Page 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB/A
(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, 1999
____ 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, 1999, the Registrant had 12,492,928 shares of Common Stock
outstanding.
Transitional Small Business Disclosure Format: Yes No X
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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.............................. 12
PART II - Other Information
Item 1. Legal Proceedings..................................... 15
Item 2. Changes in Securities................................. 15
Item 3. Default Upon Senior Securities........................ 15
Item 4. Submission of Matters to a Vote of Security Holders... 15
Item 5. Other Information..................................... 15
Item 6. Exhibits and Reports on Form 8-K...................... 15
Signatures ...................................................... 16
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CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1999 AND DECEMBER 31, 1998
March 31, December 31,
1999 1998
ASSETS (Restated)
(Unaudited)
Current assets:
Cash and cash equivalents $139,698 $567,977
Accounts receivable, less allowance for
doubtful accounts of $48,000 and
$61,000, respectively 853,201 2,251,818
Inventories, net of allowance for
obsolete inventory of $78,086 and
$172,096, respectively 1,901,520 1,772,861
Net assets held for sale of
discontinued operations:
Cycomm Secure Solutions Inc. --- 1,457,151
Net assets held for sale of
discontinued operations:
Val-Comm, Inc. 379,748 374,913
Deposits with suppliers 283,449 283,449
Other current assets 167,393 123,562
--------- ---------
Total current assets 3,725,009 6,831,731
Fixed assets, net 331,622 363,264
Goodwill, net 815,913 2,175,400
Other assets:
Deferred financing costs, net --- 31,701
Other 198,733 224,850
--------- ---------
$5,071,277 $9,626,946
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable- trade $2,185,573 $2,191,026
Accrued liabilities 614,368 394,014
Acquisition earn-out obligation 700,000 700,000
Deferred revenue 794,966 934,948
Dividends payable on preferred stock 8,857 33,333
Current portion of capital lease
obligations 3,121 22,418
Revolving credit facility 1,669,868 1,959,545
Current portion of notes payable and
convertible debentures --- 3,015,777
--------- ---------
Total current liabilities 5,976,753 9,251,061
Capital lease obligations, less current
portion 10,162 10,826
Notes payable and convertible debentures,
less current portion 3,000,000 ---
Stockholders' equity:
Preferred Stock, $50,000 par value,
unlimited authorized shares, 1
and 8 shares issued and outstanding at
March 31, 1999 and December 31, 1998,
respectively 45,000 360,000
Common Stock, no par value, unlimited
authorized shares, 12,492,928 and
12,210,311 shares issued
and outstanding at March 31, 1999
and December 31, 1998 52,020,975 51,674,618
Notes receivable - stockholders (72,786) (68,912)
Accumulated deficit (55,908,827) (51,600,647)
----------- -----------
Total stockholders' equity (3,915,638) 365,059
----------- -----------
$5,071,277 $9,626,946
=========== ===========
See accompanying notes to condensed consolidated financial statements.
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CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED MARCH 31, 1999 AND MARCH 31, 1998
(Unaudited)
Three Months Ended
March 31, March 31,
1999 1998
(Restated)
Sales $1,460,356 $3,856,957
Cost of sales 1,094,706 2,405,874
--------- ---------
Gross profit 365,650 1,451,083
--------- ---------
Expenses
Selling, general and administrative 919,018 1,276,403
Research and product development 178,285 114,815
Depreciation and amortization 317,443 161,627
--------- ---------
1,414,746 1,552,845
--------- ---------
Loss from Operations (1,049,096) (101,762)
Other Income (Expense)
Interest income 4,937 12,030
Interest expense (119,551) (99,294)
Other income
--- 1,508
------- ------
(114,614) (85,756)
======== =======
Loss from continuing operations ($1,163,710) ($187,518)
Discontinued operations
Income from operations of
discontinued operation Val-Comm Inc. 7,657 64,852
Loss from operations of discontinued
operation Cycomm Secure Solutions, Inc. (1,613,044) (969,799)
Estimated loss on disposal of Cycomm
Secure Solutions (1,535,643) ---
--------- ----------
Net Loss ($4,304,740) ($1,092,465)
=========== ===========
Earnings per share
Loss per share from continuing operations ($0.09) ($0.02)
Income per share from discontinued
operations: Val-Comm Inc. $0.00 $0.01
Loss per share from discontinued
operations: Cycomm Secure Solutions ($0.13) ($0.10)
Loss per share on disposal of Cycomm
Secure Solutions ($0.12) ---
----- -----
Net loss per share ($0.35) ($0.11)
====== ======
Weighted average number of common shares
outstanding 12,433,264 9,987,588
========== =========
See accompanying notes to condensed consolidated financial statements.
