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As filed with the Securities and Exchange Commission on October 15, 2002
Registration No. 333-96659
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2/A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CYCOMM INTERNATIONAL INC.
(Exact Name of Registrant as Specified in Its Charter)
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WYOMING 54-1779046
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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1420 Springhill Road, Suite 420, McLean, Virginia 22102, (703) 903-9548
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal
Executive Offices)
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ROBERT M. HUTTON
Vice President of Finance
Cycomm International Inc.
1420 Springhill Road, Suite 420, McLean, Virginia 22102, (703) 903-9548
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
Copy to:
DAVID J. LEVENSON, ESQ.
Troutman Sanders Mays & Valentine LLP
1660 International Drive, Suite 600
McLean, VA 22102
(703) 734-4328
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration
Statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: |_|
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. |X|
Included in this Form are 3,327,732 shares of common stock issued pursuant
to the conversion of Series F preferred stock. Cycomm registered 1,400,000
shares of common stock issued pursuant to the conversion of Series F preferred
stock on registration statement number 333-54052, which was declared effective
on February 5, 2001. Cycomm registered 1,197,972 shares of common stock issued
pursuant to the conversion of Series F preferred stock on registration statement
number 333-68572, which was declared effective on September 14, 2001.
Cover of Registration Statement continued on following page
Page 2
Cover of Registration Statement continued from previous page
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
Proposed
Maximum Proposed
Aggregate Maximum
Title of Each Class of Amount to Price Per Aggregate Amount of
Securities to be be Security Offering Price Registration
Registered Registered Fee(11)
Common Shares (1) 103,009,524 $0.0200 $2,060,190 $190
Common Shares(2) 3,327,732 $0.0200 $66,555 $6
Common Shares(3) 1,052,632 $0.0200 $21,053 $2
Common Shares(4) 16,250,000 $0.0800 $1,300,000 $120
Common Shares(5) 1,102,757 $0.4700 $518,296 $48
Common Shares(6) 1,000,000 $0.0100 $10,000 $1
Common Shares(7) 1,000,000 $0.0100 $10,000 $1
Common Shares(8) 250,000 $0.2500 $62,500 $6
Common Shares(9) 137,845 $0.4700 $64,787 $6
Common Shares(10) 137,845 $0.4700 $64,787 $6
Total 127,268,335 $4,178,168 $386
(1) Shares to be issued upon conversion of convertible debentures. The
proposed maximum aggregate price per security is calculated as of the
market price of Cycomm's stock as of October 9, 2002.
(2) Shares issued upon the conversion of Cycomm's Series F Convertible
Redeemable Preferred Stock. The proposed maximum aggregate price per
security is calculated as of the market price of Cycomm's stock as of
October 9, 2002.
(3) Shares issued under a legal settlement at a share price of $0.095 per
share. The proposed maximum aggregate price per security is calculated as
of the market price of Cycomm's stock as of October 9, 2002.
(4) Issuable upon exercise of warrants. Warrants have an exercise price of
$0.08 per share.
(5) Issuable upon exercise of warrants. Warrants have an exercise price of
$0.47 per share.
(6) Issuable upon exercise of warrants. Warrants have an exercise price of
$0.01 per share.
(7) Issuable upon exercise of warrants. Warrants have an exercise price of
$0.01 per share.
(8) Issuable upon exercise of warrants. Warrants have an exercise price of
$0.25 per share.
(9) Issuable upon exercise of warrants. Warrants have an exercise price of
$0.47 per share.
(10) Issuable upon exercise of warrants. Warrants have an exercise price of
$0.47 per share.
(11) Fee is $92 per million or 0.000092, as of October 9, 2002.
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Page 1
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities in any state where the offer or sale is not permitted.
PROSPECTUS
CYCOMM INTERNATIONAL INC.
127,268,335 Shares of Common Stock
----------------------------------
This prospectus relates to 127,268,335 shares of our common stock that may
be sold by the selling stockholders named under "Selling Shareholders" on page
24. The shares of common stock offered under this prospectus are comprised of
103,009,524 shares underling debentures convertible into common stock, 3,327,732
shares underlying preferred stock that was converted into common stock,
1,052,632 shares with registration rights, 16,250,000 shares underlying warrants
to purchase common stock at $0.08 per share, 1,378,447 shares underlying
warrants to purchase common stock at $0.47 per share, 2,000,000 shares
underlying warrants to purchase common stock at $0.01 per share and 250,000
shares underlying warrants to purchase common stock at $0.25 per share. We will
not receive any additional proceeds from the sale of the 103,009,524 shares
underlying debentures convertible into common stock, or from the 3,327,732
shares underlying preferred stock that was converted into common stock or from
the 1,052,632 shares with registration rights. We will receive up to $2,030,370
upon the exercise of the 19,878,447 warrants to purchase common stock.
Shares of Cycomm's common stock are quoted on the OTC Bulletin Board
("OTCBB") under the symbol "CYII." The reported closing per share price for the
common stock of Cycomm on October 9, 2002 was $0.02.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
These securities involve a High Degree of Risk. You should carefully
consider the "Risk Factors" beginning on page 3.
The date of this prospectus is September 23, 2002
RELY ONLY ON THIS PROSPECTUS
You should rely only on the information incorporated by reference or
presented in this prospectus. We have not authorized anyone else to provide you
with different information. We are only offering these securities in states
where the offer is permitted. You should not assume that the information in this
prospectus is accurate as of any date other than the date on the cover page of
this prospectus.
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TABLE OF CONTENTS
PAGE NUMBER
SUMMARY........................................................... 3
FORWARD LOOKING STATEMENTS........................................ 3
RISK
FACTORS........................................................... 3
DILUTION.......................................................... 5
USE OF
PROCEEDS.......................................................... 6
MARKET FOR COMMON STOCK........................................... 7
DIVIDEND POLICY................................................... 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................. 8
DESCRIPTION OF BUSINESS........................................... 13
MANAGEMENT........................................................ 19
PRINCIPAL STOCKHOLDERS............................................ 21
RELATED PARTY TRANSACTIONS........................................ 23
DESCRIPTION OF SECURITIES......................................... 24
SELLING SHAREHOLDERS.............................................. 25
PLAN OF DISTRIBUTION.............................................. 27
EXPERTS........................................................... 29
LEGAL............................................................. 29
DESCRIPTION OF PROPERTY........................................... 29
LEGAL PROCEEDINGS................................................. 29
WHERE YOU CAN FIND MORE
INFORMATION..................................................... 30
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES................................................... 30
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS........................ 31
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CYCOMM INTERNATIONAL INC.
SUMMARY
We manufacture 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 our products are designed for wireless use. Additionally, we
offer products for sale in the health and industrial markets.
