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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 June 30, 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 August 1, 1999, the Registrant had 12,992,928 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.............................. 14
PART II - Other Information
Item 1. Legal Proceedings..................................... 18
Item 2. Changes in Securities................................. 18
Item 3. Default Upon Senior Securities........................ 18
Item 4. Submission of Matters to a Vote of Security Holders... 18
Item 5. Other Information..................................... 18
Item 6. Exhibits and Reports on Form 8-K...................... 19
Signatures ...................................................... 20
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CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1999 AND DECEMBER 31, 1998
June 30, December 31,
1999 1998
(Restated)
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $4,734 $567,977
Accounts receivable, less allowance for
doubtful accounts of $144,000 and
$61,000, respectively 556,793 2,251,818
Inventories, net of allowance for
obsolete inventory of
$88,748 and $172,096, respectively 1,621,130 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. 479,382 374,913
Deposits with suppliers 283,449 283,449
Other current assets 56,295 123,562
--------- ---------
Total current assets 3,001,783 6,831,731
Fixed assets, net 328,925 363,264
Goodwill, net 900,202 2,175,400
Other assets:
Deferred financing costs, net --- 31,701
Other 224,850 224,850
--------- ---------
$4,455,760 $9,626,946
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable- trade $3,341,179 $2,191,026
Accrued liabilities 572,320 394,014
Acquisition earn-out obligation 700,000 700,000
Deferred revenue 766,342 934,948
Deposit held - Val-Comm sale 188,000 ---
Dividends payable on preferred stock 6,667 33,333
Current portion of capital lease
obligations 3,806 22,418
Revolving credit facility 914,022 1,959,545
Current portion of notes payable and
convertible debentures --- 3,015,777
--------- ---------
Total current liabilities 6,492,336 9,251,061
Capital lease obligations, less current
portion 9,477 10,826
Notes payable and convertible debentures,
less current portion 3,000,000 ---
Stockholders' equity:
Preferred Stock, $50,000 par value,
unlimited authorized shares, 7
and 8 shares issued and outstanding at
June 30, 1999 and December 31, 1998,
respectively 292,500 360,000
Common Stock, no par value, unlimited
authorized shares, 12,492,928 and
12,210,311 shares issued
and outstanding at June 30, 1999 and
December 31, 1998 52,108,975 1,674,618
Notes receivable - stockholders (74,680) (68,912)
Accumulated deficit (57,372,848) (51,600,647)
---------- ----------
Total stockholders' equity (5,046,053) 365,059
--------- ---------
$4,455,760 $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 JUNE 30, 1999 AND JUNE 30, 1998 (UNAUDITED)
Three Months Six
Ended Months Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
(Restated) (Restated)
Sales $443,637 $4,678,765 $1,903,993 $8,535,722
Cost of sales 456,066 3,474,571 1,550,772 5,880,445
------- --------- --------- ---------
Gross profit (12,429) 1,204,194 353,221 2,655,277
Expenses
Selling, general and
administrative 1,173,049 1,064,465 2,092,067 2,340,869
Research and product
development 175,854 178,232 354,139 293,047
Depreciation and
amortization 127,591 87,138 445,034 325,320
--------- --------- --------- ---------
1,476,494 1,329,835 2,891,240 2,959,236
--------- --------- --------- ---------
Loss from Operations (1,488,923) (125,641) (2,538,019) (303,959)
Other Income (Expense)
Interest income 4,096 16,696 9,033 28,727
Interest expense (80,978) (94,982) (200,529) (194,276)
Other income --- --- --- 1,508
------ ------ ------- -------
(76,882) (78,286) (191,496) (164,041)
------- ------ -------- --------
Loss from continuing
operations $(1,565,805) $(203,927) $(2,729,515) $(468,000)
=========== ========= =========== =========
Discontinued operations
