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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-QSB
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(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, 1997
Transition report under Section 13 or 15(d) of the Securities
- ---- Exchange Act of 1934
For the period from to
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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 incorporation or organization) (I.R.S. Employer Identification No.)
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 7, 1997, the Registrant had 9,467,282 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.
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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 OR
PLAN OF OPERATION................................................................................ 8
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................................................................ 11
ITEM 2. CHANGES IN SECURITIES............................................................................ 11
ITEM 3. DEFAULT UPON SENIOR SECURITIES................................................................... 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................................. 11
ITEM 5. OTHER INFORMATION................................................................................ 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................................. 11
SIGNATURES ................................................................................................. 12
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CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
SEPTEMBER 30, DECEMBER 31,
1997 1996
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ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 782,968 $ 1,220,544
Accounts receivable, net 2,880,109 2,170,518
Inventories 5,543,612 5,819,852
Prepaid expenses 71,886 76,785
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Total current assets 9,278,575 9,287,699
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Fixed assets, net 1,599,504 1,663,176
Goodwill, net 2,715,518 1,673,835
Other assets:
Notes receivable 190,998 41,521
Long-term investments --- 513,500
Deferred technology costs, net 26,103 50,227
Deferred financing costs, net 223,565 264,825
Unearned discount 52,532 159,276
Other 204,140 94,699
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697,338 1,124,048
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$14,290,935 $13,748,758
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable- trade $ 2,021,837 $ 1,871,815
Accrued liabilities 2,047,119 1,167,337
Due to affiliate 280,612 160,321
Dividends payable on preferred stock --- 86,667
Current portion of capital lease obligations 37,848 81,527
Revolving credit facility 1,409,926 1,138,933
Current portion of notes payable and convertible debentures 324,999 329,401
------------- -------------
Total current liabilities 6,122,341 4,836,001
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Capital lease obligations 51,201 71,869
Convertible debentures 3,000,000 3,074,999
Deferred credit --- 620,466
Stockholders' equity:
Common Stock, no par value, unlimited authorized shares,
9,467,282 and 8,050,401 shares issued and outstanding
at September 30, 1997 and December 31, 1996 46,742,907 42,970,749
Accumulated deficit (41,625,514) (37,825,326)
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Total stockholders' equity 5,117,393 5,145,423
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$14,290,935 $13,748,758
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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, 1997 AND AUGUST 31, 1996
(UNAUDITED)
THREE MONTHS ENDED
------------------
SEPTEMBER 30, AUGUST 31,
1997 1996
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(Restated - Note 1)
Sales $ 3,489,490 $ 4,465,105
Cost of sales 2,624,733 2,871,979
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Gross profit 864,757 1,593,126
------------ ------------
Expenses
Selling, general and administrative 1,277,365 1,939,177
Research and product development 337,660 461,040
Depreciation and amortization 227,493 179,076
Write-down of inventories to net realizable value --- 3,529
Other 3,214 (2,356)
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1,845,732 2,580,466
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LOSS FROM OPERATIONS (980,975) (987,340)
OTHER INCOME (EXPENSE)
Interest income 10,983 21,006
Interest expense (193,770) (895,637)
Gain (loss) on sale of fixed assets --- (203)
Other income 6,671 53,251
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(176,116) (821,583)
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NET LOSS $(1,157,091) $(1,808,923)
============ ============
LOSS PER SHARE
Net loss per share $(0.12) $(0.29)
=========== ============
Weighted average number of common shares
outstanding 9,408,175 6,248,291
=========== ============
NINE MONTHS ENDED
-----------------
SEPTEMBER 30, AUGUST 31,
1997 1996
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(Restated - Note 1)
Sales $10,523,175 $ 8,597,713
Cost of sales 7,577,827 6,057,935
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Gross profit 2,945,348 2,539,778
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Expenses
Selling, general and administrative 4,570,800 5,727,042
Research and product development 885,961 921,022
Depreciation and amortization 597,496 1,130,804
Write-down of inventories to net realizable value --- 869,101
Other 97 (1,265)
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6,054,354 8,646,704
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LOSS FROM OPERATIONS (3,109,006) (6,106,926)
OTHER INCOME (EXPENSE)
Interest income 46,885 64,364
Interest expense (776,892) (2,266,678)
Gain (loss) on sale of fixed assets --- (16,328)
