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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
-----------
(Mark One)
__X__ Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2002
____ Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period from ______________ to _______________
Commission file number: 1-11686
CYCOMM INTERNATIONAL INC.
(Exact name of small business issuer as specified in its charter)
Wyoming 54-1779046
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1420 Springhill Road, Suite 420
McLean, Virginia 22102
(Address of principal executive offices)
(703) 903-9548
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes x No ___
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court. Yes___ No___
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
As of August 14, 2002, the Registrant had 79,994,406 shares of Common Stock
outstanding.
Transitional Small Business Disclosure Format: Yes No X
-- ----
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CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
PART I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets........................... 3
Consolidated Statements of Operations................. 4
Consolidated Statements of Cash Flows................. 5
Consolidated Statement of Stockholders' Equity........ 6
Notes to Consolidated Financial Statements............ 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation.............................. 14
PART II - Other Information
Item 1. Legal Proceedings..................................... 17
Item 2. Changes in Securities................................. 17
Item 3. Default Upon Senior Securities........................ 18
Item 4. Submission of Matters to a Vote of Security Holders... 18
Item 5. Other Information..................................... 18
Item 6. Exhibits and Reports on Form 8-K...................... 18
Signatures ...................................................... 19
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CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2002 AND DECEMBER 31, 2001
June 30, December 31,
2002 2001
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $457,351 $80,804
Accounts receivable, less allowance for doubtful
accounts of $50,000 205,036 510,048
Inventories, net of allowance for obsolete
inventory of $220,000 and $201,460, respectively 525,659 489,236
Deferred financing costs 142,777 ---
Foreign taxes receivable 114,932 141,413
Prepaid expenses 1,891 30,562
--------- ---------
Total current assets 1,447,646 1,252,063
Equipment, net 25,909 177,977
---------- ----------
Total assets $1,473,555 $1,430,040
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable - trade $636,768 $950,955
Convertible debentures 1,052,992 ---
Discount on convertible debentures (961,200) ---
-------- --------
Convertible debentures, net of discount 91,792 ---
Warranty reserve 600,478 602,479
Accrued exit cost obligations 700,623 ---
Other accrued liabilities 398,188 644,990
Dividends payable on preferred stock 43,425 38,466
Current portion of capital lease obligations 8,647 9,626
Revolving credit facility 210,438 405,701
--------- ---------
Total current liabilities 2,690,359 2,652,217
Capital lease obligations, less current portion 11,595 14,488
Commitments and contingencies
Stockholders' deficit:
Convertible preferred stock, $50,000 par value,
unlimited authorized shares, 2 shares issued and
outstanding at June 30, 2002 and December 31, 2001,
respectively 105,000 105,000
Common stock, no par value, unlimited authorized
shares, 82,205,614 and 56,323,871 shares
issued and 77,205,614 and 56,323,871 shares
outstanding at June 30, 2002 and December 31,
2001, respectively 71,169,457 68,214,258
Accumulated deficit (72,502,856) (69,555,923)
----------- -----------
Total stockholders' deficit (1,228,399) (1,236,665)
----------- -----------
Total liabilities and stockholders' deficit $1,473,555 $1,430,040
=========== ===========
See accompanying notes to consolidated financial statements
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CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED JUNE 30, 2002 AND JUNE 30, 2001 (UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
Sales $397,691 $576,943 $969,624 $1,877,473
Cost of sales 298,760 683,595 769,805 1,715,866
------- -------- ------- ---------
Gross profit (loss) 98,931 (106,652) 199,819 161,607
Expenses
Selling, general and administrative 742,642 805,761 1,625,805 1,951,358
Exit costs 998,874 --- 998,874 ---
Research and product development 133,397 196,873 377,699 440,010
Depreciation and amortization 10,578 18,998 24,866 38,325
--------- --------- --------- ---------
1,885,491 1,021,632 3,027,244 2,429,693
--------- --------- --------- ---------
Loss from Operations (1,786,560)(1,128,284) (2,827,425) (2,268,086)
Other (Expense) Income
Interest income 307 1,890 550 6,345
Interest expense (74,477) (86,428) (114,485) (212,331)
Other (expense) income (939) 69,742 (614) 219,792
------- ------- -------- -------
(75,109) (14,796) (114,549) 13,806
