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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-KSB
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _________________
Commission file number 1-11686
CYCOMM INTERNATIONAL INC.
(Name of Small Business Issuer in Its Charter)
Wyoming 54-1779046
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1420 Springhill Road, Suite 420, McLean, Virginia 22102
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number, including area code: (703) 903-9548
--------------
Securities registered under Section 12(b) of the Exchange Act:
Common Stock, without par value
(Title of Class)
Securities registered under Section 12(g) of the Exchange Act: Common Stock
without par value
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year. $5,122,320
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant on March 30, 2002 was approximately $7,454,386
(based on the closing sale price of $0.11 per share at which the stock was sold
on March 30, 2002).
The number of shares outstanding of the issuer's class of Common Stock, no par
value, as of March 30, 2002, 67,767,149 shares
Documents Incorporated by Reference
(1) Definitive Proxy Statement for 2001 Annual Meeting of Stockholders --- Part
III - Items 9, 10, 11 and 12.
Transitional Small Business Disclosure Format (check one):
Yes No X
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TABLE OF CONTENTS
PAGE
Part I
Item 1. Description of Business ............................... 3
Item 2. Description of Property................................ 11
Item 3. Legal Proceedings...................................... 12
Item 4. Submission of Matters to a Vote of Security Holders.... 13
Part II
Item 5. Market for Common Equity and Related Stockholder Matters 13
Item 6. Management's Discussion and Analysis or Plan of Operation 16
Item 7. Financial Statements................................... 19
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure........................... 19
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section16(a) of the Exchange Act....... 20
Item 10. Executive Compensation.................................. 20
Item 11. Security Ownership of Certain Beneficial Owners and
Management.............................................. 20
Item 12. Certain Relationships and Related Transactions.......... 20
Item 13. Exhibits and Reports on Form 8-K........................ 21
Signatures........................................................ 22
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Introduction
Cycomm International Inc. ("Cycomm" or "the Company") manufactures mobile,
rugged computers with wireless communication capabilities. Rugged computers are
designed to function in harsh environments such as extreme weather, shock,
moisture and vibration, and are sold primarily to police agencies, fire
departments, utilities, field services and other mobile workers. All of Cycomm's
products are designed for wireless use. Additionally, Cycomm offers a wireless
platform and solution for public safety and other markets for mobile workers.
Cycomm International Inc. is a Wyoming corporation with its principal
office located at 1420 Springhill Road, Suite 420, McLean, VA 22102. The
telephone number is (703) 903-9548.
History
Cycomm was formed on April 30, 1986 by combining two Ontario corporations.
Historically, Cycomm has operated under various names; however, it changed its
name to Cycomm International Inc. on February 20, 1992. Cycomm was originally
incorporated in Ontario, Canada. On October 31, 1995 Cycomm changed this status
and became incorporated in the State of Wyoming.
At its formation in 1986, Cycomm was involved in the manufacturing and
marketing of sonar activated marine buoys. In 1987, Cycomm became involved in
technologies related to telecommunication systems. In May 1990, Cycomm acquired
Cycomm Corporation, an entity engaged in the development and marketing of
specialized voice privacy communications products for the secure communications
market. In November 1993, Cycomm acquired Val-Comm, Inc., a company engaged in
performing classified government contracting for various communications
projects.
Cycomm continued to develop the voice privacy and encryption technologies
through 1996. Cycomm then made two strategic acquisitions that allowed it to
leverage existing technologies and to participate in the larger mobile and
secure computer market. Specifically, Cycomm acquired XL Computing Corporation
(later named Cycomm Secure Solutions Inc.) in March 1996 and XL Computing Canada
Inc. (later named Cycomm Mobile Solutions Inc.) in June 1996. Cycomm Secure
Solutions ("CSS") was engaged in the design, manufacture and marketing of secure
computer systems. Cycomm Mobile Solutions ("CMS") is engaged in the design,
manufacture and marketing of rugged mobile computer systems.
During 1997, Cycomm shifted its resources to expand its mobile and secure
computer products subsidiaries. Cycomm closed its voice privacy subsidiary and
concentrated working capital on its CMS and CSS subsidiaries. The market for the
Cycomm's mobile computers grew much faster than the market for secure computers.
Accordingly, Cycomm began a strategy resulting in a further shifting of
development resources to the mobile computing products.
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Cycomm's mobile computing division experienced significant growth in 1998.
The secure computing division, however, generated substantial losses for the
year ended December 31, 1998. Val-Comm, Cycomm's government contracting
subsidiary experienced immaterial losses for the year ended December 31, 1998.
In January 1999, the American Stock Exchange ("AMEX") notified Cycomm that
it no longer met the AMEX continued listing criteria, and that Cycomm would be
de-listed. Cycomm underwent a significant restructuring, selling its secure
computing division and its Val-Comm subsidiary in order to focus on the wireless
mobile computing market. Proceeds from the sales were used to repay debt and to
provide working capital for the mobile computing division.
Cycomm is expanding its line of wireless mobile computing products. In
addition to its rugged laptop, Cycomm is offering a modular computer that is
mounted on automobile dashboards, as well as rugged printers and other
peripherals. Cycomm believes it is uniquely positioned from its experience in
wireless secure communications, rugged manufacturing capabilities to meet the
needs of the mobile work force.
Locations
Executive Office. Cycomm's executive offices are located in McLean,
Virginia. Our management is based in this office, along with sales, marketing,
customer support, administration, financial, investment, and investor relations.
Cycomm Mobile Solutions Inc. This subsidiary has two facilities, one
located in Montreal, Quebec and the other in Melbourne, Florida. Design and
manufacturing is completed at the Montreal facility. The Melbourne, Florida
facility handles all repair and maintenance of Cycomm's products.
Product Description and Market
Ruggedized Computers
Cycomm manufactures a wireless ruggedized laptop computer line branded
under the name "PCMobile" that is specifically designed for the public safety
market. We currently market the PCMobile to police and fire departments and
other public safety agencies as well as utility, commercial and industrial
markets. The PCMobile is designed to withstand the extreme operating conditions
in which off-the-shelf products would fail or become inoperable. Cycomm's
products allow users to stay connected while operating away from the traditional
office environment.
The proprietary design and ruggedization of our product protects it from
extreme conditions, or at least minimizes their adverse impact, enabling it to
function in harsh environments. Computers are ruggedized by the selection and
mounting of components, the design, configuration and fabrication of enclosures
and electronics, and the application of special casings, seals and coatings. The
encasement and keyboard are built with tougher materials, and the unit is sealed
to protect the components against moisture, humidity, particles and temperature
extremes.
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The PCMobile is designed to withstand a three foot drop onto concrete, and
to operate in temperatures ranging from -22 to +140 degrees Fahrenheit. Our unit
can also withstand severe moisture and humidity conditions and the infiltration
by flying or wind-borne debris, such as sand, dust or other particles. In the
operational area, the hazards involve strong vibrations and shocks that result
from rough handling and transportation as well as electric interference or
internal thermal conditions.
Public Safety Market
A significant market for ruggedized computers is the public safety market.
New computer and ruggedization technologies have enabled public safety
organizations to advance into mobile computing as a way to increase
effectiveness and efficiency of the officers on the street. Cycomm's market
research indicates that in the United States, the addressable market represents
approximately 450,000 public safety vehicles in approximately 19,000 local
police, sheriff and special police agencies. This represents a market of over
$2.1 billion.
The growth in the U.S. public safety market for rugged mobile computers is
driven by several factors. There has been an increase in federal funding made
available to local public safety agencies through the COPS MORE and other
programs which are designed to increase the number of police on the street.
There is also an effort to integrate dispatch, field data and communications
systems. Also, there are currently more rugged mobile computer options,
including the PCMobile, available to public safety organizations. As public
safety agencies become more familiar and comfortable with the use and benefits
of new technology, management believes that the market will continue to grow.
Cycomm has begun selling its products to the utilities markets, and has
established sales channels in the field service and international markets.
Cycomm believes that these markets will become a large component of future
revenue.
Product Lines and Services
Cycomm manufactures and sells a complete line of rugged computers and
peripherals. Transmission options include both wired and a variety of wireless
modes including satellite and terrestrial links such as cellular packet data
("CDPD") and Specialized Mobile Radio ("SMR").
PCMobile. The PCMobile is a "ruggedized" mobile computer specifically
developed for optimal mobility, flexibility and performance under severe
operating conditions. It is ideal for public safety and field service. The
PCMobile is certified to be used almost anywhere, performing reliably in spite
of extreme conditions. The rugged magnesium housing makes the PCMobile spill and
shock-proof and preserves the unit's structural integrity even at high
temperatures. The light blue casing reflects rather than absorbs light, helping
to maintain the electronic circuitry at lower operating temperatures. The high
bright screen can be seen in direct sunlight. Rubber gaskets are fitted around
door openings and between case mating parts. All external connectors have been
rain-tested. The PCMobile also stands up to vibration and protects against
electrostatic discharge.
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Wireless Services
Cycomm's products are wireless communications devices with secure
capabilities. Cycomm offers a radio frequency ("RF") independent internet
protocol ("IP") wireless platform for public safety agencies with less than 50
vehicles. The wireless platform is a turn-key solution, which is ideal for small
agencies, which rarely possess the technical expertise to develop and build out
an entire automated system.
Repair Services
Cycomm Mobile Solutions Customer Service Group. Cycomm provides superior
on-site and return-to-factory product support for its PCMobiles through its
Customer Service Group. All Cycomm Field Technicians and Engineers are required
to complete "A+ Certification" and in-house factory training courses in order to
repair our products. We provide 24 hour toll-free technical support to ensure
our customers' problems are resolved quickly.
Cycomm currently has an installed base of over 5,500 PCMobiles, many of
which are reaching the end of the original warranty. We are aggressively
pursuing extended warranty contracts with our customers, and view this as a
valuable revenue source for our company.
Manufacturing and Supply
Cycomm's design, engineering and manufacturing facilities are located in
Montreal, Quebec, Canada. We design, engineer and test our rugged computers
in-house. We design our own printed circuit boards, which are manufactured by
Original Equipment Manufacturers ("OEM's"). Cycomm purchases its circuit boards
and other components from OEM's and tests and assembles the final products.
