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 September 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 November 1, 1999, the Registrant had 16,182,696 shares of Common Stock
outstanding.
Transitional Small Business Disclosure Format: Yes No X
Page 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..................................... 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
Page 3
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
September 30, December 31,
1999 1998
(Restated)
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $509,412 $567,977
Accounts receivable, less allowance for
doubtful accounts of $144,000 and
$61,000, respectively 609,380 2,251,818
Inventories, net of allowance for
obsolete inventory of
$94,501 and $172,096, respectively 1,619,548 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. --- 374,913
Deposits with suppliers 283,449 283,449
Other current assets 304,256 123,562
--------- ---------
Total current assets 3,326,045 6,831,731
Fixed assets, net 310,335 363,264
Goodwill, net 858,802 2,175,400
Other assets:
Deferred financing costs, net --- 31,701
Other 224,850 224,850
--------- ---------
$4,720,032 $9,626,946
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable- trade $3,013,146 $2,191,026
Accrued liabilities 561,324 394,014
Acquisition earn-out obligation 700,000 700,000
Deferred revenue 766,342 934,948
Dividends payable on preferred stock 31,603 33,333
Current portion of capital lease
obligations 2,864 22,418
Revolving credit facility 642,129 1,959,545
Current portion of notes payable and
convertible debentures --- 3,015,777
--------- ---------
Total current liabilities 5,717,408 9,251,061
Capital lease obligations, less current
portion 8,770 10,826
Notes payable and convertible debentures,
less current portion 3,500,000 ---
Stockholders' equity:
Preferred Stock, $50,000 par value,
unlimited authorized shares,
13 and 8 shares issued and outstanding at
September 30, 1999 and December 31,
1998, respectively 564,750 360,000
Common Stock, no par value, unlimited
authorized shares, 14,932,696 and
12,210,311 shares issued
and outstanding at September 30, 1999
and December 31, 1998 53,071,444 51,674,618
Notes receivable - stockholders (76,596) (68,912)
Accumulated deficit (58,065,744) (51,600,647)
---------- ----------
Total stockholders' equity (4,506,146) 365,059
---------- ----------
$4,720,032 $9,626,946
========== ==========
See accompanying notes to condensed consolidated financial statements.
Page 4
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30,1998 (UNAUDITED)
Three Months Nine Months
Ended Ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
(Restated) (Restated)
Sales $219,822 $3,099,845 $2,123,815 $11,635,567
Cost of sales 186,297 2,562,542 1,737,069 8,442,987
------- --------- --------- ---------
Gross profit 33,525 537,303 386,746 3,192,580
Expenses
Selling, general and
administrative 755,386 754,827 2,847,453 3,095,696
Research and product
development 103,118 308,818 457,257 601,865
Depreciation and
amortization 86,826 177,850 531,860 503,170
------- --------- --------- ---------
945,330 1,241,495 3,836,570 4,200,731
------- --------- --------- ---------
Loss from Operations (911,805) (704,192) (3,449,824) (1,008,151)
Other Income (Expense)
Interest income 1,661 19,239 10,694 47,966
Interest expense (138,207) (129,055) (338,736) (323,331)
Other income 110,000 --- 110,000 1,508
------- ------- ------- -------
(26,546) (109,816) (218,042) (273,857)
Loss from continuing
operations ($938,351) ($814,008) ($3,667,866) ($1,282,008)
Discontinued operations
Income from operations of
