Page 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
__X__ Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2000
____ Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period from ______________ to _______________
Commission file number: 1-11686
CYCOMM INTERNATIONAL INC.
(Exact name of small business issuer as specified in its charter)
Wyoming 54-1779046
(State or other jurisdiction (I.R.S. Employer Identification No.)
of 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, 2000, the Registrant had 27,545,982 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....... 6
Condensed Consolidated Statement of Stockholders'
Equity................................................ 7
Notes to Condensed Consolidated Financial Statements.. 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation.................... 16
PART II - Other Information
Item 1. Legal Proceedings..................................... 19
Item 2. Changes in Securities................................. 19
Item 3. Default Upon Senior Securities........................ 19
Item 4. Submission of Matters to a Vote of Security Holders... 19
Item 5. Other Information..................................... 19
Item 6. Exhibits and Reports on Form 8-K...................... 20
Signatures ...................................................... 21
Page 3
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2000 AND DECEMBER 31, 1999
June 30, December 31,
2000 1999
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $626,313 $22,867
Accounts receivable, less allowance for doubtful
accounts of $189,000 and $254,000, respectively 458,976 1,200,771
Inventories, net of allowance for obsolete
inventory of $138,893 and $131,339, respectively 1,251,088 844,057
Deposits with suppliers 303,393 283,449
Other current assets 344,220 293,445
---------- ---------
Total current assets 2,983,990 2,644,589
Fixed assets, net 259,299 269,780
Other assets 8,243 30,648
---------- ----------
$3,251,532 $2,945,017
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable- trade $507,229 $2,416,883
Accrued liabilities 414,641 692,324
Acquisition earn-out obligation 500,000 700,000
Deferred revenue --- 770,122
Dividends payable on preferred stock 80,685 33,575
Current portion of capital lease obligations 3,185 2,785
Revolving credit facility 552,986 915,104
--------- ---------
Total current liabilities 2,058,726 5,530,793
Capital lease obligations, less current portion 6,511 8,041
Convertible debentures --- 3,500,000
Stockholders' equity:
Series B Preferred Stock, $50,000 par value,
unlimited authorized shares, 2 shares issued
and outstanding at June 30, 2000 and
December 31, 1999 90,000 90,000
Series C Preferred Stock, $50,000 par value,
unlimited authorized shares, no shares and 5
shares issued and outstanding at June 30, 2000
and December 31, 1999 --- 206,250
Series E Preferred Stock, $100,000 par value,
unlimited authorized shares, 30 shares and no
shares issued and outstanding at June 30, 2000
and December 31, 1999 1,000,000 ---
Common Stock, no par value, unlimited authorized
shares, 27,014,475 and 16,807,696 shares issued
and outstanding at June 30, 2000 and
December 31, 1999 61,357,963 54,315,402
Notes receivable - stockholders (62,918) (60,511)
Accumulated deficit (61,198,750) (60,644,958)
----------- -----------
Total stockholders' equity 1,186,295 (6,093,817)
----------- -----------
$3,251,532 $2,945,017
=========== ===========
See accompanying notes to condensed consolidated financial statements.
Page 4
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED JUNE 30, 2000 AND JUNE 30, 1999 (UNAUDITED)
Three Months Six Months
Ended Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
Sales $1,415,746 $443,637 $2,712,994 $1,903,993
Cost of sales 866,902 456,066 1,971,646 1,550,772
---------- -------- --------- ---------
Gross profit 548,844 (12,429) 741,348 353,221
Expenses
Selling, general and
administrative 934,316 1,173,049 1,743,781 2,092,067
Research and product
development 180,780 175,854 374,642 354,139
Depreciation and
amortization 24,993 127,591 55,120 445,034
--------- --------- --------- ---------
1,140,089 1,476,494 2,173,543 2,891,240
--------- --------- --------- ---------
Loss from Operations (591,245) (1,488,923) (1,432,195) (2,538,019)
Other Income (Expense)
Interest income 10,985 4,096 30,045 9,033
Interest expense (94,771) (80,978) (208,542) (200,529)
Other income 4,585 --- 4,585 ---
-------- -------- --------- ---------
(79,201) (76,882) (173,912) (191,496)
-------- -------- --------- ---------
Loss from continuing
operations $(670,446) $(1,565,805) $(1,606,107) $(2,729,515)
