Page 1
10
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB/A
(Mark One)
X Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1998
____ Transition report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period from ______________ to _______________
Commission file number: 1-11686
CYCOMM INTERNATIONAL INC.
(Exact name of small business issuer as specified in its
charter)
Wyoming 54-1779046
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1420 Springhill Road, Suite 420
McLean, Virginia 22102
(Address of principal executive offices)
(703) 903-9548
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes x No ___
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange
Act after the distribution of securities under a plan confirmed
by a court. Yes___ No___
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:
As of November 1, 1998, the Registrant had 11,540,311 shares of
Common Stock outstanding.
Transitional Small Business Disclosure Format: Yes No X
Page 2
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
PART I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets......... 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Condensed Consolidated Statement of Stockholders' 6
Equity
Notes to Condensed Consolidated Financial 7
Statements
Item 2. Management's Discussion and Analysis or
Plan of Operation............................. 9
PART II - Other Information
Item 1. Legal Proceedings............................. 14
Item 2. Changes in Securities......................... 14
Item 3. Default Upon Senior Securities................ 14
Item 4. Submission of Matters to a Vote of Security... 14
Holders
Item 5. Other Information............................. 14
Item 6. Exhibits and Reports on Form 8-K.............. 14
Signatures .............................................. 15
Page 3
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
September 30, December 31,
1998 1997
------------- ------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $737,600 $617,636
Accounts receivable, net 3,658,325 5,171,402
Inventories 5,262,026 5,374,511
Prepaid expenses 86,080 96,029
--------- ----------
Total current assets 9,744,031 11,259,578
--------- ----------
Fixed assets, net 1,521,098 1,582,475
Other assets:
Goodwill, net 2,262,678 2,534,733
Notes receivable 139,467 183,185
Deferred financing costs, net 80,759 179,460
Other 269,474 211,845
----------- -----------
2,752,378 3,109,223
----------- -----------
$14,017,507 $15,951,276
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable- trade $2,715,354 $3,386,543
Accrued liabilities 1,596,441 1,481,427
Due to affiliate 217,729 318,603
Deferred revenue 934,947 ---
Dividends payable on preferred
stock 23,333 ---
Current portion of capital lease
obligations 19,013 29,468
Revolving credit facility 2,174,703 2,629,308
Current portion of notes payable
and convertible debentures 3,189,324 413,575
--------- -------
Total current liabilities 10,870,844 8,258,924
--------- ---------
Capital lease obligations, less
current portion 46,163 54,294
Notes payable and convertible
debentures, less current portion 252,432 3,394,425
Stockholders' equity:
Series B Preferred Stock, 8 shares
issued and outstanding at
September 30, 1998 300,000 ---
Common Stock, no par value,
unlimited authorized shares,
11,540,311 and 9,816,877 shares
issued and outstanding
at September 30, 1998 and
December 31, 1997 50,380,119 47,491,611
Accumulated deficit (47,832,052) (43,247,978)
----------- -----------
Total stockholders' equity 2,848,067 4,243,633
----------- -----------
$14,017,507 $15,951,276
=========== ===========
See accompanying notes to condensed consolidated financial
statements.
