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 September 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 November 1, 1999, the Registrant had 15,372,696 shares of Common Stock
outstanding.
Transitional Small Business Disclosure Format: Yes No X
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CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
PART I - Financial Information
Item 1. Financial Statements
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
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CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
September December 31,
30,
1998
1999
ASSETS (Unaudited) (Restated)
Current assets:
Cash and cash equivalents $391,618 $567,977
Accounts receivable, net 781,327 2,353,999
Marketable securities 240,792 ---
Inventories 1,909,765 1,885,983
Prepaid expenses 19,310 21,829
Assets held for sale from disc. operations:
Cycomm Secure Solutions Inc. --- 2,655,832
Net assets of discontinued operations: Val-Comm
Inc. --- 374,913
--------- ---------
Total current assets 3,342,811 7,860,533
Fixed assets, net 245,609 569,323
Goodwill, net 673,413 2,175,400
Other assets:
Notes receivable 76,596 68,912
Deferred financing costs, net --- 31,701
Other 224,850 224,850
---------- -----------
$4,563,278 $10,930,719
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable- trade $1,643,856 $1,123,342
Accrued liabilities 1,169,747 1,221,361
Deferred revenue 622,224 934,948
Liabilities of discontinued operation: Cycomm
Secure Solutions Inc. 1,740,484 1,427,563
Dividends payable on preferred stock 31,603 33,333
Current portion of capital lease obligations 4,513 8,871
Revolving credit facility 648,426 2,310,890
Current portion of notes payable and
convertible debentures 3,000,000 3,394,425
--------- ----------
Total current liabilities 8,860,853 10,454,733
Convertible debentures, long term 500,000 ---
Capital lease obligations, less current portion 8,770 42,015
Stockholders' equity:
Series B Preferred Stock, 2 and 8 shares issued
and outstanding at September 30, 1999 and December
31, 1998 90,000 360,000
Series C Preferred Stock, 5 and no shares issued
and outstanding at September 30, 1999 and December
31, 1998 206,250 ---
Series D Preferred Stock, 6 and no shares issued
and outstanding at September 30, 1999 and December
31, 1998 268,500 ---
Common Stock, no par value, unlimited authorized
shares, 14,122,696 and 12,210,311 shares issued
and outstanding at September 30, 1999 and December
31, 1998 52,858,444 51,674,618
Accumulated deficit (58,229,539) (51,600,647)
----------- -----------
Total stockholders' equity (4,806,345) 433,971
----------- -----------
$4,563,278 $10,930,719
=========== ===========
See accompanying notes to condensed consolidated financial statements.
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CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
(Unaudited)
Three Months Nine Months
Ended Ended
September September September September
30, 1999 30, 1998 30, 1999 30, 1998
Sales $219,072 $3,099,845 $2,126,928 $11,635,567
Cost of sales 175,842 2,562,542 1,933,452 8,442,987
------- --------- --------- ---------
Gross profit 43,230 537,303 193,476 3,192,580
------- --------- --------- ---------
Expenses
Selling, general and 629,630 754,827 2,547,127 3,095,696
administrative
Research and product
development 103,118 308,818 457,257 601,865
Depreciation and amortization 86,826 177,850 323,785 503,170
------- --------- --------- ---------
819,574 1,241,495 3,328,169 4,200,731
Loss from Operations (776,344) (704,192) (3,134,693) (1,008,151)
Other Income (Expense)
Interest income 1,508 19,239 9,306 47,966
Interest expense (132,638) (129,055) (315,749) (323,331)
Other income --- --- --- 1,508
-------- ------- ------- -------
(131,130) (109,816) (306,443) (273,856)
Loss from continuing
operations ($907,474) ($814,008) ($3,441,136) ($1,282,008)
========= ========= =========== ===========
Discontinued operations
Income from operations of
discontinued operation
Val-Comm Inc. 4,872 (2,374) 111,344 94,027
Gain on disposal of Val-Comm
Inc. 265,746 --- 265,746 ---
Income (loss) from operations
of discontinued operation
Cycomm Secure Solutions, Inc --- (666,843) (1,976,080) (2,466,005)
Loss on disposal of Cycomm
Secure Solutions --- --- (1,561,931) ---
-------- --------- ---------- ----------
Net Loss ($636,856) ($1,483,225)($6,602,057) ($3,653,986)
========= =========== =========== ===========
Earnings Per Share
Loss per share from continuing
operations ($0.07) ($0.07) ($0.27) ($0.12)
====== ====== ====== ======
Income per share from
discontinued operations:
Val-Comm Inc. $0.00 $0.00 $0.01 $0.01
Loss per share on disposal of
Val-Comm Inc. $0.02 $0.00 $0.02 $0.00
Loss per share from discontinued
operations:
Cycomm Secure Solutions Inc. $0.00 ($0.06) ($0.15) ($0.23)
Loss per share on disposal of
Cycomm Secure Solutions Inc. $0.00 $0.00 ($0.02) $0.00
----- ----- ----- -----
Net Loss Per Share ($0.05) ($0.13) ($0.52) ($0.35)
====== ====== ====== ======
Weighted average number of
common shares outstanding 13,345,435 11,193,903 12,760,550 10,517,830
========== ========== ========== ==========
See accompanying notes to condensed consolidated financial statements.
