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 September 30, 2001
____ 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 November 1, 2001, the Registrant had 52,038,157 shares of Common Stock
outstanding.
Transitional Small Business Disclosure Format: Yes No X
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CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
PART I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets................. 3
Condensed Consolidated Statements of Operations....... 4
Condensed Consolidated Statements of Cash Flows....... 5
Condensed Consolidated Statement of Stockholders' Equity 6
Notes to Condensed Consolidated Financial Statements.. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation.............................. 13
PART II - Other Information
Item 1. Legal Proceedings..................................... 16
Item 2. Changes in Securities................................. 17
Item 3. Default Upon Senior Securities........................ 17
Item 4. Submission of Matters to a Vote of Security Holders... 17
Item 5. Other Information..................................... 17
Item 6. Exhibits and Reports on Form 8-K...................... 17
Signatures ...................................................... 18
Page 3
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
September 30, December 31,
2001 2000
----- ----
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $162,221 $301,110
Accounts receivable, less allowance for
doubtful accounts of $70,000 and $50,000,
respectively 1,049,467 522,119
Inventories, net of allowance for obsolete
inventory of $187,000 and $127,000,
respectively 946,272 1,607,059
Deposits with suppliers --- 283,449
Foreign taxes receivable 287,999 96,948
Prepaid expenses 52,866 78,192
Other current assets 11,264 14,520
--------- ---------
Total current assets 2,510,089 2,903,397
Fixed assets, net 194,068 227,728
---------- ----------
$2,704,157 $3,131,125
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable- trade $922,173 $1,396,182
Accrued liabilities 1,083,763 1,296,382
Acquisition earn-out obligation --- 300,000
Dividends payable on preferred stock 35,945 28,466
Current portion of capital lease obligations 9,250 8,718
Revolving credit facility 779,633 675,520
--------- ---------
Total current liabilities 2,830,764 3,705,268
Capital lease obligations, less current portion 18,771 25,127
Stockholders' equity:
Convertible Preferred Stock, $50,000 par value,
unlimited authorized shares, 2 and 11
shares issued and outstanding at September 30,
2001 and December 31, 2000, respectively 105,000 560,500
Common Stock, no par value, unlimited authorized
shares, 52,038,157 and 34,145,982 shares issued,
and 50,424,711 and 30,145,982 outstanding at
September 30, 2001 and December 31, 2000,
respectively 67,289,169 63,653,477
Notes receivable - stockholders --- (66,714)
Accumulated deficit (67,539,547) (64,746,533)
----------- -----------
Total stockholders' equity (145,378) (599,270)
---------- ----------
$2,704,157 $3,131,125
========== ==========
See accompanying notes to condensed consolidated financial statements.
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CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000 (UNAUDITED)
Quarter Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
----- ----- ----- ----
Sales $2,553,536 $454,711 $4,431,009 $3,167,705
Cost of sales 1,787,355 607,927 3,503,222 2,579,573
--------- ------- --------- ---------
Gross profit 766,181 (153,216) 927,787 588,132
Expenses
Selling, general
and administrative 1,015,534 943,447 2,966,892 2,687,228
Research and
product development 196,198 158,904 636,209 533,546
Depreciation
and amortization 19,220 36,842 57,545 91,962
--------- --------- -------- ---------
1,230,952 1,139,193 3,660,646 3,312,736
--------- --------- --------- ---------
Loss from Operations (464,771) (1,292,409) (2,732,859) (2,724,604)
Other Income (Expense)
Interest income 1,505 7,084 7,851 37,129
Interest expense (70,215) (99,113) (282,546) (307,655)
Other income 2,279 --- 222,072 4,585
------- ------- ------- --------
(66,431) (92,029) (52,623) (265,941)
Loss from continuing
operations $(531,202) $(1,384,438) $(2,785,482) $(2,990,545)
========= =========== =========== ===========
Discontinued
operations
Gain on dissolution
of discontinued
operation: Cycomm
Secure Solutions, Inc. --- --- --- 1,119,273