Other income 38,825 56,148
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(691,182) (2,162,494)
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NET LOSS $(3,800,188) $(8,269,420)
============ ============
LOSS PER SHARE
Net loss per share $(0.42) $(1.65)
============ ============
Weighted average number of common shares
outstanding 9,041,709 5,012,387
============ ============
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, 1997 AND AUGUST 31, 1996
(UNAUDITED)
NINE MONTHS ENDED
-----------------
SEPTEMBER 30, AUGUST 31,
1997 1996
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(Restated - Note 1)
OPERATING ACTIVITIES
Net loss $(3,800,188) $(8,269,420)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 597,496 1,130,804
Loss (gain) on sale of fixed assets --- 16,328
Realized loss (gain) on marketable securities (38,825) ---
Provision for product warranty --- 9,049
Write-down of inventories --- 869,101
Non-cash expenses 439,368 2,248,416
Research and product development 24,124 138,250
Change in operating assets and liabilities (68,456) (1,692,014)
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Cash used in operating activities (2,846,481) (5,549,486)
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INVESTING ACTIVITIES
Acquisition of fixed assets (261,373) (106,854)
Proceeds on disposal of fixed assets 38,954 2,074
Increase in long-term investment (205,000) ---
Decrease in long-term investment 513,500 ---
Acquisitions, net of cash acquired --- (3,150,000)
Increase in notes receivable (186,500) (20,123)
Decrease in notes receivable 41,520 1,427
Acquisition of patents --- (25,000)
Other (109,441) (50,699)
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Cash used in investing activities (168,340) (3,349,175)
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FINANCING ACTIVITIES
Borrowings under revolving credit facility 270,993 1,186,160
Issuance of common stock --- 300,000
Borrowings under notes payable --- 8,303
Repayment of notes payable and convertible debentures (329,401) (426,334)
Borrowings under convertible debentures 3,000,000 8,525,000
Deferred financing costs on convertible debentures (300,000) (852,000)
Repayment - capital leases (64,347) (17,589)
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Cash provided by financing activities 2,577,245 8,723,040
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Increase in cash and cash equivalents during the period (437,576) (175,621)
Cash and cash equivalents, beginning of period 1,220,544 787,775
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Cash and cash equivalents, end of period $ 782,968 $ 612,154
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 250,187 $ 47,716
Income taxes paid --- ---
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Conversion of convertible debentures to common stock $ 2,646,649 $ 6,737,783
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, 1997
(UNAUDITED)
PREFERRED PREFERRED COMMON
SHARES STOCK SHARES
----------- ------------ -----------
BALANCE, MAY 31, 1996 15,000 $ 1,500,000 5,943,771
Net loss
Issuance of common stock:
Conversion of debentures 1,393,186
Conversion of preferred stock (15,000) (1,500,000) 400,000
Private placement 195,331
Exercise options 100,000
Acquisition earn-out 18,113
Beneficial conversion feature of
convertible debt
Dividends on preferred stock
----------- ----------- -----------
BALANCE, DECEMBER 31, 1996 --- --- 8,050,401
Net loss
Issuance of common stock:
Conversion of debentures 1,160,132
Acquisition earn-out 256,749
Beneficial conversion feature of
convertible debt
----------- ----------- -----------
BALANCE, SEPTEMBER 30, 1997 --- $ --- 9,467,282
=========== =========== ===========
COMMON ACCUMULATED
STOCK DEFICIT
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BALANCE, MAY 31, 1996 $ 35,743,536 $(31,293,056)
Net loss (6,491,603)
Issuance of common stock:
Conversion of debentures 3,911,880
Conversion of preferred stock 1,500,000
Private placement 530,100
Exercise options 300,000
Acquisition earn-out 90,020
Beneficial conversion feature of
convertible debt 895,213
Dividends on preferred stock (40,667)
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BALANCE, DECEMBER 31, 1996 42,970,749 (37,825,326)
Net loss (3,800,188)
Issuance of common stock:
Conversion of debentures 2,646,649
Acquisition earn-out 792,176
Beneficial conversion feature of
convertible debt 333,333
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BALANCE, SEPTEMBER 30, 1997 $ 46,742,907 $(41,625,514)
============= =============
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, 1997
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, 1997 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, 1996. The interim financial information presented is not
necessarily indicative of the results from operations expected for the full
fiscal year.
The Company has changed its fiscal year end from May 31 to December 31 effective
December 31, 1996. Accordingly, the results of operations for the nine months
ended September 30, 1997 are compared to the most applicable period from the
previous fiscal year which is the nine months ended August 31, 1996.
The Company has restated its August 31, 1996 financial statements to recognize a
recently announced position by the staff of the Securities and Exchange
Commission regarding the accounting for the issuance of debt that can be
converted at a discount to the market price of the Company's common stock. In
this regard, the implicit return provided by the conversion terms of the debt is
accounted for as additional interest expense and accreted over the period
between the date of issuance of the debt and the date the debt first becomes
convertible. This prior period adjustment resulted in additional non-cash
interest expense of $1,968,306 in the nine months ended August 31, 1996 or $0.39
per share.