discontinued operation
Val-Comm Inc. 4,872 (2,374) 112,163 94,027
Gain on disposal of
Val-Comm Inc. 265,746 --- 265,746 ---
Income (loss) from
operations of
discontinued operation
Cycomm Secure
Solutions, Inc. --- (666,843) (1,613,044) (2,466,005)
Loss on disposal of
Cycomm Secure Solutions --- --- (1,535,643) ---
------- --------- --------- ---------
Net loss (667,733) $(1,483,225) ($6,438,644) ($3,653,986)
Beneficial return on
preferred shares (54,333) --- (63,666) ---
------- --------- --------- ----------
Net loss attributable
to common stockholders $(722,066) $(1,483,225) ($6,502,310) ($3,653,986)
========= =========== =========== ===========
Earnings Per Share
Loss per share from
continuing operations ($0.07) ($0.07) ($0.29) ($0.12)
Income per share from
discontinued operations:
Val-Comm Inc. $0.00 $0.00 $0.01 $0.01
Income per share on
disposal of Val-Comm Inc. $0.02 $0.00 $0.02 $0.00
Loss per share from
discontinued operations:
Cycomm Secure
Solutions Inc. $0.00 ($0.06) ($0.13) ($0.23)
Loss per share on disposal
of Cycomm Secure
Solutions Inc. $0.00 $0.00 ($0.12) $0.00
Net loss per share
attributable to
beneficial return on
preferred shares $0.00 $0.00 $0.00 $0.00
----- ----- ----- -----
Net Loss Per Share ($0.05) ($0.13) ($0.51) ($0.35)
====== ====== ====== ======
Weighted average number
of common shares
outstanding 13,345,435 11,193,903 12,760,550 10,517,830
========== ========== ========== ==========
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 SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
(Unaudited)
Nine Months Ended
September 30, September 30,
1999 1998
(Restated)
Operating activities
Net loss from continuing operations (3,667,866) (1,282,008)
Adjustments to reconcile net loss to
net cash
Provided by operating activities:
Depreciation and amortization 531,861 503,129
Non-cash compensation 88,000 ---
Write-down of investments --- 50,000
Change in operating assets and
liabilities 2,643,811 906,254
--------- -------
Cash (used in) provided by operating
activities (404,194) 177,375
--------- -------
Investing activities
Acquisition of fixed assets --- (261,186)
Increase in notes receivable (4,000) (50,000)
Decrease in notes receivable 2,000 46,249
Proceeds from sale of marketable
securities 361,260 ---
Other --- (102,000)
------- -------
Cash provided by (used in) investing
activities 359,260 (366,937)
------- --------
Financing activities
Issuance of common stock 999,329 1,991,250
Issuance of preferred stock 516,000 900,000
Borrowings under revolving credit
facility (1,317,416) (454,605)
Borrowings under convertible debentures 500,000 ---
Repayment of notes payable (15,777) (315,568)
Deferred financing costs on convertible
debentures --- (30,000)
Repayment of obligations under capital
leases (8,878) (18,586)
Cash provided by (used in) financing
activities 673,258 2,072,491
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) (1,718,157)
Proceeds from sale of discontinued
operation: Val-Comm Inc. 188,000 ---
Cash provided by (used in) discontinued
operation: Val-Comm 68,788 (34,239)
Increase (decrease) in cash and cash
equivalents during the period (58,565) 130,533
Cash and cash equivalents, beginning of
period 567,977 509,580
Cash and cash equivalents, end of period 509,412 640,113
Supplemental cash flow information:
Interest paid $280,749 $563,538
Income taxes paid --- ---
Non-cash investing and financing
activities:
Conversion of convertible debentures to
common stock --- $278,625
Conversion of preferred stock to common
stock $346,590 $623,288
See accompanying notes to condensed consolidated financial statements.