-------- ---------- ---------- ----------
Net loss (531,202) (1,384,438) (2,785,482) (1,871,272)
======== ========== ========== ==========
Beneficial return
on preferred
shares --- --- (162,500) ---
----- ----- --------- -----
Net loss
attributable
to common
stockholders ($531,202) ($1,384,438) $(2,947,982) $(1,871,272)
========= =========== =========== ===========
Earnings Per Share
Loss per share
from continuing
operations $(0.01) $(0.05) $(0.08) $(0.12)
Income per
share on
dissolution of
discontinued
operation:
Cycomm Secure
Solutions, Inc. --- --- --- $0.04
Net loss per
share attributable
to beneficial
return on
preferred shares --- --- $(0.00) ---
----- ----- ------ -----
Net loss per share
attributable to
common shareholders $(0.01) $(0.05) $(0.08) $(0.07)
======= ======= ======= =======
Weighed average
number of common
shares outstanding 45,312,190 27,628,343 38,219,460 25,136,885
========== ========== ========== ==========
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, 2001 AND SEPTEMBER 30, 2000
(Unaudited)
Nine Months Ended
September 30, September 30,
2001 2000
----- ----
Operating activities
Net loss from continuing operations $(2,785,482) $(2,990,545)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation and amortization 57,545 91,962
Change in operating assets and
liabilities (216,812) (1,266,046)
Change in accounts receivable
and inventory reserves (80,000) 74,826
----------- -----------
Cash used in operating activities (3,024,749) (4,089,803)
----------- -----------
Investing activities
Acquisition of fixed assets (20,866) (33,838)
------- -------
Cash used in investing activities (20,866) (33,838)
------- -------
Financing activities
Issuance of common stock 2,196,884 4,840,000
Exercise of stock options --- 74,999
Issuance of preferred stock 611,500 ---
Net borrowings (repayments) under
revolving credit facility 104,113 (609,973)
Repayment of obligations under capital
leases (5,771) (1,836)
--------- ---------
Cash provided by financing activities 2,906,726 4,303,190
--------- ---------
(Decrease) increase in cash and cash
equivalents during the period (138,889) 179,549
Cash and cash equivalents, beginning of
period 301,110 22,867
-------- --------
Cash and cash equivalents, end of period $162,221 $202,416
======== ========
Supplemental cash flow information:
Interest paid $ 240,942 $ 330,314
Income taxes paid $ --- $ ---
Non-cash investing and financing
activities:
Conversion of convertible debentures to --- $ 517,452
common stock
Conversion of preferred stock to common $1,090,560 $3,289,112
stock
Conversion of convertible debentures to --- $3,000,000
preferred stock
Issuance of common stock in settlement $ 52,500 ---
of interest due
See accompanying notes to condensed consolidated financial statements.
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CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE UNAUDITED PERIOD ENDED SEPTEMBER 30, 2001
AND THE YEAR ENDED DECEMBER 31, 2000
Notes
Preferred Preferred Common Common Receivable Accumulated
Shares Stock Shares Stock Stockholder Deficit
Balance,
December
31, 1999 7 $296,250 16,807,696 $54,315,402 $60,511 $(60,644,958)
==== ======== ========= =========== ======= ============
Net Loss --- --- --- --- --- (4,023,822)
Issuance
of common
stock:
Sale of
common
stock --- --- 9,400,000 5,290,000 --- ---
Shares
issued
in
settlement
of vendor
obligation --- --- 194,283 84,012 --- ---
Shares
issued
in settlement
of obligation
of
acquisition
earn-out --- --- 400,000 200,000 --- ---
Conversion
of
debenture
into
common
stock --- --- 1,034,904 517,452 --- ---
Exercise
of stock
options
and
warrants --- --- 345,833 74,999 --- ---
Issuance of
preferred
stock:
Conversion
of
debentures
into Series
E preferred
stock 30 3,000,000 --- --- --- ---
Issuance -
Series F
preferred
stock 9 353,000 --- --- --- ---
Conversion
of
preferred
stock (35) (3,206,250) 1,963,266 3,289,112 --- ---
Beneficial
conversion
rights on
preferred
stock --- 117,500 --- (117,500) ---
Accrued
interest
on notes
receivable
stock-
holders --- --- --- --- (6,023) ---
Dividends on
preferred
stock --- --- --- --- --- (77,753)
----- ----- ----- ----- ----- -------
Balance,
December
31, 2000 11 $560,500 30,145,982 $63,653,477 $(66,714) $(64,746,533)
===== ======== ========== =========== ======== ============
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Net Loss (2,785,482)
Issuance of
common
stock:
Sale of
