1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
__X__ Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 1999
____ 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 August 1, 1999, the Registrant had 12,992,928 shares of Common Stock
outstanding.
Transitional Small Business Disclosure Format: Yes No X
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' Equity 6
Notes to Condensed Consolidated Financial Statements.. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation.............................. 13
PART II - Other Information
Item 1. Legal Proceedings..................................... 17
Item 2. Changes in Securities................................. 17
Item 3. Default Upon Senior Securities........................ 17
Item 4. Submission of Matters to a Vote of Security Holders... 17
Item 5. Other Information..................................... 17
Item 6. Exhibits and Reports on Form 8-K...................... 18
Signatures ...................................................... 19
3
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1999 AND DECEMBER 31, 1998
June 30, December 31,
1999 1998
ASSETS (Unaudited) (Restated)
Current assets:
Cash and cash equivalents $4,761 $567,977
Accounts receivable, net 1,435,187 2,353,999
Inventories 2,246,571 1,885,983
Prepaid expenses 37,597 21,829
Assets held for sale from discontinued
operations: Cycomm Secure Solutions Inc. --- 2,655,832
Net assets of discontinued operations:
Val-Comm Inc. 479,382 374,913
------- -------
Total current assets 4,203,498 7,860,533
Fixed assets, net 299,363 569,323
Goodwill, net 721,981 2,175,400
Other assets:
Notes receivable 74,680 68,912
Deferred financing costs, net --- 31,701
Other 224,850 224,850
---------- -----------
$5,524,372 $10,930,719
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable- trade $3,412,692 $2,191,025
Accrued liabilities 2,138,063 1,567,694
Deferred revenue 622,224 934,948
Deposit held on sale of Val-Comm 188,000 ---
Dividends payable on preferred stoc 6,667 33,333
Current portion of capital lease obligations 16,157 22,418
Revolving credit facility 1,384,715 2,310,890
Current portion of notes payable and
convertible debentures 3,000,000 3,394,425
--------- ---------
Total current liabilities 10,146,294 10,454,733
Capital lease obligations, less current portion 9,477 42,015
Stockholders' equity:
Series B Preferred Stock, 1 and 8 shares
issued and outstanding at June 30, 1999 and
December 31, 1999 45,000 360,000
Series C Preferred Stock, 6 and no shares
issued and outstanding at June 30, 1999 and
December 31, 1999 247,500 ---
Common Stock, no par value, unlimited
authorized shares, 12,492,928 and 12,210,311
shares issued and outstanding at June 30, 1999
and December 31, 1998 52,020,975 51,674,618
Accumulated deficit (57,567,098) (51,600,647)
----------- -----------
Total stockholders' equity (5,253,623) 433,971
----------- -----------
$5,524,372 $10,930,719
========== ===========
See accompanying notes to condensed consolidated financial statements.