Cycomm uses surface mount technology ("SMT") to attach components to the
computer boards which enhances durability and ruggedness over conventional
mounting technology. In SMT, the components are glued to the board by means of a
chemical adhesion process and are then soldered instead of being inserted into
holes in the board. SMT is a more precise manufacturing technique and offers
better insulation against vibration and shock. Cycomm fabricates the prototype
of the board, tests it, purchases all the necessary components for the board and
then provides them in kit form to a specialized board fabricator for both pilot
and production runs.
Our approach to design and outsourcing differs from that followed by most
other rugged computer manufacturers which, we believe, purchase more commercial
off the shelf circuit boards and components, then attempt to "ruggedize" the
boards and components. Cycomm's approach to board fabrication allows it to
maintain better control of the quality and delivery of the boards, and to
produce a computer that can withstand more extreme operating conditions.
We anticipate that we will continue to outsource board fabrication. Given
the rapid changes in computer technology, Cycomm is not capable of keeping
abreast of the costly purchase requirements for new production equipment
necessary in the precise placement of electronic components on boards.
Outsourcing allows Cycomm's products to receive the benefit of the latest
technological developments at an acceptable cost. Once the boards are completed,
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they are tested by the fabricator and, upon satisfactory completion of such
tests, are shipped to Cycomm. When delivered, Cycomm further tests the complete
boards and other components and then assembles the computers. Apart from the
printed circuit boards, the components that Cycomm purchases from external
sources include chassis, wire harnesses, computer chips, keyboards, displays and
metal cases.
Cycomm does not assemble its products on a continuous mass-production
basis. Instead, our computers are usually assembled on a batch basis in which
products move irregularly from station to station. Because our production runs
rarely reach the volume levels of commercial production, there are no or few
economies of scale and related cost reductions that are achievable. Tests are
performed at various stages of the process according to the Cycomm's standards
or as requested by specific customers. Further testing of products is generally
accomplished at the end of the assembly process.
Generally, Cycomm is not a party to any formal written contract regarding
the deliveries of its hardware, supplies and components or their fabrication. It
usually purchases such items pursuant to written purchase orders of both
individual and blanket variety. Blanket purchase orders usually entail the
purchase of a larger amount of items at fixed prices for delivery and payment on
specific dates.
Cycomm relies on one board fabricator located within the same geographical
area as its design, engineering and assembly facilities. Certain components used
in our computers are obtained from sole sources, such as C-MAC and Performag.
Cycomm has also licensed its software from sole sources, including Microsoft and
Phoenix Technology. Cycomm has occasionally experienced delays in deliveries of
components and may experience similar problems in the future. In an attempt to
minimize such problems, Cycomm has developed and keeps an inventory of parts
that are generally more difficult to obtain. However, any interruption,
suspension or termination of component deliveries from our suppliers could have
a material adverse effect on business. Although management believes that in
nearly every case alternate sources of supply can be located, inevitably a
certain amount of time would be required to find substitutes. During any such
interruption in supplies, Cycomm may have to curtail the production and sale of
its computers for an indefinite period.
Cycomm has entered into licensing arrangements for certain hardware and
software elements contained in, or used in conjunction with, its computers.
These agreements are usually non-exclusive, provide for minimum fees and
royalties related to sales to be paid by Cycomm to the particular licenser, run
for a limited term and are subject to other terms, conditions and restrictions.
Cycomm receives its basic operating software system MS-DOS with various
Windows versions from Microsoft, Inc. pursuant to such licensing arrangements.
Cycomm also obtains from Phoenix Technologies, Inc. its BIOS (Basic Input/Output
System) pursuant to a separate license agreement. Under either arrangement,
Cycomm may modify such software and occasionally alter the BIOS for special
situations. The termination, suspension or curtailment of these or other
licensing arrangements to which Cycomm is a party may have a material adverse
impact on its business and operations.
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Although Cycomm relies on a limited number of companies in the manufacture
of our products, we believe that the specific parts employed in the
manufacturing process are available from a variety of suppliers. Further, we
believe that additional manufacturing sources could be found if necessary. We
believe that our relationships with our suppliers are satisfactory.
Marketing and Sales
Cycomm markets and sells its products through an internal sales force of
ten individuals, approximately fifty resellers in the United States and
approximately four resellers internationally. Our resellers cover approximately
all fifty states, including Washington, DC, and our foreign distributors operate
in ten countries, including England, France, Israel, Japan, Germany, South Korea
and Portugal.
Cycomm's relationship with its resellers is generally governed by a
written contract, terminable on 30 days' prior notice. These contracts usually
provide for non-exclusive territorial and product representation and discounts
off the list price on standard products based on the individual resellers annual
sales volume. Discounts on non-standard products and custom engineering are
usually subject to negotiation between the parties in accordance with the terms
of the contract and are priced on a case-by-case basis dependent upon the level
of effort in design, test, manufacture, warranty and support.
Cycomm's resellers typically purchase our products and then resell them to
their customers. These resellers accounted for an aggregate of approximately 67%
of the Company's sales. Cycomm has agreements with national resellers such as
Unisys, TRW, Ericcson, GE Capital, PRC/Litton, NTT, GTE and Matra, and
agreements with regional resellers such as ComPro Systems, Marathon Computers,
DM Data and IPI Grammtech. The loss of certain of such resellers may have a
material negative effect on Cycomm's business.
We promote our rugged computing products through the dissemination of
product literature, attendance and exhibition at trade shows and the
distribution of news releases on special developments to trade magazines and
newsletters to an extensive customer list. We also advertise in trade
periodicals. Management believes that, to date, most of Cycomm's sales leads
have been generated by trade shows, our web sites and word-of-mouth referrals.
In the public safety and government market, the sales cycle for Cycomm's
products usually involves a number of complicated steps and can take from three
months to one year. Sales to the public safety and government markets are
greatly influenced by special budgetary and spending factors pertinent to these
organizations.
Warranty and Customer Service
Cycomm usually provides a one to three year limited warranty on all its
products covering both parts and labor, however extended warranties may be
purchased by customers. Additionally, Cycomm offers a lifetime warranty on the
magnesium cases of the PCMobile. We repair or replace products that are
defective during the warranty period if proper usage and preventive maintenance
procedures have been followed by its customers. Repairs that are necessitated by
misuse of such products or are required beyond the warranty period are not
covered by its normal warranty.
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In cases of defective products, the customer typically returns them to
Cycomm's repair and maintenance facility. Service personnel replace or repair
the defective items and ship them back to the customer. Generally, all servicing
is done at our repair facility and customers are charged a fee for those service
items that are not covered by warranty. In addition to extended warranties, we
offer maintenance and service contracts.
Cycomm's customer service personnel answer technical questions from
customers and offer solutions to their specific applications problems. In
certain instances, customer service personnel receive and process orders for
product demonstrations, disseminate pricing information and accept purchase
orders for computers.
Reliance Upon Certain Customers
Cycomm is not dependent upon any single customer that purchases its
products. However, sales to one major customer comprised 46% of sales for the
year ended December 31, 2001. Sales to another major customer comprised 23% of
sales for the year ended December 31, 2000.
Research and Development
The markets served by Cycomm are characterized by rapid technological
advances, changes in customer requirements and frequent new product
introductions and enhancements. Our business requires substantial ongoing
research and development efforts and expenditures. Cycomm's future success will
depend in large measure on its ability to enhance its current products, and
develop and introduce new products that keep pace with technological
developments in response to evolving customer requirements. Cycomm's research
and development activities are primarily accomplished on an in-house basis,
sometimes supplemented by third-party subcontractors and consultants.
During the years ended December 31, 2001 and December 31, 2000, Cycomm
spent $893,583 and $784,296, respectively, on research and product development,
primarily for development of new products and products complementary to the
existing line of wireless rugged computer products. Cycomm anticipates
additional research and development expenditures on future development of
products.
Regulatory Approvals
Some of our products are subject to approval by the Federal Communications
Commission ("FCC") in the United States. The FCC requires that products not
exceed certain levels of radio wave emanation so that they will not interfere
with other electronic equipment. Furthermore, telephone products must meet
certain standards for interfacing into the telephone line, such as impedance
matching and isolation. All of Cycomm's products have received FCC approval for
both radiation and telephone connection.
Under certain circumstances, Cycomm is also subject to certain U.S. State
Department and U.S. Department of Commerce requirements involving prior
clearance of foreign sales. Such export control laws and regulations either ban
the sale of certain equipment to specified countries or require U.S.
manufacturers and others to obtain necessary federal government approvals and
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licenses prior to export. As a part of this process, Cycomm generally requires
its foreign distributors to provide documents that indicate that the equipment
is not being transferred to, or used by, unauthorized parties abroad.
Cycomm and its agents are also governed by the restrictions of the Foreign
Corrupt Practices Act of 1977, as amended ("FCPA"), which prohibits the promise
or payment of any money, remuneration or other items of value to foreign
government officials, public office holders, political parties and others with
regard to the obtaining or preserving of commercial contracts or orders. These
restrictions may hamper Cycomm in its marketing efforts abroad.
To date, Cycomm has been able to comply with all governmental requirements
without incurring significant costs. However, Cycomm cannot determine the extent
to which future earnings may be affected by new legislation or regulations
affecting its industry.
Competition
Cycomm competes in the wireless rugged computer business with a wide
variety of computer manufacturers and repackagers, some of which are larger,
better known and have more resources in finance, technology, manufacturing and
marketing. We compete based on customization capabilities, price, performance,
delivery and quality.
Typically, the companies that market and sell ruggedized computers are
repackagers having little or no input in the design of their electronics and the
selection and mounting of components on printed circuit boards. They usually
purchase the computer boards and sub-assemblies in an "as is" condition from
commercial manufacturers. The major contribution of the repackagers to the
protection of the computer is a tougher box in which the computer is housed.
However, in many cases even this stronger covering fails to shield the computer
from the penetration of rain, snow, fog, dust or other particles. In contrast,
Cycomm uses industrial-type or customized components for most of its computers
rather than strictly ordinary commercial components, which are used by many of
our competitors. In addition, Cycomm designs its boards, the computer's outer
case, keyboards, subassemblies and other elements in order to maximize the
ruggedness of its products, to furnish customization of electronics and software
to give the customer greater control over configuration and components.