Page 4
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
(Unaudited)
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
--------------------------- ---------------------------
Sales $4,419,348 $3,489,490 $14,542,419 $10,523,175
Cost of sales 3,560,515 2,624,733 11,161,792 7,577,827
--------- --------- ---------- ---------
Gross profit 858,833 864,757 3,380,627 2,945,348
--------- --------- ---------- ---------
Expenses
Selling, general
and administrative 1,378,181 1,277,365 4,734,878 4,570,800
Research and product
development 529,653 337,660 1,210,547 885,961
Depreciation and
amortization 552,620 227,493 1,471,373 597,496
Foreign exchange
loss (gain) (111,474) 3,214 (111,474) 97
Write-down of
investments to
net realizable value --- --- 50,000 ---
Write-down of inventories
to net realizable value 35,833 --- 35,833 ---
--------- --------- --------- ---------
2,384,813 1,845,732 7,391,157 6,054,354
========= ========= ========= =========
Loss from Operations (1,525,980) (980,975) (4,010,530) (3,109,006)
Other Income (Expense)
Interest income 20,430 10,983 51,711 46,885
Interest expense (190,044) (193,770) (580,143) (776,892)
Other income --- 6,671 1,508 38,825
---------- ----------- ---------- -----------
(169,614) (176,116) (526,924) (691,182)
---------- ----------- ---------- -----------
Net Loss $(1,695,594) $(1,157,091) $(4,537,454) $(3,800,188)
========== =========== ========== ===========
Loss Per Share
Net loss per share $(0.15) $(0.12) $(0.43) $(0.42)
====== ====== ====== ======
Weighted average number
of common shares
outstanding 11,193,903 9,408,175 10,517,830 9,041,709
========== ========= ========== =========
See accompanying notes to condensed consolidated financial
statements.
Page 5
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30,
1997
(Unaudited)
Nine Months Ended
-----------------
September 30, September 30,
1998 1997
------------- -------------
Operating activities
Net loss $(4,537,454) $(3,800,188)
Adjustments to reconcile net loss
to net cash provided by
operating activities:
Depreciation and amortization 1,471,373 597,496
Realized loss (gain) on
marketable securities --- (38,825)
Write-down of investments 50,000 ---
Write-down of inventories 35,833 ---
Non-cash expenses 13,889 439,368
Research and product
development 6,502 24,124
Change in operating assets and
liabilities 1,205,193 (68,456)
---------- ----------
Cash used in operating activities (1,754,664) (2,846,481)
---------- ----------
Investing activities
Acquisition of fixed assets (261,186) (261,373)
Proceeds on disposal of fixed assets --- 38,954
Increase in long-term investment --- (205,000)
Decrease in long-term investment --- 513,500
Increase in notes receivable (50,000) (186,500)
Decrease in notes receivable 50,249 41,520
Other (126,251) (109,441)
-------- --------
Cash used in investing activities (387,188) (168,340)
-------- --------
Financing activities
Issuance of common stock 1,991,250 ---
Issuance of preferred stock 900,000 ---
Borrowings under revolving credit
facility (454,605) 270,993
Repayment of notes payable and
convertible debentures (126,244) (329,401)
Borrowings under convertible
debentures --- 3,000,000
Deferred financing costs on
convertible debentures (30,000) (300,000)
Repayment - capital leases (18,585) (64,347)
Cash provided by financing --------- ---------
activities 2,261,816 2,577,245
--------- ---------
Increase (decrease) in cash and
cash equivalents during the period 119,964 (437,576)
Cash and cash equivalents, beginning
of period 617,636 1,220,544
------- ---------
Cash and cash equivalents, end of
period $737,600 $782,968
======== ========
Supplemental cash flow information:
Interest paid $563,538 $250,187
Income taxes paid --- ---
Non-cash investing and financing
activities:
Conversion of convertible
debentures to common stock $278,625 $2,646,649
Conversion of preferred stock to
common stock $623,288 ---
See accompanying notes to condensed consolidated financial
statements.