4
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED JUNE 30, 1999 AND JUNE 30, 1998
(Unaudited)
Three Months Six Months
Ended Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
Sales $342,075 $4,678,765 $1,907,857 $8,535,722
Cost of sales 465,852 3,474,571 1,757,610 5,880,445
------- --------- --------- ---------
Gross profit (123,777) 1,204,194 150,247 2,655,277
-------- --------- ------- ---------
Expenses
Selling, general and
administrative 998,480 1,064,465 1,917,497 2,340,869
Research and product
development 175,854 178,232 354,139 293,047
Depreciation and amortization 86,901 87,138 236,959 325,320
------ ------ ------- -------
1,261,235 1,329,835 2,508,595 2,959,236
--------- --------- --------- ---------
Loss from Operations (1,385,012) (125,641) (2,358,348) (303,959)
Other Income (Expense)
Interest income 2,861 16,696 7,797 28,727
Interest expense (63,560) (94,982) (183,111) (194,276)
Other income --- --- --- 1,508
------- ------- -------- -------
(60,699) 78,286 (175,314) (164,041)
------- ------ -------- --------
Loss from continuing operations $(1,445,711) $(203,927)$(2,533,662) $(468,000)
=========== ========= =========== =========
Discontinued operations
Income from operations of
discontinued operation
Val-Comm Inc. 99,634 31,549 107,291 96,401
Income (loss) from operations
of discontinued operation
Cycomm Secure Solutions, Inc. (225,022) (905,918) (1,976,899)(1,799,162)
Loss on disposal of Cycomm
Secure Solutions (1,561,931) --- (1,561,931) ---
---------- -------- ---------- ---------
Net Loss $(3,133,030) $(1,078,296)$(5,965,201)$(2,170,761)
=========== =========== =========== ===========
Earnings Per Share
Loss per share from
continuing operations ($0.12) ($0.02) ($0.20) ($0.05)
Income per share from
discontinued operations:
Val-Comm Inc. ($0.01) ($0.00) ($0.01) ($0.01)
Loss per share from discontinued
operations: Cycomm Secure
Solutions ($0.02) ($0.09) ($0.16) ($0.18)
Loss per share on disposal of
Cycomm Secure Solutions ($0.13) --- ($0.13) ---
------ ------ ------ -----
Net Loss Per Share $(0.25) $(0.10) $(0.48) $(0.21)
====== ====== ====== ======
Weighted average number of
common shares outstanding 12,492,928 10,358,742 12,463,261 10,174,191
========== ========== ========== ==========
See accompanying notes to condensed consolidated financial statements.
5
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED JUNE 30, 1999 AND JUNE 30, 1998
(Unaudited)
Six Months Ended
June 30, June 30,
1999 1998
Operating activities
Net loss from continuing operations ($2,533,662) ($468,000)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 236,966 325,320
Recognition of deferred revenue (312,724) ---
Write-down of investments --- 50,000
Change in operating assets and liabilities 2,113,997 (1,263,057)
--------- ----------
Cash used in operating activities (495,423) (1,355,737)
-------- ----------
Investing activities
Acquisition of fixed assets --- 8,110
Increase in notes receivable (4,000) (50,000)
Decrease in notes receivable 2,000 46,249
Other --- (225,275)
------- --------
Cash provided by (used in) investing activities (2,000) (220,916)
------ --------
Financing activities
Issuance of common stock --- 1,620,000
Issuance of preferred stock 247,500 900,000
Borrowings under revolving credit facility (926,176) 494,613
Repayment of notes payable (394,425) (78,913)
Deferred financing costs on convertible debentures --- (30,000)
Repayment of obligations under capital leases (9,686) (14,637)
------ -------
Cash provided by (used in) financing activities (1,082,787) 2,891,063
---------- ---------
Discontinued operations
Proceeds from sale of discontinued operation:
Cycomm Secure Solutions Inc. 729,993 ---
Cash provided by (used in) discontinued operation:
Cycomm Secure Solutions Inc. 92,126 (1,179,862)
Cash provided by (used in) discontinued operation:
Val-Comm 194,875 32,466
------- ------
Increase (decrease) in cash and cash equivalents
during the period (563,216) 167,014
Cash and cash equivalents, beginning of period 567,977 509,580
------- -------
Cash and cash equivalents, end of period $4,761 $676,594
====== ========
Supplemental cash flow information:
Interest paid $226,611 $373,867
Income taxes paid $ --- $ ---
Non-cash investing and financing activities:
Conversion of convertible debentures to
common stock $ --- $273,970
Conversion of preferred stock to common stock $381,356 $257,671
See accompanying notes to condensed consolidated financial statements.