In the public safety markets, Cycomm will often be engaged, directly or
indirectly, in the process of seeking competitive bid or negotiated contracts
with government departments and agencies. These government contracts are subject
to specific rules and regulations with which Cycomm must comply. However, Cycomm
is often one of only a few companies whose products meet the required
specifications designated by such customers.
In most cases, Cycomm tends to be the higher priced bidder for public
safety bids. The reasons for this situation are numerous. We design our
computers on an overall basis to assure their ruggedness and use in the most
demanding circumstances. Accordingly, we generally use more expensive components
than our competitors. These generally more expensive components consist of
industrial or higher-level commercial type instead of ordinary commercially
available parts. Cycom's computers are custom built to our customers'
specifications. Consequently, our products are more expensive, but generally
function at a higher level of performance and reliability than the products of
our competitors.
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For those applications in which harsh environmental and operational
conditions exist, customers are sometimes willing to pay higher prices,
especially where few, if any, other companies offer similar devices. In those
less demanding circumstances, Cycomm's products sell at a competitive
disadvantage and often are not purchased because the applications do not justify
its higher prices.
Environmental Issues
Compliance cost with environmental laws is not expected to materially
adversely affect the business of the Company.
Employees
We currently employ approximately 75 people, of whom approximately 20 are
employed in the United States and 55 are employed in Canada. Approximately 17
employees work in customer sales and service, 21 employees work in
administration, 14 employees work in research and development and 23 employees
work in manufacturing.
Cycomm's employees are not covered by a collective bargaining agreement or
represented by a labor union. Cycomm considers its relationship with its
employees to be satisfactory.
The design and manufacture of our equipment requires substantial technical
capabilities in many disparate disciplines from mechanics and computer science
to electronics and mathematics. While management believes that the capability
and experience of our technical employees compares favorably with other similar
manufacturers, there can be no assurance that we can retain existing employees
or attract and hire the highly capable technical employees necessary in the
future on terms deemed favorable to our company.
ITEM 2. DESCRIPTION OF PROPERTY
As of December 31, 2001, Cycomm leased the following facilities:
Approximate
Location Type of Facility Condition Square Ft.
-------- ---------------- --------- ----------
McLean, VA Executive Office Excellent 4,000
Melbourne, FL Repair and Service Excellent 6,200
Montreal, QB Manufacturing, R&D Excellent 10,300
and Distribution
Management believes that its manufacturing facility in Montreal, QB and
its repair facility in Melbourne, FL will meet its operational needs for the
foreseeable future. In the event that additional facilities are needed to
accommodate the continued growth in revenues and market share, facilities are
available in the immediate vicinity of the current locations. See the
accompanying financial statements for further discussion of leased facilities.
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ITEM 3. LEGAL PROCEEDINGS
On May 24, 1999, 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. The settlement was
amended to allow Cycomm until September 30, 2001 to pay the Seller $700,000 in
full settlement of the obligation. In 2000, Cycomm paid the seller $200,000 in
cash, and issued 400,000 shares of common stock with a value of $200,000. 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 settlement and subsequent amendments, Cycomm issued 200,000 warrants to
the Seller with a fair value on the date of issuance of $88,000. Additionally,
in consideration of the subsequent amendments to the settlement agreement,
Cycomm has issued 200,000 shares of common stock to the Seller. The fair value
of the stock issued in excess of the obligation satisfied in 2001 of $113,000 is
included in Cycomm's results of operations for the year ended December 31, 2001.
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 $105,100 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 April 3, 2002, Cycomm entered into a settlement agreement with Michael
D. Perrine, former president of the Company's Cycomm Mobile Solutions
subsidiary. Cycomm had filed a lawsuit against Mr. Perrine alleging breach of
contract, unjust enrichment and breach of fiduciary duty. Mr. Perrine filed a
lawsuit against Cycomm alleging breach of contract and tortuous interference
with existing contract and business relations. Under the terms of the
settlement, Cycomm issued 1,052,632 shares of Cycomm common stock with a value
of $100,000 to Mr. Perrine, and both parties agreed to dismiss their respective
lawsuits. The settlement is reflected in the results of operations for the year
ended December 31, 2001.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Cycomm did not submit any matters to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 2001.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Prior to May 5, 1999, Cycomm's common stock was traded on The American
Stock Exchange ("AMEX") under the symbol "CYI". As of May 5, 1999, the common
stock was quoted on the Over-the-Counter Bulletin Board ("OTCBB") under the
symbol "CYII".
The quotations set forth below reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not represent actual transactions. The
following tables set forth the reported high and low sales prices as reported by
the OTCBB for the periods indicated:
High Low
Year Ended December 31, 2001
First quarter $0.46 $0.21
Second quarter 0.34 0.20
Third quarter 0.27 0.15
Fourth quarter 0.29 0.14
Year Ended December 31, 2000
First quarter $3.56 $0.66
Second quarter 2.31 0.88
Third quarter 1.31 0.63
Fourth quarter 1.12 0.29
On March 30, 2002, as reported by Cycomm's transfer agent, shares of
common stock were held by 976 persons, based on the number of record holders,
including holders who are nominees for an undetermined number of beneficial
owners.
Cycomm has not paid any dividends and has no present intention of paying
dividends on the common stock in the foreseeable future as it intends to retain
any future earnings to fund operations and the continued development of its
business. The declaration and payment of dividends and the amount paid, if any,
is subject to the discretion of Cycomm's Board of Directors and will be
dependent on the earnings, financial condition, and capital requirements of
Cycomm and any other factors the Board of Directors may consider relevant.
Cycomm is required to pay dividends on its 10% convertible redeemable preferred
stock. Dividends on the preferred stock can be paid in either cash or in shares
of Cycomm's common stock. To date, all dividends have been paid in shares of
common stock.
Page 14
Recent Sales of Unregistered Securities
On August 23, 2001 we issued 550,000 shares of common stock that are
restricted under Regulation D of the Securities Exchange Act of 1934, to New
Range Management, for net proceeds of $75,000.
On September 21, 2001 we issued 1,000,000 shares of common stock that are
restricted under Regulation D of the Securities Exchange Act of 1934, to New
Range Management, for net proceeds of $135,000.
On September 21, 2001 we issued 200,000 shares of common stock that are
restricted under Regulation D of the Securities Exchange Act of 1934, to the
trustee in bankruptcy for M3i Technologies Inc. The shares were issued in
consideration of an extension to a legal settlement granted to Cycomm by the
trustee. The fair value of the shares on the date of the issuance was $38,000.
On September 21, 2001 we issued 1,500,000 shares of common stock that are
restricted under Regulation D of the Securities Exchange Act of 1934, to the
trustee in bankruptcy for M3i Technologies Inc. The shares were issued in full
settlement of a $300,000 obligation to the trustee related to a May 27, 1999
settlement agreement. The fair value of the shares on the date of the issuance
was $375,000.
On November 6, 2001 we issued 1,000,000 shares of common stock that are
restricted under Regulation D of the Securities Exchange Act of 1934, to New
Range Management, for net proceeds of $150,000.
On November 26, 2001 we issued 1,785,714 shares of common stock that are
restricted under Regulation D of the Securities Exchange Act of 1934, to Ursa
Holdings/Capital Inc., for net proceeds of $250,000.
On December 21, 2001 we issued 1,500,000 shares of common stock that are
restricted under Regulation D of the Securities Exchange Act of 1934, to Ursa
Holdings/Capital Inc., for net proceeds of $150,000.
On January 4, 2002 we issued 750,000 shares of common stock that are
restricted under Regulation D of the Securities Exchange Act of 1934, to Ursa
Holdings/Capital Inc., for net proceeds of $75,000.
On January 8, 2002 we issued 1,000,000 shares of common stock that are
restricted under Regulation D of the Securities Exchange Act of 1934, to New
Range Management, for net proceeds of $135,000.
On January 11, 2002 we issued 750,000 shares of common stock that are
restricted under Regulation D of the Securities Exchange Act of 1934, to Ursa
Holdings/Capital Inc., for net proceeds of $75,000.
Page 15
On January 23, 2002 we issued 1,500,000 shares of common stock that are
restricted under Regulation D of the Securities Exchange Act of 1934, to New
Range Management, for net proceeds of $150,000.
On January 31, 2002 we issued 1,428,572 shares of common stock that are
restricted under Regulation D of the Securities Exchange Act of 1934, to Ursa
Holdings/Capital Inc., for net proceeds of $200,000.
On February 13, 2002 we issued 1,500,000 shares of common stock that are
restricted under Regulation D of the Securities Exchange Act of 1934, to New
Range Management, for net proceeds of $195,000.
On March 7, 2002 we issued 2,750,000 shares of common stock that are
restricted under Regulation D of the Securities Exchange Act of 1934, to Ursa
Holdings/Capital Inc., for net proceeds of $250,000.
On March 26, 2002 we issued 1,764,706 shares of common stock that are
restricted under Regulation D of the Securities Exchange Act of 1934, to Ursa
Holdings/Capital Inc., for net proceeds of $150,000.
On April 5, 2002 we issued 1,052,632 shares of common stock that are
restricted under Regulation D of the Securities Exchange Act of 1934, to
Michael D. Perrine. The shares were issued in full settlement of a lawsuit.
The fair value of the shares on the date of issuance was $100,000,
All of the securities issued in the preceding transactions were sold in
reliance upon Rule 506 of Regulation D solely to accredited investors with whom
the Company had a pre-existing relationship.
Page 16
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
The following discussion should be read in conjunction with the
financial statements and related notes, which are included elsewhere in this
report. Statements made below which are not historical facts are forward-looking
statements. Forward-looking statements involve a number of risks and
uncertainties including, but not limited to, general economic conditions, our
ability to ability to execute our plans to increase revenues and market share,
competitive factors and other risk factors, not all of which are detailed here.
Results of Operations
The revenues for the year ended December 31, 2001 were $5,122,320, which
represents an increase of $1,690,191 from revenues of $3,432,129 for the prior
year. The increase is primarily the result of sales to Montgomery County,
Maryland, Henrico County, Virginia, Riverside County, California and Fairfax
County, Virginia in 2001. Sales to these four municipalities accounted for 79%
of Cycomm's 2001 revenues.