common
stock --- --- 11,853,025 2,187,632 --- ---
Shares
issued in
settlement
of
interest
due --- --- 300,000 52,500 --- ---
Shares
issued
in
settlement
of M3i
obli-
gation --- --- 1,700,000 300,000 --- ---
Execise of
stock
options --- --- 500,000 5,000 --- ---
Issuance of
preferred
stock:
Issuance -
Series F
preferred
stock 13 611,500 --- --- --- ---
Conversion
of
preferred
stock (22) (954,500) 5,925,704 978,060 --- ---
Beneficial
conversion
rights on
preferred
stock --- (112,500) --- 112,500 --- ---
Accrued
interest
on notes
receivable -
stock-
holders --- --- --- --- (1,856) ---
Write-off
of notes
receivable -
stockholders
and related
interest
receivable --- --- --- --- 68,570 ---
Dividends on
preferred
stock --- --- --- --- --- (7,532)
----- ----- ----- ----- ----- -------
Balance,
September
30, 2001 2 $105,000 50,424,711 $67,289,169 --- $(67,539,547)
===== ======== ========== =========== ====== ============
See accompanying notes to condensed consolidated financial statements.
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CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2001
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, 2001 and for the periods ended September 30, 2001 and 2000,
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, 2000. The interim financial information presented
is not necessarily indicative of the results from operations expected for the
full fiscal year.
Our Annual Report on Form 10-KSB was prepared on a going concern basis which
contemplates the realization of assets and the settlement of liabilities and
commitments in the normal course of business. We incurred a net loss from
continuing operations of $5.1 million for the year ended December 31, 2000 and
as of that date had a working capital deficit of approximately $800,000 and an
accumulated deficit of $64.7 million. As a result of the factors described
above, our auditors have modified their report on Cycomm's annual report on form
10-KSB to include an explanatory paragraph regarding the Company's ability to
continue as a going concern. In the quarter ended September 30, 2001, we
incurred a net loss of approximately $530,000, had a working capital deficit of
approximately $320,000, and an accumulated deficit of $67.5 million. Borrowings
on our revolving line of credit were in excess of amounts available as of
December 31, 2000, causing us to be out of compliance with our credit terms,
however, we were in compliance with the credit terms of our line of credit as of
September 30, 2001.
Management has taken several steps towards addressing the going concern issue.
We have expanded our sales force from two regional sales representatives and one
inside sales person, to four regional sales representatives, four inside sales
people, a vice president of sales and a manager of new business development. We
have increased our attendance at industry trade shows and increased our
marketing. In the quarter ended September 30, 2001, we continued to aggressively
pursue sales through trade shows, direct sales efforts and expansion of our
reseller distribution channels.
We have raised additional capital, which was used to fund operations, including
the growth of our sales force. Looking forward, Cycomm intends to grow its
PCMobile division by implementing plans to increase market share and revenue. We
plan to fund operations through working capital, borrowings on our secured line
of credit and through private equity placements.
Cycomm has historically been able to raise capital through private equity
placements and debenture issuances. During 2000, we raised $5,718,000 in private
equity placements. In the quarter ended September 30, 2001, Cycomm raised
$638,637 in private equity placements (See Note 7: Capital Stock for further
detail).
These interim financial statements do not give effect to any adjustments which
would be necessary should Cycomm be unable to continue as a going concern and
Page 9
therefore be required to realize its assets and discharge its liabilities in
other than the normal course of business and at amounts different from those
reflected in the accompanying consolidated financial statements. In the event
that Cycomm is unable to achieve its plans to fund operations, Cycomm will
consider further cost reductions, pursue the sale of all or part of its
business, or restructure its business under the United States Bankruptcy Code.