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.
FORWARD LOOKING STATEMENTS
This prospectus contains forward-looking statements based on our current
expectations, assumptions, estimates and projections about our business and our
industry. These forward-looking statements involve risks and uncertainties. Our
actual results could differ materially from those anticipated in these
forward-looking statements as a result of a number of factors, as more fully
described above and elsewhere in this prospectus. We undertake no obligation to
update publicly any forward-looking statements for any reason, even if new
information becomes available or other events occur in the future.
RISK FACTORS
You should consider carefully the following risks before you decide to buy
our common stock. The risks and uncertainties described below are not the only
ones facing our company. Additional risks and uncertainties also may impair our
business operations. Any of the following risks may cause our business,
financial condition and results of operations to suffer. This could cause the
trading price of our common stock to decline and you may lose all or part of the
money paid to buy our common stock.
WE MAY NOT BE PROFITABLE IN THE FUTURE
We have accumulated net losses from inception through June 30, 2002 of
approximately $73 million. Our losses have resulted principally from the
operations of subsidiaries that were sold or shut down prior to December 31,
1999. We have shifted all of our resources to our subsidiary that manufactures
rugged, wireless computers. This market has shown potential, but this subsidiary
has not been profitable on a stand-alone basis. If we are not profitable, the
market price of our stock may decline. Profitable operations depend on a number
of factors, many of which are beyond our direct control. The factors include:
|X| The demand for our products
|X| Our ability to manufacture our products efficiently and to control
production costs
|X| Our ability to increase our manufacturing capacity
|X| The level of product and price competition
|X| General economic conditions
WE RELY ON SINGLE SOURCES FOR SOME OF OUR RAW MATERIALS
AND OUR BUSINESS COULD SUFFER IF THESE MATERIALS WERE
NOT AVAILABLE FROM CURRENT SOURCES
We rely on sole sources for some of our raw materials and components. If
these raw materials or components were no longer available, our manufacturing
operations could be interrupted until another supplier could be identified, its
products validated and trading terms with it negotiated. We cannot be sure that
an alternative supplier could be identified in a timely manner, or at all, or
that favorable terms could be negotiated with an alternative supplier. Any
disruptions in our manufacturing operations from the loss of a supplier could
have a material adverse effect on our results of operations, and potentially
damage our relations with our customers.
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WE DEPEND ON KEY PERSONNEL AND MUST CONTINUE TO
ATTRACT AND RETAIN KEY PERSONNEL
Our success depends upon the continued contributions of our executive
officers and engineering personnel. The departure of any one of these key
individuals could result in setbacks that could adversely affect our success and
continuing operations. The success and growth of our company depends upon our
ability to identify, recruit and retain key management personnel. The
competition for qualified personnel is intense, and there are no assurances that
we will be successful in our efforts.
OUR COMPETITION IS SOMETIMES LARGER AND BETTER KNOWN, WITH
MORE RESOURCES IN FINANCE, MANUFACTURING AND MARKETING
We compete in the rugged, wireless computer business with a wide variety of
computer manufacturers and repackagers, some of which are larger, better known
and have more resources in finance, manufacturing and marketing. We compete
based on customization capabilities, price, performance, delivery and quality.
In the public safety market, we are often required to enter into
competitive bids or negotiated contracts with government departments and
agencies. In many cases, we are the higher priced bidder for public safety bids.
We use many custom made components, which can be more expensive than parts used
by our competitors. The parts we use are designed to be much more rugged than
parts available commercially. We also make extensive modifications and
refinements to our computers in order to meet our customers' needs. While our
products are more expensive, they generally function at a higher level of
performance and reliability than similar products offered by our competitors.
WE RELY ON KEY RESELLERS TO MARKET AND DISTRIBUTE OUR PRODUCTS
Many of our sales are made through resellers. Our resellers approach
municipalities and government agencies with total solutions for their mobile
computing needs. These resellers typically handle the software integration and
installation of our computers into public safety vehicles. Our resellers are an
important distribution channel and marketing source for our products.
Maintaining good working relationships with our resellers is critical to the
success of our company. The loss of one or any of our major resellers could
adversely affect our company's success in the future.
OUR SHARES ARE DEEMED "PENNY STOCK" AND ARE SUBJECT TO ADDITIONAL MARKET
DISCLOSURES
A "penny stock" is generally defined to be any equity security not listed
on NASDAQ or a national securities exchange that has a market price of less than
$5.00 per share, subject to certain exceptions. Our shares are traded on the
Over-the-Counter Bulletin Board ("OTCBB"), and therefore would be deemed penny
stock. In such case, trading in our shares is regulated pursuant to penny stock
rules. These rules may limit the ability of our shareholders to sell in the
secondary market, through brokers, dealers or otherwise. We also understand that
many brokerage firms will discourage their customers from trading in shares
falling within the penny stock definition due to the added regulatory and
disclosure burdens imposed by these rules.
OUR COMMON STOCK MAY BE DILUTED.
The issuance of further shares and the eligibility of issued shares for resale
will dilute our common stock and may lower the price of our common stock. If you
invest in our common stock, your interest will be diluted to the extent of the
differences between the price per share you pay for the common stock and the pro
forma as adjusted net tangible book value per share of our common stock at the
time of sale. We calculate net tangible book value per share by calculating the
total assets less intangible assets and total liabilities, and dividing it by
the number of outstanding shares of common stock.
Furthermore, we may issue additional shares, options and warrants and we may
grant additional stock options to our employees, officers, directors and
consultants under our stock option plan, all of which may further dilute our net
tangible book value.
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OUR SALE OF SHARES UPON CONVERSION OF DEBENTURES AT A PRICE BELOW THE
MARKET PRICE OF OUR COMMON STOCK WILL HAVE A DILUTIVE IMPACT.
We have issued debentures to certain investors that may be converted into
common stock at a discount to the then-prevailing market price of our common
stock. Accordingly, the issuance of shares upon conversion of the principal and
interest under the debentures will have a dilutive impact. Discounted sales
resulting from the conversion of the debentures could have an immediate adverse
effect on the market price of the common stock. Also, to the extent that
debenture and warrant holders convert their securities and sell the underlying
shares into the market, the price of our shares may decrease due to the
additional shares in the market. A decrease in the market price of our common
stock will cause the conversion price of the debentures to decrease, causing the
debentures to be convertible into a larger number of common shares, which will
further increase the dilutive impact of the debentures. A substantial decline in
the current market price of our common stock would have a dramatic effect on the
number of shares to be issued upon the conversion of debentures. For example, a
25% decrease in the market price of our common stock would cause the number of
shares to be issued upon conversion of the debentures to increase from
90,133,333 to 120,177,778. A table showing the potential effects of various
percentage stock price decreases on the number of shares to be issued upon
conversion of debentures can be found on page 28 of this document, in the "Plan
of Distributio" section. The debenture agreements limit the debenture holders
from owning more than 9.99% of Cycomm's outstanding common stock at any time,
which reduces the likelihood of a change in control in the ownership of Cycomm.