Income from operations of
discontinued operation
Val-Comm Inc. 99,634 31,549 107,291 96,401
Income (loss) from
operations of discontinued
operation Cycomm Secure
Solutions, Inc. --- (905,918) (1,613,044) (1,799,162)
Loss on disposal of
discontinued operation:
Cycomm Secure Solutions Inc. --- --- (1,535,643) ---
--------- --------- --------- ---------
Net loss (1,466,171) (1,078,296) (5,770,911) (2,170,761)
========== ========== ========== ==========
Beneficial return on
preferred shares (9,333) --- (9,333) ---
--------- --------- --------- ---------
Net loss attributable
to common stockholders $(1,475,504)$(1,078,296) $(5,780,244)$(2,170,761)
=========== =========== =========== ===========
Earnings Per Share
Loss per share from continuing
operations ($0.13) ($0.02) ($0.22) ($0.05)
Income (loss) per share from
discontinued operations:
Val-Comm Inc. $0.01 $0.00 $0.01 $0.01
Loss per share from
discontinued operations:
Cycomm Secure Solutions --- ($0.09) ($0.13) ($0.18)
Loss per share on disposal
of Cycomm Secure Solutions --- --- ($0.12) ---
Net loss per share attributable
to beneficial return on
preferred shares $0.00 --- ($0.00) ---
---- ---- ---- ----
Net loss per share attributable
to common shareholders $(0.12) $(0.10) $(0.46) $(0.21)
====== ====== ====== ======
Weighted average number of
common shares outstanding 12,492,928 10,358,742 12,463,261 10,174,191
========== ========== ========== ==========
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 JUNE 30, 1999 AND JUNE 30, 1998
Six Months Ended
June 30, June 30,
1999 1998
(Restated)
Operating activities
Net loss from continuing operations ($2,729,515) ($468,000)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 445,034 325,320
Non-cash compensation 88,000 ---
Write-down of investments --- 50,000
Change in operating assets and liabilities 3,201,486 (1,263,057)
--------- ----------
Cash provided by (used in) operating
activities 1,005,005 (1,355,737)
--------- ----------
Investing activities
Acquisition of fixed assets --- 8,110
Increase in notes receivable (4,000) (50,000)
Decrease in notes receivable 2,000 46,249
Other --- (225,275)
----- -------
Cash used in investing activities (2,000) (220,916)
------ --------
Financing activities
Issuance of common stock --- 1,620,000
Issuance of preferred stock 247,500 900,000
Borrowings under revolving credit
facility (1,045,523) 494,613
Repayment of notes payable (15,777) (78,913)
Deferred financing costs on convertible
debentures --- (30,000)
Repayment of obligations under capital
leases (7,229) (14,637)
------- ---------
Cash (used in) provided by financing
activities (821,029) 2,891,063
-------- ---------
Discontinued operations
Proceeds from sale of discontinued
operation:
Cycomm Secure Solutions Inc. 800,000 ---
Cash used in discontinued operation:
Cycomm Secure Solutions Inc. (1,743,677) (1,179,862)
Proceeds from sale of discontinued
operation: Val-Comm, Inc. 188,000 ---
Cash provided by discontinued
operation: Val-Comm, Inc. 10,458 32,466
Decrease (increase) in cash and cash
equivalents during the period (563,243) 167,014
Cash and cash equivalents, beginning of
period 567,977 509,580
Cash and cash equivalents, end of period $4,734 $676,594
Supplemental cash flow information:
Interest paid $226,611 $373,867
Income taxes paid $ --- $ ---
Non-cash investing and financing
activities:
Conversion of convertible debentures to
common stock $ --- $273,970
Conversion of preferred stock to common
stock $381,356 $257,671
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 JUNE 30, 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 (5,770,911)
Issuance of 6 247,500 --- --- ---
preferred stock:
Conversion of
preferred stock (7) (315,000) 282,617 346,357 ---
Value of options
issued to non-
employees --- --- --- 88,000 ---
Dividends on
preferred stock --- --- --- --- (1,290)
---- ------- ---------- ---------- ----------
Balance,
June 30, 1999 7 $292,500 12,492,928 52,108,975 $(57,372,848)
===== ======= ========== ========== ==========
See accompanying notes to condensed consolidated financial statements.