NOTE 2: EARNINGS PER SHARE
The Financial Accounting Standards Board's Statement No. 128, "Earnings per
Share", requires companies to report basic earnings per share (EPS) and diluted
EPS. Basic EPS is calculated by dividing net earnings by the weighted average
number of common shares outstanding during the year. Diluted EPS is calculated
by dividing net earnings by the weighted average number of common shares
outstanding during the year plus the incremental shares that would have been
outstanding upon the assumed exercise of eligible stock options, warrants and
the conversion of certain debenture issues. Included in EPS for the nine months
ended September 30, 2001 is a charge of $162,500 related to the beneficial
conversion feature of Cycomm's convertible preferred stock. Included in EPS for
the nine months ended September 30, 2000 is a gain on Cycomm's dissolution of
its Cycomm Secure Solutions, Inc. subsidiary (see Note 3: Discontinued
Operations).
NOTE 3: DISCONTINUED OPERATIONS
On June 21, 1999, Cycomm completed the sale of the assets of its Cycomm Secure
Solutions Inc. ("CSS") subsidiary. 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' 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 1999 net loss is 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.
NOTE 4: ACQUISITION EARN-OUT
In connection with the purchase price paid for Cycomm's acquisition of its
Cycomm Mobile Solutions subsidiary in 1996, Cycomm 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, 2001, 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. The settlement was amended to allow
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Cycomm until September 30, 2001 to pay the Seller $700,000 in full settlement of
the obligation. Prior to September 27, 2001, Cycomm had paid the seller $400,000
towards the settlement. On September 27, 2001, Cycomm issued 1,500,000 shares of
common stock to the Seller in full settlement of the remaining $300,000 of the
obligation.
In conjunction with the 1999 settlement and subsequent amendments, Cycomm 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. Additionally, in
consideration of the subsequent amendments to the settlement agreement, Cycomm
has issued 200,000 shares of common stock to the Seller.
NOTE 5: INVENTORIES
The following is a summary of inventories at September 30, 2001 and December 31,
2000:
September 30, December 31,
2001 2000
----- ----
Raw materials $921,308 $1,376,206
Work in process and sub-assemblies 196,375 133,106
Finished goods 15,093 224,974
Allowance for obsolete inventory (186,504) (127,227)
--------- ---------
$946,272 $1,607,059
Cycomm continually evaluates inventory for obsolescence or impairment in value.
The impairment loss is measured by comparing the carrying amount of the
inventory to its fair value with any excess of carrying value over fair value
reserved. Fair value is based on market prices where available, or on an
estimate of market value, or determined by various valuation techniques
including discounted cash flow.
NOTE 6: 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.
Revenue on the sales was recognized when the Pentium units were shipped to the
customers. As of December 31, 2000, Cycomm had completed the shipments of
Pentium units to customers, or had received waivers from customers in which they
forfeited their right to exchange 586's for Pentium units. For the nine months
ended September 30, 2000, Cycomm recognized revenue of $766,341 related to the
shipment of Pentium units to customers in exchange for the 586 units.
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NOTE 7: CAPITAL STOCK
Common Stock
On March 1, 2001, Cycomm raised capital through a private equity placement of
its common stock. In total, Cycomm issued 672,268 shares of common stock for
cash proceeds of $150,015.
On March 14, 2001, Cycomm issued 300,000 shares of its common stock in full
satisfaction of $52,500 in accrued interest due on Cycomm's $3,000,000 10%
convertible debentures. This amount represented unpaid interest for the period
of January 1, 2000 through March 31, 2000.
On April 12, 2001, Cycomm raised capital through a private equity placement of
its common stock. In total, Cycomm issued 1,000,000 shares of common stock
for cash proceeds of $250,000.
In the period from May 11, 2001 through August 13, 2001, Cycomm raised capital
through a series of related private equity placements of its common stock.
In total, Cycomm issued 2,740,000 shares of common stock for cash proceeds of
$497,637.
On May 15, 2001, Cycomm raised capital through a private equity placement of its
common stock. In total, Cycomm issued 2,000,000 shares of common stock for
cash proceeds of $497,980.