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CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE UNAUDITED PERIOD ENDED JUNE 30, 1999
AND THE YEAR ENDED DECEMBER 31, 1998
Preferred Preferred Common Common Accumulated
Shares Stock Shares Stock Deficit
Balance, December 31,
1997 --- --- 9,816,877 47,491,611 (43,247,978)
Net Loss (8,296,049)
Issuance of
common stock:
Conversion of
debentures --- --- 236,380 273,970 ---
Private placement -
common stock --- --- 1,870,000 2,895,750 ---
Value of options issued to
non-employees --- --- --- 450,000 ---
Issuance of preferred stock:
Private placement -
preferred stock 20 900,000 --- --- ---
Conversion of
preferred stock (12) (540,000) 287,054 563,287
Dividends on
preferred stock (56,620)
----- -------- ---------- --------- ----------
Balance, December 31,
1998 8 $360,000 12,210,311 $51,674,618 $(51,600,647)
===== ======== ========== =========== ============
Net Loss (5,965,201)
Issuance of
preferred stock: 6 247,500 --- --- ---
Conversion of
preferred stock (7) (315,000) 282,617 346,357 ---
Dividends on
preferred stock (1,250)
---- ------- ---------- ---------- ----------
Balance, June 30, 1999 7 $292,500 12,492,928 52,020,975 $(57,567,098)
===== ======== ========== ========== ============
See accompanying notes to condensed consolidated financial statements.
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CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 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 June 30, 1999 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, 1998. The
interim financial information presented is not necessarily indicative of the
results from operations expected for the full fiscal year.
NOTE 2 - DISCONTINUED OPERATIONS
Cycomm Secure Solutions Inc.
On March 4, 1999 the Company signed a Letter of Intent for the sale of the
assets of its secure computing subsidiary, Cycomm Secure Solutions Inc.
("CSS") to an investment group led by that subsidiary's management. On May
3, 1999, prior to the closing of the sale, the investment group signed an
agreement with the Company which allowed the investment group to operate the
business for the period prior to the closing of the sale. The agreement
allowed the investment group to operate the assets of CSS and generate
revenues for the benefit of the investment group, and made the investment
group responsible for all expenses incurred and liabilities generated on and
after May 3, 1999.
In May of 1999, the management-led group informed the Company that it would
be unable to complete the purchase of the assets of CSS. The Company
identified other potential buyers and signed a letter of intent for the sale
of the assets of CSS to Cortron Inc. ("Cortron"), a manufacturer of other
products in the secure computing industry. On June 21, 1999 the secured
lender to the Company foreclosed on the assets of CSS and sold the assets to
Cortron.
8
The results of operations for CSS are reported as discontinued operations for
all periods presented. For the six months ended June 30, 1999, the results
of CSS include a write-off of goodwill of $1,356,283 and a write-off of fixed
assets of $306,328. The results of operations for Cycomm Secure Solutions
Inc. are summarized as follows:
Six Months ended Three Months ended
---------------- ------------------
June30, June30, June 30, June 30,
1999 1998 1999 1998
-------- -------- --------- ---------
Revenue 1,916,174 2,061,614 252,123 1,048,497
Cost of Sales 1,406,918 2,093,086 224,376 1,032,878
--------- --------- ------- ---------
Gross profit (loss) 509,256 (31,472) 27,747 15,619
Operating Expenses 4,048,086 1,767,690 1,814,699 844,982
--------- --------- --------- -------
Net loss 3,538,830 (1,799,162) (1,786,952) (829,363)
========= ========== ========== ========
Net loss per share ($0.28) ($0.18) ($0.14) ($0.08)
====== ====== ====== ======
The assets sold included inventory, fixed assets and various intangibles and
other assets and had a carrying value of $2,291,924 as of June 30, 1999.
Proceeds on the sale of Cycomm Secure's assets were $729,993 for a net loss
on disposal of $1,561,931.
Val-Comm Inc.
In April 1999, the Company entered into an agreement to sell its secure
telecommunications subsidiary, Val-Comm Inc. to an individual investor in
Val-Comm's geographical area. The transaction is structured as a stock
purchase, and management anticipates that the sale will be completed in the
third quarter of 1999. The results of operations for Val-Comm Inc. are
reported as discontinued operations for all periods presented, and are
summarized as follows:
Six Months ended Three Months ended
---------------- ------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
------- ------- ------- -------
Revenue 792,601 756,908 461,093 351,413
Cost of Sales 449,403 456,667 238,020 217,154
------- ------- ------- -------
Gross profit (loss) 343,198 300,241 223,073 134,259
Operating Expenses 235,907 360,266 123,439 101,275
------- ------- ------- -------
Net income 107,291 96,401 99,634 32,984
======= ====== ====== ======
Net income per share $0.01 $0.01 $0.01 $0.00
===== ===== ===== =====
The net book value of Val-Comm's assets as of June 30, 1999 is $479,382.