========= =========== =========== ===========
Discontinued operations
Income from operations of
discontinued operation
Val-Comm Inc. --- 99,634 --- 107,291
Income (loss) from operations of
discontinued operation
Cycomm Secure Solutions, Inc. --- --- --- (1,613,044)
Loss on disposal of discontinued
operation:
Cycomm Secure Solutions Inc. --- --- --- (1,535,643)
Gain on dissolution of
discontinued operation:
Cycomm Secure
Solutions, Inc. 1,119,273 --- 1,119,273 ---
--------- --------- --------- ---------
Net income (loss) 448,827 (1,466,171) (486,834) (5,770,911)
========= ========= ========= =========
Beneficial return on preferred
shares --- (9,333) --- (9,333)
-------- ---------- -------- ----------
Net income (loss) attributable to
common stockholders $448,827 $(1,475,504) $(486,834)$(5,780,244)
======== ========== ======== ==========
Earnings Per Share: Basic
Loss per share from continuing
operations ($0.03) ($0.13) ($0.07) ($0.22)
Income (loss) per share from
discontinued operations:
Val-Comm Inc. --- $0.01 --- $0.01
Loss per share from
discontinued operations:
Cycomm Secure Solutions --- --- --- ($0.13)
Loss per share on disposal
of Cycomm Secure Solutions --- --- --- ($0.12)
Income per share on
dissolution of discontinued
operation: Cycomm Secure
Solutions, Inc. $0.04 --- $0.05 ---
Net loss per share
attributable to beneficial
return on preferred shares --- $0.00 --- $0.00
----- ------ ------ ------
Net income (loss) per share
attributable to common
shareholders $0.02 $(0.12) $(0.02) $(0.46)
===== ====== ====== ======
Page 5
Earnings Per Share: Diluted
Loss per share from
continuing operations ($0.02) ($0.13) ($0.07) ($0.22)
Income (loss) per share from
discontinued operations:
Val-Comm Inc. --- $0.01 --- $0.01
Loss per share from
discontinued operations:
Cycomm Secure Solutions --- --- --- ($0.13)
Loss per share on
disposal of Cycomm
Secure Solutions --- --- --- ($0.12)
Income per share on
dissolution of
discontinued operation:
Cycomm Secure Solutions, Inc. $0.03 --- $0.05 ---
Net loss per share
attributable to beneficial
return on preferred
shares --- $0.00 --- $0.00
----- ------ ------ ------
Net income (loss) per share
attributable to common
shareholders $0.01 $(0.12) $(0.02) $(0.46)
===== ====== ====== ======
Shares used in computing
earnings per share:
Basic 25,876,013 12,492,928 23,807,869 12,463,261
========== ========== ========== ==========
Diluted 33,960,963 12,492,928 23,807,869 12,463,261
========== ========== ========== ==========
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, 2000 AND JUNE 30, 1999 (UNAUDITED)
Six Months Ended
June 30, June 30,
2000 1999
Operating activities
Net loss from continuing operations ($1,606,107) ($2,729,515)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation and amortization 55,120 445,034
Non-cash compensation --- 88,000
Change in operating assets and
liabilities (1,675,084) 3,201,486
---------- ---------
Cash provided by (used in) operating
activities (3,226,071) 1,005,005
---------- ---------
Investing activities
Acquisition of fixed assets (22,235) ---
Increase in notes receivable --- (4,000)
Decrease in notes receivable --- 2,000
Other --- ---
------- ------
Cash used in investing activities (22,235) (2,000)
------- ------
Financing activities
Issuance of common stock 4,140,000 ---
Exercise of stock options 74,999 ---
Issuance of preferred stock --- 247,500
Borrowings under revolving credit
facility (362,117) (1,045,523)
Repayment of notes payable --- (15,777)
Deferred financing costs on convertible
debentures --- ---
Repayment of obligations under capital
leases (1,130) (7,229)
--------- --------
Cash (used in) provided by financing
activities 3,851,752 (821,029)
--------- --------
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)
Proceeds from sale of discontinued
operation:
Val-Comm, Inc. --- 188,000
Cash provided by discontinued
operation: Val-Comm, Inc. --- 10,458
------- --------
Decrease (increase) in cash and cash
equivalents during the period 603,446 (563,243)
Cash and cash equivalents, beginning of
period 22,867 567,977
-------- -------
Cash and cash equivalents, end of period $626,313 $4,734
======== =======
Supplemental cash flow information:
Interest paid $264,573 $226,611
Income taxes paid $ --- $ ---
Non-cash investing and financing
activities:
Conversion of convertible debentures to
common stock $517,452 $ ---
Conversion of preferred stock to common
stock $2,226,098 $381,356
Conversion of convertible debentures to
preferred stock $3,000,000 $ ---
See accompanying notes to condensed consolidated financial statements.