THE CONVERSION TERMS OF THE CONVERTIBLE DEBENTURES DO NOT PROHIBIT SHORT SELLING
OF OUR COMMON STOCK BY THE HOLDERS OF THE DEBENTURES OR BY OTHER SHAREHOLDERS
Our debentures are convertible into common stock at a discount of the
market price of our common stock at the time of the notice of conversion. If the
market price of our common stock declined, the conversion price of the
debentures would also decline, causing the debenture holders to receive a larger
number of common shares upon conversion. The terms of the convertible debentures
do not prohibit the holders from selling our common stock short at the market
price, converting the debentures into common stock at a discount to the market
price to cover their short position, and potentially realizing a profit on the
sale equal to the difference between the current market price and the conversion
price. Selling our stock short could cause the market price of our common stock
to decline, further reducing the conversion price of the debentures and
increasing the number of shares to be issued upon conversion of the debentures.
The debenture agreements contain no restrictions on short selling by the
debenture holders.
OUR AUDITORS HAVE ISSUED A "GOING CONCERN" OPINION ON OUR DECEMBER 31,
2001 ANNUAL REPORT ON FORM 10-KSB
Our auditors modified their report to include an explanatory paragraph
regarding the Cycomm's ability to continue as a going concern. 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 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 Cycomm through borrowings and private equity placements,
however there are no assurances that these efforts will be successful.
DILUTION
On June 30, 2002, Cycomm had a net tangible book value of $(1,228,399) or
$(0.02) per share (based on 77,205,614 shares outstanding). The net tangible
book value per share is calculated by dividing the net tangible book value
(total assets less intangible assets and total liabilities) by the number of
outstanding shares of common stock. We will not receive any additional proceeds
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from the sale of the 103,009,524 shares underlying debentures convertible into
common stock, or from the 3,327,732 shares underlying preferred stock that was
converted into common stock, or from the 1,052,632 shares that were issued in
settlement of a lawsuit. Without considering the possible exercise of the
19,878,447 warrants to purchase common stock included in the prospectus, there
will be no dilutive effect related to the sale of the common shares included in
the prospectus.
USE OF PROCEEDS
The selling shareholders will receive the proceeds from the sale of
107,389,888 shares of common stock included in this prospectus. If the
19,878,447 warrants to purchase common stock are exercised, we will receive up
to $2,030,370. Cycomm intends to use the proceeds from the exercise of the
options and warrants for working capital and for general corporate purposes. We
will not receive any proceeds from the sale of shares by the selling
shareholders.
Page 7
MARKET FOR COMMON STOCK
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
AMEX or OTCBB for the periods indicated:
High Low
Year Ended December 31, 2002
First quarter $0.20 $0.11
Second quarter $0.11 $0.05
Third quarter $0.06 $0.03
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 0.40
On September 23, 2002, as reported by Cycomm's transfer agent, shares of
common stock were held by 996 persons, based on the number of record holders,
including holders who are nominees for an undetermined number of beneficial
owners.
DIVIDEND POLICY
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 the
Cycomm and any other factors Cycomm's 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 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results of Operations
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.
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
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.
Page 9
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 three months ended June 30, 2002.
Interest expense for the six 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 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.
Page 10
Year Ended December 31, 2001 and Year Ended December 31, 2000
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.
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 June 30,
2002, Cycomm had cash and cash equivalents of $457,351.
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
Page 11
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 deficit 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
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 1-3 years 4 - 5 After 5
than 1 years 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 had 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.
In the six months ended June 30, 2002, cash used in operations amounted to
$2,180,744, largely due to Cycomm's net loss of $2,941,974. 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
Page 12
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
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 and $901,938 under
convertible debentures.
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.
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
the 2001 Consolidated Financial Statements. As disclosed in Note 2 of Notes to
the 2001 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.
Page 13
DESCRIPTION OF THE BUSINESS
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 our
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.
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.
In April 2002, Cycomm began to take major steps to reduce costs. Cycomm
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. In
connection with the closing of our Canadian facility, Cycomm reduced its staff
from approximately 75 employees to approximately 18 employees. Current staffing
levels are adequate to meet existing demand, and Cycomm has the ability to
expand production capacity rapidly. In the event that growth in demand outpaces
capacity expansion, Cycomm has identified manufacturing outsourcing companies to
handle production overflow.
Page 14
Cycomm has also expanded its product line and begun to introduce products
into new markets. Going forward, in addition to the PCMobile line of rugged
laptop computers, Cycomm will offer a modular PC, a wall-mounted rugged PC,
rugged displays and other applications that utilize its core technologies. This
expanded product suite will also allow Cycomm to enter new markets such as
utilities, health care, industrial and field service. These changes, combined
with the recent cost reductions, should greatly improve Cycomm's future
operations.
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. Cycomm's manufacturing facility is
located in Melbourne, Florida. This location also provides repair,
maintenance and technical support to customers.
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.
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.
Page 15
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.
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 manufacturing facility is located in Melbourne, Florida. 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.
Page 16
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,
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.
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
six 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.
Page 17
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.
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.
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
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.
Page 18
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.
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.
Page 19
MANAGEMENT
ALBERT I. HAWK
Albert I. Hawk, 42, is Chairman of the Board of Directors and Chief Executive
Officer of Cycomm International since May 1996. From 1993 to May 1996, Mr. Hawk
was Managing Director of Corstone Corporation, a private merchant banking and
professional services firm specializing in telecommunications and information
technologies. Mr. Hawk has invested in and served as founder, executive officer
and director of numerous high growth companies.
JAMES L. BLAND
Jim Bland, 43, is President and Chief Operating Officer Cycomm International
since March 2002. From 1994 to 2000, Mr. Bland was CEO of Datalux
Corporation a private manufacturer of rugged wireless computer hardware. Mr.
Bland is also the founder and Managing Director of InterPhase Consulting
specializing in commercialization of new technologies in the
telecommunications and computing markets. Mr. Bland currently invests in and
serves on the board of a variety of technology companies.