Management anticipates that the selling price of Val-Comm will consist of
$750,000 in cash and a promissory note of $1.5 million. As of June 30, 1999
the Company had received a deposit of $188,000 from the purchaser.
Subsequent to June 30, 1999, Cycomm received stock in the purchaser's company
valued at $900,000 to be sold by an independent third party, with proceeds of
the sale to be applied against the purchase price. See Note 9: Subsequent
Events for further detail of the sale of Val-Comm.
9
NOTE 3 - ACQUISITION EARN-OUT
XL Computing (Canada) Inc.
In connection with the purchase price paid for the Company's acquisition of
its Cycomm Mobile Solutions subsidiary, the Company entered into an
acquisition earn-out agreement with the seller, M3i Technologies Inc. and M3i
Systems Inc. (collectively the "Seller"). The earn-out provision of the
purchase price was to be paid in Cycomm common stock, up to a maximum value
of $4,000,000, subject to provisions based on the achievement of certain unit
sales volumes for a five year period. Common stock issued under the earn-out
provisions was to be issued at the average current market price of the last
month for the quarter in which it was earned. As of June 30, 1999, Cycomm
had paid $1,354,796 of contingent consideration, which was paid in 444,862
shares of common stock.
The Company and the seller were parties to a lawsuit regarding the
interpretation of the earn-out agreement. On May 24, 1999 the Company and
the seller entered into a complete settlement of the litigation. Under the
terms of the agreement, the Company can fulfil its obligation to the Seller
if payments are made before certain dates as specified in the agreement. The
Company can elect to pay $700,000 by April 30, 2000, $1,100,000 by April 30,
2001 or $1,500,000 prior to April 30, 2002. Management anticipates that the
liability to the Seller will be repaid prior to April 30, 2000, and has
recorded an accrued liability of $700,000 as of June 30, 1999.
NOTE 4 - DELISTING FROM THE AMERICAN STOCK EXCHANGE
On January 21, 1999, Cycomm was notified by the American Stock Exchange that
it no longer met continued listing criteria and would be delisted.
Specifically, Cycomm had incurred losses in its last five fiscal years and
therefore failed to meet the American Stock Exchange listing requirement of
pre-tax income of at least $750,000 in its last fiscal year, or in two of its
last three fiscal years. Additionally, Cycomm failed to satisfy the minimum
stockholders' equity requirement of $4 million. Trading of Cycomm's stock
was suspended on April 13, 1998 and Cycomm was delisted from the AMEX on
April 30, 1999. The Company began trading on the Over-the-Counter Bulletin
Board (OTCBB) on May 5, 1999 under the symbol "CYII".
NOTE 5 - DEFERRED REVENUE
The Company has recorded deferred revenue of $622,224 and $934,948 for the
periods ended June 30, 1999 and December 31, 1998 respectively. Deferred
revenue was recorded as a result of certain sales of PCMobile computers 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 retain the right to return the 586s at any time before they
receive the Pentiums. Upon the return of the 586s, the customers would be
entitled to a full refund, and the entire sale would be cancelled.
10
The 586s have been classified as demonstration units, which are recorded in
inventory, and are depreciated over a one year period. Revenue on the sales
is recognized when the Pentium units are shipped to the customers. For the
six months ended June 30, 1999, Cycomm has recognized revenue of $312,724
related to the shipment of Pentium units to customers in exchange for the 586
units.