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CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 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 June 30, 1999 and for the periods ended June 30, 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 June 30, 1999 have been restated to reflect
certain adjustments that were made during Cycomm's year-end audit. The
restatements caused an increase in revenue of $101,562, an increase in gross
margins of $111,348, an increase in operating expenses of $215,259, and an
increase in net loss from continuing operations of $120,094. Loss from
operations of discontinued operation: Cycomm Secure Solutions Inc. decreased
by $225,022, and the estimated loss on disposal of Cycomm Secure Solutions
Inc. increased by $36,348. Net loss for Cycomm decreased by $68,450.
Earnings per share has changed as follows:
Three Months Ended Six Months Ended
Earnings per share June 30,1999 June 30, 1999 June 30, 1999 June 30, 1999
Originally Originally
Restated Reported Restated Reported
Loss from continuing
operations ($0.13) ($0.12) ($0.22) ($0.20)
Income (loss) per share
from discontinued
operations: Val-Comm $0.01 ($0.01) $0.01 ($0.01)
Loss per share from
discontinued operations:
Cycomm Secure Solutions $0.00 ($0.02) ($0.13) ($0.16)
Estimated loss per share
on disposal of Cycomm
Secure Solutions $0.00 ($0.13) ($0.12) ($0.13)
----- ------ ------ ------
Net loss per share ($0.12) ($0.25) ($0.46) ($0.48)
====== ====== ====== ======
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
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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 three months ended June
30, 1999 and the six months ended June 30, 1999 are summarized as follows:
Three Months ended Six Months ended
June 30, June 30, January 1, 1999 June 30,
1999 1998 to March 4, 1999 1998
Revenue $ --- $2,061,614 $1,837,889 $1,048,497
Cost of Sales --- 2,093,086 1,354,200 1,032,878
----- --------- --------- ---------
Gross profit (loss) --- (31,472) 483,689 15,619
Operating Expenses --- 1,767,690 2,096,733 844,982
----- --------- --------- -------
Net loss $ --- ($1,799,162) ($1,613,044) ($829,363)
===== ========= ========= =======
Net loss per share $ 0.00 ($0.18) ($0.13) ($0.08)
======= ====== ====== ======
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 June 30,
1999 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 Inc. are reported as discontinued operations for all periods
presented, and are summarized as follows:
Three Months ended Six Months ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
Revenue $461,093 $351,413 $792,601 $756,908
Cost of Sales 238,020 217,154 449,403 456,667
------- ------- ------- -------
Gross profit (loss) 223,073 134,259 343,198 300,241
Operating Expenses 123,439 102,710 237,747 203,840
------- ------- ------- -------
Net income $99,634 $ 31,549 $105,451 $ 96,401
======= ======= ======= =======
Net income per share $0.01 $0.00 $0.01 $0.01
===== ===== ===== =====
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 June 30, 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
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payment schedule. Management anticipates that the liability to the Seller
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.
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. Depreciation expense on
the demonstration units was $40,689 and $64,050 for the quarters ended June
30, 1999 and 1998, respectively.
Revenue on the sales is recognized when the Pentium units are shipped to the
customers. Cycomm recognized revenue of $24,845 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 June 30, 1998.
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NOTE 6 - INVENTORIES
The following is a summary of inventories at June 30, 1999 and December 31,
1998:
June 30, December 31,
1999 1998
Raw materials $1,459,656 $990,954
Work in process and sub-assemblies 209,077 712,947
Finished goods 41,145 241,011
Allowance for obsolete inventory (88,748) (172,096)
-------- --------
$1,621,130 $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 $914,022 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 June 30, 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.
Page 12
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 June 30, 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
On February 26, 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 June 30, 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.