NOTE 2 - INVENTORIES
The following is a summary of inventories at September 30, 1997 and December 31,
1996:
SEPTEMBER 30, DECEMBER 31,
1997 1996
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Raw materials $3,591,361 $3,859,242
Work in process and sub-assemblies 1,285,437 1,593,705
Finished goods 666,814 366,905
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$ 5,543,612 $5,819,852
=========== ==========
NOTE 3 - NOTES PAYABLE AND CONVERTIBLE DEBENTURES
The Company's wholly-owned subsidiaries, XL Computing and XL Canada, have
obtained revolving credit facilities with banks. These credit facilities allow
XL Computing and XL Canada to borrow and repay amounts, at their option, up to a
maximum aggregate amount of approximately $2,000,000. The credit facilities are
collateralized by XL Computing's and XL Canada's inventory
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CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
and trade accounts receivable, and are guaranteed by the Company. At September
30, 1997, the outstanding balance on the revolving credit facilities was
$1,409,926.
On February 28, 1997, the Company issued $3.0 million of 10% convertible
debentures due February 28, 1999 which are convertible at the option of the
holders into common stock of the Company at a conversion price equal to 90% of
the average closing bid price of the Company's common stock prior to conversion,
provided; however, that the conversion price shall in no event be greater than
$6.00 per share or less than $3.00 per share. The debentures are fully eligible
for conversion after February 28, 1998.
As of September 30, 1997, the Company has outstanding $3,324,999 in convertible
debentures which are convertible at the option of the holders into common stock
of the Company at prices ranging from 79% to 90% of the average closing bid
price of the Company's common stock prior to conversion. At September 30, 1997,
an amount of $1,824,999 in convertible debentures are fully eligible for
conversion. During the nine months ended September 30, 1997, principal and
accrued interest in the amount of $2,866,095 were converted into 1,160,132
shares of common stock.
NOTE 4 - RECENT PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share", which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact is not expected to result in a change
in primary earnings per share for the periods ended September 30, 1997 and
August 31, 1996, as the effect of these changes would be anti-dilutive. The
impact of Statement No. 128 on the calculation of fully diluted earnings per
share for these periods is also expected to be anti-dilutive.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1997 and August 31, 1996
Total revenues for the three months ended September 30, 1997 were $3,489,490, a
decrease of 22% from revenues of $4,465,105 in the prior period. This change is
a result of reduced sales of secure computer systems, which decreased to
$1,297,100 from $3,825,526 in the prior period. The decrease in secure computer
systems sales is partially offset by the increase in sales of the Company's
PCMobile product, which increased $1,588,088 to $1,867,758 for the period ended
September 30, 1997.
Cost of sales for the three months ended September 30, 1997 was $2,624,733 as
compared to $2,871,979 from the prior period. This decrease is related to
reduced sales volume for secure computer systems, offset by increased sales
volume of PCMobile. These products, which comprise the computer products
segment, contributed $2,446,130 to total cost of sales, which resulted in a
gross margin of 23% for the segment, a decrease from the 35% gross margin in the
prior period. The gross margin for the communications security products segment
was 45%, as compared to 44% in the prior period.
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In connection with the Company's goal of achieving profitable operations, the
Company experienced a 28% decrease in operating expenses. Operating expenses
decreased to $1,845,732 for the three months ended as compared to $2,580,466 for
the prior period. Selling, general and administrative expenses decreased to
$1,277,365 for the period ended September 30, 1997 as compared to $1,939,177
from the prior period. This decrease is due in part to the effects of
restructuring of the communications security products segment. Research and
development costs decreased 27% to $337,660 for the period ended September 30,
1997 as products in engineering have begun to reach the production phase.
Depreciation and amortization increased 27% to $227,493 for the three months
ended September 30, 1997. This increase is a result of the amortization of
additional goodwill recorded in the current quarter related to the earn-out
provisions of the acquisition of XL Canada.
Interest expense for the three months ended September 30, 1997 was $193,770 as
compared to $895,637 for the prior period. While there has been increased debt
financing obtained by the Company in the form of convertible debentures,
acquisition debt and credit lines, the interest expense has decreased due to
reduced convertible debt interest charges. Included in interest expense are
non-recurring, non-cash charges related to convertible debt financing that give
effect to beneficial conversion features of $76,390 and $774,926 for the three
months ended September 30, 1997 and the three months ended August 31, 1996,
respectively.
The net loss of $1,157,091, or ($0.12) per share, for the three months ended
September 30, 1997 represents a decrease from $1,808,923, or ($0.29) per share
for the three months ended August 31, 1996. The decrease in net loss is largely
due to the results of the restructuring plans and the reduction in non-cash,
non-recurring interest charges.