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CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
(Unaudited)
Nine Months Ended
September September
30, 1999 30, 1998
Operating activities
Net loss from continuing operations (3,441,136) (1,282,008)
Adjustments to reconcile net loss to
net cash
Provided by operating activities:
Depreciation and amortization 323,784 503,129
Recognition of deferred revenue (312,724) ---
Write-down of investments --- 50,000
Change in operating assets and
liabilities 1,853,419 906,254
--------- -------
Cash used in operating activities (1,576,657) 177,375
--------- -------
Investing activities
Acquisition of fixed assets --- (261,186)
Increase in notes receivable (4,000) (50,000)
Decrease in notes receivable 2,000 46,249
Other --- (102,000)
----- -------
Cash provided by (used in) investing
activities (2,000) (366,937)
----- -------
Financing activities
Issuance of common stock 845,986 1,991,250
Issuance of preferred stock 516,000 900,000
Borrowings under revolving credit
facility (1,669,266) (464,605)
Borrowings under convertible debentures 500,000 ---
Repayment of notes payable (394,425) (315,568)
Deferred financing costs on
convertible debentures --- (30,000)
Repayment of obligations under capital
leases (9,686) (18,586)
------- ---------
Cash provided by (used in) financing
activities (211,391) (2,062,491)
------- ---------
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. 123,632 (1,718,517)
Proceeds from sale of discontinued
operation:
Val-Comm Inc. 750,000 ---
Cash provided by (used in)
discontinued operation:
Val-Comm 10,064 (34,239)
------- -------
Increase (decrease) in cash and cash
equivalents (176,359) 130,533
During the period
Cash and cash equivalents, beginning
of period 567,977 509,580
------- -------
Cash and cash equivalents, end of
period 391,618 640,113
======= =======
Supplemental cash flow information:
Interest paid $280,749 $563,538
Income taxes paid --- ---
Non-cash investing and financing
activities:
Conversion of convertible debentures
to common stock --- $278,625
Conversion of preferred stock to
common stock $346,590 $623,288
See accompanying notes to condensed consolidated financial statements.
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CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE UNAUDITED PERIOD ENDED SEPTEMBER 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 (12) (540,000) 287,054 563,287
preferred stock
Dividends on
preferred stock (56,620)
- -------- ---------- ---------- ----------
Balance,
December 31, 1998 8 $360,000 12,210,311 $51,674,618 $(51,600,647)
= ======== ========== =========== ============
Net Loss (6,602,057)
Issuance of common
stock:
Private placement -
Common stock --- --- 1,541,907 837,236 ---
Issuance of preferred
stock:
Issuance - Series C
preferred stock 6 247,500 --- --- ---
Issuance - Series D
preferred stock 6 268,500 --- --- ---
Reversal of
conversion of Series
B preferred stock 1 45,000 (21,745) (51,753)
Conversion of
preferred stock (8) (356,250) 392,223 398,343 ---
Dividends on
preferred stock (26,835)
-- ------- ---------- ---------- ----------
Balance,
September 30, 1999 13 $564,750 14,122,696 $52,858,444 $(58,229,539)
== ======== ========== =========== ============
See accompanying notes to condensed consolidated financial statements.