HUBERT R. MARLEAU
Hubert R. Marleau, 51, has served as a director since November 1993 (term
expires upon the election or assignment of a successor) and serves as
president and Chief Executive Officer of Palos Capital Corp., a private
merchant bank, since January 1998. Mr. Marleau was a founder and Chairman
and Chief Executive Officer of Marleau Lemire Inc., a large, independent
broker dealer in Canada, from January 1989 to December 1997. Mr. Marleau
serves on the boards of numerous public and private companies, including
Cinar Films Inc., Herzfeld Caribbean Basin Fund Inc., Liquidation World Inc.,
Uni-Select Inc., US Global Strategies Fund Ltd. and US Masters Holding Ltd.
STEPHEN SPARKS
Stephen Sparks, 43, has served as a director since September 1999 (term expires
upon the election or assignment of a successor) and is the CEO of Sparks
Personnel. Mr. Sparks has founded and been a director and officer for several
high growth companies in the Washington, D.C. area, including Customer Care
Solutions, MedOne Staffing and Seven Locks Broadcasting Company.
EXECUTIVE COMPENSATION
The following tables set forth the compensation earned by our Chief Executive
Officer, and other executive officers whose salaries exceeded $100,000 in the
fiscal years 2001 and 2000:
Long-Term
Name and Annual Compensation Compensation
Principal Other Annual All Other
Position Year Salary Bonus Compensation Options(#) Compensation(1)
Albert 2001 $240,000 --- --- --- ---
I. Hawk 2000 240,000 25,000 --- --- ---
President
and Chief
Executive
Officer
Michael D. 2001 $63,466 --- --- --- $1,784
Perrine(2) 2000 150,000 20,000 --- --- 4,693
President -
Mobile
Computing
division
Clinton M. 2001 $100,000 $18,000 --- --- $2,440
Nye (3) 2000 5,385 2,000 --- --- ---
Vice
President
of Sales
Robert M. 2001 $104,583 $10,000 --- --- $3,150
Hutton 2000 83,327 20,000 --- --- 3,178
Vice
President
of Finance
(1) Includes amounts contributed by Cycomm to the 401(k) Plan. Cycomm
contributes an amount equal to 50% of the eligible employees contribution
to the 401(k) Plan, not to exceed 3% of the employees earnings.
(2) Mr. Perrine was terminated effective June 1, 2001.
(3) Mr. Nye was hired on December 13, 2000.
Page 20
Option Grants in Last Fiscal Year
Cycomm granted 125,000 options with an exercise price of $0.29 to Clinton M.
Nye, Vice President of Sales, on March 19, 2001. These options expire on
December 29, 2005. No other options were granted to executive officers in the
year ended December 31, 2001.
Aggregated Options Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth information with respect to options exercised by
officers in the fiscal year ended December 31, 2001 and the value of such
officers' unexercised options at December 31, 2001.
Number of Shares Value of Unexercised
Shares Underlying Unexercised In-
Acquired Options at the-Money Options
On Value Fiscal Year-End(#) at Fiscal Year-End($)
Name Exercise(#)Realized($)Exercisable Unexercisable ExercisableUnexercisable
Albert I.
Hawk --- --- 1,400,000 --- --- ---
Clinton
M. Nye --- --- 62,500 62,500 --- ---
Robert M.
Hutton --- --- 125,000 --- --- ---
Page 21
PRINCIPAL STOCKHOLDERS
The following table shows beneficial ownership of shares of the Company's
common stock as of October 11, 2002 by: persons known to the Company to be the
beneficial owners of more than 5% of Cycomm's Common Stock; and stock ownership
of all directors and officers of the Company as a group:
Name and Address of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership Class(1)(2)
Michael Finklestein 56,377,137(3) 34.28%
Stonestreet Limited
Partnership
260 Town Centre Blvd.
Suite 201
Markham, ON L3R 8H8
Ari Rabinowitz 43,575,595(4) 26.50%
Alpha Capital
Pradafant 7
9490 Furstentums
Vaduz, Lichtenstein
Paul Kessler 22,934,524(5) 13.95%
Bristol Investment Fund,
Ltd.
Caledonian House
Jennett Street
Georgetown, Grand Cayman
Cayman Islands
Albert I. Hawk 3,698,153(6) 2.25%
Stephen Sparks 1,682,749(7) 1.02%
James L. Bland 1,000,000(8) *
Hubert Marleau 643,152(9) *
Robert M. Hutton 125,000(10) *
Clinton M. Nye 125,000(11) *
All officers and Directors 7,274,054 4.42%
as a group
(6 persons)
(1) Pursuant to applicable rules of the Securities and Exchange Commission,
shares of Common Stock which were not outstanding as of October 11, 2002,
but which were subject to issuance within 60 days of October 11, 2002 are
deemed to be outstanding for purposes of computing the percentage
ownership.
(2) Beneficial owners have sole voting and investment powers with respect to
shares of Common Stock actually held on October 11, 2002, except where
indicated otherwise.
(3) Includes 3,327,732 shares previously issued pursuant to the conversion of
Series F preferred stock, 45,561,905 shares to be issued upon conversion of
debentures and stock purchase warrants to acquire an aggregate of 7,487,500
shares. Pursuant to the terms of the convertible debenture and warrant
agreement, the holder may not hold more than 9.99% of Cycomm's outstanding
common stock at any time.
(4) Includes 37,638,095 shares to be issued upon conversion of debentures and
stock purchase warrants to acquire an aggregate of 5,937,500 shares.
Pursuant to the terms of the convertible debenture and warrant agreement,
the holder may not hold more than 9.99% of Cycomm's outstanding common
stock at any time.
(5) Includes 19,809,524 shares to be issued upon conversion of debentures and
stock purchase warrants to acquire an aggregate of 3,125,000 shares.
Pursuant to the terms of the convertible debenture and warrant agreement,
the holder may not hold more than 9.99% of Cycomm's outstanding common
stock at any time.
(6) Includes stock purchase options to acquire an aggregate of 1,200,000 shares
and stock purchase warrants to acquire an aggregate of 729,335 shares.
(7) Includes stock purchase warrants to acquire an aggregate of 729,335 shares.
(8) Includes stock purchase options to acquire an aggregate of 1,000,000
shares.
(9) Includes stock purchase options to acquire an aggregate of 125,000 shares.
Page 22
(10) Includes stock purchase options to acquire an aggregate of 125,000 shares.
(11) Includes stock purchase options to acquire an aggregate of 125,000 shares.
* Represents beneficial ownership of less than one percent
Page 23
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 June 30, 2002,
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 have a value of $0 as of June 30, 2002.
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, and in the year ended December 31, 2001. 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 quarter ended June 30, 2002 or the quarter ended June 30, 2001.