Page 7
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE UNAUDITED PERIOD ENDED JUNE 30, 2000
AND THE YEAR ENDED DECEMBER 31, 1999
Preferred Preferred Common Common Accumulated
Shares Stock Shares Stock Deficit
Balance,
December 31, 1998 8 $360,000 12,210,311 $51,674,618 $(51,600,647)
===== ======== ========== =========== ============
Net Loss --- --- --- --- (9,012,481)
Issuance of
common stock:
Private placement -
Common stock --- --- 3,626,907 1,765,987 ---
Value of options
issued to
non-employees --- --- --- 263,458 ---
Issuance of
preferred
stock:
Issuance - Series
C preferred
stock 6 247,500 --- --- ---
Issuance - Series
D preferred
stock 6 268,500 --- --- ---
Reversal of
conversion
of Series
B preferred
stock 1 45,000 (21,745) (46,753) ---
Conversion of
preferred
stock (14) (624,750) 992,223 658,092 ---
Dividends on
preferred
stock --- --- --- --- (31,830)
----- -------- --------- ---------- ------------
Balance,
December 31, 1999 7 $296,250 16,807,696 $54,315,402 $(60,644,958)
===== ======== ========== =========== ============
Net Loss (486,834)
Issuance of
common stock:
Private placement -
Common stock --- --- 7,400,000 4,140,000 ---
Shares cancelled
related to vendor
obligation --- --- (205,717) (77,144) ---
Shares issued in
settlement of
vendor
obligation --- --- 400,000 161,156 ---
Exercise of
stock options --- --- 145,833 74,999 ---
Conversion of
debenture
into common
stock --- --- 1,034,904 517,452 ---
Issuance of
preferred
stock:
Conversion of
debentures
into
preferred
stock 30 3,000,000 --- --- ---
Conversion of
preferred
stock (25) (2,206,250) 1,431,759 2,226,098
Dividends on
preferred
stock --- --- --- --- (66,958)
----- ---------- ---------- ----------- ------------
Balance,
March 31, 2000 12 $1,090,000 27,014,475 $61,357,963 $(61,198,750)
===== ========== ========== =========== ============
See accompanying notes to condensed consolidated financial statements.
Page 8
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2000
NOTE 1 - GENERAL
The interim financial information furnished herein was prepared from the
books and records of Cycomm International Inc. and its subsidiaries
("Cycomm") as of June 30, 2000 and for the periods ended June 30, 2000 and
1999, without audit; however, such information reflects all normal and
recurring accruals and adjustments which are, in the opinion of management,
necessary for a fair presentation of financial position and of the statements
of operations and cash flows for the interim period presented. The interim
financial information furnished herein should be read in conjunction with the
consolidated financial statements included in this report and the
consolidated financial statements and notes contained in the Cycomm's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1999. The
interim financial information presented is not necessarily indicative of the
results from operations expected for the full fiscal year.
NOTE 2: DISCONTINUED OPERATIONS
Cycomm Secure Solutions Inc.
On March 4, 1999, Cycomm signed a letter of intent for the sale of the assets
of its secure computing subsidiary, Cycomm Secure Solutions Inc. ("CSS").
The asset sale was completed on June 21, 1999. The results of operations for
CSS are reported as discontinued operations for all periods presented. For
the period ended March 4, 1999, the results of CSS included a write-off of
goodwill of $1,220,190. The results of operations for Cycomm Secure
Solutions Inc. for the period ended March 4, 1999 are summarized as follows:
January 1, 1999
to March 4, 1999
Revenue $1,837,889
Cost of Sales 1,354,200
---------
Gross profit (loss) 483,689
Operating Expenses 2,096,733
------------
Net loss ($1,613,044)
===========
Net loss per share ($0.12)
======
The assets sold included inventory, fixed assets and various intangibles and
other assets and had a carrying value of $2,333,779 as of June 21, 1999.
Proceeds on the sale of CSS's assets were used to repay a portion of CSS'
bank debt and to satisfy CSS' lease and property tax obligations. Cycomm
recognized a net loss on disposal of $1,535,643 on the sale of CSS' assets.
Included in the net loss was a gain of $278,297 on the settlement of an
operating lease obligation.
On June 29, 2000, Cycomm completed the legal dissolution of its CSS
subsidiary. As a result of the dissolution, Cycomm is not entitled to
receive any assets generated in the future by CSS, and is not liable for any
present or future unsatisfied claims of CSS' creditors. Cycomm recognized a
gain of $1,119,273 related to the dissolution 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 are reported as discontinued operations for the quarter ended June
30, 1999 and the six months ended June 30, 1999, and are summarized as
follows:
Quarter Ended Six Months Ended
June 30, 199 June 30, 1999
Revenue $461,093 $792,601
Cost of Sales 238,020 449,403
------- -------
Gross profit (loss) 223,073 343,198
Operating Expenses 123,439 237,747
------- -------
Net income $99,634 $105,451
======= ========
Net income per share $0.01 $0.01
===== =====
The net book value of Val-Comm's assets on August 21, 1999 was $484,254. The
selling price of Val-Comm consisted of an initial payment of $750,000 and a
contingent promissory note of $1.5 million. The promissory note is
contingent upon Val-Comm getting a follow-on award to an existing contract.