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CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED MARCH 31, 1999 AND MARCH 31, 1998
(Unaudited)
Three Months Ended
March 31, March 31,
1999 1998
(Restated)
Operating activities
Net loss from continuing operations ($1,163,710) ($187,518)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation and amortization 317,445 161,627
Change in operating assets and
liabilities 1,084,398 (2,449)
--------- ------
Cash provided by (used in) operating
activities 238,133 (28,340)
--------- ------
Investing activities
Acquisition of fixed assets --- (95,979)
Increase in notes receivable (4,000) 50,000
Decrease in notes receivable 2,000 (50,000)
Other 26,120 3,443
------ ------
Cash provided by (used in) investing
activities 24,120 (92,536)
------ -------
Financing activities
Issuance of preferred stock --- 900,000
Borrowings under revolving credit
facility (289,677) 227,494
Repayment of notes payable (15,777) (31,582)
Repayment of obligations under capital
leases (9,686) (7,010)
------- ---------
Cash (used in) provided by financing
activities (315,140) 1,088,902
-------- ---------
Discontinued operations
Cash used in discontinued operation:
Cycomm Secure Solutions Inc. (380,240) (894,592)
Cash provided by (used in) discontinued
operation: Val-Comm 4,848 (101)
------- ------
(Decrease) increase in cash and cash
equivalents during the period (428,279) 73,333
Cash and cash equivalents, beginning of
period 567,977 509,580
------- -------
Cash and cash equivalents, end of period $139,698 $582,913
======== ========
Supplemental cash flow information:
Interest paid $194,050 $173,626
Income taxes paid $ --- $ ---
Non-cash investing and financing
activities:
Conversion of convertible debentures to
common stock $ --- $273,970
Conversion of preferred stock to common $381,356 $ ---
stock
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, 1999
AND THE YEAR ENDED DECEMBER 31, 1998
Preferred Preferred Common Common Accumulated
Shares Stock Shares Stock Deficit
Balance,
December 31, 1997 --- --- 9,816,877 47,491,611 (43,247,978)
Net Loss (8,296,049)
Issuance of common
stock:
Conversion of
debentures --- --- 236,380 273,970 ---
Private placement -
common stock --- --- 1,870,000 2,895,750 ---
Value of options
issued to non-
employees --- --- --- 450,000 ---
Issuance of preferred
stock:
Private placement -
preferred stock 20 900,000 --- --- ---
Conversion of
preferred stock (12) (540,000) 287,054 563,287
Dividends on
preferred stock --- --- --- --- (56,620)
---- ------- ---------- ---------- ----------
Balance,
December 31, 1998 8 $360,000 12,210,311 $51,674,618 $(51,600,647)
==== ======= ========== ========== ==========
Net Loss (4,304,740)
Issuance of common stock:
Conversion of
preferred stock (7) (315,000) 282,617 346,357 ---
Dividends on
preferred stock --- --- --- --- (3,440)
---- ------ ---------- ---------- ----------
Balance,
March 31, 1999 1 $45,000 12,492,928 52,020,975 $(55,908,827)
==== ====== ========== ========== ==========
See accompanying notes to condensed consolidated financial statements.
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CYCOMM INTERNATIONAL INC. AND SUBSIDIAIRES
Notes to Condensed Consolidated Financial Statements
March 31, 1999
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, 1999 and for the period ended March 31, 1999 and
1998, 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 Cycomm's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1998. 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:
Restated Originally
Earnings per share 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 operations:
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)
====== ======
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NOTE 2 - DISCONTINUED OPERATIONS
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
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:
Quarter ended
January 1, 1999 Quarter ended
to March 4, 1999 March 31, 1998
Revenue $1,837,889 1,013,117
Cost of Sales 1,354,200 1,060,208
--------- ---------
Gross profit (loss) 483,689 (47,091)
Operating Expenses 2,096,733 922,708
---------- -------
Net loss ($1,613,044) (969,799)
=========== ========
Net loss per share ($0.13) $(0.10)
------ ------
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,
1999 are $1,310,837 of unpaid amounts due to vendors of CSS.