------- ------- -------- -------
Net loss (1,861,669)(1,143,080) (2,941,974) (2,254,280)
========== ========== ========== ==========
Beneficial return on preferred
shares --- --- --- (162,500)
------------ ----------- ---------- ----------
Net loss attributable to
common stockholders $(1,861,669)$(1,143,080)$(2,941,974)$(2,416,780)
============ =========== ========== ===========
Loss Per Share
Loss per share $(0.03) $(0.03) ($0.04) ($0.06)
Net loss per share attributable to
beneficial return on
preferred shares --- --- --- $0.00
------- ------- ------- -------
Net loss per share
attributable to common
shareholders $(0.03) $(0.03) $(0.04) $(0.06)
======= ======= ======= =======
Weighted average number of
common shares outstanding 74,427,322 41,624,962 68,382,508 38,607,815
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
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CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED JUNE 30, 2002 AND JUNE 30, 2001
(Unaudited)
Six Months Ended
June 30, June 30,
2002 2001
Operating activities
Net loss from continuing operations $(2,941,974) $(2,254,280)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Non-cash exit costs 813,475 ---
Loss on disposal of fixed assets 130,214 ---
Amortization of discount on 43,776 ---
convertible debentures
Depreciation and amortization 24,866 38,325
Change in operating assets and
liabilities (251,101) 197,372
-------- ----------
Cash used in operating activities (2,180,744) (2,018,583)
---------- ----------
Investing activities
Acquisition of fixed assets (3,012) (13,621)
------ -------
Cash used in investing activities (3,012) (13,621)
------ -------
Financing activities
Issuance of common stock 1,857,500 1,548,995
Issuance of preferred stock --- 611,500
Borrowings under convertible debentures 901,938 ---
Net repayments under revolving credit
facility (195,263) (248,608)
Repayment of obligations under capital
leases (3,872) (4,152)
--------- ---------
Cash provided by financing activities 2,560,303 1,907,735
--------- ---------
Increase (decrease) in cash and cash
equivalents during the period 376,547 (124,469)
Cash and cash equivalents, beginning of
period 80,804 301,110
-------- --------
Cash and cash equivalents, end of period $457,351 $176,641
======== ========
Supplemental cash flow information:
Interest paid $52,238 $108,088
Income taxes paid --- ---
Non-cash investing and financing
activities:
Conversion of preferred stock to common
stock --- $1,019,308
Issuance of common stock in settlement
of interest due --- $ 52,500
Issuance of common stock in settlement
of lawsuit $100,000 ---
Issuance of common stock in payment of
legal fees due $ 1,000 ---
See accompanying notes to consolidated financial statements
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CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE UNAUDITED PERIOD ENDED JUNE 30, 2002
AND THE YEAR ENDED DECEMBER 31, 2002
Notes
PreferredPreferred Common Common Receivable Accumulated
Shares Stock Shares Stock Stockholders Deficit Total
Balance,
December
31, 2000 11 $560,500 30,145,982 $63,653,477$(66,714)$(64,746,533) $(599,270)
==== ======== ========== =========== ======= =========== ========
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)
==== ======= ========== ========== ====== ============ ===========
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Net Loss --- --- --- --- --- (2,941,974) (2,941,974)
Issuance
of common
stock:
Sale of
common
stock --- --- 19,829,111 1,858,500 --- --- 1,858,500
Shares
issued
in
settle-
ment of
lawsuit --- --- 1,052,632 100,000 --- --- 100,000
Shares
held in
escrow
underlying
convertible
deben-
tures --- --- 5,000,000 --- --- --- ---
Beneficial
conversion
rights
convertible
deben-
ture --- --- --- 652,829 --- --- 652,829
Warrants
issued
with
convertible
deben-
ture --- --- --- 343,870 --- --- 343,870
Dividends
on
preferred
stock --- --- --- --- --- (4,959) (4,959)
---- -------- ---------- ---------- ---- ----------- ----------
Balance,
March 31
2002 2 $105,000 82,205,614$71,169,457 --- $(72,502,856) $(1,228,399)
==== ======== ========== ========== ==== ============ ===========
See accompanying notes to condensed consolidated financial statements.
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CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002
NOTE 1: GENERAL
The financial information presented as of any other date than December 31 has
been prepared from the books and records without audit. Financial information as
of December 31 has been derived from the audited financial statements of Cycomm
International Inc. and its subsidiaries ("Cycomm"), but does not include all the
disclosures required by generally accepted accounting principles. In the opinion
of management, the accompanying unaudited financial statements contain all
adjustments, consisting of only normal recurring adjustments necessary to
present fairly Cycomm's financial position as of June 30, 2002, and the results
of its operations and cash flows for the periods ended June 30, 2002 and 2001.
