of the asset
purchase agreement in the Company's purchase of its Cycomm Mobile Solutions
subsidiary. Under the terms of the agreement, the Company can fulfill its
obligation to the Seller if payments are made before certain dates as
specified in the agreement. The Company can elect to pay $700,000 by April
30, 2000, $1,100,000 by April 30, 2001 or $1,500,000 prior to April 30,
2002.
On June 15, 1999 the Company entered into a settlement agreement with
Infotech International, a Florida corporation involved in the resale of the
Company's PCMobile computers. The Company was the plaintiff in a case
alleging breach of contract and conversion of funds. The Company agreed to a
payment plan in which Infotech would pay $592,959 plus interest and costs
according to a fixed schedule prior to September 15, 2000. Infotech is
currently in default of this payment schedule.
A lawsuit was instituted against the Company on August 3, 1999 in the
Circuit Court of the Nineteenth Judicial Circuit in and for Indian River
County, FL by G.T. Gangemi, former President of the Company's Cycomm Secure
Solutions subsidiary. The lawsuit alleges breach of contract in connection
with the severance provisions of Mr. Gangemi's employment agreement with
Cycomm Secure Solutions, and seeks damages of approximately $77,000 and other
relief. The Company denies any wrongdoing and liability and intends to
vigorously defend the allegations.
Item 2. Changes in Securities.
None.
Item 3. Default Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
18
27. Financial Data Schedule
(b) Reports on Form 8-K:
1. Current Report on Form 8-K was filed on February 4, 1999 reporting the
decision by the American Stock Exchange to delist the Company's
common stock under Item 5. - Other Items.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CYCOMM INTERNATIONAL INC.
Date: May 19, 2000 /s/ Albert I. Hawk
Albert I. Hawk
President and
Chief Executive Officer
Date: May 19, 2000 /s/ Robert M. Hutton
Robert M. Hutton
Vice President of Finance