Page 9
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 Inc. are reported as discontinued operations for all periods
presented, and are summarized as follows:
Quarter ended
March 31, March 31,
1999 1998
Revenue 331,508 405,495
Cost of Sales 211,383 239,514
------- -------
Gross profit (loss) 120,125 165,981
Operating Expenses 112,468 101,129
------- -------
Net income 7,657 64,852
======= =======
Net income per share $0.00 $0.01
===== =====
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. Cycomm recognized a gain
on the sale of Val-Comm of $265,746 in the quarter ended September 30, 1999.
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, 1999, Cycomm
had paid $1,354,796 of contingent consideration, which was paid in 444,862
shares of common stock.
Cycomm and the Seller were parties to a lawsuit regarding the interpretation
of the earn-out agreement. On May 24, 1999, Cycomm and the Seller entered
into a complete settlement of the litigation. Under the terms of the
agreement, Cycomm could fulfill its obligation to the Seller 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
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will be paid prior to December 31, 2000 in accordance with the payment
schedule. Cycomm has recorded an accrued liability of $700,000 as of March
31, 1999. 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. The fair value of the warrants was recorded as an increase to
goodwill in the quarter ended June 30, 1999.
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
stockholder' equity requirement of $4 million.
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. Depreciation expense on
the demonstration units was $167,387 and $64,050 for the quarters ended March
31, 1999 and 1998, respectively.
Revenue on the sales is recognized when the Pentium units are shipped to the
customers. Cycomm recognized revenue of $139,982 related to the shipment of
Pentium units to customers in exchange for the 586 units for the quarter
ended March 31, 1999. No Pentium units were shipped to customers in the
quarter ended March 31, 1998.
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NOTE 6 - INVENTORIES
The following is a summary of inventories at March 31, 1999 and December 31,
1998:
March 31, December 31,
1999 1998
Raw materials $1,507,424 $990,954
Work in process and sub-assemblies 297,151 712,947
Finished goods 175,031 241,011
Allowance for obsolete inventory (78,086) (172,096)
--------- ---------
$1,901,520 $1,772,816
========== ==========
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 7 - NOTES PAYABLE AND CONVERTIBLE DEBENTURES
Cycomm has a revolving credit facility from a lender under which Cycomm may,
at its option, borrow and repay amounts up to a maximum of $4,000,000, of
which $1,669,868 was outstanding at March 31, 1999. Borrowings under this
credit facility bear interest at prime plus 3%. The credit facility is
collateralized by trade accounts receivable and inventory and restricts
Cycomm from paying dividends in certain circumstances. In conjunction with
this credit facility, Cycomm had a term loan in the amount of $568,000
collateralized by certain machinery and equipment. The interest rate on the
term loan was prime plus 3%, and the loan was payable in equal installments
of $15,777 per month through January 1, 2001. The balance of the term loan
was repaid with the proceeds of Cycomm's sale of its Cycomm Secure Solutions
Inc. subsidiary (See Note 2: Discontinued Operations).
As of March 31, 1999, the Company has outstanding a total of $3,000,000 in
convertible debentures which are convertible at the option of the holders
into common stock of the Company. The original date of maturity for the
convertible debentures was February 28, 1999, however, the Company obtained
an extension of the maturity date until March 31, 1999. Effective as of
March 31, 1999, the Company entered into a new agreement with the holders of
the debentures, which amended the terms of the note and extended the maturity
date to May 1, 2000. Pursuant to the terms of the new debenture, the
interest rate on the convertible debentures has been lowered from 12% per
annum to 7% per annum. The debentures are 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. The holders of the debentures cannot
convert more than 5% of the outstanding debentures until after August 1,
1999, 10% until after November 1, 1999, 15% until after February 1, 2000 and
the balance until after May 1, 2000.
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NOTE 8 - CAPITAL STOCK
Authorized Capital
The authorized capital of the Company consists of an unlimited number of
common shares without par value and an unlimited number of preferred shares
without par value, issuable in series.
Common Stock
The issued common stock of the Company consisted of 12,492,928 and 12,210,311
shares as of March 31, 1999 and December 31, 1998, respectively. Basic loss
per share is calculated based on the weighted average number of common shares
outstanding during each period. Diluted net loss per share was equal to basic
loss per share in each of the periods presented as the effect of potentially
dilutive securities was anitdilutive.