The results of operations are not necessarily indicative of the results that may
be expected for the year ending December 31, 2002. These unaudited consolidated
financial statements should be read in conjunction with the financial statements
and the notes thereto included in Cycomm's Annual Report on Form 10-KSB for the
year ended December 31, 2001.
Our Annual Report on Form 10-KSB was prepared on a going concern basis which
contemplates the realization of assets and the settlement of liabilities and
commitments in the normal course of business. We incurred a net loss from
continuing operations of $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. In the three months ended
June 30, 2002, we incurred a net loss of approximately $1.9 million, had a
working capital deficit of approximately $1.2 million, and an accumulated
deficit of $72.5 million. 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.
We hired a new president, who also serves as Cycomm's Chief Operating Officer,
to restructure the company and lower our operating costs. We have reduced
headcount from 75 employees to 18 employees, eliminating redundant positions,
consolidating administrative functions, and combining our manufacturing and
repair personnel. Additionally, we closed our Montreal facility. We are
exploring further cost savings initiatives, and plan to outsource tasks that can
be handled more efficiently by third parties. We have begun to sell to markets
outside of the public safety industry, and plan to aggressively pursue the field
service, utilities and industrial markets. We are also developing new products
to further expand and diversify our current product line.
Cycomm intends to fund its operations through working capital, borrowings on our
secured line of credit, private equity placements and borrowings under
convertible debentures. Historically, Cycomm has been able to raise capital
through private equity placements and debenture issuances. During 2001, we
raised $3,611,211 in private equity placements. In the six months ended June 30,
2002, Cycomm raised $1,857,500 in private equity placements (See Note 6: Capital
Stock for further detail) and $901,938 under convertible debentures (See Note 5:
Convertible Debentures for further detail).
These interim financial statements do not give effect to any adjustments which
would be necessary should Cycomm be unable to continue as a going concern and
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
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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: RESTRUCTURING
In April 2002, Cycomm began to take major steps to reduce costs. Cycomm's
organization had been built to support production levels much higher than it had
achieved historically. Management made the decision to close Cycomm's Canadian
facility, and to transfer all manufacturing operations to its Florida facility.
Cycomm is continuing to manufacture its existing product line of rugged, mobile
computers.
On April 9, 2002, Cycomm reduced its staff from approximately 75 employees to
approximately 45 employees. On June 28, 2002, Cycomm further reduced its staff
to 18 employees. The terminated personnel included 28 general and administrative
employees, 19 research and development employees, 7 production employees, 2
repair and maintenance employees and 1 salesperson. The total value of employee
severance packages was $511,737. In the six months ended June 30, 2002, Cycomm
paid $166,946 in severance. Cycomm has accrued $344,791 for severance
obligations as of June 30, 2002, which is included in accrued exit cost
obligations. The severance packages included $111,761 in payroll and vacation
benefits that had been previously accrued, therefore severance expense of
$399,976 was incurred in the three months ended June 30, 2002 and is included in
exit cost expenses.
Cycomm agreed to pay employee severance over a period of time, as specified in
each individual severance agreement. Subsequent to June 30, 2002, Cycomm has
made one scheduled severance payment. As of August 14, 2002,
the outstanding employee severance obligation is $287,038.
On June 28, 2002, Cycomm closed its Canadian facility. The lease for the
Canadian facility does not expire until March 31, 2008. The present value of
future lease payments due under the Canadian facility lease is $751,060.
Management has estimated the present value of income from subleasing the
Canadian facility as approximately $395,228, therefore Cycomm recorded $355,832
at June 30, 2002 as an accrued exit obligation related to the termination of the
Canadian facility lease, and recognized this amount as exit costs in the three
months ended June 30, 2002.
In connection with the closing of the Canadian facility, Cycomm made the
decision to abandon certain fixed assets, and accordingly, Cycomm has
written off fixed assets with a book value of $130,214. This write-off is
included in exit costs in the three months ended June 30, 2002.
Management also determined that the closing of the Canadian facility could
prevent Cycomm from collecting the full amount of foreign taxes receivable from
the Canadian government related to tax credits for research and development.