Cycomm paid $44,180 and $39,971 in rent and office expenses to Corstone in the
quarters ended June 30, 2002 and June 30, 2001, respectively. 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. 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 $250,000 500,000 729,335
Stephen Sparks 250,000 500,000 729,335
Palos Capital Corp(1) 250,000 500,000 ---
(1) Palos Capital Corp is an independent broker dealer in which Hubert R.
Marleau has an ownership interest
Page 24
DESCRIPTION OF SECURITIES
Common Stock
Cycomm may issue an unlimited number of shares of common stock, without
par value, of which 78,283,504 shares were issued and 85,283,504 shares were
outstanding as of October 11, 2002. Assuming all of the options and warrants
are exercised and all convertible securities are converted, there will be
164,440,184 shares issued and outstanding.
All issued and outstanding shares of common stock, including those to be
issued, will be fully paid and non-assessable. Each holder of record of common
stock is entitled to one vote for each share held on all matters requiring a
vote of shareholders, including the election of directors. There are no
preferences, conversion rights, preemptive rights, subscription rights, or
restrictions on transfers attached to the shares of common stock. In the event
of liquidation, dissolution, or winding up of Cycomm, the holders of shares of
common stock are entitled to participate in the assets of Cycomm available for
distribution after satisfaction of the claims of creditors.
Preferred Stock
Cycomm may issue an unlimited number of shares of preferred stock, without
par value. The preferred stock may be issued at any time and from time to time
in one or more series. Except as provided in the Series B preferred stock, the
Board of Directors, without further shareholder approval, may determine the
rights, liabilities and preferences of each series of preferred stock. The
issuance of preferred stock by the Board of Directors with voting conversion or
other rights could have the effect of delaying, deferring, or preventing a
change in control of Cycomm, or could adversely affect the voting power of the
holders of common stock.
Series B Preferred Stock. The Series B preferred stock is convertible at the
option of the holder into 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. As of September
23, 2002, two shares of Series B preferred stock were outstanding, and were
convertible into an aggregate of 4,878,151 shares of common stock based on the
conversion price at that date.
Options
Cycomm grants options to various employees, directors and service
providers. The options give the holder the right to purchase shares of common
stock of Cycomm and terms of the options being offered are described below:
1997 Stock Option Plan. In November 1997, Cycomm adopted the 1997 Stock Option
Plan ("1997 Plan") under which 1,000,000 shares were reserved for grant to all
eligible persons of Cycomm. 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. The stock
options have a term of ten years. As of September 23, 2002, a total of 64,958
stock options have been granted under the 1997 Plan and 935,042 stock options
are available for grant.
Non-qualified Options. Cycomm has granted 2,820,000 non-qualified stock options
to directors, officers, key employees and other persons as of September 23,
2002. These options have vesting periods ranging from immediate vesting to two
years. Expiration terms range from two to ten years. The options are normally
granted at an exercise price that equals the fair market value on the date each
option is granted.
Page 25
Warrants
Cycomm grants warrants, from time to time, to various parties in
conjunction with services rendered, acquisitions or financings . The warrants
give the holder the right to purchase shares of common stock of Cycomm and terms
of the warrants being offered herein are described below:
Warrants. In connection with the issuance of convertible debt and the sale of
common stock, Cycomm issued 18,500,000 common share purchase warrants to the
investors in the offerings. Cycomm issued 13,125,000 warrants at $0.08 per share
which expire on June 17, 2008, 3,125,000 warrants at $0.08 per share which
expire on September 4, 2008, 2,000,000 warrants at $0.01 per share which expire
on June 30, 2005 and 250,000 warrants at $0.25 per share which expire on April
11, 2004.
Cycomm also issued 1,378,447 warrants at $0.47 per share which expire on January
25, 2005. These warrants were issued in conjunction with the anti-dilution
provisions of warrants issued to Special Situations Fund, L.L.P. ("SSF"), Albert
I. Hawk and Stephen Sparks on January 25, 2000. SSF received 1,102,757 warrants,
Albert I. Hawk received 137,845 warrants and Stephen Sparks received 137,845
warrants. The exercise price of the 4,731,921 warrants originally held by SSF,
the 591,940 warrants originally held by Albert I. Hawk and the 591,940 warrants
originally held by Stephen Sparks were also re-priced to $0.47 per share as a
result of the anti-dilution provisions.
SELLING SHAREHOLDERS
The following table identifies the Selling Shareholders as of September 23,
2002, and indicates for each beneficial owner (i) the number of shares and the
percentage of the outstanding shares beneficially owned before the offering,
(ii) the number of shares to be offered and sold, and (iii) the number of shares
and the percentage of the outstanding shares to be owned after the offering is
complete.
Name of Selling Beneficial Shares Owned Shares to be Beneficial Shares Owned
Shareholder Prior to Offering(1) Offered(1) After Offering(2)
Number Percent Number Percent
Michael
Finklestein 56,377,137 34.28% 56,077,137(3) 300,000(4) *
Stonestreet L.P.
Ari Rabinowitz
Alpha Capital 43,575,595 26.50% 43,575,595(5) --- ---
Paul Kessler
Bristol
Investment Fund 22,934,524 13.95% 22,934,524(6) --- ---
Ltd.
Arthur Marxe
Special
Situations Fund 5,834,678 3.55% 1,102,757(7) 4,731,921(8) 2.88%
Albert I. Hawk 3,698,153 2.25% 137,845(9) 3,560,308(10) 2.17%
Peter Melhado 2,854,167 1.74% 250,000(11) 2,604,167 1.58%
Stephen Sparks 1,682,749 1.02% 137,845(12) 1,544,904(13) *
Michael D. 1,052,632 * 1,052,632(14) --- ---
Perrine
Peter Dolby
1,000,000 * 1,000,000(15) --- ---
Sandine Bon
1,000,000 * 1,000,000(16) --- ---
Page 26
(1) As to each person or entity named as beneficial owner, the percentage of
ownership is determined by assuming that any convertible debentures,
options, warrants and Series B preferred stock held which are exercisable
or convertible within 60 days from the date hereof have been exercised or
converted, as the case may be.
(2) Unless otherwise indicated, assumes the exercise, conversion and sale of
all shares being offered by the named Selling Security Holders.
(3) Includes 3,327,732 shares previously issued pursuant to the conversion of
Series F preferred stock, 45,561,905 shares to be issued upon conversion of
debentures and stock purchase warrants to acquire an aggregate of 7,187,500
shares. Pursuant to the terms of the convertible debenture and warrant
agreement, the holder may not hold more than 9.99% of Cycomm's outstanding
common stock at any time.
(4) Includes 300,000 shares related to warrants.
(5) Includes 37,638,095 shares to be issued upon conversion of debentures and
stock purchase warrants to acquire an aggregate of 5,937,500 shares.