Cost of sales for the year ended December 31, 2001 was $4,754,662 as
compared to cost of sales of $3,461,560 for the prior year. Cycomm had gross
margins of 7% in the year ended December 31, 2001, as compared to gross margins
of (1%) in the prior year. The increase in gross margins is a result of
increased sales, which allows manufacturing overhead to be spread over more
products, lowering the cost of production per unit. Cycomm's cost of sales for
2001 includes warranty costs of $231,789, as compared to warranty costs of
$639,165 in 2000. Warranty costs for 2000 related primarily to the replacement
of defective hard drives from one of Cycomm's suppliers, and the correction of
an error with our real-time clocks in units with 586 processors.
Operating expenses increased to $5,056,845 for the year ended December 31,
2001 as compared to $4,708,284 for the prior year. Selling, general and
administrative ("SG&A") expenses were $4,087,059 for the year ended December 31,
2001, as compared to $3,835,302 for the year ended December 31, 2000. The
increase was primarily a result of the expansion of Cycomm's sales force from 4
people in the year ended December 31, 2000 to 10 people in the year ended
December 31, 2001.
Research and development expenses for the year ended December 31, 2001
were $893,583, an increase of $109,287 from the prior year. 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 $76,203 for the year ended
December 31, 2001, as compared to $88,686 in the prior year. The decrease is a
result of certain fixed assets reaching the end of their depreciable lives
during 2001.
Page 17
Interest expense for the year ended December 31, 2001 was $316,164 as
compared to $431,473 for the year ended December 31, 2000. The decrease is the
result of lower average debt balances during the year. The decrease in interest
charges paid on the revolving line of credit were partially offset by an
increase in finance charges paid to one of Cycomm's key suppliers in the year
ended December 31, 2001, as compared to finance charges paid to this supplier in
the year ended December 31, 2000.
Other income for the year ended December 31, 2001 was $46,370 as compared
to $4,585 in the prior year. Included in other income for the year ended
December 31, 2001 is a gain of $70,940 on the settlement of a vendor obligation,
offset by miscellaneous expenses.
Net loss from continuing operations was $4,799,724, or $0.11 per share,
for the year ended December 31, 2001 as compared to $5,143,095, or $0.20 per
share for the year ended December 31, 2000. The decrease in net loss from
continuing operations is the result of the factors discussed above.
Cycomm legally dissolved its Cycomm Secure Solutions ("CSS") subsidiary in
the year ended December 31, 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 year ended December 31, 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 December 31,
2001, Cycomm had cash and cash equivalents of $80,804.
In the year ended December 31, 2001, cash used in operations amounted to
$3,530,525, largely due to Cycomm's loss from continuing operations of
$4,799,724. Inventories decreased by $1,117,823, a vendor deposit was reduced by
$283,449 and accounts receivable decreased by $12,071, but these sources of cash
were offset by an increase in foreign taxes receivable of $44,465, a decrease in
accounts payable of $445,227 and a decrease in accrued liabilities of $27,481.
Cash used in investing activities was $26,452, related to the purchase of fixed
assets. Cash provided by financing activities was $3,336,671 for the year ended
December 31, 2001. Cycomm completed a series of private placements of its common
stock for net proceeds of $3,004,721, and completed a private placement of
Series F preferred stock for net proceeds of $611,500. Cycomm decreased the
amounts drawn on its revolving line of credit by $269,819 during the year ended
December 31, 2001.
Cycomm's net working capital at December 31, 2001 was ($1,400,154) as
compared to ($801,871) at December 31, 2000. In the year ended December 31,
2001, Cycomm's current assets decreased by $1,651,334, and current liabilities
decreased by $1,053,051. Inventories decreased as a result of improved inventory
turnover and lower purchasing levels in the fourth quarter of 2001. Accounts
receivable decreased as a result of improved collections and low sales volumes
in the fourth quarter of 2001. The balance of Cycomm's revolving credit
facility, which is collateralized by accounts receivable and inventory,
decreased as a result of the decreases in accounts receivable and inventory. The
decrease in accounts payable is the result of a supplier applying a $283,449
deposit against outstanding payables, the recognition of $70,940 from the
settlement of a vendor obligation and normal payments to suppliers. Cycomm also
Page 18
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.
As of December 31, 2001, Cycomm had certain contractual obligations
related to capital leases, operating leases and unconditional purchase
obligations. A summary of these obligations is provided below.
Contractual
Obligations Payments Due by Period
Total Less than 1 1-3 years 4 - 5 years After 5 years
year
Capital Lease
Obligations $28,958 $11,364 $17,594 --- ---
Operating Leases 1,896,086 371,548 1,143,223 381,315 ---
--------- ------- --------- ------- ----
Total Contractual
Cash
Obligations $1,925,044 $382,912 $1,160,817 $381,315 ---
========= ======== ========== ======== ====
The Company also has unconditional purchase obligations of $2,058,045 to
purchase inventory parts.
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 $2,000,000.
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. The amounts outstanding on the credit
facility were $405,701 and $675,520 as of December 31, 2001 and December 31,
2000, respectively. As of December 31, 2001, 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
$5,019. As of March 22, 2002, Cycomm was in compliance with the terms of its
loan agreement. The revolving credit facility was renewed and amended subsequent
to year end.
Cycomm's auditors modified their report to include an explanatory
paragraph regarding the Company's ability to continue as a going concern.
Management is addressing the going concern by further penetrating new markets
such as military, field service and utilities, implementing cost savings
initiatives, evaluating potential acquisitions and strategic partnerships, and
further capitalizing the Company through borrowings and private equity
placements.
In the next twelve months, Cycomm will continue expenditures related to
sales and marketing, in order to generate cash flows from operations. Cycomm
intends to expand its sales force and reseller network with an aggressive
recruiting campaign in order to expand its national and international sales
coverage. Cycomm will increase its visibility in the market through increased
print and electronic advertisements, and through attendance at national and
regional trade shows.
Management is not planning to use a substantial amount of its resources in
investing activities in the next twelve months. Our manufacturing facility
currently has adequate capacity and management does not anticipate any material
capital expenditures.
Page 19
In order to fund its marketing plans, Cycomm will need to generate cash
from financing activities, and increase sales in order to access its existing
line of credit. Cycomm has historically been able to satisfy its cash
requirements through private placements of its common stock and management
believes it will be able to raise funds in the future.
Cycomm is also exploring several strategic alternatives, such as potential
relationships and strategic transactions. Management is evaluating transactions
that would provide Cycomm with access to greater financial resources, and
strategic partnerships that would provide Cycomm with revenue from new markets.
Critical Accounting Policies
Cycomm's accounting policies are more fully described in Note 2 of Notes to
Consolidated Financial Statements. As disclosed in Note 2 of Notes to
Consolidated Financial Statements, the preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions about future events that affect the amounts
reported in the financial statements and accompanying notes. Future events and
their effects cannot be determined with absolute certainty. Therefore, the
determination of estimates requires the exercise of judgment. Actual results
inevitably will differ from those estimates, and such differences may be
material to the financial statements.
ITEM 7. FINANCIAL STATEMENTS
Cycomm's financial statements are located in a separate section of this Annual
Report on Form 10-KSB. See Item 13. Exhibits and Reports on Form 8-K and the
Financial Statements commencing on page F-1 of this Annual Report on Form
10-KSB.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
While Cycomm is exposed to changes in interest rates as a result of its
outstanding debt, Cycomm does not currently utilize any derivative financial
instruments related to its interest rate exposure. Total debt outstanding at
December 31, 2001 was $405,701, related to borrowings on a variable rate secured
line of credit. At this level of variable rate borrowing, a hypothetical 10%
increase in interest rates would have increased Cycomm's net loss by
approximately $15,000 for the year December 31, 2001.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Page 20
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by Item 9 relating to directors of the Company is
presented under the caption "Nomination and Election of Directors" of the
Company's definitive Proxy Statement for the 1997 Annual Meeting of Shareholders
to be filed with the Securities and Exchange Commission (the "Commission") no
later than April 30, 2002.
Section 16 Reports
The information required by this Item is present under the caption "Other
Matters -- Compliance with Section 16(a) of the Exchange Act" of the Company's
definitive Proxy Statement to be filed with the Commission no later than April
30, 2002.
ITEM 10. EXECUTIVE COMPENSATION
The information required by Item 10 is presented under the caption
"Executive Compensation" of the Company's definitive Proxy Statement to be filed
with the Commission no later than April 30, 2002.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 11 is present under the caption "Security
Ownership of Certain Beneficial Owners and Management" of the Company's
definitive Proxy Statement to be filed with the Commission no later than April
30, 2002.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 12 is presented under the caption
"Certain Transactions" of the Company's definitive Proxy Statement to be filed
with the Commission no later than April 30, 2002.
Page 21
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(1) See the financial statements of the Company and the report thereon
included in Item 7 of Part II of this Annual Report on Form 10-KSB.
No individual items included in accrued expenses on the balance
sheet was greater than 5% of the respective total on the balance
sheet.
(2) The following exhibits are filed as part of this Annual Report on Form
10-KSB and incorporated by reference herein to the extent possible.
Reference
1.1 Certificate of Incorporation (1)
1.2 Certificate of Incorporation on Change of Name (1)
1.3 Certificate of Continuance (1)
1.4 Amended Articles of Incorporation
10.6 Asset Purchase Agreement among and between (2)
9036-8028 Quebec, Inc., Cycomm International Inc.
and M3i Technologies, Inc. and M3i Systems Inc.
date June 21, 1996
10.7 Management Services Agreement - Albert I. Hawk (3)
10.11 Commercial Revolving Loan, Additional Loan and
Security Agreement by and among the Company
and American Commercial Finance Corp. (4)
10.12 Cycomm International Inc. 1997 Stock Option Plan (4)
10.13 Stock Purchase Agreement and Certificate of
Designation of Series B Convertible Redeemable
Preferred Stock (4)
23.1 Consent of Independent Auditors *
(1) Previously filed as an Exhibit to Form 20-F Registration Statement (as
amended), Form 20-F Annual Reports and Form 6-K Reports of Foreign
Issuer and incorporated by reference herein.
(2) Previously filed as an Exhibit to Form 8-K dated June 21, 1996 and
incorporated by reference herein
(3) Previously filed as an Exhibit to Form 10-KSB for the year ended May
31, 1996 dated September 12, 1996 and incorporated by reference herein.
(4) Previously filed as an Exhibit to Form 10-KSB for the year ended
December 31, 1997 dated March 31, 1998 and incorporated by reference
herein.