NOTE 6 - INVENTORIES
The following is a summary of inventories at June 30, 1999 and December 31,
1998:
June 30, December 31,
1999 1998
------- -----------
(Restated)
Raw materials $1,506,115 $932,025
Work in process and sub-assemblies 272,959 651,018
Finished goods 467,497 302,940
------- -------
$2,246,571 $1,885,983
========== ==========
NOTE 7 - NOTES PAYABLE AND CONVERTIBLE DEBENTURES
The Company has a revolving credit facility from a lender under which the
Company may, at its option, borrow and repay amounts up to a maximum of
$4,000,000, of which $1,384,715 was outstanding at June 30, 1999. Borrowings
under this credit facility bear interest at prime plus 3%. Additionally, the
terms of the credit facility prohibit the Company from paying dividends in
certain circumstances. The revolving credit facility was originally
comprised of a $3,432,000 facility collateralized by the trade accounts
receivable and inventory of Cycomm Mobile Solutions and Cycomm Secure
Solutions, and a $568,000 term loan collateralized by certain machinery and
equipment of Cycomm Secure Solutions. After the June 21, 1999 sale of the
assets of Cycomm Secure Solutions, the revolving credit facility was
restructured as a $4,000,000 facility collateralized by the trade accounts
receivable and inventory of Cycomm Mobile Solutions, and by the remaining
accounts receivable of Cycomm Secure Solutions. As of June 30, 1999, the
Company is not in compliance with the terms of its loan agreement as total
borrowings under the revolving credit facility exceed the value of the
underlying collateral by $470,693. This is a result of the sale of Cycomm
Secure Solutions' machinery and equipment for less than the book value of the
assets, and because several Cycomm Secure and Cycomm Mobile accounts
receivable have been disallowed as collateral by the lender because the
accounts are over 90 days past due.
As of June 30, 1999, the Company has outstanding a total of $3,000,000 in
convertible debentures which are convertible at the option of the holders
into common stock of the Company. The original date of maturity for the
convertible debentures was February 28, 1999, however, the Company obtained
an extension of the maturity date until March 31, 1999. On March 31, 1999,
the Company entered into a new agreement with the holders of the debentures,
which amended the terms of the note and extended the maturity date to May 1,
2000. Pursuant to the terms of the new debenture, the interest rate on the
convertible debentures has been lowered from 12% per annum to 7% per annum.
The debentures are convertible at the market price of Cycomm's common stock,
provided that the market price is not below $0.50 per share at the time of
conversion. The holders of the debentures cannot convert more than 5% of the
outstanding debentures until after August 1, 1999, 10% until after November
11
1, 1999, 15% until after February 1, 2000 and the balance until after May 1,
2000.
NOTE 8 - 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
The issued common stock of the Company consisted of 12,492,928 and 12,210,311
shares as of June 30, 1999 and December 31, 1998, respectively. Basic loss
per share is calculated based on the weighted average number of common shares
outstanding during each period. Diluted net loss per share was equal to basic
loss per share in each of the periods presented as the effect of potentially
dilutive securities was anitdilutive.
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 common stock
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
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. As of June 30, 1999, 19 shares of
Series B preferred stock had been converted into 569,671 shares of common
stock, and 1 share of Series B preferred stock was 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
is convertible at the option of the holder into common stock pursuant to a
conversion schedule as set forth in the agreement. The holder can convert 50%
of its preferred shares after four months from the issuance date, and the
balance after nine months from the issuance date. The conversion price is
the lesser of $.625, 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 $.50 per share at the conversion date, Cycomm
has the right to redeem the preferred shares at a premium of 15% over the
conversion price. As of June 30, 1999, no shares of Series C preferred stock
were eligible for conversion.
NOTE 9 - SUBSEQUENT EVENTS
On August 3, 1999, the holders of the $3,000,000 convertible debentures
converted $150,000 or 5% of the outstanding debentures into 382,856 shares of
12
common stock of the Company. Additionally, the holders elected to convert
the interest payment due of $52,500 into 120,000 shares of common stock of
the Company.
On July 6, 1999, Cycomm issued 500,000 restricted shares of its common stock
in a private equity placement for net proceeds of $296,700.
