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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
(Mark One)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934 [FEE REQUIRED]
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM JUNE 1, 1996 TO DECEMBER 31, 1996
Commission file number 1-11686
CYCOMM INTERNATIONAL INC.
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(Name of Small Business Issuer in Its Charter)
Wyoming 54-1779046
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(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
1420 Springhill Road, Suite 420, McLean, Virginia 22102
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(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number, including area code: (703) 903-9548
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Securities registered pursuant to Section 12(b) of the Act:
Common Stock, without par value
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(Title of Class)
Securities registered pursuant to Section 12(g) of the Act: None
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 preceding
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
-- --
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
[ ]
Issuer's revenues for its most recent fiscal year. $8,588,845
The aggregate market value of the voting stock held by non-affiliates of the
registrant on March 17, 1997 was approximately $26,800,000 (based on the price
at which the stock was sold on that date).
The number of shares outstanding of the issuer's class of Common Stock, no par
value, as of March 17, 1997, 9,134,159 shares
DOCUMENTS INCORPORATED BY REFERENCE
(1) Definitive Proxy Statement for 1996 Annual Meeting of Stockholders ---
Items 9, 10, 11 and 12.
Transitional Small Business Disclosure Format (check one):
Yes No X
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TABLE OF CONTENTS
<TABLE>
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PAGE
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PART I
<S> <C> <C>
Item 1. Description of Business ........................................... 1
Item 2. Description of Property............................................ 11
Item 3. Legal Proceedings.................................................. 11
Item 4. Submission of Matters to a Vote of Security Holders................ 11
PART II
Item 5. Market for Common Equity and Related Stockholder Matters........... 12
Item 6. Management's Discussion and Analysis or Plan of Operation.......... 13
Item 7. Financial Statements............................................... 16
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure........................................... 16
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section16(a) of the Exchange Act................... 16
Item 10. Executive Compensation............................................. 17
Item 11. Security Ownership of Certain Beneficial Owners and Management..... 17
Item 12. Certain Relationships and Related Transactions..................... 17
Item 13. Exhibits and Reports on Form 8-K................................... 18
Signatures.................................................................. 21
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
Cycomm International Inc. (hereinafter referred to as "Cycomm
International" and together with its subsidiaries the "Company") was formed on
April 30, 1986 by the amalgamation under the laws of Ontario of two Ontario
corporations. Historically, the Company has operated under various names;
however, it changed its name to Cycomm International on February 20, 1992. The
Company continued its incorporation on October 31, 1995 from Ontario, Canada to
the State of Wyoming pursuant to the Articles of Continuance.
The Company has four active wholly-owned subsidiaries as follows:
- Cycomm Corporation ("Cycomm"), incorporated in Oregon, on January 1, 1985.
- Val-Comm, Inc. ("Val-Comm"), incorporated in New Mexico, on July 12, 1984.
- XL Computing Corporation ("XL Computing"), incorporated in Delaware, on
February 26, 1996.
- XL Computing Canada Inc. ("XL Canada"), incorporated in Quebec, Canada on
June 3, 1996.
As at December 31, 1996, the Company had a 25.5% equity investment in
Sistemas de Recepcion de Satelite Galactica C.A. ("Galactica"), incorporated in
Venezuela on July 21, 1987. The Company sold this investment to the majority
shareholder in March 1997.
[ORGANIZATIONAL CHART]
HEADQUARTERS. The Company's principal executive offices are located in
McLean, Virginia. Management of all subsidiaries and the Company's growing
number of strategic relationships is conducted from this location, along with
overall financial and investment responsibilities.
CYCOMM CORPORATION. Located in Portland, Oregon, this wholly-owned
subsidiary provides security through both encryption and scrambling of voice
and data signals for the wireless and wireline telecommunications industry.
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XL COMPUTING CORPORATION. Located in Sebastian, Florida, this wholly-owned
subsidiary is an information technology company that designs, manufactures and
markets ruggedized, TEMPEST specified (TEMPEST is the classified standard for
securing computer equipment and peripherals) computer and communication
equipment for niche markets worldwide. XL Computing operates from a 44,000
square foot, ISO 9000 facility.
XL Computing's business compliments the Company's secure communication
business, implements Cycomm's secure technology into its products and shares
sales and distribution channels.
XL COMPUTING CANADA INC. Located in Montreal, Canada, this wholly-owned
subsidiary designs and markets ruggedized mobile computing and communications
systems primarily to the utility and public safety markets.
XL Canada has expanded the Company's ruggedized computer product line by
adding state, local and commercial markets to XL Computing's core government
and military business. In addition, by integrating the secure communications
technology of the Company and utilizing the design and manufacturing
capabilities of XL Computing, significant cost advantages will be achieved as
the PCMobile line begins full-scale production.
VAL-COMM, INC. Located in Albuquerque, New Mexico, this wholly-owned
subsidiary is a communications, engineering and consulting company which
provides feasibility studies for possible development projects and custom
communications equipment developed for classified U.S. government agencies.
These activities can include prototype development but generally involve the
modification of one or more products available from unrelated companies into an
integrated communications system to meet its clients' requirements. Such work
involves classified U.S. government contracts for which Val-Comm maintains U.S.
government facilities security clearances.
Val-Comm has a complementary engineering capability and a high level
security clearance which enables it to contract on U.S. government projects
requiring such levels of security clearance.
SIGNIFICANT DEVELOPMENTS DURING THE SEVEN MONTHS ENDED DECEMBER 31, 1996
ACQUISITION OF XL COMPUTING CANADA INC. On June 21, 1996, the Company acquired
substantially all of the assets of M3i Technologies Inc., renamed XL Canada, a
Montreal, Canada based company that designs and sells mobile computing and
communications systems. The principal product of XL Canada is PCMobile, a
ruggedized portable RF ready computer currently being sold into the state and
local public safety markets.
The purchase price consisted of $1 million cash and up to $4 million in
common stock of the Company payable on a quarterly basis at the average current
market price for the quarter of issuance. The common stock will be issued
pursuant to an earn out formula over the next five years tied to each PCMobile
unit sold. The earn out will be fully paid upon XL Canada's
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booking of approximately $31 million in revenues from the sales of the PCMobile
product over the next five years.