On June 29, 2001, Cycomm raised capital through a private equity placement of
its common stock. In total, Cycomm issued 1,176,471 shares of common stock
for cash proceeds of $182,000.
On August 1, 2001, Cycomm raised capital through a private equity placement of
its common stock. In total, Cycomm issued 1,000,000 shares of common stock
for cash proceeds of $135,000.
On August 21, 2001, Cycomm raised capital through a private equity placement of
its common stock. In total, Cycomm issued 857,143 shares of common stock for
cash proceeds of $150,000.
On August 23, 2001, Cycomm raised capital through a private equity placement of
its common stock. In total, Cycomm issued 550,000 shares of common stock for
cash proceeds of $75,000.
On September 18, 2001, Cycomm issued 500,000 shares of common stock upon the
exercise of non-employee stock options of $5,000. The stock options had been
granted as placement fees related to a previous financing.
On September 21, 2001, Cycomm raised capital through a private equity placement
of its common stock. In total, Cycomm issued 1,000,000 shares of common
stock for cash proceeds of $135,000.
On September 27, 2001, Cycomm issued 1,500,000 shares of its common stock to
fulfil a $300,000 obligation due to M3i Technologies Inc. and M3i Systems Inc.
(collectively "M3i") in full settlement of a lawsuit regarding the
interpretation of the earn-out agreement related to Cycomm's acquisition of its
Cycomm Mobile Solutions subsidiary. Cycomm also issued an additional 200,000
shares of common stock to M3i in consideration for previous amendments to the
settlement (See Note 4: Acquisition Earn Out).
Page 12
Preferred Stock
On January 5, 2001, Cycomm issued 6 shares of Series F convertible preferred
stock ("Series F preferred stock") for gross proceeds of $300,000. On January
23, 2001, Cycomm issued 7 shares of Series F preferred stock for gross proceeds
of $350,000. Net proceeds, after issuance costs for these transactions totaled
$611,500. In connection with the issuance of the Series F preferred stock,
4,000,000 shares of Cycomm's common stock were placed in an escrow account to be
available upon conversion of the Series F preferred stock. The Series F
preferred stock was convertible at the option of the holder into Cycomm common
stock. The Series F preferred stock had no voting rights. In the event of
liquidation of the Company, the Series F preferred stock had preferences
entitling the holders to the original face value of outstanding shares, plus
interest at 8% per annum. The conversion price was the lesser of $0.32, or a 25%
discount of the three-day average closing bid price prior to the date of
conversion. The shares had beneficial conversion rights of $162,500 on the date
of issuance. As of September 30, 2001, all of the shares of Series F preferred
stock and related accrued interest had been converted into 5,925,704 shares of
common stock.
As of September 30, 2001, 2 shares of Series B preferred stock are outstanding.
The Series B preferred stock was issued on February 26, 1998. It is convertible
at the option of the holder into Cycomm common stock. The conversion price is
the lesser of $2.38 or a 15% discount to the five-day average closing bid price
prior to the date of conversion. If the stock is trading at or below $1.50 per
share at the conversion date, Cycomm has the right to redeem the Series B
preferred shares at a premium of 18% over the conversion price. The Series B
preferred stock has no voting rights. In the event of liquidation of the
Company, the Series B preferred stock has preferences entitling the holders to
the original face value of outstanding shares, plus accrued dividends.
Page 13
NOTE 8: SEGMENT AND RELATED INFORMATION
Cycomm has one reporting segment, which sells wireless rugged computing products
and peripherals. Geographic region data on sales and the location of
identifiable assets is provided in the tables below.
Quarters Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
----- ----- ----- ----
Geographic Region Data
Sales
United States $2,548,858 $ 438,394 $4,387,661 $2,786,758
Canada 4,678 16,317 43,347 380,947
---------- --------- ---------- ----------
$2,553,536 $ 454,711 $4,431,009 $3,167,705
========== ========= ========== ==========
Loss from Operations
United States $ (546,250) $ (794,559) $(2,019,965) $(1,795,245)
Canada 81,479 (497,850) (712,894) (929,359)
---------- ----------- ----------- -----------
$(464,771) $(1,292,409) $(2,732,859) $(2,724,604)
========== ============ ============ ============
Identifiable Assets September 30, December 31,
2001 2000
----- ----
United States $ 1,607,880 $1,175,833
Canada 1,096,277 1,955,292
---------- ----------
$2,704,157 $3,131,125
========== ==========
NOTE 9: SUBSEQUENT EVENTS
On October 12, 2001, 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 issuance. In total, Cycomm issued 1,613,446 shares of common stock for
cash proceeds of $262,089.