On May 5, 1999, Cycomm issued 6 shares of Series C convertible redeemable
preferred stock ("Series C preferred stock") with a conversion value of
$50,000 per share for net proceeds of $247,500. The Series C 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 50%
of its preferred shares after four months from the issuance date, and the
balance after nine months from the issuance date. The conversion price is
the lesser of $.625, 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 $.50 per share at the conversion date, Cycomm
has the right to redeem the preferred shares at a premium of 15% over the
conversion price. As of June 30, 1999, no shares of Series C preferred stock
were eligible for conversion.
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
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
Page 13
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.
NOTE 10 - SUBSEQUENT EVENTS
On July 6, 1999, Cycomm issued 500,000 restricted shares of its common stock
in a private equity placement for net proceeds of $296,700.
On July 13, 1999, Cycomm issued 6 shares of Series D convertible redeemable
preferred stock ("Series D preferred stock") with a conversion value of
$50,000 per share for net proceeds of $268,500. The Series D 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 after 30 days from the issuance date, and a further
25% every 30 days thereafter, unless the stock is trading at less than $0.50
on the conversion date. If the common stock is trading at less than $0.50 on
the conversion date, the Company has the right to redeem the preferred shares
at a premium of 18% over the conversion value. If the Company does not elect
to redeem the shares, the holder can convert 10% of the preferred shares in a
period of 20 day consecutive intervals. The conversion price is a 20%
discount of the five-day average closing bid price prior to the date of
conversion. As of August 15, 1999, no shares of Series D preferred stock had
been converted to common shares.
Page 14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation.
Results of Continuing Operations
On June 21, 1999 the Company completed the sale of its secure computing
segment, Cycomm Secure Solutions, Inc. ("CSS"). CSS had lost over $4 million
in the year ended December 31, 1998, and lost an additional $1.6 million in
the six months ended June 30, 1999, which caused a significant drain on the
Company's cash resources. The operating results of CSS for the quarter and
the six months ended June 30, 1999 are not included in results from
continuing operations, and are classified on a separate line item on the
income statement.
Cycomm 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 June 30, 1999 and
June 30, 1998 and the six months ended June 30, 1999 and June 30, 1998
reflect only the results of the Company's PCMobile product line and the
results of the parent company.
Three Months Ended June 30, 1999 and June 30, 1998
Revenues for the three months ended June 30, 1998 were $443,637 as compared
to revenues of $4,678,765 for the prior period. The decrease in sales was a
result of production shortfalls caused by inadequate resources available to
the Company.
Cost of sales for the three months ended June 30, 1999 were $456,066 as
compared to cost of sales of $3,474,571 for the prior period. Gross margins
for the three months ended June 30, 1999 were (3%), which represents a
decrease from 26% in the prior period. The negative gross margin in the
current period is a result of the significant decrease in the volume of
sales. 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 increased to $1,476,494 for the period ended June 30, 1999
as compared to $1,329,835 in the prior period. Selling, general and
administrative expenses increased $108,584 to $1,173,049 for the current
period. Research and development costs were $175,854 for the quarter ended
June 30, 1999, as compared to $178,232 in the prior period. The research and
development expenses in the current period are related to engineering on the
Pentium and Pentium II models of the PCMobile. Depreciation and amortization
increased to $127,591 for the quarter ended June 30, 1999 as compared to
$87,138 in the prior period.
Interest expense for the quarter ended June 30, 1999 was $80,978 as compared
to $94,982 for the prior period. The decrease is primarily the result of the
change in the interest rate on the convertible debentures from 12% to 7%.
(see Note 7).
Page 15
Net loss from continuing operations increased to $1,565,805, or $0.13 per
share, for the quarter ended June 30, 1999 from $203,927, or $0.02 per share
for the quarter ended June 30, 1998. The increase in net loss from
continuing operations is primarily the result of the significant decrease in
PCMobile sales and margins from the prior period.
The loss from discontinued operations from the Company's Cycomm Secure
Solutions ("CSS") subsidiary was $905,918 for the quarter ended June 30,
1998. The sale of CSS was recognized in the quarter ended March 31, 1999.
Income from discontinued operations from the Company's Val-Comm subsidiary
was $99,634 for the quarter ended June 30, 1999, an increase from $31,549 for
the quarter ended June 30, 1998.