Val-Comm's management is optimistic that they will receive this award. The
contingent promissory note bears interest at 7%, and is payable over two
years should payment be required, with 50% of the note due on August 21, 2000
and the balance of the note due on August 21, 2001. Cycomm recognized a gain
on the sale of Val-Comm of $265,746.
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 June 30, 2000, Cycomm had received
proceeds of $496,034 from the sale of the purchaser's stock. The total
amount due from the purchaser on the initial payment is $65,966 as of June
30, 2000 and is included in other current assets.
NOTE 3: ACQUISITION EARN-OUT
In connection with the purchase price paid for the Company's acquisition of
its Cycomm Mobile Solutions subsidiary, the Company entered into an
acquisition earn-out agreement with the seller, M3i Technologies Inc. and M3i
Systems Inc. (collectively the "Seller"). The earn-out provision of the
purchase price was to be paid in Cycomm common stock, up to a maximum value
of $4,000,000, subject to provisions based on the achievement of certain unit
sales volumes for a five year period. Common stock issued under the earn-out
provisions was to be issued at the average current market price of the last
month for the quarter in which it was earned. As of June 30, 2000, Cycomm
had paid $1,354,796 of contingent consideration, which was paid in 444,862
shares of common stock.
Page 10
The Company and the seller were parties to a lawsuit regarding the
interpretation of the earn-out agreement. On May 24, 1999, the Company and
the seller entered into a complete settlement of the litigation. Under the
terms of the agreement, the Company could fulfil its obligation to the Seller
if payments were made before certain dates as specified in the agreement.
The Company could elect to pay $700,000 by April 30, 2000, $1,100,000 by
April 30, 2001 or $1,500,000 prior to April 30, 2002. The settlement
agreement was amended on February 3, 2000 to allow Cycomm until December 31,
2000 to pay $700,000 in full and final settlement of the obligation, to be
paid in accordance with a payment schedule. Management anticipates that the
liability to the Seller will be paid prior to December 31, 2000 in accordance
with the payment schedule. The first scheduled payment of $100,000 was made
on February 7, 2000, and the second payment of $100,000 was made on May 11,
2000. Cycomm has recorded an accrued liability of $500,000 as of June 30,
2000. In conjunction with the settlement, the Company issued 200,000
warrants to the seller with a fair value on the date of issuance of
$88,000. It was considered part of the purchase price and subsequently
written off in conjunction with goodwill impairment charge (See Note 6:
Impairment of Goodwill).
NOTE 4: DELISTING FROM THE AMERICAN STOCK EXCHANGE
On January 21, 1999, Cycomm was notified by the American Stock Exchange that
it no longer met continued listing criteria and would be delisted.
Specifically, Cycomm had incurred losses in its last five fiscal years and
therefore failed to meet the American Stock Exchange listing requirement of
pre-tax income of at least $750,000 in its last fiscal year, or in two of its
last three fiscal years. Additionally, Cycomm failed to satisfy the minimum
stockholders' equity requirement of $4 million. Trading of Cycomm's stock
was suspended on April 13, 1999 and Cycomm was delisted from the AMEX on
April 30, 1999. Cycomm 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. All demonstration units
were fully depreciated during the year ended December 31, 1999. Depreciation
expense on the demonstration units was $40,689 for the quarter ended June 30,
1999, and $208,075 for the six months ended June 30, 1999.
Revenue on the sales is recognized when the Pentium units are shipped to the
customers. In the quarter ended June 30, 2000, no Pentium units were shipped
related to the Pentium for 586 trade-in issue. Cycomm recognized revenue of
Page 11
$24,845 related to the shipment of Pentium units to customers in exchange for
the 586 units for the quarter ended June 30, 1999. For the six months ended
June 30, 2000 and June 30, 1999, Cycomm recognized revenue of $185,207 and
$168,606, respectively.
On April 4, 2000, Cycomm entered into an agreement under which a customer
agreed to keep the 586 units originally delivered, instead of trading the
units for Pentiums. The customer agreed to forfeit its right to trade in the
units in exchange for the forgiveness of $278,818 owed to Cycomm. Cycomm
also provided the customer with 15 additional PCMobile units at no additional
cost. As a result of this settlement, Cycomm recognized deferred revenue of
$581,134 in the quarter ended June 30, 2000.