SIGNIFICANT DEVELOPMENTS SUBSEQUENT TO THE SEVEN MONTHS ENDED DECEMBER 31, 1996
DELTA DATA. On February 7, 1997, the Company completed an Asset Purchase
Agreement between the Company and The Titan Corporation ("Titan") whereby the
Company acquired substantially all of the assets of Delta Data, an
unincorporated division of Titan, for a purchase price of $205,000. Titan is
based in San Diego, California and is engaged in the design, manufacturing and
installation of high technology information and electronic systems. Delta Data
is based in Columbia, Maryland and is engaged in the manufacture and sale of
secure and ruggedized computer products and services.
MAJOR ORDER. On March 13, 1997, XL Computing and XL Canada were awarded a
contract with an aggregate contract value of approximately $4 million. XL
Computing will supply the Fairfax County, Virginia Police and Fire & Rescue
departments with its ruggedized laptop, the PCMobile. XL Computing is scheduled
to deliver nearly 800 PCMobiles to Fairfax County by the end of the year. This
order represents the largest order the Company has received for PCMobile to
date.
STRATEGIC PARTNERSHIP. In March 1997, the Company announced the formation of a
strategic partnership with a consortium of Korean investors including Bookook
Securities Co., Ltd. and Hanil Securities Co., Ltd. granting them non-exclusive
rights to certain technology, products, and intellectual property in South
Korea and elsewhere in Asia. The Company also announced the receipt of a US$3
million loan from these partners to be used for acquisitions and working
capital.
SALE OF GALACTICA. On March 24, 1997, the Company sold its investment in
Galactica to the majority shareholder for an aggregate price, which
approximates book cost, of $1,027,000, consisting of cash of $513,500 and a
contingent promissory note of $513,500. The sale of Galactica completes the
disposition of non-core assets and provides additional working capital and
financial flexibility to the Company.
BUSINESS OF THE COMPANY
The Company's historical business focus has been on providing security
for voice and data transmission over wireless systems, particularly to cellular
telephone end users. Through its recently acquired subsidiaries, the Company
has leveraged its core competencies to manufacture and sell a full line of
secure, ruggedized computer products presently sold into the military, utility
and public safety markets.
The Company has been a pioneer in the wireless security field and
holds patents and rights for a family of technologies and products. In 1997,
the Company has shifted its business strategy away from the manufacturing of
scrambling products and has emphasized the licensing of its technology. The
Company believes that it will minimize the manufacturing risks and the
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associated costs and maximize revenue opportunities from its historical costs
of developing its technology. Consequently, the Company has allocated resources
to its secure and rugged computing product line, which has the most near term
profitability potential. During the present fiscal year, the Company will
continue to integrate the various divisions resulting in a single secure,
rugged telecommunications and computing product company.
In connection with the implementation of the Company's strategy, several
one time charges were incurred during the period ended December 31, 1996. In
this regard, the Company believes that it will maximize its ability to achieve
positive cash flow and profitability at an earlier date.
MARKET FOR THE COMPANY'S PRODUCTS AND SERVICES
RUGGEDIZED COMPUTERS. Off the shelf computers are designed to operate in
stable, controlled environments, such as offices or homes. As end user
applications demand mobile computing, traditional computers will not operate or
are susceptible to damage under harsh conditions. The growing market for value
added ruggedized computers has paralleled the growth in mobile computing
requirements, applications and end users.
The Company manufactures a full line of ruggedized computers and
peripherals for operation under harsh environments. This ruggedized technology
is an extension of the TEMPEST and EMI (Electro-Magnetic Interface)
manufacturing process from which the Company produces a product line that is
both rugged and TEMPEST compliant.
COMPUTER SECURITY. Computers, monitors, keyboards, printers and related
peripherals produce emissions that can be intercepted with relatively
inexpensive equipment through the building structure from various distances. In
this regard, it is possible to obtain the content being inputted or transmitted
on such computers or related peripherals.
The Company manufactures a full line of TEMPEST and EMI computers, both
stationary and portable and related products that protect against the
interception of emissions.
WIRELESS SECURITY. Cellular telephone service is a form of
telecommunications designed to provide high quality wireless telephone service
to a large number of simultaneous users from hand held, vehicle mounted or
fixed radio telephones. Cellular telephones are designed to meet the growing
demands of an increasingly mobile society and allow people to have
instantaneous communications for business, pleasure or safety. In the United
States, Europe and other developing areas the construction and use of cellular
systems during the past five years has accelerated and is expected to continue
for the next ten years until the next generation of technologies are
commercialized.
Beginning in the early 1990s, public awareness of the ease of unauthorized
cellular telephone monitoring increased. A radio scanner available from
consumer electronic stores can be easily modified to receive all cellular
bands, thus allowing users' telephone calls to be
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intercepted. Cellular conversations generally take place within a single cell
site, so cell site switching offers little, if any, additional protection.
Cycomm's products provide protection against unwanted eavesdropping on
calls and is a critical protection to business, governmental and professional
groups which need to protect industrial secrets and clients' confidential
information. Cycomm's sophisticated voice privacy technology encrypts the
cellular and landline calls so that all an eavesdropper hears is garbled speech
or "white noise".
VOICE SECURITY SYSTEMS. Cycomm began to develop its cellular security
products in response to security concerns. Cycomm believes that the commercial
success of its cellular security products depends upon both the level of
security and voice quality such products provide. Commercial security products
must balance the degree of security provided by encoding of speech with the
decoded voice quality of such speech. Cycomm believes that the best product is
a security product that would make it difficult and prohibitively expensive to
intercept a conversation while maintaining voice quality at such a level that
the user finds it difficult to discern any degradation compared to normal
cellular usage. Cycomm's voice security products are designed to balance the
need for security with the desire for a high level of voice quality.
XL COMPUTING AND XL CANADA PRODUCT LINES AND SERVICES
XL Computing's primary customers are the United States and foreign
governments; XL Canada targets police and fire, other local and state public
safety agencies, and the commercial, industrial and utility markets. These
companies have fourteen full time sales persons. While some direct sales are
made, the majority of revenues are generated by systems integrators, other
third party resellers, vendors and Original Equipment Manufacturers ("OEM").
These subsidiaries manufacture and sell a complete line of computers and
peripherals from a ruggedized laptop computer to an "office in a suitcase" for
the Mobile Field Office market that incorporates Cycomm encryption technology.