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CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD ENDED SEPTEMBER 30, 1998
(Unaudited)
Preferred Preferred Common Common Accumulated
Shares Stock Shares Stock Deficit
--------- --------- ------ ------ -----------
Balance,
December 31, 1996 --- --- 8,050,401 $42,970,749 $(37,825,326)
Net loss
Issuance of common
stock: (5,422,652)
Conversion of
debentures 1,219,727 2,742,753
Private placement 120,000 180,000
Acquisition
earn-out 426,749 1,264,776
Beneficial conversion
feature of
convertible debt 333,333
--- -------- ---------- ----------- ------------
Balance,
December 31, 1997 --- --- 9,816,877 47,491,611 (43,247,978)
Net loss (4,537,454)
Issuance of preferred
stock:
Private placement 20 $900,000
Issuance of common
stock:
Conversion of
debentures 236,380 273,970
Conversion of
preferred stock (12) (600,000) 287,054 623,288
Private placement 1,200,000 1,991,250
Dividends payable -
preferred stock (46,620)
--- -------- ---------- ----------- ------------
Balance,
September 30, 1998 8 $300,000 11,540,311 $50,380,119 $(47,832,052)
=== ======== ========== =========== ============
See accompanying notes to condensed consolidated financial
statements.
Page 7
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 1998
NOTE 1 - GENERAL
The interim financial information furnished herein was prepared
from the books and records of Cycomm International Inc. and its
subsidiaries (the "Company") as of September 30, 1998 and for the
period then ended, without audit; however, such information
reflects all normal and recurring accruals and adjustments which
are, in the opinion of management, necessary for a fair
presentation of financial position and of the statements of
operations and cash flows for the interim period presented. The
interim financial information furnished herein should be read in
conjunction with the consolidated financial statements included
in this report and the consolidated financial statements and
notes contained in the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1997. The interim financial
information presented is not necessarily indicative of the
results from operations expected for the full fiscal year.
NOTE 2 - INVENTORIES
The following is a summary of inventories at September 30, 1998
and December 31, 1997:
September 30, December 31,
1998 1997
Raw materials $2,187,939 $1,988,897
Work in process and sub-assemblies 2,440,115 2,591,442
Finished goods 633,972 794,172
---------- ----------
$5,262,026 $5,374,511
========== ==========
NOTE 3 - NOTES PAYABLE AND CONVERTIBLE DEBENTURES
In December 1997, the Company obtained a revolving credit
facility from a lender under which the Company may, at its
option, borrow and repay amounts up to a maximum of $3,432,000,
of which $2,174,703 was outstanding at September 30, 1998.
Borrowings under this credit facility bear interest at prime plus
3%. The credit facility is collateralized by trade accounts
receivable and inventory and restricts the Company from paying
dividends in certain circumstances. In conjunction with this
credit facility, the Company obtained a term loan in the amount
of $568,000 collateralized by certain machinery and equipment.
This term loan bears interest at prime plus 3% and is payable in
equal installments of $15,777 per month through January 1, 2001.
As of September 30, 1998, the Company has outstanding a total of
$3,000,000 in convertible debentures which were originally
convertible at the option of the holders into common stock of the
Company at 90% of the average closing bid price of the Company's
common stock prior to conversion, provided however, that the
conversion price was not greater than $6.00 per share nor less
than $3.00 per share. However, on June 15, 1998, the Company
entered into an agreement with the holders of the convertible
debentures, under which the holders waived their right of
conversion in exchange for an increase in the coupon interest
rate of the debentures from 10% to 12%. The Company intends to
repay the convertible debentures at the maturity date of February
Page 8
28, 1999 with the proceeds of a future debt or equity financing.
During the nine months ended September 30, 1998, principal and
accrued interest on convertible debentures in an amount of
$278,625 were converted into 236,380 shares of common stock.
NOTE 4 - PREFERRED STOCK
In February, 1998, the Company issued $1,000,000 of Series B
Convertible Redeemable Preferred Stock ("Series B Preferred").
Proceeds to the Company were $900,000, net of issuance costs of
$100,000. The Series B Preferred has no voting rights and will
pay a cumulative dividend of 10% per annum, which can be paid at
the option of the Company in either cash or in the Company's
common stock.