NOTE 6: IMPAIRMENT OF GOODWILL
In 1999, Cycomm made the determination that the value of goodwill related to
the acquisition of Cycomm Mobile Solutions ("CMS") was impaired under SFAS
121. CMS has a history of losses and negative cash flows from operations.
Cycomm recorded an impairment charge of $838,202 in the year ended December
31, 1999 to fully write down goodwill related to CMS due to the fact that the
carrying value of that asset was in excess of its fair value.
NOTE 7: INVENTORIES
The following is a summary of inventories at June 30, 2000 and December 31,
1999:
June 30, December 31,
2000 1999
Raw materials $997,546 $841,910
Work in process and sub-assemblies 316,311 122,160
Finished goods 76,124 11,326
Allowance for obsolete inventory (138,893) (131,339)
---------- --------
$1,251,088 $844,057
========== ========
Cycomm continually evaluates inventory for obsolescence or impairment in
value. The impairment loss is measured by comparing the carrying amount of
the inventory to its fair value with any excess of carrying value over fair
value reserved. Fair value is based on market prices where available, or on
an estimate of market value, or determined by various valuation techniques
including discounted cash flow.
Page 12
NOTE 8: NOTES PAYABLE AND CONVERTIBLE DEBENTURES
Notes payable and convertible debentures are as follows:
June 30, December 31,
2000 1999
7% convertible debentures, due May 1, 2000 $ --- $3,000,000
7% convertible debenture, due September 20, 2004 --- 500,000
Revolving credit facility, prime + 3% 552,986 915,104
------- -------
552,986 4,415,104
Less current portion 552,986 915,104
-------- ----------
$ --- $3,500,000
======== ==========
On February 28, 1997, Cycomm issued $3,000,000 of 10% convertible debentures
due February 28, 1999 which were convertible at the option of the holders
into Cycomm's common stock. On March 31, 2000, Cycomm entered into an
agreement with the debenture holders under which the debentures were sold to
a third party, who was assigned all rights privileges and obligations of the
original holders. Concurrent with the sale, Cycomm entered into an agreement
with the new holders under which the debentures were converted into preferred
stock of Cycomm. The debentures were converted into 30 shares of Series E
convertible redeemable preferred stock ("Series E preferred stock") with a
conversion value of $100,000 per share. The Series E preferred stock is
convertible at any time at the option of the holder. The conversion price is
equal to the average closing bid price of Cycomm's stock for the 20 days
prior to the date of conversion. The Series E preferred stock cannot be
converted for less than $2.00 per share. The Series E preferred stock
accrues dividends at 7% per annum, which can be paid in cash or in common
stock at the option of the Company. The Series E preferred stock is
redeemable at Cycomm's option at a price equal to conversion price on the
date of redemption. The Series E preferred stock has no mandatory redemption
provisions. See Note 9: Capital Stock for further discussion of the Series E
preferred stock.
On September 20, 1999, the Company issued a $500,000 7% convertible debenture
due September 20, 2004 which was convertible at the option of the holder into
Cycomm's common stock at the lesser of $0.50 per share or the average closing
bid price of Cycomm's common stock for the 5 days prior to conversion. On
March 30, 2000, the debenture and was converted. At the time of conversion,
the debenture had earned accrued interest of $17,452. The principal and
accrued interest were converted into 1,034,904 shares of common stock.
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. As of
June 30, 2000, the available borrowing base on the revolving credit facility
was $575,229. Borrowings under this credit facility bear interest at prime
plus 3%. The credit facility is collateralized by the trade accounts
receivable, inventory and other assets of Cycomm Mobile Solutions. As of
June 30, 2000, the amount outstanding on the credit facility was $552,986.
Page 13
NOTE 9: CAPITAL STOCK
Common Stock
In January 2000, Cycomm raised capital through three separate private equity
placements of its common stock. The equity placements were priced at the
market price of Cycomm's common stock on the date of the letter of intent.
The market price of Cycomm's common stock increased prior to the date of
issuance, causing the private equity placements to be issued at a discount to
the market price. In total, the Cycomm issued 6,200,000 shares of common
stock for gross proceeds of $3,170,000. Cash proceeds, after commissions and
issue costs were $3,060,000. In conjunction with these private placements,
Cycomm issued 5,000,000 warrants to the purchasers, with a fair value on the
date of issuance of approximately $8,736,500.