Cycomm has recorded a reserve of $112,852 against foreign taxes receivable, and
has recognized this amount as exit costs in the three months ended June 30,
2002.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144 (FAS 144), "Accounting for the Impairment
or Disposal of Long-Lived Assets", which addresses financial accounting and
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reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations", for a
disposal of a segment of a business. The Company adopted FAS 144 as of January
1, 2002. This guidance was followed in recognizing the impact of closing the
Canadian facility.
In June 2002, the FASB issued Statement No. 146 (FAS 146), "Accounting for Costs
Associated with Exit or Disposal Activities." FAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs in a Restructuring)." FAS 146 specifies that a
liability for a cost associated with an exit or disposal activity is incurred
when the definition of a liability in Concepts Statement 6, "Elements of
Financial Statements", is met. The provisions of FAS 146 are effective for exit
or disposal activities that are initiated after December 31, 2002, with early
application encouraged. The Company has implemented FAS 146 in June 2002 related
to the closure of the Canadian facility.
NOTE 3: INVENTORIES
The following is a summary of inventories at June 30, 2002 and December 31,
2001:
June 30, December 31,
2002 2001
----- ----
Raw materials $544,319 $645,286
Work in process and sub-assemblies 20,068 35,966
Finished goods 181,272 9,444
Allowance for obsolete inventory (220,000) (201,460)
--------- ---------
$525,659 $489,236
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 4: REVOLVING CREDIT FACILITY
On February 28, 2002, Cycomm renewed and amended its revolving credit facility
to allow the Company to borrow and repay amounts up to a maximum of $1,000,000.
As part of the renewal, the interest rate on the revolving credit facility was
increased to prime plus 4%. Prior to February 28, 2002, Cycomm was able to
borrow and repay amounts up to a maximum of $2,000,000, and was paying an
interest rate of prime plus 3%.
Cycomm restructured the terms of its revolving credit facility in order to lower
the minimum loan balance on which the Company was paying interest. Prior to
February 28, 2002, Cycomm was paying interest on a minimum loan balance of
$1,050,000. Under the new terms of the revolving credit facility, Cycomm is
paying interest on a minimum loan balance of $550,000.
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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 $210,438 and $405,701 as of June 30, 2002 and
December 31, 2001, respectively. As of June 30, 2002, Cycomm was in compliance
with the terms of the credit facility. 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.
NOTE 5: CONVERTIBLE DEBENTURES
On June 17, 2002, Cycomm issued $1,050,000 of 8% convertible debentures due June
17, 2003 which are convertible at the option of the holders into Cycomm common
stock at the lesser of 75% of the average of the three lowest closing prices for
the 30 days prior to the date of issuance ($0.04), or 75% of the average of the
three lowest closing prices for the 30 days prior to the date of conversion. The
debentures are fully eligible for conversion as of June 17, 2002. Interest on
the debentures can be paid in either cash or common stock, at Cycomm's option.
In the event that the debentures have not been fully converted into common stock
at the date of maturity, the debentures can be converted into common stock at
Cycomm's option. Cycomm issued 5,000,000 shares of common stock to be available
upon conversion of the debentures. The shares of common stock are restricted and
are being held in escrow by the collateral agent and holder of the convertible
debentures. In connection with the issuance of the debentures, Cycomm issued
13,125,000 warrants to purchase common stock at $0.08 per share. The warrants
are immediately exercisable for a period of seven years.
Cycomm allocated the proceeds from the offering, less issue costs paid to the
investor of $53,301, to the warrants and the debentures based on the relative
fair value of each instrument. This resulted in $343,870 recorded as a discount
on the convertible debentures for the relative fair value of the warrants. The
proceeds allocated to the debentures were compared to the fair value of the
common stock into which the debentures are convertible in order to determine the
intrinsic value of the beneficial conversion feature. The value of the
beneficial conversion feature of $652,829 was recorded as an additional discount
on the convertible debentures. The total discount was limited to the proceeds
raised, less issue costs paid to the investor of $53,301, and will be amortized
as interest expense over the term of the debentures.
NOTE 6: CAPITAL STOCK
Common Stock
On January 8, 2002, Cycomm raised capital through a private equity placement of
its common stock. Cycomm issued 1,000,000 shares of common stock for cash
proceeds of $135,000.
On January 11, 2002, Cycomm raised capital through a private equity placement of
its common stock. Cycomm issued 1,500,000 shares of common stock for cash
proceeds of $150,000.
On January 23, 2002, Cycomm raised capital through a private equity placement of
its common stock. Cycomm issued 1,500,000 shares of common stock for gross
proceeds of $225,000. Cash proceeds, after commissions and issue costs were
$150,000.