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CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 1999
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, 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.
The results of operations for CSS are reported as discontinued operations for
all periods presented. For the nine months ended September 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:
8
Three Months ended Nine Months ended
Sept. 30, Sept.30, Sept. 30, Sept. 30,
1999 1998 1999 1998
Revenue --- $1,022,296 $1,916,174 $3,083,910
Cost of Sales --- 811,171 1,406,918 2,904,257
---- ------- --------- ---------
Gross profit (loss) --- 211,125 509,256 179,653
Operating Expenses --- 877,968 2,485,336 2,645,658
---- ------- --------- ---------
Net loss --- $(666,843) $(1,976,080) $(2,466,005)
==== ======= ========= =========
Net loss per share ($0.00) ($0.06) ($0.15) ($0.23)
====== ====== ====== ======
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 21, 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 was structured as a stock
purchase, and was completed on August 21,1999. The results of operations for
Val-Comm Inc. are reported as discontinued operations for all periods
presented, and are summarized as follows:
Three Months ended Nine Months ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1999 1998 1999 1998
Revenue $209,132 $308,412 $1,001,733 $1,065,320
Cost of Sales 121,107 194,082 570,510 650,749
------- ------- ------- -------
Gross profit (loss) 88,025 114,330 431,223 414,571
Operating Expenses 83,153 116,704 319,879 320,544
------ ------- ------- -------
Net income $4,872 $(2,374) $111,344 $94,027
====== ======= ======== =======
Net income per share $0.00 ($0.00) $0.01 $0.01
===== ====== ===== =====
The net book value of Val-Comm's assets as of August 21, 1999 was $484,254.
The selling price of Val-Comm consisted of an initial payment of $750,000 and
a promissory note of $1.5 million. The promissory note bears interest at 7%,
and is payable over two years, with 50% of the note due on August 21, 2000
and the balance of the note due on August 21, 2001. As of September 30, the
Company has recorded a gain on the sale of Val-Comm of $265,746.
The initial payment of $750,000 was made with $188,000 in cash and with stock
in the purchaser's company that was valued at $900,000 at the time of the
purchase. The stock was to be sold by an independent third party, and the
proceeds were to be paid to Cycomm. As of September 30, 1999 the Company had
received proceeds of $361,260 from the sale of the purchaser's stock. The
total amount due from the purchaser on the initial payment is $200,740 as of
September 30, 1999. See Note 9: Subsequent Events for further detail of the
sale of Val-Comm.
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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 September 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 September 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 September 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.
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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
nine months ended September 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 September 30, 1999 and December
31, 1998:
September 30, December 31,
1999 1998
(Restated)
Raw materials $1,269,317 $932,025
Work in process and sub-assemblies 279,251 651,018
Finished goods 361,197 302,940
--------- ---------
$1,909,765 $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 $648,426 was outstanding at September 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 September
30, 1999, the Company was not in compliance with the terms of its loan
agreement as total borrowings under the revolving credit facility exceeded
the value of the underlying collateral by $276,127. This was 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 November 15, 1999, the Company
was in compliance with the terms of its loan agreement.
On February 28, 1997 Cycomm issued $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
11
holders of the debentures cannot convert more than 5% of the outstanding
debentures until after August 1, 1999, 10% until after November 1, 1999, 15%
until after February 1, 2000 and the balance until after May 1, 2000.
On September 20, 1999 Cycomm issued a $500,000 convertible debenture which
bears interest at 7% and is convertible at the option of the holder into
common stock of the Company. The maturity date of the debenture is September
20, 2004. The debenture is convertible at the lower of $0.50 per share or
the average closing bid price of the stock for the 30 trading days prior to
the date of the notice of conversion.
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 14,122,696 and 12,210,311
shares as of September 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.