Page 6
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE UNAUDITED PERIOD ENDED SEPTEMBER 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 (6,438,644)
Issuance of
common stock:
Private placement -
Common stock --- --- 1,751,907 965,986 ---
Issuance of
preferred stock:
Issuance - Series C
preferred stock 6 247,500 --- --- ---
Issuance - Series D
preferred stock 6 268,500 --- --- ---
Shares held in
escrow for issuance
upon conversion of
Series D preferred
stock --- --- 600,000 --- ---
Reversal of
conversion
of Series B 1 45,000 (21,745) (46,753)
preferred stock
Conversion of (8) (356,250) 392,223 389,593 ---
preferred stock
Value of options
issued to
non-employees --- --- --- 88,000 ---
Dividends on
preferred stock --- --- --- --- (26,453)
---- ------- ---------- ---------- ----------
Balance,
September 30, 1999 13 $564,750 14,932,696 $53,071,444 $(58,065,744)
===== ======== ========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
Page 7
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 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 September 30, 1999 and for the periods ended September 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 September 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 $750, a decrease in gross
margins of $9,705, an increase in operating expenses of $125,756, and an
increase in net loss from continuing operations of $30,877. Earnings per
share has changed as follows:
Three Months Ended Nine Months Ended
Earnings per share September 30, September 30, September 30, September 30,
1999 1999 1999 1999
Originally Originally
Restated Reported Restated Reported
Loss from
continuing
operations ($0.07) ($0.07) ($0.29) ($0.27)
Income (loss)
per share from
discontinued
operations:
Val-Comm $0.00 $0.00 $0.01 $0.01
Income per share
on disposal of
Val-Comm $0.02 $0.02 $0.02 $0.02
Loss per share
from discontinued
operations:
Cycomm Secure
Solutions $0.00 $0.00 ($0.13) ($0.15)
Loss per share on
disposal of
Cycomm Secure
Solutions $0.00 $0.00 ($0.12) ($0.02)
----- ----- ------ ------
Net loss per share ($0.05) ($0.05) ($0.51) ($0.52)
====== ====== ====== ======
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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
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
September 30, 1999 and the nine months ended September 30, 1999 are
summarized as follows:
Three Months ended Nine Months ended
Sept. 30, Sept.30, January 1, 1999 Sept. 30,
1999 1998 to March 4, 1999 1998
Revenue --- $1,022,296 $1,837,889 $3,083,910
Cost of Sales --- 811,171 1,354,200 2,904,257
----- ------- --------- ---------
Gross profit (loss) --- 211,125 483,689 179,653
===== ======= ========= =========
Operating Expenses --- 877,968 2,096,733 2,645,658
------ -------- ---------- ----------
Net loss --- $(666,843) ($1,613,044) $(2,466,005)
====== ======= ========== =========
Net loss per share ($0.00) ($0.06) ($0.13) ($0.23)
====== ====== ====== ======
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 September
30, 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:
Three Months ended Nine Months ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1999 1998 1999 1998
Revenue $209,132 $308,412 $1,001,733 $1,065,320
Cost of Sales 121,107 194,082 570,510 650,749
------- ------- ------- -------
Gross profit (loss) 88,025 114,330 431,223 414,571
Operating Expenses 83,153 116,704 319,060 320,544
------ ------- ------- -------
Net income $4,872 $(2,374) $112,163 $94,027
====== ======= ======= =======
Net income per share $0.00 ($0.00) $0.01 $0.01
===== ====== ===== =====
The net book value of Val-Comm's assets as of 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. As of September 30, the
Company has recorded 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 is being sold by an independent third party, with the
proceeds paid to Cycomm. As of September 30, 1999 Cycomm has received
proceeds of $361,260 from the sale of the purchaser's stock. The total
amount due from the purchaser on the initial payment is $200,740 as of
September 30, 1999. See Note 9: Subsequent Events for further detail of the
sale of Val-Comm.
NOTE 3 - ACQUISITION EARN-OUT
XL Computing (Canada) Inc.
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 September 30, 1999,
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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
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, 1998 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
Cycomm 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. No depreciation related to
demonstration units was recorded in the quarter ended September 30, 1999.
Depreciation expense of $64,050 related to demonstration units was recorded
in the quarter ended September 30, 1998.
Revenue on the sales is recognized when the Pentium units are shipped to the
customers. No Pentium units were shipped to customers in the quarters ended
September 30, 1999 and September 30, 1998.
Page 11
NOTE 6 - INVENTORIES
The following is a summary of inventories at September 30, 1999 and December
31, 1998:
September 30, December 31,
1999 1998
Raw materials $1,269,317 $990,954
Work in process and sub-assemblies 279,251 712,947
Finished goods 165,481 241,011
Allowance for obsolete inventory (94,501) (172,096)
-------- ---------
$1,619,548 $1,772,816
========== ==========
NOTE 7 - NOTES PAYABLE AND CONVERTIBLE DEBENTURES
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, of which $642,129 was outstanding at September 30, 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 September 30, 1999, Cycomm was not in compliance with the terms of its
loan agreement as total borrowings under the revolving credit facility
exceeded the available borrowing base of the underlying collateral by
$276,127. This was a result of accounts receivable being disallowed as
collateral by the lender because certain invoices were over 90 days past
due. As of November 15, 1999, the Company was in compliance with the terms
of its loan agreement.