Nine Months Ended September 30, 1997 and August 31, 1996
Total revenues for the nine months ended September 30, 1997 were $10,523,175
which represents an increase of 22% over revenues of $8,597,713 for the prior
period. The increased revenues are partly related to the inclusion of the
revenues of XL Computing and XL Canada acquired in March 1996 and June 1996,
respectively. These subsidiaries accounted for $9,133,010, or 87% of total
revenues for the current period. The remaining revenue of $1,410,165 is related
to the communications security products segment and represents an approximate
29% increase from the prior period. The increase is due to the shipments of the
CSD Slice products to Lucent Technologies.
Cost of sales for the nine months ended September 30, 1997 was $7,577,827 as
compared to cost of sales of $6,057,935 for the prior period. The increase is
related to the acquisitions of XL Computing and XL Canada. These subsidiaries,
which form the computer products segment, contributed $6,769,287 to total cost
of sales which resulted in a gross margin of 26% for sales in this segment for
the current period, as compared to 27% in the prior period. The gross margin for
sales in the communications security products segment was 43%, as compared to
44% in the prior period.
In connection with the Company's goal of achieving profitable operations, the
Company experienced a 30% decrease in operating expenses despite the inclusion
of the results of its acquisitions of XL Computing and XL Canada. Operating
expenses decreased to $6,054,354 for the nine months ended as compared to
$8,646,704 for the prior period. Selling, general and administrative expenses
decreased to $4,570,800 for the period ended September 30, 1997 as
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compared to $5,727,042 from the prior period. This decrease is due in part to
the effects of restructuring of the communications security products segment.
Research and development costs decreased 4% to $885,961 for the period ended
September 30, 1997. This decrease reflects a credit of $206,000 related to the
development of the CSD cellular security device offset by increased expenditures
on the development of the PCMobile computer and enhancements on secure computer
systems products. Depreciation and amortization decreased 47% to $597,496 for
the nine months ended September 30, 1997 due to the acceleration of goodwill
amortization of $501,523 in the prior period. Additionally, the Company recorded
inventory write-downs of $869,101 in the prior period related to the
obsolescence of certain communications security products.
Interest expense for the nine months ended September 30, 1997 was $776,892 as
compared to $2,266,678 for the prior period. While there has been increased debt
financing obtained by the Company in the form of convertible debentures,
acquisition debt and credit lines, the interest expense has decreased due to
reduced convertible debt interest charges. Included in interest expense are
non-recurring, non-cash charges related to convertible debt financing that give
effect to beneficial conversion features of $439,368 and $1,968,306 for the nine
months ended September 30, 1997 and the nine months ended August 31, 1996,
respectively.
The net loss of $3,800,188, or ($0.42) per share, for the nine months ended
September 30, 1997 represents a decrease from $8,269,420, or ($1.65) per share
for the nine months ended August 31, 1996. The decrease in net loss in largely
due to the results of the restructuring plans, the write-down of inventory and
goodwill recorded in the prior period, and the reduction in non-cash,
non-recurring interest charges.
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, 1997, the Company had cash and cash equivalents of $782,968.
In the nine months ended September 30, 1997, cash used in operations amounted to
$2,846,481. Investing activities used cash of $168,340 during the nine months
ended September 30, 1997, the major activity being the sale of the Company's
investment in Galactica for $1,027,000, of which $513,500 was paid in cash at
closing. This amount was offset by capital expenditures, the investment in Delta
Data for $205,000 and an increase in notes receivable. Cash provided by
financing activities was $2,577,245. The issuance of convertible debentures
resulted in net proceeds of $2,700,000. The Company increased the amounts drawn
on its revolving credit facilities in an amount of $270,993 during the nine
months ended September 30, 1997.
The Company's net working capital decreased to $3,156,234 at September 30, 1997,
from $4,451,698 at December 31, 1996, as cash was used to fund working capital
needs.
The Company expects its secure, rugged computer segment to be able to fund
operations from working capital, secured lines of credit and funding from the
parent company. The operations of the secure 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. As compared to prior periods, the Company has shown revenue
growth while narrowing losses. The Company anticipates continued improvement to
achieve profitability in the near term. The Company believes that it has the
capital resources
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available through existing cash, operations and the ability to raise additional
debt and equity financings to develop and market its products and to make
acquisitions. In this regard, the Company believes that it will be able to meet
its obligations over 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
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.
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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 7, 1997 /s/ Albert I. Hawk
-------------------
Albert I. Hawk
President and
Chief Executive Officer
Date: November 7, 1997 /s/ Michael R. Skoff
--------------------
Michael R. Skoff
Chief Financial Officer
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