Transmission options include both wired and a variety of wireless modes
including satellite links. Security options range from encryption to a
"TEMPEST" configuration.
TEMPEST PENTIUM COMPUTER. The TEMPEST Pentium Computer (486KT)
incorporates an Intel PentiumTM microprocessor into the industry standard
ISA/PL1 bus packaged TEMPEST 205P cabinet. This unit has been tested to meet
NST1SSAM TEMPEST - 1/92 and AMSG emission specifications.
TEMPEST LAPTOP COMPUTER. The TEMPEST laptop computer incorporates an Intel
486DX41100 driven laptop computer into an aluminum alloy case. The 486LT is
significantly more rugged than commercial units and will meet the strictest
TEMPEST requirements.
TEMPEST/INKJET PRINTER. The 3414T is the TEMPEST version of the popular
Hewlett Packard 320 Inkjet Printer. Monochrome and color versions are
available. The 3414T supports 300dpi (color) at up to 3 pages per minute.
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TEMPEST MONITORS. XL Computing offers a full line of ruggedized TEMPEST
and EMI compliant monitors. The EMI and TEMPEST designs use a combination of
containment and suppression techniques that retain the OEM cabinetry. A high
quality OCLI glass screen with anti-reflective coating is incorporated into the
display providing maximum resolution and brightness.
RUGGED LASER PRINTER. The 3418T deskjet printer meets and exceeds
standards for printing in the military environment. The 3418T based on the
popular Deskjet 340 from Hewlett Packard, is shock isolated to accommodate the
shock and vibration of the severe military platform. It is also shielded to
meet EMI/RFI (and TEMPEST) requirements of these demanding applications. The
rugged design allows for easy access to all OEM functionality, while providing
a high degree of protection required in the harsh environment to which it will
be exposed. This printer has been engineered to survive the shock and vibration
environmental extremes found in ground-mobile and shipboard applications. The
rugged printer offers performance identical to the commercial version of the
printer. Modular construction and ease of access to all LRUs (line replaceable
units) supports an MTTR (mean time to repair) of less than 30 minutes.
MOBILE FIELD OFFICE SYSTEMS. The rugged mobile imaging and communications
system ("MICS") is a portable office that fits into a lightweight, rugged,
suitcase-type carrier suitable for commercial travel. This self-contained
system is easily taken into harsh field environments and provides personnel
with the capability to accomplish their data collection and transmission tasks
using landline, cellular and satellite communications with state-of-the-art
technology in the military environment. Standard peripherals include a
ruggedized computer (486 or Pentium driven) a removable hard disk drive, modem,
fax card, cellular phone, printer, scanner, and a battery backup. A digital
camera is an optional feature allowing the operator to take pictures or collect
data and immediately transfer it to other users or a central location.
PCMOBILE. The PCMobile is a "ruggedized" mobile computer specifically
developed for optimal mobility, flexibility and performance under severe
operating conditions. It is ideal for field service and public safety. The
PCMobile is certified to be used almost anywhere, performing reliably in spite
of extreme conditions. The rugged magnesium housing makes the PCMobile spill
and shock-proof and preserves the unit's structural integrity even at high
temperatures. The light blue casing reflects rather than absorbs light, helping
to maintain the electronic circuitry at lower operating temperatures. Rubber
gaskets are fitted around door openings and between case mating parts. All
external connectors have been rain-tested. The PCMobile also stands up to
vibration and meets the standards for protection from electrostatic discharge.
The 586 model of the PCMobile is expected to be delivered in mid-1997 and the
Pentium model is expected to be delivered in the fall of 1997.
CYCOMM CORPORATION'S PRODUCT LINE AND SERVICES
Cycomm has historically focused on three segments of the communications
and security market: 1) voice and data network providers; 2) hardware
manufacturers; and 3) value-added computer and telecommunications systems
providers. Cycomm, however, in 1997 emphasized a
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strategy of licensing and alliances with other segments of the computing and
telecommunications industry to commercialize applications of its technologies
to meet other emerging security requirements. Included in this strategy was the
focus on providing higher levels of security through encryption and the
subsequent Fall 1996 roll out of its "Slice" CSD technology developed with Bell
Laboratories and resold by Lucent Technologies, Inc.
Currently, the majority of cellular service carriers in the United States
utilize analog transmission and industry projections are that analog backbone
systems will continue to dominate the market for the next several years. As
digital cellular systems continue to grow, the industry is expected to operate
in a dual-mode phase with products that will incorporate both analog and
digital capability. During this phase the analog portions of user's calls will
continue to be protected by the use of security technologies and products
installed in, or attached to, such dual-mode phones.
SERIES 300. Cycomm developed the 300 Series privacy system as an
integrated set of scrambling products that, working together, provide a
complete privacy solution for individuals, corporations and cellular carriers.
Cycomm has substantially completed the 300E Series, the next generation of
privacy products. Cycomm, however, has not pursued the roll out of this product
line, but has rather emphasized the high security level encryption product.
CELLULAR SECURITY DEVICE ("SLICE CSD"). The Slice CSD incorporates voice
encryption security in a Cycomm Slice package for the Motorola MicroTAC line of
cellular phones. The Slice CSD uses Lucent SurityTM encryption technology,
licensed from Lucent in 1995, and is compatible with Lucent's Telephone
Security Device 3600 family of products ("TSD").
Encryption technology provides a higher level of communications security when
compared to more common analog scrambling technologies. Encryption level
security is required by most government and law enforcement users. Lucent's TSD
products, which were introduced in 1993, are now widely used within several
U.S. Government agencies for non-classified secure communications over landline
telephones. Over 10,000 TSDs are now in use by the U.S. Government. With the
introduction of Cycomm's Slice CSD product line, the potential market has been
expanded to include many applications requiring secure communication between
cellular and landline telephones. The Slice CSD also supports cellular to
cellular secure communications.
The Slice CSD was designed to address the key issues affecting user
satisfaction with secure communications products, with special emphasis on ease
of use and voice quality. The design of the CSD allows simple installation
between the phone and battery of most Motorola MicroTAC portable cellular
phones. The unit incorporates two buttons; one to initiate and the other to
clear the secure communications mode. By utilizing Lucent's proprietary voice
encoding and encryption algorithms, the CSD offers unparalleled voice quality,
even when compared to other less secure systems. Initial reactions of
experienced secure communications professionals to the CSD's functionality and
voice quality have been very favorable.