As of September 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.
On September 20, 1999 Cycomm issued a $500,000 convertible debenture which
bears interest at 7% and is convertible at the option of the holder into
common stock of the Company. The maturity date of the debenture is September
20, 2004. The debenture is convertible at the lower of $0.50 per share or
Page 12
the average closing bid price of the stock for the 30 trading days prior to
the date of the notice of conversion.
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 14,332,696 and 12,210,311
shares as of September 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.
During the quarter ended September 30, 1999, Cycomm was able to raise
additional working capital through the issuance of its common stock in
private equity placements. 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 August 4, 1999, Cycomm issued 462,856 restricted shares of its
common stock in a private equity placement for net proceeds of $217,142. On
September 17, 1999, Cycomm issued 250,000 shares of common stock for net
proceeds of $125,000. On September 30, 1999, Cycomm issued 333,334
restricted shares of its common stock in a private equity placement for net
proceeds of $250,000.
Additionally, Cycomm issued 205,717 restricted shares of its common stock in
a private equity placement to relieve an obligation of $77,144.
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 Cycomm's
common stock. 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. In the nine months ended
September 30, 1999, 7 shares of Series B preferred stock were converted into
282,617 shares of common stock. In the quarter ended September 30, 1999,
Cycomm also reversed an earlier conversion of 1 share of preferred stock,
canceling the 21,745 shares of common stock that had previously been issued.
As of September 30, 1999, 18 shares of Series B preferred stock have been
converted into 547,926 shares of common stock, and 2 shares of Series B
preferred stock are outstanding.
Page 13
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 $0.63, 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. On September 27, 1999, 1 share of Series C preferred stock
was converted into 109,606 shares of common stock. As of September 30, 1999,
2 shares of Series C preferred stock were eligible for conversion.
On July 14, 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. The conversion price is the lesser of $0.74, or
a 20% discount of the five-day average closing bid price prior to the date of
conversion. Cycomm can redeem the Series D preferred shares at any time
prior to conversion at a price equal to the conversion value of the shares.
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 18% over the conversion price. 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. As of September 30, 1999, 3 shares
of Series D preferred stock were eligible for conversion, however no shares
had been converted. In conjunction with the issuance of the Series D
preferred stock, Cycomm has placed 600,000 shares of its common stock in an
escrow account, to be issued upon conversion of the preferred shares. If the
Series D preferred stock is redeemed by Cycomm, the common shares held in
escrow will be remitted to the Company. The common shares held in escrow are
not included in the total amount of common shares issued and outstanding used
in the calculation of earnings per share.
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 14
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.
NOTE 10 - SUBSEQUENT EVENTS
The Company raised additional working capital through two private placements
subsequent to September 30, 1999. On October 28, 1999 Cycomm issued 500,000
shares of its common stock for net proceeds of $250,000. On November 1, 1999
Cycomm issued 500,000 shares of its common stock for net proceeds of $250,000.
On October 25, 1999 the Company received a deposit of $100,000 from a
potential investor interested in completing a larger private placement with
Cycomm. In connection with this deposit, Cycomm has placed 250,000 shares of
its common stock in an escrow account with the investor's legal counsel. If
the final terms of the private placement call for a placement of Cycomm's
common shares, these shares will be released to the investor and Cycomm will
issue additional shares to complete the full value of the investment. If the
private placement involves preferred shares or debt, these shares will be
remitted back to Cyomm, and the related preferred shares or debt instruments
will be issued to the investor. In the event that no private placement is
made, the shares will be remitted back to the Company, and Cycomm will return
the $100,000 to the potential investor.
The sale of Val-Comm consisted of an initial purchase price of $750,000 and a
promissory note for $1.5 million. 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 September 30, 1999 the Company had received proceeds of $361,260 from the
sale of the purchaser's stock. Subsequent to September 30, 1999 the
remainder of the purchaser's stock was sold for proceeds of $134,773. As of
November 1, 1999 Cycomm, is owed $65,966 from the purchaser on the initial
payment of $750,000.
Page 15
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 incurred over $4 million
in losses in the year ended December 31, 1998, and incurred an additional
$1.9 million in losses from operations in the nine months ended September 30,
1999, which caused a significant drain on the Company's cash resources. The
operating results of CSS for the nine months ended September 30, 1999 are not
included in results from continuing operations, and are classified on a
separate line item on the income statement.