Pursuant to the terms of the convertible debenture and warrant agreement,
the holder may not hold more than 9.99% of Cycomm's outstanding common
stock at any time.
(6) Includes 19,809,524 shares to be issued upon conversion of debentures and
stock purchase warrants to acquire an aggregate of 3,125,000 shares.
Pursuant to the terms of the convertible debenture and warrant agreement,
the holder may not hold more than 9.99% of Cycomm's outstanding common
stock at any time.
(7) Warrants to purchase common stock issued pursuant to anti-dilution
provisions of previously issued warrants.
(8) Includes 4,731,921 shares related to warrants.
(9) Warrants to purchase common stock issued pursuant to anti-dilution
provisions of previously issued warrants.
(10) Includes 1,200,000 shares related to options and 591,490 shares related to
warrants.
(11) Includes 250,000 shares related to warrants.
(12) Warrants to purchase common stock issued pursuant to anti-dilution
provisions of previously issued warrants.
(13) Includes 591,490 shares related to warrants.
(14) Shares issued in settlement of a lawsuit.
(15) Includes 1,000,000 shares related to warrants.
(16) Includes 1,000,000 shares related to warrants.
* Represents beneficial ownership of less than 1%
Page 27
The selling shareholders listed in the table above exercise voting and
control powers over the Cycomm common stock offered for resale. Pursuant to
Section 13 or 15(d) of the Exchange Act, we are required to disclose all
material relationships between the selling shareholders and Cycomm for the last
three years for the selling shareholders who do not file periodic reports with
the SEC. Of the selling shareholders in the table above, Arthur Marxe, Albert I
Hawk, Peter Melhado and Stephen Sparks file periodic reports. Descriptions of
the relationships between Cycomm and the other selling shareholders are provided
below.
Michael Finklestein is a principal of Stonestreet LP ("Stonestreet"). In
December of 2000, Stonestreet invested $350,000 in Cycomm's Series F preferred
stock. In connection with the investment in Series F preferred stock,
Stonestreet received 300,000 warrants to purchase Cycomm common stock at $0.40
per share. In June of 2002, Stonestreet invested $450,000 in debentures
convertible into Cycomm common stock. In connection with the June investment in
debentures, Stonestreet received 5,625,000 warrants to purchase Cycomm common
stock at $0.08 per share. In September of 2002, Stonestreet invested $125,000 in
debentures convertible into Cycomm common stock. In connection with the August
investment in debentures, Stonestreet received 1,562,500 warrants to purchase
Cycomm common stock at $0.08 per share.Stonestreet is an affiliate of Canaccord
Capital, a registered broker dealer in Canada. In the Preferred Stock Purchase
Agreement for the Series F preferred stock, and in the Subscription Agreements
for the debentures issued in June of 2002 and in September of 2002, Stonestreet
represented to Cycomm that the investments had been made for Stonestreet's own
accounts, and not with a view to distribute the underlying securities.
Ari Rabinowitz is a principal of Alpha Capital ("Alpha"). In June of 2002,
Alpha invested $350,000 in debentures convertible into Cycomm common stock. In
connection with the June investment in debentures, Alpha received 4,375,000
warrants to purchase Cycomm common stock at $0.08 per share. In September of
2002, Alpha invested $125,000 in debentures convertible into Cycomm common
stock. In connection with the August investment in debentures, Alpha received
1,562,500 warrants to purchase Cycomm common stock at $0.08 per share.
Paul Kessler is a principal of Bristol Investments Fund Ltd. ("Bristol").
In June of 2002, Bristol invested $250,000 in debentures convertible into Cycomm
common stock. In connection with the June investment in debentures, Bristol
received 3,125,000 warrants to purchase Cycomm common stock at $0.08 per share.
Michael D. Perrine was President of Cycomm's wholly owned subsidiary,
Cycomm Mobile Solutions Inc., from April 1, 1999 to May 1, 2001. Mr. Perrine
was issued 1,052,632 in full settlement of a lawsuit he had filed against
Cycomm.
Peter Dolby and Sandine Bon were each issued 1,000,000 warrants to
purchase Cycomm common stock at $0.01 per share in full payment of investment
banking services provided to Cycomm from January 1, 2002 to December 31, 2002.
PLAN OF DISTRIBUTION
The selling shareholders may offer their shares for sale from time to time
in transactions for their own accounts to or through broker-dealers on OTCBB at
prevailing market prices or at negotiated prices. The broker-dealers may receive
discounts, commissions or concessions from the selling shareholders or from the
broker-dealers' customers who purchase the shares. The selling shareholders and
the broker-dealers who sell the shares may be deemed "underwriters" within
Section 2(11) of the Securities Act of 1933 and any discounts, commissions or
concessions received by them may be deemed "underwriting compensation" under
that Act. The selling shareholders will receive all of the proceeds of the
sales. We will not receive any of these proceeds. We will bear all of the
expenses of the registration statement of which this prospectus is a part.
Of the shares included in this registration statement, 103,009,524 are
related to shares to be issued upon conversion of 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. On September 4,
2002, Cycomm issued $250,000 of 8% convertible debentures due September 4, 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
Page 28
lowest closing prices for the 30 days prior to the date of conversion. The
debentures are fully eligible for conversion. 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 has issued 7,000,000 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 June 17, 2002 issuance of the debentures,
Cycomm issued 13,125,000 warrants to purchase common stock at $0.08 per share.
The warrants are immediately exercisable and expire on June 17, 2009. In
connection with the September 4, 2002 issuance of the debentures, Cycomm issued
3,125,000 warrants to purchase common stock at $0.08 per share. The warrants are
immediately exercisable and expire on August September 4, 2009.
The conversion price of the debentures is based upon the market price of
Cycomm's stock. If the price of our stock declines, we will be required to issue
a larger number of shares upon conversion of the debentures. Pursuant to the
terms of the debenture agreements, Cycomm was required to register 200% of the
total shares to be issued upon conversion based on the current share price. The
table below shows the effect of a decline in Cycomm's stock price on the number
of shares to be issued to the debenture holders.
Shares to Be Issued Upon Conversion of Debentures
Holder Current Share Decrease of 25% Decrease of 50% Decrease of 75%
Price $0.02
Michael
Finklestein
Stonestreet, LP 39,866,667 53,155,556 79,733,333 159,466,667
Ari Rabinowitz
Alpha Capital 32,933,333 43,911,111 65,866,667 131,733,333
Paul Kessler
Bristol
Investments
Fund Lt. 17,333,333 23,111,111 34,666,667 69,333,333
Total 90,133,333 120,177,778 180,266,667 360,533,333
Cycomm is also registering 3,327,732 shares that were previously issued
upon the conversion of Cycomm's Series F convertible preferred stock. 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. Cycomm registered 2,597,972 shares of
common stock related to the conversion of Series F preferred stock in a previous
registration statement; Cycomm registered 1,400,000 shares of common stock
issued pursuant to the conversion of Series F preferred stock on registration
statement number 333-54052, which was declared effective on February 5, 2001.