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Pre-production deliveries of the CSD Slice began in September, 1996, with
customer testing and final development continuing until November, 1996.
Production deliveries, primarily to Lucent Technologies, began in January,
1997.
BACKLOG
On December 31, 1996, the Company had a backlog of contracts and purchase
orders of approximately $3.3 million in its computer equipment segment. This
backlog consists of contracts and purchase orders for computer equipment and
peripherals to be manufactured and delivered usually during the upcoming 12
months. The contracts and purchase orders define the price and specifications
of the equipment to be delivered. However, due to the nature of the business,
the backlog at any particular date may not be indicative of the Company's
revenues or other operating results for any subsequent fiscal period. The
Company cannot, therefore, assure that the backlog will be realized as revenue.
Subsequent to December 31, 1996 the Company received contracts and purchase
orders of approximately $4.5 million for computer equipment which is not
included in the above backlog amount.
On December 31, 1996, the Company had a backlog of purchase orders and
contracts of approximately $635,000 in its communications security products
segment. This segment also includes backlog as a prime or subcontractor on
several government contracts.
RELIANCE UPON CERTAIN CUSTOMERS/SUPPLIERS
The Company is not dependent upon any single customer that purchases its
products. However, sales to two major customers comprise 30% and 25%
respectively, of sales for the seven months ended December 31, 1996. Sales to
three major customers comprise 25%, 20% and 9% respectively, of sales for the
year ended May 31, 1996. These sales represented customers of XL Computing
during the ten week period ended May 31, 1996 and were not necessarily
indicative of the reliance upon customers for a full year period.
Although the Company relies on a limited number of companies to manufacture its
products, it believes that the specific parts employed in the manufacturing
process are available from a variety of suppliers. Further, the Company
believes that additional manufacturing sources could be found if necessary. The
Company believes its relationship with its suppliers is satisfactory.
RESEARCH AND DEVELOPMENT
During the seven months ended December 31, 1996 and the fiscal years ended May
31, 1996 and 1995, the Company spent $841,103, $749,041 and $502,505,
respectively, on research and product development, primarily for development of
products complementary to the existing line of secure and rugged computer and
cellular voice privacy products. The Company anticipates additional research
and development expenditures on future development of products.
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ENVIRONMENTAL ISSUES
Compliance cost with environmental laws is not expected to materially adversely
affect the business of the Company.
EMPLOYEES
The Company currently employs approximately 138 people, of which approximately
105 are employed in the United States and 33 in Canada. Approximately 23
employees work in customer sales and service, 18 work in administration, 33
work in research and development and 64 employees work in manufacturing.
PATENTS
Cycomm has or has applied for patent protection for certain of its principal
proprietary technologies. There can be no assurance that the patent
applications will be successful, that any patents issued are or will be valid,
or that others will not develop functionally equivalent or superior technology
that does not infringe Cycomm's patents. There can also be no assurance that
Cycomm's existing patents will go unchallenged.
Cycomm is the assignee of U.S. Patent No. 4,864,566 issued on September 5,
1989, entitled "Precise Multiplexed Transmission and Reception of Analog and
Digital Data Through a Narrow-Band Channel." This patent covers the basic
synchronization that makes it possible to achieve a certain level of voice
quality and security. Cycomm voice privacy products are partially protected by
this patent because an adaptation of the synchronization technique is used.
Furthermore, protection is enhanced by utilizing large amounts of microcode
embedded in microprocessor chips that are dependent upon semi-custom gate array
circuits. Both microcode and circuits are proprietary.
On May 14, 1996, Cycomm received, as assignee, U.S. Patent No. 5,517,683
entitled "Conforment Compact Portable Cellular Phone Case System and
Connector". This patent covers Cycomm's Slice packaging and functionality, as
it applies to a number of potential applications for the Motorola MicroTAC line
of cellular phones. Cycomm's current Slice products, the Series 300 Slice HPU
and Series 500 Slice CSD, now have full patent protection. The Company plans to
pursue new products and licensing opportunities to exploit the Slice
technology, and to protect against any infringement of the Slice patent.
Cycomm uses a voice scrambling, privacy technique referred to as "Variable
Split Band Inversion." The technique is not patented by Cycomm since it is a
known technique and Cycomm purchases the integrated circuit presently utilized
from a third-party vendor. However, any usage of a scrambling method over a
communications network is difficult to implement while retaining good speech
quality when the speech is decoded at the remote end of the conversation.
Cycomm's proprietary technology is used in conjunction with this scrambler
integrated circuit to accomplish the task of bringing decoded voice quality up
to a level acceptable to the general business user. The Company believes that
the lack of patent protection
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does not present a material risk to Cycomm because it is better protected with
proprietary means since Cycomm believes that other competitors may try to avoid
the patent procedure through the use of different circuits or software.
Cycomm is the assignee of U.S. Patent No. 4,972,479 issued on November 20,
1990 entitled "Method and Apparatus for Providing Privacy/Security in a
Communication System". This patent covers apparatus and methods for providing
privacy on communications systems which include radio links in a manner which
does not require both a scrambler and descrambler at each called party
location. This allows the cellular user to route calls in encrypted form
through a central location and then on to the called party in decoded form
without the necessity of routing the call through a cellular service carrier's
MTSO. In addition, Cycomm owns certain trademarks in the marketing of Cycomm's
cellular and telephone voice privacy products.
REGULATORY APPROVALS
Cycomm's products are subject to approval by the Federal Communications
Commission ("FCC") in the United States. The FCC require that products not
exceed certain levels of radio wave emanation so that they will not interfere
with other electronic equipment. Furthermore, telephone products must meet
certain standards for interfacing into the telephone line, such as impedance
matching and isolation. All of the Cycomm products have received FCC approval
for both radiation and telephone connection.
In general, the FCC and its approval process is objective. Product designs are
required to meet these objective criteria and specifications. In the event that
a Cycomm privacy product failed a test, the introduction of the product would
be delayed.
To date, Cycomm has been able to comply with all governmental requirements
without incurring significant costs. However, Cycomm cannot determine the
extent to which future earnings may be affected by new legislation or
regulations affecting its industry.