Cycomm completed the sale of its secure communications equipment subsidiary,
Val-Comm Inc. to an Albuquerque, NM businessman on August 21, 1999. Val-Comm
had been profitable in 1998, and had net income of $112,163 prior to the date
of sale. Results of operations from Val-Comm have been excluded from results
from continuing operations, and are classified separately on the income
statement.
The results of continuing operations for the quarters ended September 30,
1999 and September 30, 1998 and the nine months ended September 30, 1999 and
September 30, 1998 reflect only the results of the Company's PCMobile product
line and the results of the parent company.
Three Months Ended September 30, 1999 and September 30, 1998
Revenues for the three months ended September 30, 1999 were $219,822 as
compared to revenues of $3,099,845 for the prior period. The decrease in
sales was a result of reduced production of PCMobile units caused primarily
by limited financial resources available to the Company. The backlog of
orders for PCMobile units was $6 million as of November 1, 1999.
Cost of sales for the three months ended September 30, 1999 were $186,297 as
compared to cost of sales of $2,562,542 for the prior period. Gross margins
for the three months ended September 30, 1999 were 15%, which represents a
slight decrease from 17% 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 $945,330 for the period ended September 30,
1999 as compared to $1,241,495 in the prior period. Selling, general and
administrative expenses were $755,386, as compared to $754,827 for the
current period. Research and development costs decreased by $205,700 to
$103,118 as a result of reductions in R&D headcount and a reduction in the
funds allocated to the R&D department. Depreciation and amortization
decreased to $86,826 for the quarter ended September 30, 1999 as compared to
$177,850 in the prior period. The decrease is the result of the depreciation
of PCMobile demonstration units in the quarter ended September 30, 1998.
Page 16
Interest expense for continuing operations for the quarter ended September
30, 1999 was $138,207 as compared to $129,055 for the prior period. The
increase in interest expense for continuing operations is a result of a
restructuring of Cycomm's line of credit. In quarter ended September 30,
1998, interest on the revolving line of credit was allocated between the
Company's mobile computing and secure computing subsidiaries. Following the
Company's June 21, 1999 sale of its secure computing subsidiary, all interest
expense on the revolving line of credit was allocated to the company's mobile
computing subsidiary. The increase in interest expense on Cycomm's revolving
line of credit is offset by the reduction in the interest rate on the
convertible debentures from 12% to 7%. (see Note 7).
Net loss from continuing operations increased to $938,351 or $0.07 per share,
for the quarter ended September 30, 1999 from $814,008, or $0.07 per share
for the quarter ended September 30, 1998. The increase in net loss from
continuing operations is primarily the result of the significant decrease in
PCMobile sales from the prior period.
The sale of the Cycomm Secure Solutions subsidiary was recognized in the
quarter ended March 30, 1999, and therefore had no income statement effect in
the quarter ended September 30, 1999. The net loss of Cycomm Secure for the
quarter ended September 30, 1998 was $666,843.
Income from discontinued operations from the Company's Val-Comm subsidiary
was $4,872 for the period ended August 21, 1999, the date of the sale of
Val-Comm, as compared to a net loss of ($2,374) for the period ended
September 30, 1998. Cycomm recognized a gain on the disposal of Val-Comm
Inc. of $265,746 in the quarter ended September 30, 1999.
Nine Months Ended September 30, 1999 and September 30, 1998
Revenues for the nine months ended September 30, 1999 were $2,123,815 as
compared to revenues of $11,635,567 for the prior period. The decrease in
sales was a result of reduced production of PCMobile units caused primarily
by limited financial resources available to the Company.
Cost of sales for the nine months ended September 30, 1999 were $1,737,069 as
compared to cost of sales of $8,442,987 for the prior period. Gross margins
for the nine months ended September 30, 1999 were 18%, which represents a
decrease from 27% 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 $3,836,570 for the nine months ended
September 30, 1999 as compared to $4,200,731 in the prior period. Selling,
general and administrative expenses decreased to $2,847,453 for the nine
months ended September 30, 1999, as compared to $3,095,696 for the current
period. This decrease is mainly the result of reductions in management
headcount, manufacturing headcount and reductions in facilities costs.