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On January 31, 2002, Cycomm raised capital through a private equity placement of
its common stock. Cycomm issued 1,428,572 shares of common stock for cash
proceeds of $200,000.
On February 13, 2002, Cycomm raised capital through a private equity placement
of its common stock. Cycomm issued 1,500,000 shares of common stock for gross
proceeds of $270,000. Cash proceeds, after commissions and issue costs were
$195,000.
On March 7, 2002, Cycomm raised capital through a private equity placement of
its common stock. Cycomm issued 2,750,000 shares of common stock for cash
proceeds of $250,000.
On March 15, 2002, Cycomm issued 2,500 shares of common stock in payment of
legal services totalling $500.
On March 15, 2002, Cycomm issued 50,000 shares of common stock upon the exercise
of non-employee stock options for proceeds of $500.
On March 26, 2002, Cycomm raised capital through a private equity placement of
its common stock. Cycomm issued 1,764,706 shares of common stock for cash
proceeds of $150,000.
On April 3, 2002, Cycomm issued 1,052,632 shares of common stock in settlement
of a lawsuit. The shares were issued in full settlement of a $100,000
obligation.
On April 26, 2002, Cycomm raised capital through a private equity placement of
its common stock. Cycomm issued 2,333,333 shares of common stock for cash
proceeds of $175,000.
On May 3, 2002, Cycomm raised capital through a private equity placement of its
common stock. Cycomm issued 2,000,000 shares of common stock for cash proceeds
of $140,000.
On May 14, 2002, Cycomm raised capital through a private equity placement of its
common stock. Cycomm issued 2,500,000 shares of common stock for cash proceeds
of $200,000.
On May 22, 2002, Cycomm raised capital through a private equity placement of its
common stock. Cycomm issued 1,500,000 shares of common stock for cash proceeds
of $112,500.
Page 13
NOTE 7: SEGMENT AND RELATED INFORMATION
Cycomm has one reporting segment, which sells wireless rugged computing products
and peripherals. Prior to June 28, 2002, we operated a manufacturing facility in
Montreal, Canada. On June 28, 2002, we closed this facility and transferred
inventory and certain fixed assets to our Melbourne, Florida facility. Fixed
assets with a book value of $130,214 were not transferred to Florida, and were
written off as of June 30, 2002. Geographic region data on sales and the
location of identifiable assets is provided in the tables below.
Quarters Ended Six Months Ended
-------------- ----------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
----- ----- ----- ----
Geographic Region Data
Sales
United States $ 389,173 $ 557,464 $929,236 $1,838,805
Canada 8,518 19,479 40,388 38,668
--------- --------- -------- ----------
$ 397,691 $ 576,943 $969,624 $1,877,473
========= ========= ======== ==========
Loss from Operations
United States $ 565,667 $ 689,060 $1,169,078 $1,473,713
Canada 1,220,893 439,224 1,658,347 794,373
---------- ---------- ---------- ----------
$1,786,560 $1,128,284 $2,827,425 $2,268,086
========== ========== ========== ==========
Identifiable Assets June 30, December 31,
2002 2001
United States $1,473,555 $ 717,048
Canada --- 712,992
---------- ----------
$1,473,555 $1,430,040
========== ==========
NOTE 8: SUBSEQUENT EVENTS
On July 1, 2002 Cycomm issued 1,000,000 warrants to purchase Cycomm common stock
at $0.01 per share in payment of a consulting agreement, and an additional
1,000,000 warrants to purchase Cycomm common stock at $0.01 per share in payment
of another consulting agreement.
On July 31, 2002, Cycomm issued 288,344 shares of common stock upon conversion
of debentures with principal and accrued interest of $7,569.
On August 12, 2002, Cycomm issued 500,448 shares of common stock upon conversion
of debentures with principal and accrued interest of $13,162.
On August 12, 2002, Cycomm issued 2,000,000 shares of common stock to be held in
escrow. These shares were issued in anticipation of a proposed future financing.
Page 14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation.
Results of Continuing Operations
Three Months Ended June 30, 2002 and June 30, 2001
Revenues for the three months ended June 30, 2002 were $397,691 as compared to
revenues of $576,943 for the prior period. The decrease in revenue was primarily
the result of delays related to the restructuring of our company. During the
three months ended June 30, 2002, we reduced our headcount from 75 employees to
18 employees and closed our Canadian facility. The transition of the
manufacturing operations and physical transfers of materials slowed productivity
in the three months ended June 30, 2002.