During the quarter ended September 30, 1999, Cycomm was able to raise
additional working capital through the issuance of its common stock in
private equity placements. 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 August 4, 1999, Cycomm issued 502,856 restricted shares of its
common stock in a private equity placement for net proceeds of $217,142. On
September 30, 1999, Cycomm issued 333,334 restricted shares of its common
stock in a private equity placement for net proceeds of $250,000.
Additionally, Cycomm issued 205,717 restricted shares of its common stock in
a private equity placement to relieve an obligation of $77,144.
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
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Series B preferred stock had been converted into 569,671 shares of common
stock, and 1 share of Series B preferred stock was outstanding. However in
August of 1999, the broker for a preferred stockholder informed Cycomm that
one share of the Series B preferred stock had been converted in error. The
conversion of the share of preferred stock was reversed. As of September 30,
1999 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
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 $0.63, 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 September 30, 1999, 3 shares of Series C preferred
stock were eligible for conversion.
On July 14, 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. The conversion price is the lesser of $0.74, or
a 20% discount of the five-day average closing bid price prior to the date of
conversion. Cycomm can redeem the Series D preferred shares at any time
prior to conversion at a price equal to the conversion value of the shares.
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 18% over the conversion price. 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. As of September 30, 1999, 3 shares
of Series D preferred stock were eligible for conversion, however no shares
had been converted. In conjunction with the issuance of the Series D
preferred stock, Cycomm has placed 600,000 shares of its common stock in an
escrow account, to be issued upon conversion of the preferred shares. If the
Series D preferred stock is redeemed by Cycomm, the common shares held in
escrow will be remitted to the Company. The common shares held in escrow are
not included in the total amount of common shares issued and outstanding used
in the calculation of earnings per share.
NOTE 9 - SUBSEQUENT EVENTS
The Company raised additional working capital through two private placements
subsequent to September 30, 1999. On October 28, 1999 Cycomm issued 500,000
shares of its common stock for net proceeds of $250,000. On November 1, 1999
Cycomm issued 500,000 shares of its common stock for net proceeds of $250,000.
On October 25, 1999 the Company received a deposit of $100,000 from a
potential investor interested in completing a larger private placement with
Cycomm. In connection with this deposit, Cycomm has placed 250,000 shares of
its common stock in an escrow account with the investor's legal counsel. If
the final terms of the private placement call for a placement of Cycomm's
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common shares, these shares will be released to the investor and Cycomm will
issue additional shares to complete the full value of the investment. If the
private placement involves preferred shares or debt, these shares will be
remitted back to Cyomm, and the related preferred shares or debt instruments
will be issued to the investor. In the event that no private placement is
made, the shares will be remitted back to the Company, and Cycomm will return
the $100,000 to the potential investor.
The sale of Val-Comm consisted of an initial purchase price of $750,000 and a
promissory note for $1.5 million. The initial payment of $750,000 was made
with $188,000 in cash and with stock in the purchaser's company that was
valued at $900,000 at the time of the purchase. The stock was to be sold by
an independent third party, and the proceeds were to be paid to Cycomm. As
of September 30, 1999 the Company had received proceeds of $361,260 from the
sale of the purchaser's stock. Subsequent to September 30, 1999 the
remainder of the purchaser's stock was sold for proceeds of $134,773. As of
November 1, 1999 Cycomm, is owed $65,966 from the purchaser on the initial
payment of $750,000.
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 incurred over $4 million
in losses in the year ended December 31, 1998, and incurred an additional
$1.9 million in losses from operations in the nine months ended September 30,
1999, which caused a significant drain on the Company's cash resources. The
operating results of CSS for the nine months ended September 30, 1999 are not
included in results from continuing operations, and are classified on a
separate line item on the income statement.
The Company completed the sale of its secure communications equipment
subsidiary, Val-Comm Inc. to an Albuquerque, NM businessman on August 21,
1999. Val-Comm had been profitable in 1998, and had net income of $111,344
for the nine months ended September 30, 1999. Results of operations from
Val-Comm have been excluded from results from continuing operations, and are
classified separately on the income statement.
The results of continuing operations for the quarters ended September 30,
1999 and September 30, 1998 and the nine months ended September 30, 1999 and
September 30, 1998 reflect only the results of the Company's PCMobile product
line and the results of the parent company.