The Series B Preferred is convertible at the option of the holder
into common stock of the Company pursuant to a conversion
schedule as set forth in the agreement. The holder can convert
25% of its preferred shares on or after the 90th day after
February 26, 1998, and up to a further 25% every 30 days
thereafter. 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 the Company's common
stock is trading at or below $1.50 at the conversion date, the
Company has the right to redeem the Series B Preferred at a
premium of 18% over the conversion price. If the Company does
not exercise this right, the holder may then convert only 10% of
the Series B Preferred, and up to a further 10% every 20 days
thereafter.
As of September 30, 1998, Series B Preferred with stated value
and accrued dividends of $623,288 had been converted into 287,054
shares of Common Stock.
In conjunction with the issuance of the Series B Preferred, the
Company issued 70,000 warrants to purchase common stock at a
purchase price of $2.50 per share. These warrants expire on
February 26, 2000.
NOTE 5 - RESTATEMENTS
The Form 10-QSB/A for the period ended 9/30/98 has been restated to
reflect an accounting treatment related to certain sales of PCMobile
computers in which customers were given PCMobiles with 586 processors
(the "586s") to be used until PCMobiles with Pentium processors
(the "Pentiums") became available. At the time the sales 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 sale. When the Pentiums became available, the customers
could trade in the 586s for Pentiums at no additional charge. Cycomm
recorded revenue on the sales at the time the 586s were shipped. There
were several delays in the development of the Pentium PCMobile, which
caused these sales to extend over multiple accounting periods.
Management has determined that revenue should not have been recognized
when the 586s were shipped, but should have been delayed until the
Pentiums were shipped to the customers. The 586s have been reclassified
as demonstration units, which are recorded in inventory, and are now
depreciated over a one year period. Payments received from customers
have been recorded as deferred revenue.
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For the three months ended September 30, 1998 the effects of the
restatements are as follows. Revenues were reduced by $11,206 with a
corresponding reduction in cost of sales of $7,280. Depreciation
expense increased by $208,443. Accounts receivable increased by
$727,159, inventory decreased by $201,163, and the Company recorded
$738,365 in deferred revenue.
For the nine months ended November 30, 1998 the effects of the
restatements are as follows. Revenues were reduced by $1,242,378 with a
corresponding reduction in cost of sales of $836,201. Depreciation
expense increased by $477,291. Accounts receivable decreased by
$307,430, inventory increased by $358,910, and the Company recorded
$196,583 in deferred revenue.
NOTE 6 - RECENT PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share", which was required to be
adopted on December 31, 1997. Under the new standard, companies
are required to report basic earnings per share (EPS) and diluted
EPS, instead of the primary and fully diluted EPS disclosures
which were previously required. 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 and preferred stock. For the periods ended
September 30, 1998, and September 30, 1997, the effect of the
exercise of stock options, warrants and the conversion of
debentures and preferred stock 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.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information"
(Statement 131), which is effective for years beginning after
December 15, 1997. Statement 131 establishes standards for the
way that public business enterprises report information about
operating segments in annual financial statements and requires
that those enterprises report selected information about
operating segments in interim financial reports. It also
establishes standards for related disclosures about products and
services, geographic areas, and major customers. Statement 131
is effective for financial statements for fiscal years beginning
December 15, 1997, and therefore the Company will adopt the new
requirements retroactively in 1998. Management has not completed
its review of Statement 131, but does not anticipate that the
adoption of this statement will have a significant effect on the
Company's reported segments.
Item 2. Management's Discussion and Analysis or Plan of
Operation.
Results of Operations
Three Months Ended September 30, 1998 and September 30, 1997
Revenues for the three months ended September 30, 1998 were
$4,419,348 which represents an increase of 27% over revenues of
$3,489,490 for the prior period. Sales of the Company's PCMobile
rugged laptop computers increased to $3,038,747 as compared to
$1,867,758 in the prior period. However, sales of secure
computing products were $1,022,296, as compared to $1,297,100
from the prior period. These two product lines, which comprise
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the computer products segment, accounted for 92% of total
revenue, as compared to 91% in the prior period. The remaining
revenue of $358,305 is related to the communications security
products segment, and reflects an increase of $33,674 from the
prior period.