Cycomm registered 1,197,972 shares of common stock issued pursuant to the
conversion of Series F preferred stock on registration statement number
333-68572, which was declared effective on September 14, 2001. As of October 11,
2002, there are no shares of Series F preferred stock outstanding.
Page 29
EXPERTS
The consolidated financial statements of Cycomm at December 31, 2001 and
2000, and for each of the two years in the period ended December 31, 2001,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their reports thereon
(which contain an explanatory paragraph describing conditions that raise
substantial doubt about the Company's ability to continue as a going concern as
described in Note 1 to the consolidated financial statements) appearing
elsewhere herein, and are included in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.
LEGAL MATTERS
Hirst & Applegate, 200 Boyd Building, Cheyenne, Wyoming will pass upon the
validity of the shares of common stock offered in this prospectus.
DESCRIPTION OF PROPERTY
As of September 23, 2002, Cycomm leased the following facilities:
Approximate
Location Type of Facility Condition Square Ft.
-------- ---------------- --------- ----------
McLean, VA Executive Office Excellent 4,000
Melbourne, FL Manufacturing and Excellent 6,200
Repair
Montreal, QB No longer utilized Excellent 10,300
Management believes that its manufacturing and 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. On June 28, 2002, Cycomm closed its Montreal, QB facility and began
manufacturing units in the Melbourne, FL facility. The Montreal facility was
closed in order to consolidate operations and reduce overhead costs. The
Montreal lease expires March 31, 2008, however, Management is currently
negotiating a settlement for early termination of the leasing arrangement. The
Melbourne lease expires June 30, 2003 and the McLean facility is under a
sub-lease which expires March 31, 2006.
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.
Page 30
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission (the "SEC"). You may
read and copy any document we file at the SEC's public reference rooms in
Washington, DC, New York, New York and Chicago, Illinois. The SEC public
reference room in Washington, DC is located at 450 Fifth Street, N.W.,
Washington, D.C. 20549-1004. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Our SEC filings are also available to
you free of charge at the SEC's web site at http:/www.sec.gov.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Provisions of the Wyoming Business Corporation Act and Cycomm's Bylaws
provide indemnification for directors, officers and controlling persons of
Cycomm against certain liabilities, including liability under the Securities Act
of 1933, under certain circumstances. Insofar as indemnification for liabilities
arising under that Act may be permitted to such persons, Cycomm has been advised
that in the opinion of the SEC such indemnification is against public policy as
expressed in that Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment of
expenses incurred or paid in the successful defense of any action) is asserted
by such persons in connection with this registration statement, unless Cycomm's
counsel is of the opinion that the matter has been settled by controlling
precedent, Cycomm will submit to a court the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of that question.
Page 31
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
Financial Statements
Interim Financial Statements (unaudited):
Consolidated Balance Sheet as of June 30, 2002 32
Consolidated Statements of Operations for the Periods Ended
June 30, 2002 and June 30, 2001 33
Consolidated Statements of Cash Flows for the Periods Ended
June 30, 2002 and June 30, 2001 34
Consolidated Statement of Stockholders' Deficit 35
Notes to the Consolidated Interim Financial Statements 37
Annual Financial Statements:
Report of Independent Auditors 42
Consolidated Balance Sheets as of December 31, 2001 and
December 31, 2000 43
Consolidated Statements of Operations for the Years Ended
December 31, 2001 and December 31, 2000 44
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001 and December 31, 2000 45
Consolidated Statements of Stockholders' Deficit for the
Years Ended December 31, 2001 and December 31, 2000 46
Notes to the Consolidated Financial Statements 48
Page 32
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2002
June 30,
2002
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $457,351
Accounts receivable, less allowance for doubtful
accounts of $50,000 205,036
Inventories, net of allowance for obsolete
inventory of $220,000 525,659
Deferred financing costs 142,777
Foreign taxes receivable 114,932
Prepaid expenses 1,891
---------
Total current assets 1,447,646
Equipment, net 25,909
----------
Total assets $1,473,555
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable - trade $636,768
Convertible debentures 1,052,992
Discount on convertible debentures (961,200)
--------
Convertible debentures, net of discount 91,792
Warranty reserve 600,478
Accrued exit cost obligations 700,623
Other accrued liabilities 398,188
Dividends payable on preferred stock 43,425
Current portion of capital lease obligations 8,647
Revolving credit facility 210,438
---------
Total current liabilities 2,690,359
Capital lease obligations, less current portion 11,595
Commitments and contingencies
Stockholders' deficit:
Convertible preferred stock, $50,000 par value,
unlimited authorized shares, 2 shares issued and
outstanding at June 30, 2002 105,000
Common stock, no par value, unlimited authorized
shares, 82,205,614 shares issued and 77,205,614
shares outstanding at June 30, 2002 71,169,457
Accumulated deficit (72,502,856)
-----------
Total stockholders' deficit (1,228,399)
-----------
Total liabilities and stockholders' deficit $1,473,555
===========
See accompanying notes to consolidated financial statements
Page 33
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.
Page 34
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
Page 35
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)
==== ======= ========== ========== ====== ============ ===========
Page 36
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.
Page 37
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
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
Page 38
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
only been able to make 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 furniture and fixed assets, 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
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:
June 30,
2002
Raw materials $544,319
Work in process and sub-assemblies 20,068
Finished goods 181,272
Allowance for obsolete inventory (220,000)
---------
$525,659
========
Page 39
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.
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.
Page 40
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.
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 41
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,
2002
United States $1,473,555
Canada ---
----------
$1,473,555
==========
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.
On September 4, 2002, Cycomm issued $250,000 of 8% convertible debentures due
September 4, 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 2,000,000 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 3,125,000 warrants to purchase common stock at $0.08
per share. The warrants are immediately exercisable for a period of seven years.
On September 24, 2002, Cycomm issued 289,098 shares of common stock upon
conversion of debentures with principal and accrued interest of $7,661.
Page 42
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Cycomm International Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Cycomm
International Inc. and subsidiaries 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 43
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 44
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 (loss) 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 45
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 46
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)
Page 47
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)
==== ======== ========== =========== ======= =========== ========
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
Page 48
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.
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.
Page 49
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)
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.
Page 50
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
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 2001 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
Page 51
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.
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.
Page 52
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.
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
Page 53
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
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.
Page 54
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.
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.