Cost of sales for the three months ended June 30, 2002 was $298,760 as compared
to cost of sales of $683,595 for the prior period. Gross margins for the three
months ended June 30, 2002 were 25% as compared to gross margins of (18%) in the
prior period. The improvement in gross margins is a result of lower overhead
costs associated with the reduction in headcount.
Operating expenses increased to $1,885,491 for the three months ended June 30,
2002 as compared to $1,021,632 in the prior period. Selling, general and
administrative expenses decreased to $742,642 from $805,761 in the three months
ended June 30, 2001, primarily as a result of headcount reductions. The
restructuring of Cycomm's organization caused Cycomm to incur $998,874 in exit
costs in the three months ended June 30, 2002. This amount includes $399,976
related to severance charges for terminated employees, $355,832 related to the
termination liability for the lease on Cycomm's Canadian facility, a $130,214
write-off of Canadian fixed assets, and a reserve of $112,852 taken against the
value of Cycomm's Canadian foreign taxes receivable. Research and development
costs decreased to $133,397 as compared to $196,873 in the prior period. The
decrease is the result of headcount reductions in the R&D staff.
Depreciation and amortization decreased to $10,578 for the three months ended
June 30, 2002 as compared to $18,998 in the prior period. The decrease is a
result of certain fixed assets reaching the end of their depreciable lives, and
the write-off of Canadian fixed assets with a book value of $130,214 included
in exit costs in the three months ended June 30, 2002.
Interest expense for the three months ended June 30, 2002 was $74,477 as
compared to $86,428 for the prior period. The decrease is a result of lower
average debt balances during the six months ended June 30, 2002, and a lower
amount of interest being paid to vendors, offset by interest on convertible
debentures. On June 17, 2002, Cycomm issued debentures convertible into Cycomm
common stock with a principal amount of $1,050,000, bearing interest at 8% and
maturing on June 17, 2003. The total interest accrued on the principal of the
debentures in the three months ended June 30, 2002 was $2,992. The debentures
have a beneficial conversion feature, in which they are convertible at a
discount to the market price of Cycomm's common stock. This beneficial
conversion feature has a value of $652,829, which is amortized over the life of
the debenture and recognized as interest expense. Total interest related to the
amortization of the beneficial conversion feature in the three months ended June
30, 2002 was $23,252. Additionally, Cycomm issued 13,125,000 warrants to
purchase common stock at $0.08 per share to the debenture holders. The relative
fair value of these warrants is $343,870, which is amortized over the life of
Page 15
the debenture and recognized as interest expense. Total interest related to the
amortization of the relative fair value of the warrants in the three months
ended June 30, 2002 was $12,247. The portion of deferred loan costs related to
financing fees is amortized over the life of the debentures, and recognized as
interest expense. Total interest expense related to the amortization of deferred
loan costs was $5,285 in the three months ended June 30, 2002.
Net loss increased to $1,861,669, or $0.03 per share, for the three months ended
June 30, 2002 from $1,143,080, or $0.03 per share for the three months ended
June 30, 2001. The increase in net loss is a result of the factors discussed
above.
Six Months Ended June 30, 2002 and June 30, 2001
Revenues for the six months ended June 30, 2002 were $969,624 as compared to
revenues of $1,877,473 for the prior period. The decrease in sales was a
primarily the result of the loss of a major customer which accounted for 40% of
Cycomm's sales in the six months ended June 30, 2001. Revenue was also affected
by delays caused by the restructuring of our company. During the six months
ended June 30, 2002, we reduced our headcount from 75 employees to 18 employees
and closed our Canadian facility. The transition of the manufacturing operations
and physical transfers of materials slowed productivity in the three months
ended June 30, 2002.
Cost of sales for the six months ended June 30, 2002 was $769,805 as compared to
cost of sales of $1,715,866 for the prior period. Gross margins for the six
months ended June 30, 2002 were 21% as compared to gross margins of 9% in the
prior period. The improvement in gross margins is a result of lower overhead
costs associated with the reduction in headcount.