Cost of sales for the three months ended September 30, 1998 were
$3,560,515 as compared to cost of sales of $2,624,733 for the
prior period. This increase is a result of the increased sales
volume of PCMobile products, offset by the decrease in sales
volume for secure computing products. Cost of sales for the
computer products segment were $3,361,612, resulting in a gross
margin of 17%, as compared to cost of sales of $2,446,130 and
gross margin of 23% in the prior period. The gross margin in the
communications security products segment was 49% in the current
period, as compared to 45% in the prior period.
Operating expenses were $2,384,813 for the three months ended
September 30, 1998 as compared to $1,845,732 in the prior
period. Selling, general and administrative expenses increased
$100,816 to $1,378,181 for the current period. Research and
development costs were $529,653 as compared to $337,660 in the
prior period. Current period costs are related primarily to the
engineering of the PCMobile Pentium(TM) and the next generation
Pentium II(TM) computers. Depreciation and amortization increased to
$552,620 for the three months ended September 30, 1998 as
compared to $227,493 in the prior period. This increase is
primarily the result of amortization of goodwill related to the
acquisitions of XL Computing Corporation and XL Canada and the
accelerated depreciation of PCMobile demonstration units
("demos"). The Company realized a foreign exchange gain of
$111,474 for the three months ended September 30, 1998 as a
result of the increased strength of the U.S. dollar as compared
to the Canadian dollar.
Interest expense for the three months ended September 30, 1998
was $190,044 as compared to interest expense of $193,770 for the
prior period. Included in interest expense for the three
months ended September 30, 1997 are non-recurring, non-cash charges
of $76,390 related to convertible debt financing that give effect
to beneficial conversion features. Recurring interest charges have
increased primarily as a result of increased borrowing on the
Company's line of credit.
The net loss of $1,695,594 or $0.15 per basic share, for the
three months ended September 30, 1998 represents an increase from
$1,157,091 or $0.12 per basic share for the three months ended
September 30, 1997. The Company experienced significantly higher
sales levels as compared to prior period, however, operating
expenses also increased as the Company invested in the
development and the sales and marketing of its next generation
PCMobile products. These factors, combined with increased
depreciation and amortization costs caused greater losses in the
current period, as compared to the quarter ended September 30,
1997.
Nine Months Ended September 30, 1998 and September 30, 1997
Revenues for the nine months ended September 30, 1998 were
$14,542,419 which represents an increase of 50% over revenues of
$10,523,175 for the prior period. Sales of the Company's
PCMobile rugged laptop computers increased to $10,523,175 as
compared to $4,717,191 in the prior period. However, sales of
secure computing products were $3,083,910, a decrease of
$1,311,909 from the prior period. These two product lines, which
comprise the computer products segment, accounted for 92% of
total revenue, as compared to 87% in the prior period. The
remaining revenue of $1,177,497 is related the communications
security products segment, and reflects a decrease of $232,668
from the prior period.
Page 11
Cost of sales for the nine months ended September 30, 1998 were
$11,161,792 as compared to cost of sales of $7,577,827 for the
prior period. This increase is a result of the increased sales
volume of PCMobile products, offset by the decrease in sales
volume for secure computing products. Cost of sales for the
computer products segment were $10,482,632, resulting in a gross
margin of 22%, as compared to cost of sales of $6,769,288 and
gross margin of 26% in the prior period. The gross margin in the
communications security products segment was 42% in the current
period, as compared to 43% in the prior period.
Operating expenses increased to $7,391,157 for the nine months
ended September 30, 1998 as compared to $6,054,354 in the prior
period. Selling, general and administrative expenses increased
to $4,734,878, an increase of $164,078 from the prior period.