* Filed herewith
(b) Reports on Form 8-K:
None
Page 22
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
had duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CYCOMM INTERNATIONAL INC.
Date: April 15, 2002 By: /s/ Albert I. Hawk
------------------------
Albert I. Hawk
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Robert M. Hutton
-------------------------
Robert M. Hutton
Vice President of Finance
(Principal Accounting Officer)
In accordance with the requirements of the Exchange Act, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
By: /s/ Albert I. Hawk April 15, 2002
------------------------------------------
Albert I. Hawk,
Chief Executive Officer
By: /s/ James L. Bland III April 15, 2002
-------------------------------------------
James L. Bland III, President
By: /s/ Hubert Marleau April 15, 2002
-------------------------------------------
Hubert Marleau, Director
By: /s/ Steven Sparks April 15, 2002
-------------------------------------------
Steven Sparks, Director
Page 23
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form SB-2 No. 333-68572, Form S-8 No. 333-45882, Form SB-2 No. 333-54052 and
Form SB-2/A No. 333-37056) of Cycomm International Inc., of our report dated
March 22, 2002, with respect to the consolidated financial statements of
Cycomm International Inc. included in this Annual Report (Form 10-KSB) for
the year ended December 31, 2001.
McLean, Virginia
April 9, 2002
Page F-1
Cycomm International Inc. and Subsidiary
Index to Consolidated Financial Statements
For the Year Ended December 31, 2001,
and the Year Ended December 31, 2000
Report of Independent Auditors F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Cash Flows F-5
Consolidated Statements of Stockholders' Deficit F-6
Notes to Consolidated Financial Statements F-7
Page F-2
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Cycomm International Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of Cycomm
International Inc. and subsidiary as of December 31, 2001 and 2000 and the
related consolidated statements of operations, stockholders' deficit and cash
flows for each of the two years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Cycomm International Inc. and subsidiaries at December 31, 2001 and 2000 and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As more fully
described in Note 1, the Company has incurred recurring losses from operations
and has a working capital deficiency and an accumulated deficit. Further, the
Company was not in compliance with the terms of its debt agreements at December
31, 2001, and it likely that there will be instances of non-compliance with the
terms of its debt agreements in 2002. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that might result from the outcome of this
uncertainty.
/s/ Ernst & Young LLP
McLean, Virginia
March 22, 2002
Except for Note 18, as to which the date is
April 9, 2002
Page F-3
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2001 2000
----- ----
ASSETS
Current assets:
Cash and cash equivalents $80,804 $301,110
Accounts receivable, less allowance
for doubtful accounts of $50,000
and $50,000, respectively 510,048 522,119
Inventories, net of allowance for obsolete
inventory of $201,460 and $127,227,
respectively 489,236 1,607,059
Deposits with materials suppliers --- 283,449
Foreign taxes receivable 141,413 96,948
Prepaid expenses 30,562 78,192
Other assets --- 14,520
--------- ---------
Total current assets 1,252,063 2,903,397
Equipment, net 177,977 227,728
---------- ----------
Total assets $1,430,040 $3,131,125
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable - trade $950,955 $1,396,182
Accrued liabilities 1,247,469 1,296,382
Acquisition earn-out obligation --- 300,000
Dividends payable on preferred stock 38,466 28,466
Current portion of capital lease obligations 9,626 8,718
Revolving credit facility 405,701 675,520
--------- ---------
Total current liabilities 2,652,217 3,705,268
Capital lease obligations, less current portion 14,488 25,127
Commitments and contingencies (Note 4)
Stockholders' deficit:
Convertible preferred stock, $50,000 par
value, unlimited authorized shares, 2 and
11 shares issued and outstanding
at December 31, 2001 and December 31, 2000,
respectively 105,000 560,500
Common stock, no par value, unlimited
authorized shares, 56,323,871 issued
and outstanding at December 31, 2001,
and 34,145,982 issued and 30,145,982
outstanding at December 31, 2000 68,214,258 63,653,477
Notes receivable - stockholders --- (66,714)
Accumulated deficit (69,555,923) (64,746,533)
----------- -----------
Total stockholders' deficit (1,236,665) (599,270)
Total liabilities and stockholders' deficit
----------- -----------
$1,430,040 $3,131,125
=========== ===========
(See accompanying notes)
Page F-4
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended Year ended
December 31, December 31,
2001 2000
Sales $5,122,320 $3,432,129
Cost of sales 4,754,662 3,461,560
--------- ---------
Gross profit 367,658 (29,431)
Expenses:
Selling, general and administrative 4,087,059 3,835,302
Research and product development 893,583 784,296
Depreciation and amortization 76,203 88,686
--------- ----------
5,056,845 4,708,284
---------- ----------
Loss from Operations (4,689,187) (4,737,715)
Other Income (Expense)
Interest income 9,257 44,008
Interest expense (316,164) (431,473)
Loss on disposal of fixed assets --- (22,500)
Gain on legal settlement 150,000 ---
Other income 46,370 4,585
---------- ----------
(110,537) (405,380)
---------- ----------
Loss from Continuing Operations (4,799,724) (5,143,095)
Discontinued Operations:
Gain on dissolution of discontinued
operation: Cycomm Secure
Solutions, Inc. --- 1,119,273
--------- ----------
Net loss (4,799,724) (4,023,822)
Beneficial return on preferred shares (162,500) (117,500)
---------- ----------
Net loss attributable to common stockholders $(4,962,224) $(4,141,322)
=========== ===========
Earnings per share - basic and diluted
Loss per share from continuing operations $(0.11) $(0.20)
Gain per share on dissolution of Cycomm Secure
Solutions Inc. --- 0.04
Net loss per share attributable to beneficial
return on preferred shares (0.01) (0.00)
------ ------
Net loss per share attributable to common
stockholders $(0.12) $(0.16)
====== ======
Shares used in the calculation of basic and
diluted net loss per share 42,012,497 26,138,625
========== ==========
(See accompanying notes)
Page F-5
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended
December 31, December 31,
2001 2000
----- ----
Operating activities
Net loss $(4,799,724) $(5,143,095)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 76,203 88,686
Obsolete inventory 357,662 60,000
Acquisition earn-out settlement 113,000 ---
Loss on disposal of fixed assets --- 22,500
Change in operating assets and liabilities 722,334 (175,776)
---------- ----------
Cash used in operating activities (3,530,525) (5,147,685)
---------- ----------
Investing activities
Purchase of equipment (26,452) (47,698)
------- -------
Cash used in investing activities (26,452) (47,698)
------- -------
Financing activities
Issuance of common stock, net of issuance costs 3,004,721 5,364,999
Issuance of preferred stock, net of issuance costs 611,500 353,000
Net repayments under revolving credit facilities (269,819) (239,584)
Repayment of obligations under capital leases (9,731) (4,789)
--------- ---------
Cash provided by financing activities 3,336,671 5,473,626
--------- ---------
Increase (decrease) in cash and cash equivalents
during the year (220,306) 278,243
Cash and cash equivalents, beginning of year 301,110 22,867
------- --------
Cash and cash equivalents, end of year $80,804 $301,110
======= ========
(See accompanying notes)
Page F-6
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
Notes
PreferredPreferred Common Common Receivable Accumulated
Shares Stock Shares Stock Stockholders Deficit Total
Balance,
December
31,
1999 7 $296,250 16,807,696$54,315,402$(60,511)$(60,644,958)$(6,093,817)
Net
Loss --- --- --- --- --- (4,023,822) (4,023,822)
Issu-
ance
of
common
stock:
Sale of
common
stock --- --- 9,400,000 5,290,000 --- --- 5,290,000
Shares
issued
in
settle-
ment of
vendor
obliga-
tion --- --- 194,283 84,012 --- --- 84,012
Shares
issued in
settle-
ment
of
obliga-
tion
of
acquisi-
tion
earn-out --- --- 400,000 200,000 --- --- 200,000
Conversion
of
debenture
into
common
stock --- --- 1,034,904 517,452 --- --- 517,452
Exercise of
stock
options
and
warrants --- --- 345,833 74,999 --- --- 74,999
Issuance of
preferred
stock:
Conversion
of
debentures
into Series
E preferred
stock 30 3,000,000 --- --- --- --- 3,000,000
Issuance -
Series F
preferred
stock 9 353,000 --- --- --- --- 353,000
Conversion
of
preferred
stock (35)(3,206,250) 1,963,266 3,289,112 --- --- 82,862
Beneficial
conversion
rights
on
preferred
stock --- 117,500 --- (117,500) --- --- ---
Accrued
interest
on notes
receivable -
stock
holders --- --- --- --- (6,203) --- (6,203)
Dividends
on
preferred
stock --- --- --- --- --- (77,753) (77,753)
--- ----- -------- --------- ------- --------- -------
Balance,
December
31, 2000 11 $560,500 30,145,982 $63,653,477$(66,714)$(64,746,533) $(599,270)
==== ======== ========== =========== ======= =========== ========
Page F-7
Net Loss --- --- --- --- --- (4,799,724) (4,799,724)
Issuance
of common
stock:
Sale of
common
stock --- --- 17,752,185 2,999,721 --- --- 2,999,721
Shares
issued in
settle-
ment
of
interest
due --- --- 300,000 52,500 --- --- 52,500
Shares
issued in
settle-
ment
of
obligation
of
acquisi-
tion
earn-out --- --- 1,700,000 413,000 --- --- 413,000
Exercise of
stock
options --- --- 500,000 5,000 --- --- 5,000
Issuance of
preferred
stock:
Issuance -
Series F
preferred
stock 13 611,500 --- --- --- --- 611,500
Conversion
of
preferred
stock (22)(1,229,500) 5,925,704 1,253,060 --- --- 23,560
Beneficial
conversion
rights on
preferred
stock --- 162,500 --- (162,500) --- --- ---
Write-off
of notes
receivable -
stockholders
and
related
interest
receivable --- --- --- --- 66,714 --- 66,714
Dividends
on
preferred
stock --- --- --- --- --- (9,666) (9,666)
---- ------- --------- --------- ------ ------------ ------------
Balance,
December
31, 2001 2 $105,000 56,323,871$68,214,258 --- $(69,555,923) $(1,236,665)
==== ======= ========== ========== ====== ============ ===========
See accompanying notes to condensed consolidated financial statements.