Preferred Stock
In February 1998, Cycomm issued 20 shares of Series B convertible redeemable
preferred stock ("Series B preferred stock") with a conversion value of
$50,000 per share for net proceeds of $900,000. The Series B preferred stock
is convertible at the option of the holder into common stock pursuant to a
conversion schedule as set forth in the agreement. The holder can convert 25%
of its preferred shares on or after the 90th day after February 26, 1998, and
up to a further 25% every 30 days thereafter. The conversion price is the
lesser of $2.38, or a 15% discount of the five-day average closing bid price
prior to the date of conversion. In the event that Cycomm's common stock is
trading at or below $1.50 per share at the conversion date, Cycomm has the
right to redeem the preferred shares at a premium of 18% over the conversion
price. If Cycomm does not exercise this right, the holder may convert 10% of
its preferred shares, and up to a further 10% every 20 days thereafter. As
of March 31, 1999, 19 shares of Series B preferred stock had been converted
into 569,671 shares of common stock, and 1 share of Series B preferred stock
was outstanding.
NOTE 9 - IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs or hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities.
Based on recent assessments, the Company determined that it will not need to
modify or replace its software or hardware so that those systems will
properly utilize dates beyond December 31, 1999.
Cycomm's plan to resolve the Year 2000 Issue involves the following three
phases: assessment, testing, and implementation. To date, the Company has
completed its assessment of systems that could be significantly affected by
the Year 2000. The completed assessment indicated the Company's significant
information technology systems will not be affected by the Year 2000 issue.
The computers manufactured by Cycomm are also Year 2000 compliant, and will
Page 13
not need to be modified. Accordingly, the Company does not believe that the
Year 2000 presents a material exposure as it relates to the Company's
products. In addition, the Company is gathering information about the Year
2000 compliance status of its significant suppliers and vendors and continues
to monitor their compliance.
Cycomm has queried its significant suppliers regarding the status of Year
2000 compliance. To date, the Company is not aware of any supplier with a
Year 2000 issue that would materially impact the Company's results of
operations, liquidity, or capital resources. However, the Company has no
means of ensuring that suppliers will be Year 2000 ready. The inability of
suppliers to complete their Year 2000 resolution process in a timely fashion
could materially impact the Company. The effect of non-compliance by
suppliers is not determinable.
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. As noted above, Cycomm has
not yet completed all necessary phases of the Year 2000 program. If the
Company identifies a vendor or supplier with a Year 2000 compliance issue, or
if a vendor or supplier is unable to complete their Year 2000 readiness
program, the Company could be materially adversely affected. The amount of
potential material adverse effects cannot be reasonably estimated at this
time.
The Company currently has no contingency plans in place in the event it does
not complete all phases of the Year 2000 program. Cycomm plans to continue
to evaluate the status of its Year 2000 program and determine whether such a
plan is necessary.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation.
Results of Continuing Operations
Quarter Ended March 31, 1999 and March 31, 1998
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 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. 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, 1999
and March 31, 1998 reflect only the results of the Cycomm's PCMobile product
line and the results of the parent company.
Revenues for the three months ended March 31, 1998 were $1,460,356 as
compared to revenues of $3,856,957 for the prior period. The decrease in
sales was a result of production shortfalls caused by inadequate resources
available to the Company.
Page 14
Cost of sales for the quarter ended March 31, 1999 were $1,094,706 as
compared to cost of sales of $2,405,874 for the prior period. Gross margins
for the quarter ended March 31, 1999 were 25%, which represents a decrease
from 38% in the prior period. The decrease in gross margins is directly
attributable to 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 $1,414,746 for the period ended March 31,
1999 as compared to $1,552,845 in the prior period. Selling, general and
administrative expenses decreased $357,385 to $919,018 for the current
period. This decrease is mainly the result of management headcount
reductions. Research and development costs increased to $178,285 as compared
to $114,815 in the prior period. The research and development expenses in
the current period approximate normal levels for the PCMobile product, and
are related primarily to streamlining the production of the Pentium and
Pentium II models of the PCMobile. Depreciation and amortization increased
to $317,443 for the quarter ended March 31, 1999 as compared to $161,627 in
the prior period. The increase in depreciation and amortization is primarily
the result of depreciation of PCMobile demonstration units, which increased
to $167,387 for the quarter ended March 31, 1999, as compared to $64,050 for
the quarter ended March 31, 1998.