COMPETITION
The markets for privacy and encryption products and secure and rugged computing
are niche value added markets. As the markets grow and/or the Company is
successful, it is anticipated that competitors will enter these markets. Such
competitors, who may be larger and better capitalized than the Company, will
face significant cost and time commitments necessary to compete directly with
the Company. In this regard, the Company believes that its focus on niche
markets in which it has developed various strategic relationships, its
proprietary technology and the uncertainty of the developing markets provide
barriers to entry against competitors.
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ITEM 2. DESCRIPTION OF PROPERTY
As of December 31, 1996, the Company leased the following facilities:
<TABLE>
<CAPTION>
Approximate
Location Type of Facility Condition Square Ft.
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<S> <C> <C> <C>
McLean, VA Executive Office Excellent 4,000
Portland, OR R&D and Distribution Good 6,500
Sebastian, FL Corporate, R&D, Excellent 44,000
Manufacturing
and Distribution
Montreal, QB Manufacturing, R&D and Excellent 10,300
Distribution
</TABLE>
See also Note 8 to the Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings against it other
than routine litigation that is incidental to the business of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 20, 1996, the Company held its Annual Meeting of Stockholders in
McLean, Virginia pursuant to the Notice of Annual Meeting and related Proxy
Statement dated October 11, 1996. As follows are the actions that were taken at
the meeting:
1. To elect Albert I. Hawk, Rick E. Mandrell and Hubert Marleau as directors
for one-year term expiring in 1997. The results of the voting were as
follows:
<TABLE>
<CAPTION>
Nominee For Withheld
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<S> <C> <C>
Albert I. Hawk 5,214,705 42,550
Rick E. Mandrell 5,212,505 44,750
Hubert Marleau 5,200,297 56,958
</TABLE>
2. To approve the selection of Ernst & Young, LLP., as independent certified
public accountants for the 1997 fiscal year. The results of the voting
were as follows:
<TABLE>
<CAPTION>
For Against Withheld
--- ------- --------
<S> <C> <C>
5,205,847 5,600 44,308
</TABLE>
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on The American Stock Exchange ("AMEX")
under the symbol "CYI". The following tables set forth the reported high and
low sales prices as reported by AMEX for the periods indicated:
<TABLE>
<CAPTION>
High Low
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YEAR ENDED MAY 31, 1995
First quarter * $11.25 $2.80
Second quarter * 11.25 7.20
Third quarter * 11.90 6.25
Fourth quarter * 11.90 5.65
YEAR ENDED MAY 31, 1996
First quarter * $11.25 $4.38
Second quarter* 6.75 3.75
Third quarter 5.63 3.19
Fourth quarter 7.25 2.88
SEVEN MONTHS ENDED DECEMBER 31, 1996
First quarter $7.31 $3.25
Second quarter 5.44 3.13
Month of December 1996 3.69 2.56
* restated to reflect the 1 for 5 Reverse Split of the outstanding
shares of common stock, effective October 19, 1995.
</TABLE>
The number of record holders of the common stock as of March 17, 1997 was
1,003.
The Company has no present intention of paying dividends on the common stock in
the foreseeable future as it intends to retain any future earnings to fund
operations and the continued development of its business. The declaration and
payment of dividends and the amount paid, if any, is subject to the discretion
of the Company's Board of Directors and will be dependent on the earnings,
financial condition, and capital requirements of the Company and any other
factors the Company's Board of Directors may consider relevant. However, the
Company was required to pay an 8% cumulative dividend on all outstanding Series
A Preferred Stock. Effective September 30, 1996, all outstanding shares of
Series A Preferred Stock were converted to common stock.
12
<PAGE> 15
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
RESULTS OF OPERATIONS
SEVEN MONTHS ENDED DECEMBER 31, 1996 COMPARED TO SIX MONTHS ENDED NOVEMBER 30,
1995
The Company has changed its fiscal year end from May 31 to December 31
effective December 31, 1996. Accordingly, the results of operations reported
for the transition period of the seven months ended December 31, 1996 are
compared to the most applicable period from the previous fiscal year which is
the six months ended November 30, 1995.
The revenues for the seven months ended December 31, 1996 were $8,588,845 which
represents an increase of 907% over revenues of $852,428 for the prior period.
The increased revenues are related to the inclusion of the revenues of XL
Computing and XL Canada from March 1996 and June 1996, respectively. These
newly acquired subsidiaries accounted for $7,705,374, or 90% of total revenues.
The remaining revenue of $883,471 related to the communications security
products segment and reflected an approximate 4% increase from the prior
period.
Cost of sales for the seven months ended December 31, 1996 were $6,763,463 as
compared to cost of sales of $448,298 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 $6,240,046 to total cost
of sales which resulted in a gross margin of 19% for sales in this segment. The
current period gross margin is low as a result of non-recurring write-offs of
certain deferred project costs and certain inventory adjustments. The gross
margin for sales in the communications security products segment was 41%, as
compared to 47% in the prior period. The decrease in gross margin in the
communications products segment is due to the sale of written down products in
the prior period.
In connection with the Company's goal of achieving profitable operations, the
Company elected to incur certain expenses and one time charges in the period
ended December 31, 1996. Operating expenses increased to $5,046,970 for the
seven months ended as compared to $2,472,893 for the prior period. The increase
is mainly due to the acquisition of XL Computing and XL Canada. Selling,
general and administrative ("SG&A") expenses increased to $4,462,434 for the
period ended December 31, 1996 as compared to $1,942,806 from the prior period.
This increase is due to the acquisitions and represent increased personnel,
facilities and operating costs. Research and development costs increased 191%
to $841,103 for the period ended December 31, 1996. This increase reflects the
Company's expenditures developing the CSD cellular security device, the
enhancements on the TEMPEST line of computers and the development of the
PCMobile computer. Depreciation and amortization increased 94% to $535,162 for
the seven months ended and reflects the increased depreciation and amortization
of capital assets and goodwill related to the acquisitions. During the seven
months ended December 31, 1996, the Company recorded write-down of inventories
in the communications security totaling $476,099. The write-downs covered
certain raw materials and finished goods related to
13
<PAGE> 16
analog scrambling products no longer produced. Additionally, the Company
recorded a write-down of $544,648 related to the sale of its investment in
Galactica. This write-down reflects the full reserve of a contingent promissory
note received as consideration in the sale of Galactica. However, it is
possible the Company will receive payment on all or a portion of the contingent
promissory note in the future and is expected to account for this as other
income at the time of receipt.