On July 13, 1999, Cycomm issued 6 shares of Series D convertible redeemable
preferred stock ("Series D preferred stock") with a conversion value of
$50,000 per share for net proceeds of $268,500. The Series D preferred stock
is convertible at the option of the holder into common stock pursuant to a
conversion schedule as set forth in the agreement. The holder can convert 25%
of its preferred shares after 30 days from the issuance date, and a further
25% every 30 days thereafter, unless the stock is trading at less than $0.50
on the conversion date. If the common stock is trading at less than $0.50 on
the conversion date, the Company has the right to redeem the preferred shares
at a premium of 18% over the conversion value. If the Company does not elect
to redeem the shares, the holder can convert 10% of the preferred shares in a
period of 20 day consecutive intervals. The conversion price is a 20%
discount of the five-day average closing bid price prior to the date of
conversion. As of August 15, 1999, no shares of Series D preferred stock had
been converted to common shares.
The Company is currently in the process of selling its secure communications
subsidiary, Val-Comm Inc. ("Val-Comm") to an individual investor in
Val-Comm's geographic area. Management anticipates that the selling price of
Val-Comm will consist of $750,000 in cash and a promissory note of $1.5
million. As of June 30, 1999 the Company had received a deposit of $188,000
from the purchaser. Subsequent to June 30, 1999, Cycomm received stock in
the purchaser's company valued at approximately $900,000 to be sold by an
independent third party, with proceeds of the sale to be applied against the
purchase price. As of August 15, 1999 the Company had received $133,895 from
the sale of the purchaser's stock.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation.
Results of Continuing Operations
On June 21, 1999 the Company completed the sale of its secure computing
segment, Cycomm Secure Solutions, Inc. ("CSS"). CSS had lost over $4 million
in the year ended December 31, 1998, and lost an additional $3.5 million in
the six months ended June 30, 1999, which caused a significant drain on the
Company's cash resources. The operating results of CSS for the quarter and
the six months ended June 30, 1999 are not included in results from
continuing operations, and are classified on a separate line item on the
income statement.
The Company is currently involved in the sale of its secure communications
equipment subsidiary, Val-Comm Inc. to an individual investor in Val-Comm's
geographic region. The sale of Val-Comm will generate additional working
capital and will allow the Company to concentrate fully on its core business,
the PCMobile line of rugged computers. Results of operations from Val-Comm
have also been excluded from results from continuing operations, and are
classified separately on the income statement.
13
The results of continuing operations for the quarters ended June 30, 1999 and
June 30, 1998 and the six months ended June 30, 1999 and June 30, 1998
reflect only the results of the Company's PCMobile product line and the
results of the parent company.
Three Months Ended June 30, 1999 and June 30, 1998
Revenues for the three months ended June 30, 1998 were $342,075 as compared
to revenues of $4,678,765 for the prior period. The decrease in sales was a
result of production shortfalls caused by inadequate resources available to
the Company.
Cost of sales for the three months ended June 30, 1999 were $465,582 as
compared to cost of sales of $3,474,571 for the prior period. Gross margins
for the three months ended June 30, 1999 were (36%), which represents a
decrease from 26% in the prior period. The negative gross margin in the
current period is a result of the significant decrease in the volume of
sales. The Company prices its PCMobiles to attain gross margins within a
range of 30% to 40%. However, lower levels of production cause manufacturing
overhead to be spread over fewer products, which increases the cost of
production per unit and creates lower gross margins.
Operating expenses decreased to $1,261,235 for the period ended June 30, 1999
as compared to $1,329,835 in the prior period. Selling, general and
administrative expenses decreased $65,985 to $998,480 for the current
period. This decrease is a result of reductions in management headcount and
facilities costs. Research and development costs were $175,854 for the
quarter ended June 30, 1999, as compared to $178,232 in the prior period.
The research and development expenses in the current period are related to
engineering on the Pentium and Pentium II models of the PCMobile.
Depreciation and amortization decreased to $86,901 for the quarter ended June
30, 1999 as compared to $87,138 in the prior period.