Research and development costs decreased to $457,257 as compared to $601,865
in the prior period. The decrease in research and development expenses is
mainly the result of headcount and other reductions made in the quarter ended
September 30, 1999. Depreciation and amortization was $531,860 for the nine
Page 17
months ended September 30, 1999 as compared to $503,170 in the prior period.
Interest expense for continuing operations for the nine months ended
September 30, 1999 was $338,736 as compared to $323,331 for the prior year.
The increase in interest expense for continuing operations is a result of a
restructuring of Cycomm's line of credit. In nine months ended September 30,
1998, interest on the revolving line of credit was allocated between the
Company's mobile computing and secure computing subsidiaries. Following the
Company's June 21, 1999 sale of its secure computing subsidiary, all interest
expense on the revolving line of credit was allocated to the company's mobile
computing subsidiary. The increase in interest expense on Cycomm's revolving
line of credit is offset by the reduction in the interest rate on the
convertible debentures from 12% to 7%. (see Note 7).
Net loss from continuing operations increased to $3,667,866, or $0.29 per
share, for the nine months ended September 30, 1999 from $1,282,008, or $0.12
per share for the nine months ended September 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 Cycomm's
reductions in selling, general and administrative expenses.
The loss from discontinued operations from the Company's Cycomm Secure
Solutions ("CSS") subsidiary was $1,613,044 for the nine months ended
September 30, 1999, as compared to $2,466,005 in the prior period. The 1999
results are for the period ended March 4, 1999, the date of the decision to
sell the assets of CSS. Prior to the date of sale, production was decreased
and certain cost reductions were made. 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 $112,163 for the nine months ended September 30, 1999 as compared to
$94,027 in the prior period. The 1999 results are for the period ended
August 21, 1999, the date of the sale of Val-Comm. Cycomm recognized a gain
of $265,746 on the disposal of Val-Comm Inc.
Liquidity and Capital Resources
Cycomm has satisfied working capital requirements through cash on hand,
available lines of credit and various equity related financings. At
September 30, 1999, the Company had cash and cash equivalents of $509,412.
In the nine months ended September 30, 1999, cash used in operations amounted
to $404,194. Cash provided by investing activities during the nine months
ended September 30, 1999 totaled $359,260, which was comprised of $361,260
from the sale of marketable securities related to the sale of Cycomm's
Val-Comm subsidiary, offset by a net of $2,000 used in notes receivable
activity. Cash provided by financing activities was $673,258 for the nine
months ended September 30, 1999. Cycomm obtained cash totaling $999,329 as a
result of five separate private equity placements of its common stock.
Additionally, in the nine months ended September 30, 1999, Cycomm obtained
$247,500 from the issuance of its Series C preferred stock, and $268,500 from
the issuance of its Series D preferred stock. Cycomm issued a convertible
debenture during the nine months ended September 30, 1999 for total proceeds
Page 18
of $500,000. Cycomm had a net decrease of $1,317,416 in borrowings under the
secured credit facility in the nine months ended September 30, 1999.
The Company's net working capital increased to ($2,391,363) at September 30,
1999, from ($2,419,330) at December 31, 1998 as a result of several factors.
Cycomm reclassed $3,000,000 of convertible debentures from short term to long
term liabilities, and reduced amounts borrowed on its revolving credit
facility by $1,317,416. Cycomm's production levels decreased significantly
from 1998 due to limited financial resources available to the Company. As a
result, cash on hand decreased $58,565, accounts receivable decreased
$1,642,438 and inventories decreased $153,313 from December 31, 1998 to
September 30, 1999. Additionally, in the nine months ended September 30, 1999
Cycomm sold its Cycomm Secure Solutions ("CSS") subsidiary in an asset sale
transaction. The assets of CSS had a carrying value of $2,333,779 and were
sold for gross proceeds of $800,000. Proceeds of the sale were used to pay
down a portion of the Company's revolving line of credit. As of September
30, 1999 the Company carried liabilities related to its CSS subsidiary of
$1,310,837.
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.
Page 19
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, 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.
Page 20
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 21
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