Interest expense for the seven months ended December 31, 1996 was $1,499,781 as
compared to $524,195 for the prior period. This increase is due to increased
debt financing obtained by the Company in the form of convertible debentures,
acquisition debt and credit lines. Included in interest expense are charges of
$1,235,125 and $466,666 for the seven months ended December 31, 1996 and the
six months ended November 30, 1995, respectively. These are non-recurring,
non-cash charges related to convertible debt financing that give effect to
beneficial conversion features.
The net loss of $6,491,603, or ($0.92) per share, for the seven months ended
December 31, 1996 represents an increase from $2,984,154, or ($0.83) per share
for the six months ended November 30, 1995. The increase in net loss in largely
due to the losses generated by the acquired subsidiaries and the non-recurring
write-downs of inventories and the investment in Galactica and the
non-recurring interest charges. The loss per share has remaining relatively
steady as the weighted average number of shares outstanding has increased from
3,613,192 at November 30, 1995 to 7,040,356 December 31, 1996.
YEAR ENDED MAY 31, 1996 COMPARED TO MAY 31, 1995
Sales increased to $4,985,036 from $1,283,081 during the same period for the
prior year. The increase is attributable to the aggressive commercialization of
Cycomm's privacy product line and revenue generated by XL Computing which was
acquired as of March 15, 1996. XL Computing's revenue during the period was
$3,396,294. For the year ended May 31, 1996, the Company experienced a loss of
$9,444,651, an increase of $4,814,205 from the loss of $4,630,446 experienced
for the year ended May 31, 1995.
For the year ended May 31, 1996, cost of sales were $3,634,254, an increase
from $855,414 for fiscal year 1995. Administrative and operating expenses
increased to $8,943,261, an increase of $3,870,347 from the fiscal 1995 total
of $5,072,914. The increase in cost of sales is due to the inclusion in cost of
sales of $2,774,646 attributable to XL Computing. The increase in
administrative and operating expenses is due in part to the inclusion of XL
Computing expenses of $808,442. Severance cost made up the balance of the
difference. Depreciation and amortization increased by $853,311 largely due to
the accelerated write-off of $501,523 of goodwill in the Communications
Security Product segment related to the Datotek acquisition. Inventory
write-down increased by $677,560 versus fiscal 1995 due to obsolescence of
certain secure communications inventory. Consulting fees increased by $454,631
due to costs associated with hiring a public relations firm and retaining a
sales and marketing consulting group for the Communications Security Products
segment. Salaries, benefits and management fees increased
14
<PAGE> 17
by approximately $1,000,000. Most of the increase is due to XL Computing costs
for the period. The remaining increase is attributable to administrative
services.
Research and product development costs increased by $246,536 due to development
and preproduction costs associated with Slice CSD technology and upgrading
existing product lines.
Interest expense for the year ended May 31, 1996 was $1,895,236 as compared to
$41,767 for the prior period. Included in interest expense for the year ended
May 31, 1996 is a non-recurring, non-cash charge of $1,660,046 related to
convertible debt financings that give effect to beneficial conversion features.
Notes payable and convertible debentures increased by $3,273,892. This debt was
incurred to fund working capital obligations. In addition, $1,500,000 of
preferred stock was issued to help fund the acquisition of XL Computing.
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 December
31, 1996, the Company had cash and cash equivalents of $1,220,544. At December
31, 1996, XL Computing was in non-compliance with certain debt covenants on its
revolving bank loan. XL Computing has received a waiver relating to these
covenants at December 31, 1996.
In the seven months ended December 31, 1996, cash used in operations amounted
to $4,872,682. Investing activities used $1,131,876 during the seven months
ended December 31, 1996, the major activity being the acquisition of XL Canada
on June 21, 1996. Cash provided by financing activities was $4,747,835. The
issuance of convertible debentures resulted in net proceeds of $3,510,000.
Additionally, the Company obtained equity financing of $830,100 in the form of
a private placement and option exercises. The Company obtained traditional bank
credit lines in an amount of $1,138,933 in the seven months ended December 31,
1996. Acquisition debt of $703,541 was repaid during the seven months ended
December 31, 1996.
The Company's net working capital increased to $4,451,698 at December 31, 1996,
from $3,584,335 at May 31, 1996, as funds were raised to make acquisitions and
fund working capital needs.
Significant items affecting cash and cash equivalents subsequent to December
31, 1996, include the issue of $3.0 million in convertible debt and the sale of
the Company's investment in Galactica for $1,027,000, of which $513,500 was
paid in cash at closing. The proceeds from these investing and financing
activities will provide working capital for operations and acquisitions during
the 1997 fiscal year.
Until the operations of secure communications products achieves certain levels,
this business segment will require additional financing through funding from
other subsidiaries activities, borrowings or issuance of equity and debt
securities. The Company expects its computer
15
<PAGE> 18
equipment segment to be able to fund operations from working capital, secured
lines of credit and funding from the parent company. The Company believes that
it has the capital resources to raise funds through 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
during the remainder of the present fiscal year. There can, however, be no
assurance that the above will be successfully accomplished, or will be possible
on terms acceptable to the Company. In that event, there is substantial doubt
about the Company's ability to continue as a going concern.
ITEM 7. FINANCIAL STATEMENTS
CYCOMM INTERNATIONAL INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SEVEN MONTHS ENDED DECEMBER 31, 1996
AND THE YEARS ENDED MAY 31, 1996 AND 1995
<TABLE>
<S> <C>
Report of Independent Auditors F-2
Consolidated Statements of Operations F-3
Consolidated Balance Sheets F-4
Consolidated Statements of Cash Flows F-5
Consolidated Statements of Stockholders' Equity F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by Item 9 relating to directors of the Company is
presented under the caption "Nomination and Election of Directors" of the
Company's definitive Proxy Statement for the 1996 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission (the
"Commission") no later than April 30, 1997, and is hereby incorporated by
reference herein.
SECTION 16 REPORTS
The information required by this Item is present under the caption "Other
Matters -- Compliance with Section 16(a) of the Exchange Act" of the Company's
definitive Proxy Statement to be filed with the Commission no later than April
30, 1997 and is hereby incorporated by reference herein.