Page F-8
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 1: NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Cycomm International Inc. ("Cycomm") is a manufacturer of wireless, ruggedized
mobile computers, branded under the name "PCMobile". Cycomm is based in McLean,
Virginia, with a manufacturing facility in Montreal, Quebec and a repair and
maintenance facility in Melbourne, Florida.
Our consolidated financial statements have been 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 $4.8 million for the year ended December 31,
2001 and as of that date had a working capital deficit of approximately $1.4
million and an accumulated deficit of $69.6 million. Further, we were not in
compliance with the terms of our debt agreements at December 31, 2001. These
factors raise substantial doubt about Cycomm's ability to continue as a going
concern.
Management has taken several steps towards addressing the going concern issue.
In 2001, we increased revenues and reduced net loss from operations, primarily
as a result of sales to our largest customer, Montgomery County, Maryland. At
the end of 2001, we began to sell products into the utilities markets. Looking
forward, we plan to enter the federal government, military, and field service
markets, offer a wider variety of products, and implement significant cost
reduction initiatives. 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 2001, we raised $3,611,221 in private
equity placements (See Note 10: Capital Stock). Subsequent to December 31, 2001,
Cycomm has raised $1,230,000 in private equity placements (See Note 18:
Subsequent Events for further detail).
These consolidated financial statements do not give effect to any adjustments
which would be necessary should Cycomm be unable to continue as a going concern
and 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 and may be required to seek protection under
the United States Bankruptcy Code.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of Cycomm and its
wholly-owned subsidiary after elimination of intercompany accounts and
transactions.
Cash and Cash Equivalents
Cycomm considers all short-term deposits with a maturity of three months or less
to be cash equivalents.
Page F-9
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out method. Market is determined by the replacement cost
method for raw materials and the net realizable value method for work in process
and sub-assemblies and finished goods.
Use of Estimates in the Preparation of Consolidated Financial Statements
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, accounts payable, accrued
liabilities, capital lease obligations, notes payable and convertible debentures
approximate their fair values.
Equipment and Depreciation
Equipment is carried at the lower of cost or market less accumulated
depreciation and amortization. Depreciation is calculated on a straight-line
basis over the estimated useful lives of the fixed assets as follows:
Equipment under capital lease Term of the respective lease
Furniture and fixtures 5 to 7 years
Research equipment 3 to 10 years
Computer equipment 3 to 7 years
Office equipment 5 to 7 years
Manufacturing equipment 3 to 7 years
Amortization of leasehold improvements is calculated on a straight-line basis
over the term of the respective lease.
Research and Product Development Costs
Research and product development costs are expensed as incurred.
Leases
Equipment acquired under leases which transfer substantially all of the benefits
of ownership to the lessee are recorded as the acquisition of assets and the
assumption of a related obligation. Under this method, assets are depreciated
over their expected useful lives, and obligations, including interest thereon,
are extinguished over the life of the lease.
All other leases are accounted for as operating leases wherein rental payments
are charged to operations as incurred.
Revenue Recognition
Product sales, less estimated returns and allowances, are recorded at the time
of shipment. Revenue is recognized when it meets four basic criteria: (1)
Page F-10
persuasive evidence of an arrangement exists, (2) delivery has occurred or
services rendered, (3) the fee is fixed and determinable, and (4) collectibility
is reasonably assured.
Product Warranty
Cycomm provides a three year warranty for its PCMobile computers which excludes
certain components. The rechargeable batteries and some hard drives are covered
by a one year warranty, while the magnesium casing of the PCMobile comes with a
limited lifetime warranty. A reserve is established to cover estimated warranty
costs during this period. Warranty reserves for the years ended December 31,
2001 and 2000 were $602,480 and $677,100 respectively, and are included in
accrued liabilities.
Advertising Costs
Cycomm expenses advertising costs as incurred. Such costs were insignificant in
2001 and 2000.
Foreign Currency Transactions
The Company considers the functional currency of its foreign subsidiary to be
the U.S. dollar. Exchange adjustments from foreign currency transactions are
recognized in income and were insignificant in 2001 and 2000.
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 2001 and 2000
are charges of $162,500 and $117,500 related to the beneficial conversion
feature of Cycomm's convertible preferred stock. For the years ended December
31, 2001 and 2000, the effect of the exercise of stock options, warrants and the
conversion of preferred stock and debentures would be anti-dilutive, and
therefore, diluted earnings (loss) per share is equal to basic earnings (loss)
per share as disclosed in the consolidated statements of operations.
Stock-based compensation
The provisions of Financial Accounting Standard No. 123, Accounting for
Stock-Based Compensation, allow companies to either expense the estimated fair
value of stock options or to continue their current practice but disclose the
pro forma effects on net income and earnings per share had the value of the
options been expensed. Cycomm has elected to continue its practice of
recognizing compensation expense for its stock option and warrant incentive
plans under Accounting Principles Board Statement No. 25 ("APB 25"), and to
provide the required pro forma information for stock options and warrants
granted after June 1, 1995. Under APB 25, compensation cost is the excess, if
any, of the quoted market price of the stock at the grant date, or other
measurement date, over the exercise price.
New accounting pronouncements
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets. Statement 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
Page F- 11
30, 2001. Statement 141 also includes guidance on the initial recognition and
measurement of goodwill and other intangible assets arising from business
combinations completed after June 30, 2001. Statement 142 prohibits the
amortization of goodwill and intangible assets with indefinite useful lives.
Statement 142 requires that these assets be reviewed for impairment at least
annually. Intangible assets with finite lives will continue to be amortized over
their estimated useful lives. Additionally, Statement 142 requires that goodwill
included in the carrying value of equity method investments no longer be
amortized.
The Company will apply Statement 142 beginning in the first quarter of 2002.
Application of the nonamortization and impairment provisions of Statement 142 is
not anticipated to be significant.
Reclassification
Certain items previously reported in specific financial statement captions have
been reclassified to conform with the 2000 presentation.
NOTE 3: DISCONTINUED OPERATIONS
On June 21, 1999, Cycomm completed the sale of the assets of its Cycomm Secure
Solutions Inc. ("CSS") subsidiary. 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. 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.
In the period from 1996 through 1998, Cycomm paid $1,354,796 of contingent
consideration to the seller, which was paid in 444,862 shares of common stock.
In September of 1998, 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 Cycomm until September 30, 2001 to pay the Seller $700,000 in
full settlement of the obligation. In 2000, Cycomm paid the seller $200,000 in
cash, and issued 400,000 shares of common stock with a value of $200,000. 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 a 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. Cycomm recognized
$113,000 in additional expense during 2001 related to the issuance of common
stock in settlement of the obligation.
Page F- 12
NOTE 5: INVENTORIES
Inventories by categories are as follows:
December 31, December 31,
2001 2000
----- ----
Raw materials $645,286 $1,376,206
Work in process and sub-assemblies 35,966 133,106
Finished goods 9,444 224,974
Allowance for obsolete inventory (201,460) (127,227)
--------- ---------
$489,236 $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.
NOTE 6: EQUIPMENT
Equipment and accumulated depreciation and amortization by categories are as
follows:
Accumulated
depreciation
and Net book
Cost amortization value
December 31, 2001
Equipment under capital leases $14,754 $11,177 $3,577
Furniture and fixtures 35,788 27,842 7,946
Research equipment 63,276 31,717 31,559
Computer equipment 177,571 131,498 46,073
Office equipment 86,488 59,298 27,190
Manufacturing equipment 132,474 81,821 50,653
Leasehold improvements 74,650 63,671 10,979
------ ------ ------
585,001 407,024 177,977
======= ======= =======
December 31, 2000
Equipment under capital leases $14,754 $8,494 $6,260
Furniture and fixtures 30,177 18,954 11,223
Research equipment 47,251 21,071 26,180
Computer equipment 163,704 101,251 62,453
Office equipment 80,835 58,847 21,988
Manufacturing equipment 142,783 61,375 81,408
Leasehold improvements 69,958 51,742 18,216
------ ------ ------
$549,462 $321,734 $227,728
======== ======== ========
Depreciation and amortization expense for the years ended December 31, 2001 and
2000 was $76,203 and $88,686, respectively.
Page F- 13
NOTE 7: NOTES PAYABLE AND CONVERTIBLE DEBENTURES
Cycomm has a revolving credit facility from a lender under which Cycomm may, at
its option, borrow and repay amounts up to a maximum of $2,000,000. 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. The amounts outstanding on the credit facility were
$405,701 and $675,520 as of December 31, 2001 and December 31, 2000,
respectively. As of December 31, 2001, 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
$5,019. As of March 22, 2002, Cycomm was in compliance with the terms of its
loan agreement. The revolving credit facility was renewed and amended subsequent
to year end (See Note 18: Subsequent Events).
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 was convertible at any time into common
stock at the option of the holder. The conversion price was 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 could not be converted for less than
$2.00 per share. The Series E preferred stock accrued dividends at 7% per annum,
which could be paid in cash or in common stock at the option of the Company. The
Series E preferred stock was redeemable at Cycomm's option at a price equal to
conversion price on the date of redemption. The Series E preferred stock had no
mandatory redemption provisions. The Series E preferred stock was converted into
1,500,000 shares of Cycomm's common stock during the year ended December 31,
2000. See Note 10: 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 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.
NOTE 8: 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.
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
Page F- 14
the customer with 15 additional PCMobile units at no additional cost. As a
result of this settlement, Cycomm recognized previously deferred revenue of
$770,122 in the year ended December 31, 2000.
NOTE 9: COMMITMENTS AND CONTINGENCIES
Lease Commitments
Cycomm leases equipment, included in fixed assets, under leases which are
classified as capital leases. Total payments under these capital leases are due
in monthly installments with imputed interest in a range of 10.3% to 12.7%
through December 31, 2006. Cycomm occupies office space at various locations
under non-cancellable operating leases. Certain leases contain escalation
clauses and require the Company to pay its share of any increase in operating
expenses and real estate tax. Future minimum lease payments under Cycomm's
capital and non-cancellable operating leases are as follows:
Capital Operating
Year ending December 31, Leases Leases
2002 $11,364 $371,548
2003 8,071 373,098
2004 6,256 381,000
2005 3,267 389,125
2006 --- 218,819
Thereafter --- 162,496
------ ----------
28,958 $1,896,086
====== ==========
Less: amount representing interest on
capital leases 4,844
-----
Present value of future minimum capital
lease payments $24,114
=======
Total rental expense under the various operating leases for continuing
operations amounted to $364,237 and $275,459 for the years ended December 31,
2001 and 2000, respectively.