Operating expenses increased to $3,027,244 for the six months ended June 30,
2002 as compared to $2,429,693 in the prior period. Selling, general and
administrative expenses decreased to $1,625,805 from $1,951,358 in the six
months ended June 30, 2001. The decrease is primarily the result of costs
related to Cycomm's restructuring efforts. The restructuring of Cycomm's
organization caused Cycomm to incur $998,874 in exit costs in the six months
ended June 30, 2002. This amount includes $399,976 related to severance charges
for terminated employees, $355,832 related to the termination liability for the
lease on Cycomm's Canadian facility, a $130,214 write-off of Canadian fixed
assets, and a reserve of $112,852 taken against the value of Cycomm's Canadian
foreign taxes receivable. Research and development costs decreased to $377,699
as compared to $440,010 in the prior period. The decrease is the result of
headcount reductions in the R&D staff.
Depreciation and amortization decreased to $24,866 for the six months ended June
30, 2002 as compared to $38,325 in the prior period. The decrease is a result of
certain fixed assets reaching the end of their depreciable lives, and the
write-off of Canadian fixed assets with a book value of $130,214 included in
exit costs in the six months ended June 30, 2002.
Interest expense for the three months ended June 30, 2002 was $114,485 as
compared to $212,331 for the prior period. The decrease is a result of lower
average debt balances during the six months ended June 30, 2002, and a lower
amount of interest being paid to vendors, offset by interest on convertible
debentures. On June 17, 2002, Cycomm issued debentures convertible into Cycomm
common stock with a principal amount of $1,050,000, bearing interest at 8% and
maturing on June 17, 2003. The total interest accrued on the principal of the
debentures in the six months ended June 30, 2002 was $2,992. The debentures have
Page 16
a beneficial conversion feature, in which they are convertible at a discount to
the market price of Cycomm's common stock. This beneficial conversion feature
has a value of $652,829, which is amortized over the life of the debenture and
recognized as interest expense. Total interest related to the amortization of
the beneficial conversion feature in the six months ended June 30, 2002 was
$23,252. Additionally, Cycomm issued 13,125,000 warrants to purchase common
stock at $0.08 per share to the debenture holders. The relative fair value of
these warrants is $343,870, which is amortized over the life of the debenture
and recognized as interest expense. Total interest related to the amortization
of the relative fair value of the warrants in the six months ended June 30, 2002
was $12,247. The portion of deferred loan costs related to financing fees is
amortized over the life of the debentures, and recognized as interest expense.
Total interest expense related to the amortization of deferred loan costs was
$5,285 in the six months ended June 30, 2002.
Net loss increased to $2,941,974, or $0.04 per share, for the six months ended
June 30, 2002 from $2,254,280, or $0.06 per share for the six months ended June
30, 2001. The increase in net loss is a result of the factors discussed above.
Liquidity and Capital Resources
Cycomm has satisfied working capital requirements through cash on hand,
available lines of credit and various equity related financings. At June 30,
2002, Cycomm had cash and cash equivalents of $457,351.
In the six months ended June 30, 2002, cash used in operations amounted to
$2,941,974, largely due to Cycomm's net loss of $2,180,744. Accounts receivable
decreased by $305,012, but this was offset by an increase in inventory of
$36,423, an increase in foreign taxes receivable of $86,371, and a decrease in
accounts payable of $314,187. Cash used in investing activities during the six
months ended June 30, 2002 totaled $3,012. Cash provided by financing activities
was $2,560,303 for the six months ended June 30, 2002. Cycomm completed 11
private placements of common stock for net proceeds of $1,857,500, borrowed
funds under convertible debentures totaling $901,938 and decreased the amounts
drawn on its bank credit lines in an amount of $195,263 during the six months
ended June 30, 2002.
Cycomm's net working deficit at June 30, 2002 was ($1,242,713) as compared to
($1,400,154) at December 31, 2001. In the six months ended June 30, 2002,
Cycomm's current assets increased by $195,583, and current liabilities decreased
by $38,142. Accounts receivable decreased as a result of improved collections
and lower sales volumes. Inventories increased in preparation for deliveries to
customers in the third quarter of 2002. Accounts payable decreased as Cycomm
paid down vendor obligations. The balance of Cycomm's revolving credit facility,
which is collateralized by accounts receivable, decreased as a
result of the decreases in accounts receivable.
Cycomm's auditors modified their report on Cycomm's 2001 Annual Report on Form
10-KSB to include an explanatory paragraph regarding the Company's ability to
continue as a going concern. Management has taken several steps towards
addressing the going concern issue. We hired a new president, who also serves as
Cycomm's Chief Operating Officer, to restructure the company and lower our
operating costs. We have reduced headcount from 75 employees to 18 employees,
eliminating redundant positions, consolidating administrative functions, and
combining our manufacturing and repair personnel. Additionally, we closed our
Page 17
Montreal facility. We are exploring further cost savings initiatives, and plan
to outsource tasks that can be handled more efficiently by third parties. We
have begun to sell to markets outside of the public safety industry, and plan to
aggressively pursue the field service, utilities and industrial markets. We are
also developing new products to further expand and diversify our current product
line.