Six Months Ended June 30, 1999 and June 30, 1998
Revenues for the six months ended June 30, 1998 were $1,903,993 as compared
to revenues of $8,535,722 for the prior period. The decrease in sales was a
result of production shortfalls caused by inadequate resources available to
the Company.
Cost of sales for the six months ended June 30, 1999 were $1,550,772 as
compared to cost of sales of $5,880,445 for the prior period. Gross margins
for the six months ended June 30, 1999 were 19%, which represents a decrease
from 31% 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 $2,891,240 for the six months ended June 30,
1999 as compared to $2,959,236 in the prior period. Selling, general and
administrative expenses decreased $248,802 to $2,092,067 for the current
period. This decrease is mainly the result of management headcount
reductions and reductions in facilities costs. Research and development
costs increased to $354,139 as compared to $293,047 in the prior period. The
research and development expenses in the current period relate to engineering
of the Pentium and Pentium II models of the PCMobile. Depreciation and
amortization increased to $445,034 for the six months ended June 30, 1999 as
compared to $325,320 in the prior period, with the difference being the
result of depreciation of demonstration units.
Interest expense for the six months ended June 30, 1999 was $200,529 as
compared to $194,276 for the prior period.
Net loss from continuing operations increased to $2,729,515, or $0.22 per
share, for the six months ended June 30, 1999 from $468,000, or $0.05 per
share for the six months ended June 30, 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.
Page 16
The loss from discontinued operations from the Company's Cycomm Secure
Solutions subsidiary was $1,613,044 for the six months ended June 30, 1999,
as compared to $1,799,162 in the prior period. Included in the loss for the
period ended June 30, 1999 is a write-off of goodwill of $1,220,190. The
loss on the sale of Cycomm Secure Solutions' assets was $1,535,643.
Income from discontinued operations from the Company's Val-Comm subsidiary
was $107,291 for the six months ended June 30, 1999 as compared to $96,401 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 June 30,
1999, the Company had cash and cash equivalents of $4,734.
In the six months ended June 30, 1999, cash provided by operations was
$1,005,005. Cash used in investing activities during the six months ended
June 30, 1999 totaled $2,000. Cash used in financing activities was $821,029
for the six months ended June 30, 1999. The Company decreased the amounts
drawn on its bank credit lines in an amount of $1,045,523 during the six
months ended June 30, 1999.
The Company's net working capital at June 30, 1999 was ($3,490,553) as
compared to ($2,419,330) at December 31, 1998. Trade accounts payable
increased by $1,150,153 to $3,341,179 at June 30, 1999.
The Company 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. The Company is addressing its cash flow
problems with several actions including the sale of its non-core
subsidiaries, a reduction in general and administrative costs and by raising
additional funds through private equity placements.
The sale of the Company's Cycomm Secure Solutions Inc. ("CSS") subsidiary has
eliminated a significant cash drain for the Company, as CSS lost over $4
million for the year ended December 31, 1998 and lost $1,613,044 in the six
months ended June 30, 1999. Proceeds from the sale of CSS were used to pay
down the Company's secured line of credit. The sale of the Company's
Val-Comm subsidiary will generate cash which will be used primarily to fund
PCMobile operations.
The Company has made significant reductions in its general and administrative
costs. Both management and overall headcount have been reduced in the six
months ended June 30, 1999. The Company has relocated its PCMobile field
service operation in Florida to a less expensive facility, and has eliminated
several non-essential expenses.
As of August 1, 1999 the Company had a backlog of approximately $6 million
for its PCMobile product, and management anticipates demand for these
products to continue. The Company is currently addressing the need for
additional working capital in order to deliver existing orders for its
products.
Page 17
In the event that the Company is unable to raise additional capital through
private equity placements or in the event that the sale of Val-Comm cannot 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.
Page 18
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 fulfil 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.
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. 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.
Page 19
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 20
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