Interest expense for the quarter ended June 30, 1999 was $63,560 as compared
to $94,982 for the prior period. The decrease is primarily the result of the
change in the interest rate on the convertible debentures from 12% to 7%.
(see Note 7).
Net loss from continuing operations increased to $1,445,711, or $0.12 per
share, for the quarter ended June 30, 1999 from $203,927, or $0.02 per share
for the quarter ended June 30, 1998. The increase in net loss from
continuing operations is primarily the result of the significant decrease in
PCMobile sales and margins from the prior period.
The loss from discontinued operations from the Company's Cycomm Secure
Solutions subsidiary was $225,022 for the quarter ended June 30, 1999, as
compared to $905,918 in the prior period. In the quarter ended June 30,
1999, the Company recognized a loss of $1,561,931 on the sale of the assets
of Cycomm Secure Solutions.
Income from discontinued operations from the Company's Val-Comm subsidiary
was $99,634 for the quarter ended June 30, 1999 as compared to $31,549 in the
prior period.
Six Months Ended June 30, 1999 and June 30, 1998
Revenues for the six months ended June 30, 1998 were $1,907,857 as compared
to revenues of $8,535,722 for the prior period. The decrease in sales was a
result of production shortfalls caused by inadequate resources available to
the Company.
14
Cost of sales for the six months ended June 30, 1999 were $1,757,610 as
compared to cost of sales of $5,880,445 for the prior period. Gross margins
for the six months ended June 30, 1999 were 8%, which represents a decrease
from 31% in the prior period. The decrease in gross margins is directly
attributable to the decrease in sales volume from the prior period. The
Company prices its PCMobiles to attain gross margins within a range of 30% to
40%. However, lower levels of production cause manufacturing overhead to be
spread over fewer products, which increases the cost of production per unit
and lowers margins.
Operating expenses decreased to $2,508,595 for the six months ended June 30,
1999 as compared to $2,959,236 in the prior period. Selling, general and
administrative expenses decreased $423,372 to $1,917,497 for the current
period. This decrease is mainly the result of management headcount
reductions and reductions in facilities costs. Research and development
costs increased to $354,139 as compared to $293,047 in the prior period. The
research and development expenses in the current period relate to engineering
of the Pentium and Pentium II models of the PCMobile. Depreciation and
amortization decreased to $236,959 for the six months ended June 30, 1999 as
compared to $325,320 in the prior period, with the difference being the
result of fewer demonstration units being depreciated in the current period
than in the six months ended June 30, 1998.
Interest expense for the six months ended June 30, 1999 was $183,111 as
compared to $194,276 for the prior period. The decrease is a result of the
change in the interest rate on the convertible debentures from 12% to 7%.
(see Note 7).
Net loss from continuing operations increased to $2,533,662, or $0.20 per
share, for the six months ended June 30, 1999 from $468,000, or $0.05 per
share for the six months ended June 30, 1998. The increase in net loss from
continuing operations is a result of the significant decrease in PCMobile
sales and margins from the prior period, offset by the Company's reductions
in selling, general and administrative expenses.
The loss from discontinued operations from the Company's Cycomm Secure
Solutions subsidiary was $1,976,899 for the six months ended June 30, 1999,
as compared to $1,799,162 in the prior period. Included in the loss for the
period ended June 30, 1999 is a write-off of goodwill of $1,356,283 and a
write-off of fixed assets of $306,328. The loss on the sale of Cycomm Secure
Solutions' assets was $1,561,931.
Income from discontinued operations from the Company's Val-Comm subsidiary
was $107,291 for the six months ended June 30, 1999 as compared to $96,401 in
the prior period.
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 June 30,
1999, the Company had cash and cash equivalents of $4,761.
In the six months ended June 30, 1999, cash used in operations amounted to
$495,423. Cash used in investing activities during the six months ended June
30, 1999 totaled $2,000. Cash used in financing activities was $1,082,787
for the six months ended June 30, 1999. The Company decreased the amounts
15
drawn on its bank credit lines in an amount of $1,320,601 during the six
months ended June 30, 1999.