Research and development costs increased to $1,210,547 as
compared to $885,961 in the prior period. These costs are
related to the engineering of the PCMobile Pentium(TM) and Pentium
II(TM) computers, and the development of new products for the
Company's secure computing product line. Depreciation and
amortization increased to $1,471,373 for the nine months ended
September 30, 1998 as compared to $597,496 in the prior period.
This increase is primarily the result of amortization of goodwill
related to the acquisitions of XL Computing Corporation and XL
Canada and the accelerated depreciation of PCMobile demonstration
units ("demos"). The Company realized a foreign exchange gain of
$111,474 for the nine months ended September 30, 1998 as a result
of the increased strength of the U.S. dollar as compared to the
Canadian dollar.
Interest expense for the nine months ended September 30, 1998 was
$580,143 as compared to $776,892 for the prior period. Included
in interest expense for the nine months ended September 30, 1998
and September 30, 1997 are non-recurring, non-cash charges of
$13,889 and $439,368, respectively, related to convertible debt
financing that give effect to beneficial conversion
features. Recurring interest charges have increased primarily
as a result of increased borrowing on the Company's line of credit.
The net loss of $4,537,454, or $0.43 per basic share, for the
nine months ended September 30, 1998 represents a decrease from
$3,800,188, or $0.42 per basic share for the nine months ended
September 30, 1997. The decrease in net loss in largely due to
the profitable performance of the PCMobile product line, offset
in part by the results of the secure computing product line,
increased research and development costs and increased
depreciation and amortization expenses.
Liquidity and Capital Resources
The Company has satisfied working capital requirements through
cash on hand, available lines of credit and various equity
related financings. At September 30, 1998, the Company had cash
and cash equivalents of $737,600.
In the nine months ended September 30, 1998, cash used in
operations amounted to $1,754,664. Cash used in investing
activities during the nine months ended September 30, 1998
totaled $387,188. Cash provided by financing activities was
$2,261,816 for the nine months ended September 30, 1998.
The Company has generated working capital through certain private
equity placements. In February 1998, the Company issued $1,000,000
of Series B Convertible Redeemable Preferred Stock for net proceeds
of $900,000 (See Note 4).
Page 12
In May 1998, the Company issued 900,000 unregistered shares of
common stock in a private equity placement for net proceeds of
$1,620,000. In conjunction with this private placement, the
Company issued 75,000 warrants to purchase common stock at a
purchase rice of $2.50 per share and 50,000 warrants to purchase
common stock at a purchase price of $3.00 per share. These
warrants expire on May 15, 1999. In September 1998, the Company
issued 300,000 unregistered shares of common stock in a private
equity placement for net proceeds of $371,250. In conjunction
with this private placement, the Company issued 75,000 warrants
to purchase common stock at a purchase price of $2.50 per share.
These warrants expire on September 17, 2000. Subsequent to
September 30, 1998, the Company issued 320,000 unregistered
shares of common stock in a private equity placement for net
proceeds of $432,000. In conjunction with this private placement,
the Company issued 100,000 warrants to purchase common stock at a
purchase price of $2.00 per share. These warrants expire on
November 11, 1999. The proceeds from these private placements were
used for operating working capital and general corporate purposes.
Amounts outstanding on the Company's bank credit line decreased
by $580,849 during the nine months ended September 30, 1998 due,
in part, to increased accounts receivable collections and reduced
inventory balances.
The Company's net working capital decreased to $(1,126,813) at
September 30, 1998, from $3,000,655 at December 31, 1997. The
decrease in net working capital is a result of $3,000,000 of
convertible debentures due February 28, 1998 being reclassified
from long term liabilities to current liabilities.
The Company continues to experience losses from
operations, management anticipates that additional debt or
equity financings will be required in the near term in order to
fund the operations and continued growth of the Company. The
secure computing division of the Company has been restructured to
reduce overhead costs, and management believes that future
operations of the division will be funded through working
capital. The operations of the communications products segment
have improved through the results of certain restructurings;
accordingly, this business segment will require only minimal
financing through funding from the parent company. The Company
anticipates that revenue and gross margin improvements will
enable the Company to achieve profitability in the near term.