On November 6, 2001, 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 issuance. In total, Cycomm issued 1,000,000 shares of common stock for
cash proceeds of $150,000.
Page 14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation.
Results of Continuing Operations
Quarters Ended September 30, 2001 and September 30, 2000
Revenues for the quarter ended September 30, 2001 were $2,553,536 as compared to
revenues of $454,711 for the quarter ended September 30, 2000. This increase is
primarily the result of sales to Montgomery County, Maryland in the quarter
ended September 30, 2001.
Cost of sales for the quarter ended September 30, 2000 was $1,787,355 as
compared to cost of sales of $607,927 for the prior period. Gross margins for
the quarter ended September 30, 2001 were 30%, as compared to (34%) in the
quarter ended September 30, 2000. The increase in gross margins is a result of
higher sales volumes, which create favorable overhead variances.
Operating expenses increased to $1,230,952 for the quarter ended September 30,
2001 as compared to $1,139,193 in the quarter ended September 30, 2000. Selling,
general and administrative expenses increased $72,087 to $1,015,534 for the
current quarter. The increase is a result of additions to our sales force and
increased marketing efforts. Research and development costs were $196,198 for
the quarter ended September 30, 2001, as compared to $158,904 in the quarter
ended September 30, 2000. Current quarter R&D efforts involved final testing of
the Pentium III PCMobiles, dual USB docking stations and high bright screen
solutions. Depreciation and amortization decreased to $19,220 for the quarter
ended September 30, 2001 as compared to $36,842 in the quarter ended September
30, 2000 as a result of assets reaching the end of their depreciable lives.
Interest expense for the quarter ended September 30, 2001 was $70,215 as
compared to $99,113 for the quarter ended September 30, 2000. The decrease is
the result of the renegotiation of the terms of Cycomm's revolving credit
facility. Prior to May 2001, Cycomm was paying interest of prime + 3% on a
minimum average loan balance of $2,000,000. As of May 1, 2001, Cycomm began
paying prime + 3% on a minimum loan balance of $1,000,000. The decrease in
interest charges paid on the revolving line of credit were partially offset by
an increase in finance changes paid to one of Cycomm's key suppliers in the
quarter ended September 30, 2001, as compared to finance charges paid to this
supplier in the quarter ended September 30, 2000.
Nine Months Ended September 30, 2001 and September 30, 2000
Revenues for the nine months ended September 30, 2001 were $4,431,009 as
compared to revenues of $3,167,705 for the nine months ended September 30, 2000.
The increase in sales is primarily the result sales to Montgomery County,
Maryland in the nine months ended September 30, 2001.
Cost of sales for the nine months ended September 30, 2000 was $3,503,222 as
compared to cost of sales of $2,579,573 for the prior period. Gross margins for
the quarter ended September 30, 2001 were 21%, as compared to 19% in the nine
months ended September 30, 2000. The increase in gross margins is a result of
higher sales volumes, which create favorable overhead variances.
Page 15
Operating expenses increased to $3,660,646 for the nine months ended September
30, 2001 as compared to $3,312,736 in the prior period. Selling, general and
administrative expenses increased $279,664 to $2,966,892 for the nine months
ended June 30, 2001. This increase is mainly the result of the expansion of
Cycomm's sales force from 4 people in the nine months ended September 30, 2000
to 10 people in the nine months ended September 30, 2001. Research and
development costs increased to $636,209 as compared to $533,546 in the prior
period. Cycomm increased its R&D expenditures in order to accelerate the release
of the Pentium III PCMobile and docking stations with dual USB ports.