The Company's net working capital at June 30, 1999 was ($5,942,796) as
compared to ($2,594,200) at December 31, 1998. Trade accounts payable
increased by $1,221,667 to $3,412,692 at June 30, 1999.
The Company is currently facing significant cash flow problems, which have
slowed the production of the PCMobile product line and have caused revenues
to decrease and losses to grow. The Company is addressing its cash flow
problems with several actions including the sale of its non-core
subsidiaries, a reduction in general and administrative costs and by raising
additional funds through private equity placements.
The sale of the Company's Cycomm Secure Solutions Inc. ("CSS") subsidiary has
eliminated a significant cash drain for the Company, as CSS lost over $4
million for the year ended December 31, 1998 and lost $3,538,830 in the six
months ended June 30, 1999. Proceeds from the sale of CSS were used to pay
down the Company's secured line of credit. The sale of the Company's
Val-Comm subsidiary will generate cash which will be used primarily to fund
PCMobile operations.
The Company has made significant reductions in its general and administrative
costs. Both management and overall headcount have been reduced in the six
months ended June 30, 1999. The Company has relocated its PCMobile field
service operation in Florida to a less expensive facility, and has eliminated
several non-essential expenses.
As of August 1, 1999 the Company had a backlog of approximately $6 million
for its PCMobile product, and management anticipates demand for these
products to continue. The Company is currently addressing the need for
additional working capital in order to deliver existing orders for its
products.
In the event that the Company is unable to raise additional capital through
private equity placements or in the event that the sale of Val-Comm cannot be
completed on terms acceptable to management, the Company will consider
further cost cutting measures, including the discontinuation of certain
business segments, sale of assets or protection under Federal bankruptcy laws.
16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
On May 24, 1999 the Company entered into a settlement agreement with
the trustee in bankruptcy of M3i Technologies, Inc., a Quebec corporation.
The Company was the defendant in a case alleging breach of contract and
misrepresentation in connection with the "earn out" provision of the asset
purchase agreement in the Company's purchase of its Cycomm Mobile Solutions
subsidiary. Under the terms of the agreement, the Company can fulfil its
obligation to the Seller if payments are made before certain dates as
specified in the agreement. The Company can elect to pay $700,000 by April
30, 2000, $1,100,000 by April 30, 2001 or $1,500,000 prior to April 30,
2002.
On June 15, 1999 the Company entered into a settlement agreement with
Infotech International, a Florida corporation involved in the resale of the
Company's PCMobile computers. The Company was the plaintiff in a case
alleging breach of contract and conversion of funds. The Company agreed to a
payment plan in which Infotech would pay $592,959 plus interest and costs
according to a fixed schedule prior to September 15, 2000.
A lawsuit was instituted against the Company on August 3, 1999 in the
Circuit Court of the Nineteenth Judicial Circuit in and for Indian River
County, FL by G.T. Gangemi, former President of the Company's Cycomm Secure
Solutions subsidiary. The lawsuit alleges breach of contract in connection
with the severance provisions of Mr. Gangemi's employment agreement with
Cycomm Secure Solutions. The Company denies any wrongdoing and liability and
intends to vigorously defend the allegations.
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.
17
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27. Financial Data Schedule
(b) Reports on Form 8-K:
1. Current Report on Form 8-K was filed on February 4, 1999
reporting the decision by the American Stock Exchange to delist
the Company's common stock under Item 5. - Other Items.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CYCOMM INTERNATIONAL INC.
Date: August 20, 1999 /s/ Albert I. Hawk
---------------
Albert I. Hawk
President and
Chief Executive Officer
Date: August 20, 1999 /s/ Robert M. Hutton
-----------------
Robert M. Hutton
Vice President of Finance
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CYCOMM INTERNATIONAL INC.
Date August 20, 1999
-------------------------
Albert I. Hawk
President and
Chief Executive Officer
Date: August 20, 1999 -------------------------
Robert M. Hutton
Vice President of Finance