The Company believes that it has the capital resources available
through additional debt and equity financings to develop and
market its products and to make acquisitions. The Company
believes that it will be able to meet its obligations in the near
term. There can, however, be no assurance that the above will be
successfully accomplished, or will be possible on terms
acceptable to the Company.
Year 2000 Issue
The Year 2000 Issue is the result of computer programs being
written using two digits rather than four to define the
applicable year. Any of the Company's computer programs or
hardware that have date-sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things,
a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Based on recent assessments, the Company determined that it will
not need to modify or replace its software or hardware so that
those systems will properly utilize dates beyond December 31,
1999.
Page 13
Cycomm's plan to resolve the Year 2000 Issue involves the
following three phases: assessment, testing, and implementation.
To date, the Company has completed its assessment of systems that
could be significantly affected by the Year 2000. The completed
assessment indicated the Company's significant information
technology systems will not be affected by the Year 2000 issue.
The computers manufactured by Cycomm are also Year 2000
compliant, and will not need to be modified. Accordingly, the
Company does not believe that the Year 2000 presents a material
exposure as it relates to the Company's products. In addition,
the Company is gathering information about the Year 2000
compliance status of its significant suppliers and vendors and
continues to monitor their compliance.
Cycomm has queried its significant suppliers regarding the status
of Year 2000 compliance. To date, the Company is not aware of
any supplier with a Year 2000 issue that would materially impact
the Company's results of operations, liquidity, or capital
resources. However, the Company has no means of ensuring that
suppliers will be Year 2000 ready. The inability of suppliers
to complete their Year 2000 resolution process in a timely
fashion could materially impact the Company. The effect of
non-compliance by suppliers is not determinable.
Management of the Company believes it has an effective program in
place to resolve the Year 2000 issue in a timely manner. As
noted above, Cycomm has not yet completed all necessary phases of
the Year 2000 program. If the Company identifies a vendor or
supplier with a Year 2000 compliance issue, or if a vendor or
supplier is unable to complete their Year 2000 readiness program,
the Company could be materially adversely affected. The amount
of potential material adverse effects cannot be reasonably
estimated at this time.
The Company currently has no contingency plans in place in the
event it does not complete all phases of the Year 2000 program.
Cycomm plans to evaluate the status of completion in March 1999
and determine whether such a plan is necessary.
Page 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
A lawsuit was instituted against the Company on September 2,
1998 in the United States District Court for the Eastern District
of Virginia by the trustee in bankruptcy of M3i Technologies,
Inc., a Quebec corporation from which the Company and a
subsidiary purchased certain PCMobile assets in June 1996. The
lawsuit alleges breach of contract and misrepresentation in
connection with the "earn out" provision of the asset purchase
agreement and seeks monetary damages and other relief.
Management is unable to predict the outcome of the lawsuit as
this time, however, the Company believes the lawsuit is without
merit and will defend it vigorously. The Company has filed a
counterclaim to recover certain shares of Common Stock issued to
M3i Technologies pursuant to a settlement agreement. This
lawsuit is currently in the discovery stage.
Item 2. Changes in Securities.
None.
Item 3. Default Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27. Financial Data Schedule
(b) Reports on Form 8-K:
None.
Page 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CYCOMM INTERNATIONAL INC.
Date: November 13, 1998 /s/ Albert I. Hawk
------------------
Albert I. Hawk
President and
Chief Executive Officer
Date: November 13, 1998 /s/ Michael R. Skoff
--------------------
Michael R. Skoff
Chief Financial Officer
Page 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CYCOMM INTERNATIONAL INC.
Date November 13, 1998
--------------------
Albert I. Hawk
President and
Chief Executive Officer
Date: November 13, 1998
---------------------
Michael R. Skoff
Chief Financial Officer