16
<PAGE> 19
ITEM 10. EXECUTIVE COMPENSATION
The information required by Item 10 is presented under the caption "Executive
Compensation" of the Company's definitive Proxy Statement to be filed with the
Commission no later than April 30, 1997 and is hereby incorporated by reference
herein.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 11 is present under the caption "Security
Ownership of Certain Beneficial Owners and Management" of the Company's
definitive Proxy Statement to be filed with the Commission no later than April
30, 1997 and is hereby incorporated by reference herein.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 12 is presented under the caption "Certain
Transactions" of the Company's definitive Proxy Statement to be filed with the
Commission no later than April 30, 1997 and is hereby incorporated by reference
herein.
17
<PAGE> 20
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this Annual Report on Form
10-KSB and incorporated by reference herein to the extent possible.
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
1.1 Certificate of Incorporation (1)
1.2 Certificate of Incorporation on Change of Name (1)
1.3 Certificate of Continuance (1)
Material Contracts:
10.1 Agreement by and between Cycomm Corporation and (2)
Cycomm International Inc. and Datotek, Inc. and
AT&T Corp.
10.2 Management Services Agreement - Peter Hickey (1)
10.3 Management Services Agreement - Rick E. Mandrell (1)
10.4 Management Services Agreement - Gordon Collett (1)
10.5 Stock Purchase Agreement by and among the Company (3)
and XL Vision Inc. and XL Computing Corporation
dated March 21, 1996
10.6 Asset Purchase Agreement among and between (4)
9036-8028 Quebec, Inc., Cycomm International Inc.
and M3i Technologies, Inc. and M3i Systems Inc.
date June 21, 1996
10.7 Management Services Agreement - Albert I. Hawk (5)
10.8 Employment Agreement - Michael R. Skoff ___
21.1 Subsidiaries of the Registrant ___
</TABLE>
(1) Previously filed as an Exhibit to Form 20-F Registration Statement (as
amended), Form 20-F Annual Reports and Form 6-K Reports of Foreign Issuer
and incorporated by reference herein.
(2) Previously filed as an Exhibit to Form F-1 Registration Statement filed on
May 9, 1995 and incorporated by reference herein.
(3) Previously filed as an Exhibit to Form 8-K dated March 21, 1996 and
incorporated by reference herein.
(4) Previously filed as an Exhibit to Form 8-K dated June 21, 1996 and
incorporated by reference herein.
(5) Previously filed as an Exhibit to Form 10-KSB for the year ended May 31,
1996 dated September 12, 1996 and incorporated by reference herein.
18
<PAGE> 21
(b) Reports on Form 8-K:
1. Current Report on Form 8-K was filed on December 13, 1996 reporting
the change of fiscal year end under Item 8. - Change in Year End.
2. Current Report on Form 8-K was filed on February 21, 1997 reporting
the acquisition of substantially all the assets of Delta Data under
Item 5. - Other Items.
3. Current Report on Form 8-K was filed on March 18, 1997 reporting the
issuance of convertible debentures under Item 9. - Sales of Equity
Securities Pursuant to Regulations S.
19
<PAGE> 22
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
CYCOMM INTERNATIONAL INC.
Date: April 9, 1997 By: /s/ Albert I. Hawk
----------------------------
Albert I. Hawk
President and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Michael R. Skoff
----------------------------
Michael R. Skoff
Chief Financial Officer
(Principal Financial Officer)
In accordance with the requirements of the Exchange Act, this report has
been signed below by the following persons on behalf of the registrant and in
the capabilities and on the dates indicated.
By: /s/ Albert I. Hawk April 9, 1997
-----------------------------------------------
Albert I. Hawk, President and
Chief Executive Officer
By: /s/ Hubert Marleau April 9, 1997
-----------------------------------------------
Hubert Marleau, Director
By: /s/ Rick E. Mandrell April 9, 1997
-----------------------------------------------
Rick E. Mandrell, Secretary and
Director
By: /s/ Ret. Gen. Thomas A. Stafford April 9, 1997
------------------------------------------------
Ret. Gen. Thomas A. Stafford, Director
20
<PAGE> 23
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND MAY 31, 1996 AND 1995
F-1
<PAGE> 24
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
We have audited the accompanying consolidated balance sheets of Cycomm
International Inc. and subsidiaries as of December 31, 1996 and May 31, 1996
and the related consolidated statements of operations, stockholders' equity and
cash flows for the seven month period ended December 31, 1996 and the years
ended May 31, 1996 and 1995. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Cycomm International Inc. and subsidiaries at December 31, 1996 and May 31,
1996 and the consolidated results of their operations and their cash flows for
the seven month period ended December 31, 1996 and the years ended May 31, 1996
and 1995, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 1 to the consolidated financial statements, the Company has
incurred recurring losses from operations and has an accumulated deficit that
raises substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
As discussed in Note 2, the Company's consolidated financial statements
for the year ended May 31, 1996, have been restated to reflect a change in
their method of accounting for their convertible debentures.