Purchase Commitments
As of December 31, 2001, the Company had purchase commitments of $2.1 million to
purchase inventory parts.
Contingencies
Cycomm is engaged in ordinary and routine litigation incidental to its business.
Management does not anticipate that any amounts which it may be required to pay
by reason thereof will have a material effect on Cycomm's financial position or
results of operation.
NOTE 10: 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.
Page F-15
Common Stock
During 2000, Cycomm raised capital through 7 separate private equity placements
of its common stock. The stock was issued at a discount to the market price on
the date of the issuance. In total, the Company issued 9,400,000 shares of
common stock for gross proceeds of $5,620,000. Cash proceeds, after commissions
and issue costs were $5,290,000. In conjunction with these private placements,
the Company issued 6,919,999 warrants with an exercise price of $0.75.
In 2000, Cycomm issued 194,283 shares in full settlement of a vendor obligation
of $84,012.
Cycomm issued 145,833 shares of common stock upon the exercise of non-employee
stock options for proceeds of $74,999.
During 2001, Cycomm raised capital through 14 separate private equity placements
of its common stock. The stock was issued at a discount to the market price on
the date of the issuance. In total, the Company issued 17,752,185 shares of
common stock for gross proceeds of $3,133,084. Cash proceeds, after commissions
and issue costs were $2,999,721. In conjunction with these private placements,
the Company issued 250,000 warrants with an exercise price of $0.25 per share,
411,000 warrants with an exercise price of $0.20 per share, 176,471 warrants
with an exercise price of $0.17 per share and 255,000 warrants with an exercise
price of $0.15 per share.
Included in the 14 separate private equity placements is the sale of 4,000,000
shares placed in escrow in conjunction with the issuance of Cycomm's Series F
Convertible Preferred Stock (see Preferred Stock section below).
Convertible preferred shares and related accrued dividends were converted into
5,925,704 and 1,963,266 shares of common stock for the years ended December 31,
2001 and 2000, respectively. Convertible debentures and related accrued interest
were converted into 1,034,904 shares of common stock during the year ended
December 31, 2000. No convertible debentures were converted into common stock
during 2001.
Cycomm entered into a settlement with M3i Technologies Inc. and M3i Systems Inc.
(collectively "M3i") over a lawsuit regarding the interpretation of the earn-out
agreement related to Cycomm's acquisition of its Cycomm Mobile Solutions
subsidiary. The case was settled for $700,000, of which Cycomm paid $500,000 in
common stock. In 2000, Cycomm issued 400,000 shares of common stock with a value
of $200,000 to M3i. In 2001, Cycomm issued 1,700,000 shares of common stock to
M3i in settlement of the remaining $300,000 obligation. On the date of
settlement, the stock had a value of $413,000. Cycomm also issued an additional
200,000 shares of common stock to M3i Technologies and M3i Systems upon their
exercise of stock options issued under the settlement.
In 2001, Cycomm issued 300,000 shares in full settlement of $52,500 of accrued
interest.
In 2001, Cycomm issued 500,000 shares of common stock upon the exercise of
non-employee stock options for proceeds of $5,000.
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
Page F-16
per share for net proceeds of $900,000. The Series B preferred stock 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 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. The Series B
preferred stock has no voting rights. In the event of the 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. No shares
of Series B preferred stock were converted during 2001. As of December 31, 2001,
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.
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 was
convertible at the option of the holder into common stock. As of December 31,
2000, 6 shares of Series C preferred stock were converted into 541,365 shares of
common stock. As of December 31, 2001, no shares of Series C preferred stock are
outstanding.
On March 31, 2000, Cycomm issued 30 shares of Series E convertible redeemable
preferred stock ("Series E preferred stock") in conjunction with the conversion
of the $3,000,000 7% convertible debentures due May 1, 2000 (See Note 7: Notes
Payable and Convertible Debentures). In the year ended December 31, 2000, 30
shares of Series E preferred stock were converted into 1,500,000 shares of
Cycomm's common stock. Accrued dividends of $63,017 were paid with the issuance
of 31,507 shares of Cycomm's common stock. As of December 31, 2000, no shares of
Series E preferred stock were outstanding.
On December 29, 2000, Cycomm issued 9 shares of Series F convertible preferred
stock ("Series F preferred stock") with a conversion value of $50,000 per share
for net proceeds of $353,000. In connection with the issuance of the Series F
preferred stock, Cycomm placed 4,000,000 shares of its common stock in an escrow
account to be available upon conversion of the Series F preferred stock. Cycomm
issued 13 additional shares of Series F preferred stock in January 2001 for net
proceeds of $611,500. The Series F preferred stock was convertible at the option
of the holder into shares of Cycomm common stock. The Series F preferred stock
had no voting rights. In the event of the liquidation of the Company, the Series
F preferred stock had preferences entitling the holders to the original face
value of outstanding shares, plus yield of 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. In the year ended December 31, 2001, 22
shares of Series F preferred stock and related accrued dividends were converted
into 5,925,704 shares of common stock. As of December 31, 2001, no shares of
Series F preferred stock were outstanding.
Page F-17
NOTE 11: STOCK OPTIONS AND WARRANTS
Stock Options
Cycomm has historically granted non-qualified stock options to directors,
officers, employees and other parties which generally become exercisable
immediately and have expiration terms ranging from two to five years. The
options are granted at an exercise price that equals the fair market value on
the date each option is granted.
In November 1997, Cycomm adopted the 1997 Stock Option Plan ("1997 Plan") under
which a maximum aggregate of 1,000,000 shares were reserved for grant to all
eligible employees of the Company. The stock options granted under the 1997 Plan
are exercisable at the fair market value of the common stock on the date of
grant with 25% vesting on each of the four successive anniversary dates from the
date of grant. The stock options have a term of ten years. No options were
issued under this plan in 2000 or 2001. As of December 31, 2000, 530,000 options
are available under the 1997 Plan.
During the year ended December 31, 2001, Cycomm issued 205,000 options to its
officers and employees at $0.29 per share, which approximated the market price
on the date the options were granted. Cycomm issued 140,000 options at $0.81 per
share, which was higher than the market price on the date the options were
granted. Cycomm issued 5,000 options to an employee at $0.375, which was higher
than the market price on the date the options were granted. Cycomm issued
500,000 options with an exercise price of $0.01 per share in conjunction with a
private placement of its common stock. These options were not covered under the
1997 plan.
During 2000, Cycomm issued 6,919,999 warrants to purchase its common stock for
services related to the private placement of equity securities with exercise
prices within a range of $0.40 to $2.25.
On January 24, 2000, Cycomm issued 500,000 warrants to the Chief Executive
Officer, and 500,000 warrants to a member of the Board of Directors at $0.75 per
share related to their participation in a private placement of common stock.
In conjunction with the private placements in 2001, Cycomm issued 2,178,159
warrants to purchase common stock with exercise prices in the range of $0.15 to
$0.25 per share.
Page F-18
The following table summarizes the activity in common shares subject to options
and warrants for the relevant periods ended December 31, 2001:
Weighted Weighted
Average Average
Exercise Exercise
Options Price Warrants Price
Balance,
December 31, 1999 3,731,209 $0.44 350,000 $1.10
========= =========
Granted --- --- 6,919,999 $0.75
Exercised (145,833) $0.51 (200,000) $0.00
Terminated (50,000) $6.24 (150,000) $2.58
--------- ---------
Balance,
December 31, 2000 3,535,376 $1.31 6,919,999 $0.75
========= =========
Granted 850,000 $0.21 2,178,159 $0.39
Exercised (500,000) $0.01 --- ---
Terminated (1,020,000) $2.31 (33,333) 0.75
========== =========
Balance,
December 31, 2001 2,865,376 $0.86 9,064,825 $0.60
========== =========
Options were exercisable with respect to 2,595,909 shares at December 31, 2001.
The weighted average exercise price of options exercisable at December 31, 2001
was $0.90. The weighted average contractual life of options outstanding as of
December 31, 2001 was 2.77 years and the exercise price ranged from $0.29 to
$2.50.
Warrants were exercisable with respect to 9,064,830 shares at December 31, 2001.
The weighted average exercise price of options exercisable at December 31, 2001
was $0.60. The weighted average contractual life of warrants outstanding as of
December 31, 2001 was 2.89 years and the exercise price ranged from $0.15 to
$2.25.
Had compensation expense for Cycomm's stock options granted after June 1, 1995
been determined based on the fair value at the grant dates for awards under
those plans, the Company's pro forma net loss and net loss per share for the
reported periods would have been as follows:
Year Ended Year Ended
December 31, 2001 December 31, 2000
Net loss attributable to common $(4,962,224) $(4,141,322)
stockholders
Compensation expense (131,607) (464,273)
---------- ---------
Pro forma net loss attributable to
common stockholders $(5,093,831) $(4,605,595)
=========== ===========
Pro forma net loss per share
attributable to common stockholders $(0.12) $(0.18)
======= =======
The effects on pro forma net loss per share of expensing the estimated fair
value of stock options and warrants are not necessarily representative of the
effects on reported net income for future years due to such things as the
vesting period of the stock options and warrants and the potential for issuance
of additional stock options and warrants in future years.
Page F-19
The fair value of options and warrants granted after June 1, 1995, used as a
basis for the above pro forma disclosures, was estimated at the date of grant
using the Black-Scholes option pricing model. The option and warrant pricing
assumptions for 2001 include a dividend yield of 0%, an expected volatility of
1.208 and a risk free interest rate of 5.50% over the life of the options. The
expected life of the options was 4 years for 2001. The option and warrant
pricing assumptions for 2000 include a dividend yield of 0%, an expected
volatility of 1.512 and a risk free interest rate of 6.50% over the life of the
options. The expected life of the options was 5.00 years for 1999.
The weighted average fair values and exercise prices are as follows:
Year Ended Year Ended
December 31, 2001 December 31, 2000
Weighted-average fair
value per option $0.18 ---
granted
Weighted-average fair
value per warrant $0.14 $0.69
granted
For the years ended December 31, 2001 and 2000, the Company recognized no
compensation expense related to stock options issued to non-employees.