Cycomm intends to fund its operations through working capital, borrowings on our
secured line of credit, private equity placements and borrowings under
convertible debentures. Historically, Cycomm has been able to raise capital
through private equity placements and debenture issuances. During 2001, we
raised $3,611,211 in private equity placements. In the six months ended June 30,
2002, Cycomm raised $1,857,500 in private equity placements (See Note 6: Capital
Stock for further detail) and $901,938 under convertible debentures (See Note 5:
Convertible Debentures for further detail).
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
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 1,052,632 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.
On November 21, 2001, the Telepad Corporation Liquidating Trust (the "Trustee")
filed a lawsuit against Cycomm alleging breach of contract, breach of express
trust and unjust enrichment. Telepad Corporation ("Telepad") had entered a bid
to sell Cycomm products to TRW Systems & Information Technology Group ("TRW")
for use in Montgomery County, MD. On March 17, 1999, Telepad filed a voluntary
petition for relief under Chapter 11 of the Bankruptcy Code. On October 8, 1999,
Cycomm entered into an agreement with the Trustee which assigned Telepad's bid
to Cycomm. In exchange, Cycomm agreed that if the bid was accepted, Cycomm would
pay the Trustee 5% of the total value of products sold to TRW. The Telepad bid
was never accepted by TRW. Instead, TRW chose to purchase Cycomm's products
through a different reseller. Cycomm's maximum exposure in this lawsuit is
$115,000. Cycomm intends to defend this case vigorously. Cycomm does not believe
that loss of this case is probable, and has not accrued for any potential loss
related to this case.
Item 2. Changes in Securities.
On May 22, 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 $112,500.
Page 18
On June 17, 2002 we issued 5,000,000 shares of common stock that are
restricted under Regulation D of the Securities Exchange Act of 1934, to SS
Equities. These shares are being held in escrow by SS Equities, as the
collateral agent for Cycomm and the holders of Cycomm convertible debentures.
On July 31, 2002 we issued 288,344 shares of common stock that are
restricted under Regulation D of the Securities Exchange Act of 1934, to Alpha
Capital upon the conversion of debentures with principal and accrued interest of
$7,569.
On August 12, 2002 we issued 500,448 shares of common stock that are
restricted under Regulation D of the Securities Exchange Act of 1934, to
Stonestreet LP upon the conversion of debentures with principal and accrued
interest of $13,162.
On August 12, 2002 we issued 2,000,000 shares of common stock that are
restricted under Regulation D of the Securities Exchange Act of 1934, to SS
Equities. These shares are being held in escrow by SS Equities, as a collateral
agent, in anticipation of a proposed financing between Cycomm and a group of
investors.
Item 3. Default Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit 99.1 Officer's Certification
(b) Reports on Form 8-K:
None
Page 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CYCOMM INTERNATIONAL INC.
Date: August 19, 2002 /s/ Albert I. Hawk
---------------------------------------
Albert I. Hawk
Chief Executive Officer
Date: August 19, 2002 /s/ Robert M. Hutton
----------------------------------------
Robert M. Hutton
Vice President of Finance
Page 20
Exhibit 99.1
I, Albert I. Hawk, CEO of Cycomm International Inc. (the "Company"), certify,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
1350, that:
(1) the Quarterly Report on Form 10-Q of the Company for the quarter ended
June 30, 2002 (the "Report") fully complies with the requirements of
Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934 (15 U.S.C.
78m or 78o(d)); and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
Dated: August 19, 2002
/s/ Albert I. Hawk
------------------------------
Albert I. Hawk
Chief Executive Officer
I, Robert M. Hutton, Principal Accounting Officer of Cycomm International
Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, 18 U.S.C. Section 1350, that:
(1) the Quarterly Report on Form 10-Q of the Company for the quarter ended
June 30, 2002 (the "Report") fully complies with the requirements of
Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934 (15 U.S.C.
78m or 78o(d)); and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
Dated: August 19, 2002
/s/ Robert M. Hutton
------------------------------
Robert M. Hutton
Principal Accounting Officer