Three Months Ended September 30, 1999 and September 30, 1998
Revenues for the three months ended September 30, 1999 were $219,072 as
compared to revenues of $3,099,845 for the prior period. The decrease in
sales was a result of reduced production of PCMobile units caused primarily
by limited financial resources available to the Company. The backlog of
orders for PCMobile units was $6 million as of November 1, 1999.
Cost of sales for the three months ended September 30, 1999 were $175,842 as
compared to cost of sales of $2,562,542 for the prior period. Gross margins
for the three months ended September 30, 1999 were 20%, which represents a
slight increase from 17% in the prior period. The Company prices its
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PCMobiles to attain gross margins within a range of 30% to 40%. However,
reduced levels of production caused manufacturing overhead to be spread over
fewer products, which increased the cost of production per unit and resulted
in lower gross margins.
Operating expenses decreased to $819,574 for the period ended September 30,
1999 as compared to $1,241,495 in the prior period. Selling, general and
administrative expenses decreased $125,197 to $629,630 for the current
period. This decrease is a result of reductions in management headcount,
manufacturing headcount and facilities costs. Research and development costs
decreased by $205,700 to $103,118 as a result of reductions in R&D headcount
and a reduction in the funds allocated to the R&D department. Depreciation
and amortization decreased to $86,826 for the quarter ended September 30,
1999 as compared to $177,850 in the prior period. The decrease is the result
of the depreciation of PCMobile demonstration units in the quarter ended
September 30, 1998.
Interest expense for the quarter ended September 30, 1999 was $132,638 as
compared to $129,055 for the prior period. Interest expense increased as a
result of the change in structure of the Company's revolving credit facility
(see Note 7). For the period ended September 30, 1998, the revolving credit
facility was collateralized by assets of both Cycomm Mobile Solutions and
Cycomm Secure Solutions, and interest expense is allocated to both interest
from continuing operations and to the loss from discontinued operations of
Cycomm Secure Solutions. For the period ended September 30, 1999, the note
has been restructured to be collateralized by the assets of Cycomm Mobile
Solutions, and all interest on the credit facility is allocated to interest
expenses from continuing operations. The increase in interest expense from
the change in the credit facility is offset by the decrease in the interest
rate on the $3,000,000 convertible debentures, which was reduced from 12% to
7%. (see Note 7).
Net loss from continuing operations increased to $907,474, or $0.07 per
share, for the quarter ended September 30, 1999 from $814,008, or $0.07 per
share for the quarter ended September 30, 1998. The increase in net loss
from continuing operations is primarily the result of the significant
decrease in PCMobile sales from the prior period.
The Cycomm Secure Solutions subsidiary was sold in the quarter ended June 30,
1999, and therefore had no income statement effect in the quarter ended
September 30, 1999. The net loss of Cycomm Secure for the quarter ended
September 30, 1998 was $666,843.
Income from discontinued operations from the Company's Val-Comm subsidiary
was $4,872 for the quarter ended September 30, 1999 as compared to a net loss
of ($2,374) in the prior period. Cycomm recognized a gain on the disposal of
Val-Comm Inc. of $265,746 in the quarter ended September 30, 1999.
Nine Months Ended September 30, 1999 and September 30, 1998
Revenues for the nine months ended September 30, 1999 were $2,126,928 as
compared to revenues of $11,635,567 for the prior period. The decrease in
sales was a result of reduced production of PCMobile units caused primarily
by limited financial resources available to the Company.
15
Cost of sales for the nine months ended September 30, 1999 were $1,933,452 as
compared to cost of sales of $8,442,987 for the prior period. Gross margins
for the nine months ended September 30, 1999 were 9%, which represents a
decrease from 27% 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 $3,328,169 for the nine months ended
September 30, 1999 as compared to $4,200,731 in the prior period. Selling,
general and administrative expenses decreased $548,569 to $2,547,127 for the
current period. This decrease is mainly the result of reductions in
management headcount, manufacturing headcount and reductions in facilities
costs. Research and development costs decreased to $457,257 as compared to
$601,865 in the prior period. The decrease in research and development
expenses is mainly the result of headcount and other reductions made in the
quarter ended September 30, 1999. Depreciation and amortization decreased to
$323,785 for the nine months ended September 30, 1999 as compared to $503,170
in the prior period, with the difference being the result of fewer
demonstration units being depreciated in the current period than in the nine
months ended September 30, 1998.