On May 8, 2000, Cycomm raised capital through a private equity placement of
its common stock. The stock was issued at a discount to the market price on
the date of the issuance. In total, Cycomm issued 1,200,000 shares of common
stock for gross proceeds of $1,200,000. Cash proceeds, after commissions and
issue costs were $1,080,000.
Five shares of Series B convertible preferred shares and related accrued
dividends were converted into 431,759 shares of common stock during the six
months ended June 30, 2000. There are two shares of Series B convertible
preferred stock outstanding as of June 30, 2000, with a combined face value
of $100,000 and accrued dividends of $23,425. Dividends can be paid in cash
or in common stock at the option of Cycomm.
On March 30, 2000, the $500,000 7% convertible debenture due September 20,
2004 was converted into common stock of the Company. At the time of
conversion, the debenture had earned accrued interest of $17,452. The
principal and accrued interest were converted into 1,034,904 shares of common
stock.
On January 21, 2000, Cycomm cancelled 205,717 shares of its common stock that
had been issued in settlement of a vendor obligation of $77,144, and issued
400,000 shares in full settlement of an obligation of $161,223.
On January 13, 2000, Cycomm issued 145,833 shares of common stock upon the
exercise of non-employee stock options for proceeds of $74,999.
Preferred Stock
On March 31, 2000, Cycomm issued 30 shares of Series E convertible redeemable
preferred stock ("Series E preferred stock") with a conversion value of
$100,000 in conjunction with the conversion of the $3,000,000 7% convertible
debentures due May 1, 2000 (See Note 8: Notes Payable and Convertible
Debentures). The conversion price is equal to the average closing bid price
of the Company's stock for the 20 days prior to the date of conversion. The
Series E preferred stock cannot be converted for less than $2.00 per share.
The Series E preferred stock accrues dividends at 7% per annum, which can be
paid in cash or in common stock at Cycomm's option. The Series E preferred
stock is redeemable at Cycomm's option at a price equal to conversion price
on the date of redemption. The Series E preferred stock has no mandatory
redemption provisions.
Page 14
In the quarter ended June 30, 2000, 20 shares of Series E preferred stock
were converted into 1,000,000 shares of Cycomm's common stock. As of June
30, 2000, there were 10 shares of Series E preferred stock outstanding with a
combined face value of $1,000,000 and accrued dividends of $57,260.
NOTE 10: SEGMENT AND RELATED INFORMATION
The results of operations by geographic region for the quarters ended June
30, 2000 and 1999, and the six months ended June 30, 2000 and 1999 are as
follows:
Quarters Ended Six Months Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
Sales
United States $1,400,574 $ 410,774 $2,348,364 $1,834,900
Canada 15,172 32,863 364,630 69,093
---------- --------- ---------- ----------
$1,415,746 $ 443,637 $2,712,994 $1,903,993
========== ========= ========== ==========
Loss from Operations
United States $ 24,601 $ 970,010 $1,000,686 $1,749,849
Canada 566,644 518,913 431,509 788,170
--------- ---------- ---------- ----------
$ 591,245 $1,488,923 $1,432,195 $2,538,019
========= ========== ========== ==========
Page 15
NOTE 11: EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net earnings by the
weighted average number of common shares outstanding during the related
periods. Diluted earnings per share is calculated by dividing net earnings
by the weighted average number of common shares outstanding during the
related periods plus the incremental shares that would have been outstanding
upon the assumed exercise of eligible stock options, warrants and the
conversion of convertible preferred stock. In periods in which Cycomm
incurred net losses, the effect of the exercise of stock options, warrants
and the conversion of preferred stock would be anti-dilutive, causing diluted
earnings per share to equal basic earnings per share as disclosed in the
consolidated statements of operations. For the quarter ended June 30, 2000,
Cycomm recorded net income, and computed diluted earnings per share as
follows:
Quarter Ended
June 30,
2000
Numerators:
Loss from continuing operations $(670,446)
Gain on dissolution of discontinued
operation:
Cycomm Secure Solutions Inc. 1,119,273
Net income (loss) attributable to
common shareholders $448,827
========
Denominator:
Denominator for basic earnings per share:
Weighted average shares outstanding 25,876,013
Stock options 2,021,438
Warrants 5,400,000
Convertible preferred stock 663,512
----------
Denominator for dilutive earnings per
share 33,960,963
==========
Earnings per share: Basic
Loss per share from continuing operations $(0.03)
Income per share on dissolution of
discontinued operation: Cycomm Secure
Solutions, Inc. $0.04
-----
Net income (loss) per share attributable
to common shareholders $0.02
=====
Earnings per share: Diluted
Loss per share from continuing operations $(0.02)
Income per share on dissolution of
discontinued operation: Cycomm Secure
Solutions, Inc. $0.03
-----
Net income (loss) per share attributable
to common shareholders $0.01
=====
Page 16
NOTE 12: SUBSEQUENT EVENTS
On July 26, 2000, Cycomm raised capital through a private equity placement of
its common stock. The stock was issued at a discount to the market price on
the date of the issuance. In total, Cycomm issued 333,334 shares of common
stock for total proceeds of $250,000. In conjunction with this private
equity placement, Cycomm issued 33,333 warrants to purchase Cycomm's common
stock with an exercise price of $0.75 per share.