Depreciation and amortization decreased to $57,545 for the nine months ended
September 30, 2001 as compared to $91,962 in the prior period.
Interest expense for the nine months ended September 30, 2001 was $282,546 as
compared to $307,655 for the nine months ended September 30, 2000. The decrease
is the result of the renegotiation of the terms of Cycomm's revolving credit
facility. Prior to May 2001, Cycomm was paying interest of prime + 3% on a
minimum average loan balance of $2,000,000. As of May 1, 2001, Cycomm began
paying prime + 3% on a minimum loan balance of $1,000,000. The decrease in
interest charges paid on the revolving line of credit were partially offset by
an increase in finance changes paid to one of Cycomm's key suppliers in the nine
months ended September 30, 2001, as compared to finance charges paid to this
supplier in the nine months ended September 30, 2000.
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 $0.04 per
share, for the nine months ended September 30, 2000.
Page 16
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, 2001, Cycomm had cash and cash equivalents of $162,221.
In the nine months ended September 30, 2001, cash used in operations was
$3,024,749, largely due to Cycomm's net loss from continuing operations of
$2,785,482. Inventories decreased by $600,787 and a vendor deposit was reduced
by $283,449, but these sources of cash were offset by increases in accounts
receivable of $547,348, increases in foreign taxes receivable of $191,051,
decreases in trade accounts payable of $474,009. Cash used in investing
activities in the nine months ended September 30, 2001 totaled $20,866. Cash
provided by financing activities was $2,906,726 for the nine months ended
September 30, 2001. Cycomm completed a series of private placements of its
common stock for net proceeds of $2,196,884, and completed a private placement
of Series F preferred stock for net proceeds of $611,500. Cycomm increased the
amounts drawn on its revolving line of credit by $104,113 during the nine months
ended September 30, 2001.
Cycomm's net working capital at September 30, 2001 was ($320,675) as compared to
($801,871) at December 31, 2000. In the nine months ended September 30, 2001,
Cycomm's current assets decreased by $393,308, and current liabilities decreased
by $874,504. Inventories decreased as Cycomm improved its inventory turnover
with greater sales volumes. This decrease was offset by the increase in accounts
receivable caused by greater sales volumes. The balance of Cycomm's revolving
credit facility, which is collateralized by accounts receivable and inventory,
increased as a result of the increase in accounts receivable. The decrease in
accounts payable is primarily the result of a supplier applying a $283,449
deposit against outstanding payables, and the recognition of $70,940 from the
settlement of a vendor obligation. Cycomm also repaid a $300,000 obligation
related to the earn-out portion of the acquisition of the Cycomm Mobile
Solutions subsidiary by issuing 1,500,000 shares of Cycomm common stock to the
seller (See Note 4: Acquisition Earn-Out).
Cycomm's auditors modified their report on Cycomm's annual report on form 10-KSB
to include an explanatory paragraph regarding the Company's ability to continue
as a going concern. 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 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
On May 24, 1999, Cycomm entered into a settlement agreement with the trustee in
bankruptcy of M3i Technologies, Inc., a Quebec corporation (the "Seller").
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 the Cycomm's purchase of its Cycomm Mobile Solutions
subsidiary. The settlement was amended to allow Cycomm until September 30, 2001
to pay the Seller $700,000 in full settlement of the obligation. Prior to
September 27, 2001, Cycomm had paid the seller $400,000 towards the settlement.
On September 27, 2001, Cycomm issued 1,500,000 shares of common stock to the
Seller in full settlement of the remaining $300,000 of the obligation.
On June 15, 1999, Cycomm entered into a settlement agreement with Infotech
International, a Florida corporation involved in the resale of Cycomm's PCMobile
computers. Cycomm was the plaintiff in a case alleging breach of contract and
conversion of funds. Cycomm agreed to a payment plan in which Infotech would pay
$592,959 plus interest and costs according to a fixed schedule prior to
September 15, 2000. Infotech paid $110,000 to Cycomm before defaulting on the
payment schedule. Infotech subsequently merged with another company to form
MobileTec International. On March 6, 2001, Cycomm agreed to a new settlement in
which MobileTec paid Cycomm $150,000 in cash, and Cycomm received 500,000 shares
of MobileTec common stock in full settlement of all obligations outstanding.