Interest expense for the quarter ended March 31, 1999 was $119,551 as
compared to $99,294 for the prior period. The increase is a result of the
change in the interest rate on the convertible debentures from 10% to 12%.
On March 31, 1999 the terms of the convertible debentures were renegotiated,
and the interest rate was reduced to 7% (see Note 7).
Net loss from continuing operations increased to $1,163,710, or $0.09 per
share, for the quarter ended March 31, 1999 from $187,518, or $0.02 per share
for the quarter ended March 31, 1998. The increase in net loss from
continuing operations is a result of the significant decrease in PCMobile
sales and margins from the prior period, offset by the Company's reductions
in selling, general and administrative expenses.
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, as
compared to $969,799 in the prior period. 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, as compared to $64,852 in the prior period.
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, 1999, the Company had cash and cash equivalents of $139,698.
In the three months ended March 31, 1999, cash provided by operations
amounted to $238,133. Cash provided by investing activities during the three
months ended March 31, 1999 totaled $24,120. Cash used in financing
activities was $315,140 for the three months ended March 31, 1999. The
Company decreased the amounts drawn on its bank credit lines in an amount of
$289,677 during the three months ended March 31, 1999.
Page 15
Cycomm's net working capital at March 31, 1999 was ($2,251,744) as compared
to ($2,419,330) at December 31, 1998. The change in net working capital is a
result of several factors. Cycomm reclassified $3,000,000 of convertible
debentures from current to long term obligations, as the maturity date has
been extended until May 1, 2000. Net assets of Cycomm's CSS subsidiary that
were held for sale at December 31, 1998, decreased by $1,457,151 as a result
of the sale. Additionally, accounts receivable decreased by $1,398,617 from
December 31, 1998 to March 31, 1999 as a result of collections and write-offs
of certain CSS receivables.
Cycomm is currently facing significant cash flow problems, which have slowed
the production of the PCMobile product line and have caused revenues to
decrease and losses to grow. Cycomm is addressing these problems with the
sale of two of its subsidiaries, Cycomm Secure Solutions Inc. ("CSS") and
Val-Comm Inc. The sale of CSS will eliminate a significant cash drain for
the Company, as CSS lost over $4 million for the year ended December 31,
1998. Proceeds from the sale will be used to pay down the Company's secured
line of credit and vendors. The sale of Val-Comm will generate cash which
will be used primarily to fund PCMobile operations. In the event that one or
both of these transactions are not completed or are unable to be completed on
terms acceptable to management, the Company will consider further cost
cutting measures, including the discontinuation of certain business segments,
sale of assets or protection under Federal bankruptcy laws.
Management is also streamlining operations by reducing headcount,
implementing programs to grow revenue and evaluating plans to further
capitalize the Company through private equity placements or borrowings.
Page 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
A lawsuit was instituted against the Company on September 2, 1998 in
the United States District Court for the Eastern District of Virginia by the
trustee in bankruptcy of M3i Technologies, Inc., a Quebec corporation from
which the Company and a subsidiary purchased certain PCMobile assets in June
1996. The lawsuit alleges breach of contract and misrepresentation in
connection with the "earn out" provision of the asset purchase agreement and
seeks monetary damages and other relief. The Company has denied any
wrongdoing and liability and has vigorously defended the allegations. The
Company is in advanced settlement negotiations with the plaintiff. The
lawsuit has been stayed during the settlement negotiations.
The Company instituted a lawsuit on February 5, 1999 in the Circuit
Court of the Thirteenth Judicial Circuit in and for Hillsborough County,
Florida against Infotech International, a Florida corporation involved in the
resale of the Company's PCMobile computers. The lawsuit alleges breach of
contract and conversion of funds. The Company is seeking damages of $592,959
plus interest and costs. The Company is in advanced settlement negotiations
with the defendant.
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:
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.
Page 17
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: July 25, 2000 /s/ Albert I. Hawk
Albert I. Hawk
President and
Chief Executive Officer
Date: July 25, 2000 /s/ Robert M. Hutton
Robert M. Hutton
Vice President of Finance