On July 24, 2000, the remaining 10 shares of Series E preferred stock and the
related accrued dividends were converted into 531,507 shares of common stock.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation.
Results of Continuing Operations
During 1999, Cycomm sold two of its subsidiaries: Cycomm Secure Solutions
Inc. ("CSS") and Val-Comm, Inc. The operating results of CSS and Val-Comm
for the quarter and the six months ended June 30, 1999 are not included in
results from continuing operations, and are classified on separate line items
on the income statement.
The results of continuing operations for the quarters ended June 30, 2000 and
June 30, 1999 reflect only the results of Cycomm's PCMobile product line and
the results of the parent company.
Quarters Ended June 30, 2000 and June 30, 1999
Revenues for the quarter ended June 30, 2000 were $1,415,746 as compared to
revenues of $443,637 for the quarter ended June 30, 1999. The increase is a
result of the recognition of $581,134 in deferred revenue (See Note 5:
Deferred Revenue), and a general increase in sales volumes from the quarter
ended June 30, 1999. Cycomm experienced production shortfalls in the quarter
ended June 30, 1999 caused by inadequate resources available to the Company.
Cost of sales for the quarter ended June 30, 2000 were $866,902 as compared
to cost of sales of $456,066 for the prior period. Gross margins for the
quarter ended June 30, 2000 were 39%, which increased from (3%) in the
quarter ended June 30, 1999. The increase in gross margins is a result of
the recognition of $581,134 which was classified as deferred revenue (See
Note 5: Deferred Revenue) being recognized in the quarter ended June 30,
2000, while the corresponding cost of sales for these revenues were
recognized during 1999.
Operating expenses decreased to $1,140,089 for the quarter ended June 30,
2000 as compared to $1,476,494 in the quarter ended June 30, 1999. Selling,
general and administrative expenses decreased $238,733 to $934,316 for the
current quarter. This decrease is a result of reduced facilities costs and
reductions in headcount. Research and development costs were $180,780 for
the quarter ended June 30, 2000, as compared to $175,854 in the quarter ended
June 30, 1999. Depreciation and amortization decreased to $24,993 for the
Page 17
quarter ended June 30, 2000 as compared to $127,591 in the quarter ended June
30, 1999. Depreciation and amortization for the quarter ended June 30, 1999
contained expenses not included in the current quarter, including
depreciation of PCMobile demonstration units totaling $40,689 (See Note 5:
Deferred Revenue), and amortization of goodwill related to PCMobile's
division, Cycomm Mobile Solutions totaling $33,470 (See Note 6: Impairment of
Goodwill).
Interest expense for the quarter ended June 30, 2000 was $94,771 as compared
to $80,978 for the quarter ended June 30, 1999. The increase is the result
of finance changes paid to one of Cycomm's key suppliers in the quarter ended
June 30, 2000.
Net loss from continuing operations decreased to $670,466, or $0.03 per
share, for the quarter ended June 30, 2000 from $1,565,805, or $0.13 per
share for the quarter ended June 30, 1999. The decrease in net loss from
continuing operations is primarily the result of the recognition of $581,134
in deferred revenue, overall increased revenues, and reductions in SG&A and
depreciation and amortization costs.
Income from discontinued operations from the Company's Val-Comm subsidiary
was $99,634 for the quarter ended June 30, 1999.
Cycomm legally dissolved its Cycomm Secure Solutions ("CSS") subsidiary in
the quarter ended June 30, 2000. As a result of the dissolution, Cycomm
eliminated CSS' liabilities and recognized a gain of $1,119,273, or $0.04 per
share, for the quarter ended June 30, 2000.
Six Months Ended June 30, 2000 and June 30, 1999
Revenues for the six months ended June 30, 2000 were $2,712,994 as compared
to revenues of $1,903,993 for the six months ended June 30, 1999. The
increase in sales is primarily the result of the recognition of $766,341 in
deferred revenue (See Note 5: Deferred Revenue) in the six months ended June
30, 2000.