MobileTec is privately held, and Cycomm has assigned no value to the shares
received.
A lawsuit was instituted against Cycomm 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 our Cycomm Secure Solutions subsidiary. The lawsuit
alleged breach of contract in connection with the severance provisions of Mr.
Gangemi's employment agreement with Cycomm Secure Solutions. On January 24,
2001, Mr. Gangemi was awarded damages of $101,500 plus interest. Cycomm and Mr.
Gangemi entered into a settlement agreement under which Cycomm will pay Mr.
Gangemi a total of $94,000 plus interest in equal monthly installments.
On August 3, 2001, Cycomm filed a lawsuit in the Circuit Court for Fairfax
County, Virginia against Michael D. Perrine, former President of our Cycomm
Mobile Solutions subsidiary. The lawsuit alleges breach of contract, unjust
enrichment and breach of fiduciary duty. Cycomm is seeking damages of $10,887
plus interest and legal costs. On August 27, 2001, Mr. Perrine filed a lawsuit
in the United States District Court, Northern District of Texas against Cycomm.
Mr. Perrine's lawsuit against Cycomm alleges breach of contract and tortious
interference with existing contract and business relations. Mr. Perrine is
seeking damages of $75,608 plus interest and legal costs for the alleged breach
of contract, and is seeking punitive damages for the alleged tortious
interference with existing contract and business relations. As the litigation
is in the preliminary stages and the outcome is uncertain, Cycomm has not made
any accrual related to this claim.
Page 18
Item 2. Changes in Securities.
None.
Item 3. Default Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27. Financial Data Schedule
(b) Reports on Form 8-K:
None.
Page 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CYCOMM INTERNATIONAL INC.
Date: November __, 2001 /s/ Albert I. Hawk
-------------------------------
Albert I. Hawk
President and
Chief Executive Officer
Date: November __, 2001 /s/ Robert M. Hutton
------------------------------------
Robert M. Hutton
Vice President of Finance
Page 20
Appendix A to item 601(c) of Regulation S-K
Commercial and Industrial Companies
Article 5 of Regulation S-X
Item Number Item Description
5-02(1) 162,221 Cash and cash Items
5-02(2) 0 Marketable securities
5-02(3)(a)(1) 1,119,467 Notes and accounts receivable - trade
5-02(4) 70,000 Allowances for doubtful accounts
5-02(6) 946,272 Inventory
5-02(9) 2,510,089 Total current assets
5-02(13) 573,208 Property, plant and equipment
5-02(14) 379,140 Accumulated depreciation
5-02(18) 2,704,157 Total assets
5-02(21) 2,830,764 Total current liabilities
5-02(22) 779,633 Bonds, mortgages and similar debt
5-02(28) 0 Preferred stock - mandatory redemption
5-02(29) 105,000 Preferred stock - no mandatory redemption
5-02(30) 67,289,169 Common stock
5-02(31) 0 Other stockholders' equity
5-02(32) 2,704,157 Total liabilities and stockholders' equity
5-03(b)1(a) 4,431,009 Net sales of tangible products
5-03(b)1 4,431,009 Total revenues
5-03(b)2(a) 3,503,222 Cost of tangible goods sold
5-03(b)2 3,503,222 Total costs and expenses applicable to sales and
revenues
5-03(b)3 3,660,646 Other costs and expenses
5-03(b)5 0 Provisions for doubtful accounts and notes
5-03(b)8 282,546 Interest and amortization of debt discount
5-03(b)(10) (2,785,482) Income before taxes and other items
5-03(b)(11) 0 Income tax expenses
5-03(b)(14) (2,785,482) Income/loss continuing operations
5-03(b)(15) 0 Discontinued operations
5-03(b)(17) 0 Extraordinary items
5-03(b)(18) 0 Cumulative effect - changes in accounting
principles
5-03(b)(19) (2,785,482) Net income or loss
5-03(b)(20) (.07) Earnings per share - basic
5-03(b)(20) (.07) Earnings per share - diluted