Interest expense for the nine months ended September 30, 1999 was $315,749 as
compared to $323,331 for the prior period. The decrease is a result of the
reduction in the interest rate on the convertible debentures from 12% to 7%.
(see Note 7). The decrease from the change in interest rate is offset by the
change in structure of the Company's revolving credit facility (see Note 7).
For the period from January 1, 1999 through June 21, 1999, the revolving
credit facility was collateralized by assets of both Cycomm Mobile Solutions
and Cycomm Secure Solutions, and interest expense is allocated to both
interest from continuing operations and to the loss from discontinued
operations of Cycomm Secure Solutions. As of June 21, 1999 the note was
restructured to be collateralized by the assets of Cycomm Mobile Solutions,
therefore interest from the period of June 21, 1999 to September 30, 1999 and
all interest on the credit facility is allocated to interest expenses from
continuing operations.
Net loss from continuing operations increased to $3,441,136, or $0.27 per
share, for the nine months ended September 30, 1999 from $1,282,008, or $0.12
per share for the nine months ended September 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 $1,976,080 for the nine months ended June 30, 1999,
as compared to $2,466,005 in the prior period. Included in the loss for the
period ended September 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 $111,344 for the nine months ended September 30, 1999 as compared to
$94,027 in the prior period. Cycomm recognized a gain of $265,746 on the
disposal of Val-Comm Inc. in the nine months ended September 30, 1999.
16
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, 1999, the Company had cash and cash equivalents of $391,618.
In the nine months ended September 30, 1999, cash used in operations amounted
to $1,576,657. Cash used in investing activities during the nine months ended
September 30, 1999 totaled $2,000. Cash used in financing activities was
$211,391 for the nine months ended September 30, 1999. The Company decreased
the amounts drawn on its bank credit lines by $1,669,266 and repaid a term
loan to the bank of $394,425 during the nine months ended September 30, 1999.
The Company completed the sales of two of its subsidiaries, Cycomm Secure
Solutions Inc. and Val-Comm Inc. in the nine months ended September 30,
1999. Proceeds from the sale of Cycomm Secure Solutions Inc. totaled
$729,993, and proceeds from the sale of Val-Comm Inc. received as of
September 30, 1999 total $549,260 (see Note 2).
The Company's net working capital at September 30, 1999 was ($5,518,042) as
compared to ($2,594,200) at December 31, 1998. Trade accounts payable
increased by $520,514 to $1,643,856 at September 30, 1999.
As a result of the losses of the Company's secure division and the timing of
its disposition, the Company is continuing to resolve significant cash flow
constraints that have reduced the production of PCMobile units and have
caused reduced revenue and increased losses. The Company has taken 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 incurred over $4
million in losses for the year ended December 31, 1998 and $1,976,080 in
losses from operations in the nine months ended September 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 has generated cash
which is being used 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 nine
months ended September 30, 1999. The Company has relocated its PCMobile field
service operation in Florida to a less expensive facility, and has eliminated
many non-revenue producing expenses.
As of November 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 in the process of obtaining the
financial resources necessary to further increase production of PCMobile
units and to satisfy current and future orders.
In the event that the Company is unable to raise additional capital through
private equity placements, or begin to be able to meet working capital
requirements through business operations, the Company will consider further
17
cost cutting measures, including the discontinuation of certain business
segments, sale of assets or other appropriate actions.
18
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, and seeks damages of approximately $77,000 and other
relief. 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.
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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.
20
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 20, 1999 /s/ Albert I.
Hawk
Albert I. Hawk
President and
Chief Executive Officer
Date: November 20, 1999 /s/ Robert M. Hutton
Robert M. Hutton
Vice President of Finance
21
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 20, 1999
Albert I. Hawk
President and
Chief Executive Officer
Date: November 20, 1999
Robert M. Hutton
Vice President of Finance