Page 55
Preferred Stock
On February 26, 1998, Cycomm issued 20 shares of Series B convertible redeemable
preferred stock ("Series B preferred stock") with a conversion value of $50,000
per share for net proceeds of $900,000. The Series B preferred stock is
convertible at the option of the holder into Cycomm 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 56
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.
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
Options Exercise Price Warrants Exercise 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.
Page 57
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.
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 58
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 --- ---
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.
Page 59
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.
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
Page 60
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)
(1) Palos Capital Corp is an independent broker dealer in which
Hubert R. Marleau, a Director of Cycomm, has an ownership interest
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
1999, Cycomm sold its Secure Computing and Communications Security segments
resulting in the Company having only one reporting segment (See Note 3:
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
Page 61
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.
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 1,052,632 shares of Cycomm common stock with a value of $100,000
to Mr. Perrine, and both parties agreed to dismiss their respective lawsuits. 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.
Part II. Information Not Required in Prospectus
Item 24. Indemnification of Directors and Officers.
Provisions of the Wyoming Business Corporation Act and Cycomm's Bylaws
provide indemnification for directors, officers and controlling persons of
Cycomm against certain liabilities, including liability under the Securities Act
of 1933, under certain circumstances. Insofar as indemnification for liabilities
arising under that Act may be permitted to such persons, Cycomm has been advised
that in the opinion of the SEC such indemnification is against public policy as
expressed in that Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment of
expenses incurred or paid in the successful defense of any action) is asserted
by such persons in connection with this registration statement, unless Cycomm's
counsel is of the opinion that the matter has been settled by controlling
precedent, Cycomm will submit to a court the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of that question.
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses in connection with
distribution of the Common Shares hereby registered. All amounts are estimated
except the SEC fees and are expressed in U.S. dollars.
Payable by Registrant
SEC Registration Fee $ 533
Legal fees 5,000
Accounting fees 5,000
Miscellaneous fees 1,000
--------
Total $11,533
=======
Page 62
Item 26. Recent Sales of Unregistered Securities
On May 14, 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, Ltd., for net proceeds of $112,500.
Item 27. Exhibits.
(a) Exhibits
(1) The following exhibits are filed as part of this Registration
Statement on Form SB-2/A and incorporated by reference herein to the extent
possible.
3.1 Certificate of Incorporation (1)
3.2 Certificate of Incorporation on Change of Name (1)
3.3 Certificate of Continuance (1)
3.4 Amended Articles of Incorporation
5.1 Legal Opinion of Hirst & Applegate *
___
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)
10.14 Stock Purchase Agreement and Certificate of
Designation of Series F Convertible Redeemable
Preferred Stock (4)
23.1 Consent of Ernst & Young, Independent Auditors *
23.2 Consent of Hirst & Applegate *
(included in Exhibit 5.1)
* Filed herewith
(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.
Page 63
Item 28. Undertakings.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
the offering.
(b) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, Cycomm has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of Cycomm in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, Cycomm will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Act of 1934) that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
Page 64
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2/A and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of McLean, Commonwealth of Virginia, on September 23,
2002.
CYCOMM INTERNATIONAL INC.
Albert I. Hawk
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
Date: October 11, 2002
- -------------------------------------
Albert I. Hawk
Chief Executive Officer and Chairman of the Board
(Principal executive officer)
Date: October 11, 2002
- -------------------------------------
Robert M. Hutton, Vice President of Finance
(Principal financial officer and principal accounting officer)
Date: October 11, 2002
- --------------------------------------
Hubert R. Marleau, Director
Date: October 11, 2002
- ----------------------------------------
James L. Bland
Date: October 11, 2002
- ----------------------------------------
Stephen Sparks, Director
Robh/Form SB-2A/SB-2A Sept 2002
Page 65
Exhibit 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated March 22, 2002 (except Note 18, as to which the date is
April 9, 2002) in Amendment No. 2 to the Registration Statement (Form SB-2/A No.
333-96659) dated October 11, 2002 and the related Prospectus of Cycomm
International, Inc. for the registration of 127,268,335 shares of its common
stock.
/s/ Ernst & Young LLP
McLean, Virginia
October 11, 2002
Page 66
Exhibit 5.1
Consent of Hirst & Applegate, P.C. Wyoming Counsel
---------
October 11, 2002
Cycomm International Inc.
1420 Springhill Road
Suite 420
McLean, VA 22102
Ladies and Gentlemen:
RE: REGISTRATION ON FORM SB-2/A
We have acted as Wyoming counsel to Cycomm International Inc., a Wyoming
corporation (the "Company"), in connection with the registration of 127,268,335
shares of its common stock, no par value, (its "Common Shares"), for sale by
certain stockholders of Company, the registration of 103,009,524 Common Shares
to be issued upon conversion of debentures, 3,327,732 Common Shares underlying
preferred stock that was converted into common stock, the registration of
1,052,632 Common Shares issued in settlement of a lawsuit and the registration
of 19,878,447 Common Shares to be issued upon exercise of outstanding warrants
(the "Warrants"). We have examined such documents, corporate records, minutes,
consents, certificates of officers of the Company and other instruments, and
have reviewed such laws and regulations as we have deemed necessary. In the
course of such examination, we have assumed the genuineness of all signatures;
the legal capacity of all natural persons; the authenticity of all documents
submitted to us as originals; the conformity to original documents of all
documents submitted to us as certified, photostatic or facsimile copies; and the
authenticity and completeness of the originals of all such copies. As to any
facts material to this opinion which we did not independently establish or
verify, we have relied upon statements and representations of officers and other
representatives of Cycomm and others.
Based upon and subject to the foregoing, and subject to the other
limitations and qualifications set forth herein, we are of the opinion that the
Common Shares have been duly authorized for issuance by Cycomm and that the
Common Shares are, and the Common Shares underlying the debentures and Warrants
upon exercise or conversion, in the manner and under circumstances described in
the Registration Statement, Form SB-2/A, will be, validly issued, fully paid and
nonassessable.
The foregoing opinion is subject to the qualifications that:
(a) legality, validity or enforcement may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting the rights of creditors generally;
(b) general principles of equity, including principles of commercial
reasonableness, good faith and fair dealing, regardless of whether
enforcement is considered in proceedings at law or in equity;
(c) our opinion is limited to matters governed by the laws of Wyoming
and no opinion is expressed herein as to any matter governed by the
laws of any other jurisdiction;
Page 67
(d) the opinions expressed herein are strictly limited to the matters
stated herein and no other opinions may be implied beyond the
matters expressly so stated.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters".
Yours very truly,
HIRST & APPLEGATE, P.C.
BY: DALE W. COTTAM