Page F-20
NOTE 12: SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the relevant periods are summarized as
follows:
Year ended Year ended
December 31, December 31,
2001 2000
----- ----
Cash flow effects of changes in operating
assets and liabilities, net of
acquisitions:
Accounts receivable $12,071 $672,449
Notes receivable (Stockholders) 66,714 ---
Inventories 760,161 (823,002)
Prepaid expenses and other current assets 17,685 134,433
Deposits with materials suppliers 283,449 ---
Accounts payable, accrued liabilities and (417,746) 610,466
other current liabilities
Deferred revenue --- (770,122)
-------- ---------
$722,334 $(175,776)
======== =========
Non-cash investing and financing activities:
Conversion of convertible debentures to --- $517,452
common stock
Conversion of preferred stock and accrued
dividends to common stock $978,060 $3,289,412
Settlement of accrued liabilities $352,500 ---
Cash paid during the period:
Interest paid $313,042 $396,070
Income taxes paid --- ---
Page F-21
NOTE 13: INCOME TAXES
Cycomm accounts for income taxes under the liability method required by FAS
Statement No. 109, "Accounting for Income Taxes". Deferred income taxes reflect
the net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. For consolidated financial statement purposes, a valuation
allowance has been recognized to offset certain deferred tax assets for which
realization is uncertain due to Cycomm's history of losses. Cycomm's ability to
use these losses in future periods may also be limited by certain provisions of
the Internal Revenue Code. Significant components of Cycomm's deferred tax
liabilities and assets as of December 31, 2001 and 2000 are as follows:
December 31, December 31,
2001 2000
---- ----
Deferred tax assets
Non-employee stock warrants 268,474 278,249
Book over tax depreciation and amortization 327,008 321,363
Net operating loss carryforward 21,300,107 17,096,895
Nondeductible expense and reserves 805,557 824,399
----------- -----------
Total deferred tax assets 22,701,146 18,520,906
Valuation allowance for deferred tax assets (22,701,146) (18,520,906)
----------- -----------
Net deferred tax asset $ --- $ ---
=========== ===========
There was no provision for income taxes in the years ended December 31, 2001 and
2000 as Cycomm incurred losses in those years and a valuation allowance was
provided for the increase in the deferred tax asset.
A reconciliation between federal statutory income tax rates and the effective
tax rate of Cycomm at December 31 is as follows:
December 31, December 31,
2001 2000
----- ----
US federal statutory benefit rate (34.0)% (35.0)%
US state tax benefit, net of federal income (3.6) (6.7)
tax effect
Permanent Items 0.1 (4.7)
Change in valuation allowance 37.5 46.4
---- ----
Effective rate on operating loss --- ---
==== ====
Cycomm has US net operating loss carryfowards available at December 31, 2001 of
approximately $47.3 million for US tax purposes to offset income in future
years. These carryfowards will expire in the years 2016 through 2021, unless
previously utilized. The tax attributes identified above may be subject to
limitation arising from changes of ownership over the three year statutory
testing period. Cycomm has Canadian net operating loss carryforwards available
at December 31, 2001 of approximately $6.7 million; these carryforwards will
expire in the years 2004 and 2008 if not used.
In addition, Cycomm has future deductible research and development costs for
Canadian federal tax purposes of $0.9 million. These costs have an indefinite
carryover period.
Page F-22
NOTE 14: RELATED PARTY TRANSACTIONS
In April 1997, Cycomm loaned certain officers, directors and employees an
aggregate of $184,000 in order to purchase 92,000 shares of the Company's common
stock in a private transaction. The loans were secured by the common stock,
accrued interest at 5.9% and were due April 30, 2002. As of December 31, 2001,
principal of $127,520 was outstanding, however, as a result of the decrease in
value of the underlying stock, Cycomm has recorded a valuation allowance against
the entire balance. The loans are reflected as contra equity accounts in the
accompanying balance sheet, and have values of $0 and $66,714 for the years
ended December 31, 2001 and December 31, 2000, respectively.
Cycomm subleases office space from Corstone Corporation, which previously
employed Cycomm's Chief Executive Officer and former Chief Financial Officer.
Corstone is a merchant banking firm that provided consulting services to Cycomm
prior to 1998. These consulting services included financial, legal and
administrative services. Consulting fees of $17,500 were paid to Corstone in
2001. No consulting fees were paid to Corstone for the year ended December 31,
2000. In the year ended December 31, 2001, Cycomm paid $168,509 in rent and
office expenses to Corstone. The Chief Executive Officer and former Chief
Financial Officer have no direct or indirect ownership interest in Corstone
Corporation.
On September 20, 1999, Cycomm received an investment of $500,000 from Stephen
Sparks in the form of a convertible debenture. On March 31, 2000, the
convertible debenture and related accrued interest were converted into 1,034,904
shares of Cycomm's common stock. (See Note 6: Notes Payable and Convertible
Debentures). In connection with this investment, Mr. Sparks was appointed to
Cycomm's Board of Directors. Mr. Sparks owns several businesses in the
Washington, DC area including a temporary employee staffing company. Cycomm
occasionally uses Mr. Sparks' company for temporary employee staffing, and is
charged standard rates for their services.
Cycomm has an employee staff leasing agreement with ProLease, a company in which
Cycomm's Chief Executive Officer holds a minority ownership interest. Under this
agreement, ProLease is the employer of record for Cycomm's U.S. employees and
handles payroll processing, payroll tax and benefit administration, and other
human resources functions. Cycomm's U.S. employees are eligible to participate
in ProLease's 401(K) plans and health insurance benefits packages. Cycomm is
charged standard rates for ProLease's services.
In January 2000, Cycomm raised capital through a private equity placement of
common stock with a group called Special Situations Funds LLC ("SSF"). In
connection with this private placement, some of our officers and directors
invested money in Cycomm at the same terms offered to SSF. The amounts invested
by each officer and director are listed below:
Name of Shares of Common
Officer or Director Amount Invested Stock Received Warrants Received
Albert I. Hawk $250,000 500,000 591,490
Stephen Sparks 250,000 500,000 591,490
Palos Capital 250,000 500,000 ---
Corp(1)
NOTE 15: SEGMENT AND RELATED INFORMATION
In 1998, Cycomm adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, to report the results of its three business
segments: Mobile Computing, Secure Computing and Communications Security. During
Page F-23
1999, Cycomm sold its Secure Computing and Communications Security segments
resulting in the Company having only one reporting segment (See Note 2:
Discontinued Operations). The results from continuing operations on Cycomm's
financial statements for the years ended December 31, 2001 and 2000 present the
results of the Mobile Computing segment.
Geographic Region Data December 31, December 31,
2001 2000
----- ----
Sales
United States $4,992,409 $2,998,342
Canada 129,911 433,787
---------- ----------
$5,122,320 $3,432,129
========== ==========
Loss from Operations
United States $2,943,122 $2,831,039
Canada 1,746,065 1,906,676
---------- ----------
$4,689,187 $4,737,715
========== ==========
Identifiable Assets
United States $ 717,048 $1,242,547
Canada 712,992 1,955,292
---------- ----------
$1,430,040 $3,197,839
========== ==========
NOTE 16: MAJOR CUSTOMERS AND SUPPLIERS
Cycomm is not dependent upon any single customer that purchases its products.
However, sales to one major customer comprised 46% of consolidated sales for the
year ended December 31, 2001. Sales to another major customer comprised 23% of
consolidated sales for the year ended December 31, 2000.
Cycomm relies on one board fabricator located within the same geographical area
as its design, engineering and assembly facilities. In addition, certain
components and licensed software used in our computers are obtained from sole
sources. Any interruption, suspension or termination of board fabricator and/or
component deliveries from our suppliers could have a material adverse effect on
business. Although management believes that in nearly every case alternative
sources of supply can be located, inevitably a certain amount of time would be
required to find substitutes. During any such interruption in supplies, Cycomm
may have to curtail the production and sale of its computers for an indefinite
period.
NOTE 17: CREDIT RISK
Financial instruments which potentially subject Cycomm to concentrations of
credit risk consist principally of trade receivables. Concentration of credit
risk with respect to trade receivables exists at year end as approximately
$327,718 or 68% of the outstanding accounts receivable related to three
customers. Cycomm performs ongoing credit evaluations of its customers and
maintains allowances for potential credit losses which, when realized, have been
within the range of management's expectations.
NOTE 18: SUBSEQUENT EVENTS
Subsequent to 2001, Cycomm raised capital through 7 separate private equity
placements of its common stock. In total, the Company issued 11,443,278 shares
of common stock for gross proceeds of $1,380,000. Cash proceeds, after
commissions and issue costs were $1,230,000.
Page F-24
On February 28, 2002, the terms of Cycomm's revolving credit facility were
amended to reduce the maximum borrowing base from $2,000,000 to $1,000,000, and
to increase the interest rate on the facility from prime plus 3% to prime plus
4%. The credit facility is collateralized by the trade accounts receivable,
inventory and other assets of Cycomm Mobile Solutions.
On April 5, 2002, Cycomm entered into a settlement agreement with Michael D.
Perrine, former president of the Company's Cycomm Mobile Solutions subsidiary.
Cycomm had filed a lawsuit against Mr. Perrine alleging breach of contract,
unjust enrichment and breach of fiduciary duty. Mr. Perrine filed a lawsuit
against Cycomm alleging breach of contract and tortuous interference with
existing contract and business relations. Under the terms of the settlement,
Cycomm issued 1,000,000 shares of Cycomm common stock with a value of $100,000
to Mr. Perrine, and both parties agreed to dismiss their respective lawsuits. As
of December 31, 2001, Cycomm has recorded an accrued liability of $100,000
related to the judgment.
On April 9, 2002, Cycomm reduced its staff from approximately 75 employees to
approximately 45 employees. The reduction in staff was made to lower fixed costs
and to reduce Cycomm's breakeven level of sales. The terminated personnel
included 15 general and administrative employees, 8 research and development
employees and 7 production employees. The reduction was largely the elimination
of redundant administrative functions within the Company. The terminated
employees in R&D and production were primarily responsible for design and
manufacture of sub-assemblies for Cycomm's products, a function that Cycomm has
chosen to outsource.