Cost of sales for the six months ended June 30, 2000 were $1,971,646 as
compared to cost of sales of $1,550,772 for the six months ended June 30,
1999. Gross margins for the six months ended June 30, 2000 were 27%, which
represents an increase from 19% in the prior period. The increase in gross
margins is a result of $766,341 in deferred revenue (See Note 5: Deferred
Revenue) being recognized in the six months ended June 30, 2000, while the
corresponding cost of sales was recognized during 1999.
Operating expenses decreased to $2,173,543 for the six months ended June 30,
2000 as compared to $2,891,240 in the prior period. Selling, general and
administrative expenses decreased $348,286 to $1,743,781 for the six months
ended June 30, 2000. This decrease is mainly the result of reductions in
facilities costs and headcount reductions. Research and development costs
increased to $374,642 as compared to $354,139 in the prior period. The
research and development expenses in the current period relate to engineering
of the Pentium II and Pentium III versions of our PCMobile and the further
development of our multimedia docking station. Depreciation and amortization
decreased to $55,120 for the six months ended June 30, 2000 as compared to
$445,034 in the prior period. Depreciation and amortization for the six
months ended June 30, 1999 contained expenses not included in the period,
including depreciation of PCMobile demonstration units totaling $208,075 (See
Page 18
Note 5: Deferred Revenue), and amortization of goodwill related to PCMobile's
division, Cycomm Mobile Solutions totaling $82,038 (See Note 6: Impairment of
Goodwill).
Interest expense for the six months ended June 30, 1999 was $208,542 as
compared to $200,529 for the prior period. The increase is the result of
finance charges paid to one of Cycomm's key suppliers in the six months ended
June 30, 2000.
Net loss from continuing operations decreased to $1,606,107, or $0.07 per
share, for the six months ended June 30, 2000 from $2,729,515, or $0.22 per
share for the six months ended June 30, 1999. The decrease in net loss from
continuing operations is primarily the result of the recognition of $766,341
in deferred revenue, reductions in SG&A expenses and decreases in
depreciation and amortization costs.
Income from discontinued operations from the Company's Val-Comm subsidiary
was $107,291 for the six months ended June 30, 1999.
Cycomm's loss from its discontinued operation Cycomm Secure Solutions Inc.
was $1,613,044 for the six months ended June 30, 1999. Included in this loss
is a write-off of goodwill of $1,220,190. The loss on the sale of Cycomm
Secure Solutions' assets was $1,535,643.
Cycomm legally dissolved its Cycomm Secure Solutions ("CSS") subsidiary in
the six months ended June 30, 2000. As a result of the dissolution, Cycomm
eliminated CSS' liabilities and recognized a gain of $1,119,273, or $0.05 per
share, for the six months ended June 30, 2000.
Liquidity and Capital Resources
Cycomm has satisfied working capital requirements through cash on hand,
available lines of credit and various equity related financings. At June 30,
2000, Cycomm had cash and cash equivalents of $626,313.
In the six months ended June 30, 2000, cash used in operations was
$3,226,071, as Cycomm reduced its current liabilities by $3,472,067,
increased inventories by $407,031, and reduced accounts receivable by
$741,795. Cash used in investing activities during the six months ended June
30, 2000 was $22,235. Cash provided by financing activities totaled
$3,851,752 for the six months ended June 30, 2000. Cycomm raised $4,140,000
through private equity placements and decreased the amounts drawn on its bank
credit lines in an amount of $362,117 during the six months ended June 30,
2000.
Cycomm's net working capital at June 30, 2000 was $925,264 as compared to
($2,886,204) at December 31, 1999. The increase in net working capital is a
direct result of Cycomm raising $4,140,000 in private equity placements. The
additional capital was used to fund operations, purchase inventory and reduce
outstanding payables.
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 Cycomm entered into a settlement agreement with the
trustee in bankruptcy of M3i Technologies, Inc., a Quebec corporation.
Cycomm 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 Cycomm's purchase of its Cycomm Mobile Solutions
subsidiary. Under the terms of the agreement, Cycomm can fulfil its
obligation to the Seller if payments are made before certain dates as
specified in the agreement. Cycomm can elect to pay $700,000 by December 31,
2000, $1,100,000 by April 30, 2001 or $1,500,000 prior to April 30, 2002.
Cycomm is currently on a payment schedule with the Seller, and has paid
$200,000 towards the $700,000 settlement due on December 31, 2000.
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 20
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27. Financial Data Schedule
(b) Reports on Form 8-K:
None
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: August 21, 2000 /s/ Albert I. Hawk
Albert I. Hawk
President and
Chief Executive Officer
Date: August 21, 2000 /s/ Robert M. Hutton
Robert M. Hutton
Vice President of Finance