Vienna, Virginia
March 27, 1997 /s/ Ernst & Young LLP
F-2
<PAGE> 25
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED TWELVE MONTHS ENDED MAY 31,
DECEMBER 31, --------------------------------
1996 1996 1995
------------ -------------- ---------------
(Restated Note 2) (Restated Note 2)
<S> <C> <C> <C>
Sales $8,588,845 $ 4,985,036 $ 1,283,081
Cost of sales 6,763,463 3,634,254 855,414
----------- ------------ -----------
Gross profit 1,825,382 1,350,782 427,667
----------- ------------ -----------
Expenses
Selling, general and administrative 4,462,434 5,730,671 3,671,854
Research and product development 841,103 749,041 502,505
Depreciation and amortization (Notes 3 and 5) 535,162 1,228,295 374,984
Foreign exchange loss(gain) 12,906 14,797 (19,326)
Write-down of inventories to net realizable value 476,099 1,220,457 542,897
Write-down of investments to net realizable value (Note 6) 544,648 ---
----------- -------------- -----------
6,872,352 8,943,261 5,072,914
----------- -------------- -----------
LOSS FROM OPERATIONS (5,046,970) (7,592,479) (4,645,247)
----------- -------------- -----------
OTHER INCOME (EXPENSE)
Interest income 51,540 64,345 111,590
Interest expense (Note 2) (1,499,781) (1,895,236) (41,767)
Equity in losses of long-term investments --- --- (69,580)
Gain (loss) on sale of fixed assets (898) (27,300) 3,871
Other income 4,506 6,019 10,687
----------- -------------- -----------
(1,444,633) (1,852,172) 14,801
----------- -------------- -----------
NET LOSS $(6,491,603) $(9,444,651) $(4,630,446)
=========== ============== ===========
LOSS PER SHARE
Net loss per share $(0.92) $(2.36) $ (1.43)
=========== ============== ===========
Weighted average number of common shares outstanding 7,040,356 4,002,289 3,233,467
=========== ============== ===========
</TABLE>
(See accompanying notes)
F-3
<PAGE> 26
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MAY 31,
1996 1996
------------ ---------------
ASSETS (Restated-Note 2)
<S> <C> <C>
Current assets:
Cash and cash equivalents $1,220,544 $ 2,477,267
Accounts receivable, less allowance for doubtful accounts of $11,526 and $20,864,
respectively (Notes 7 and 18) 2,170,518 1,782,982
Inventories (Notes 4, 7 and 18) 5,819,852 2,691,000
Prepaid expenses 76,785 186,451
------------ -------------
Total current assets 9,287,699 7,137,700
------------ -------------
Fixed assets, net (Note 5) 1,663,176 1,593,672
Goodwill, net of accumulated amortization of $1,398,555 and $1,223,278, respectively
(Note 3) 1,673,835 1,849,114
Other assets:
Notes receivable 41,521 69,182
Long-term investments (Note 6) 513,500 1,175,859
Deferred technology costs, net of accumulated amortization of $927,620 and
$820,093, respectively 50,227 157,754
Deferred financing costs, net of accumulated amortization of $42,675 and $14,816,
respectively 264,825 316,084
Patents, net of accumulated amortization of $25,000 and $2,500, respectively --- 22,500
Unearned discount 159,276 499,188
Other 94,699 ---
------------ -------------
1,124,048 2,240,567
------------ -------------
$13,748,758 $12,821,053
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $1,871,815 $ 1,746,093
Accrued liabilities 1,167,337 658,841
Due to affiliate (Note 13) 160,321 60,129
Dividends payable on preferred stock 86,667 46,000
Current portion of capital lease obligations (Note 8) 81,527 9,360
Revolving credit facility (Note 7) 1,138,933 ---
Current portion of notes payable and convertible debentures (Note 7) 329,401 1,032,942
------------ -------------
Total current liabilities 4,836,001 3,553,365
------------ -------------
Capital lease obligations, less current portion (Note 8) 71,869 8,207
Notes payable and convertible debentures, less current portion (Note 7) 3,074,999 3,309,001
Deferred credit (Note 3) 620,466 ---
Commitments (Notes 1, 8 and 18)
Stockholders' equity:
Series A Preferred stock, 15,000 shares issued and outstanding at May 31, 1996
(Note 9) --- 1,500,000
Common stock, no par value, unlimited authorized shares, 8,050,401 and 5,943,771
shares issued and outstanding at December 31, 1996 and May 31, 1996,
respectively (Notes 9 and 10) 42,970,749 35,743,536
Accumulated deficit (37,825,326) (31,293,056)
------------- -------------
Total stockholders' equity 5,145,423 5,950,480
------------- -------------
$13,748,758 $12,821,053
============= =============
</TABLE>
(See accompanying notes)
F-4
<PAGE> 27
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED TWELVE MONTHS ENDED MAY 31,
DECEMBER 31, -----------------------------------------
1996 1996 1995
------------- ----------------- -------------------
(Restated - Note 2) (Restated - Note 2)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(6,491,603) $(9,444,651) $(4,630,446)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 535,162 1,228,295 374,984
Loss (gain) on sale of fixed assets 898 27,300 (3,871)
Write-down of inventories to net realizable value 476,099 1,220,457 542,897
Write-down of investments to net realizable value 544,648 --- ---
Non-cash expenses 1,360,125 1,835,046 ---
Deferred technology costs 107,527 184,333 186,666
Equity in losses of long-term investments --- --- 69,580
Change in operating assets and liabilities (Note 11) (1,405,538) 609,653 (339,729)
----------- ------------ ------------
Cash used in operating activities (4,872,682) (4,339,567) (3,799,919)
----------- ------------ ------------
INVESTING ACTIVITIES
Long-term investments 117,711 --- (32,311)
Prepayment of royalties --- 30,466 (404)
Acquisition of fixed assets (192,425) (135,907) (26,464)
Proceeds on disposal of fixed assets 5,997 24,389 19,803
Payment for acquisitions, net of cash acquired:
- XL (Canada) Inc. (Note 3) (1,000,000) --- ---
- XL Computing Corporation (Note 3) --- (2,150,000) ---
- Advanced Cellular Privacy System (Note 3) --- --- (250,000)
Increase in notes receivable (15,000) (20,000) (56,364)
Decrease in notes receivable 42,661 1,427 ---
Acquisition of patents --- (25,000) ---
Other (90,820) --- ---
----------- ------------ ------------
Cash used in investing activities (1,131,876) (2,274,625) (345,740)
----------- ------------ ------------
FINANCING ACTIVITIES
Issuance of common stock 830,100 --- 2,692,512
Borrowings under notes payable 1,138,933 38,349 8,000
Repayment of notes payable and convertible debentures (703,541) (315,336) (81,549)
Borrowings under convertible debentures 3,900,000 8,425,000 130,000
Deferred financing costs on convertible debentures (390,000) (842,500) ---
Obligations under capital leases --- --- 11,731
Repayment of obligations under capital leases (27,657) (5,774) (25,119)
----------- ------------ ------------
Cash provided by financing activities 4,747,835 7,299,739 2,735,575
----------- ------------ ------------
Increase (decrease) in cash and cash equivalents during
the year (1,256,723) 685,547 (1,410,084)
Cash and cash equivalents, beginning of period 2,477,267 1,791,720 3,201,804
----------- ------------ ------------
Cash and cash equivalents, end of period $1,220,544 $ 2,477,267 $ 1,791,720
=========== ============ ============
</TABLE>
(See accompanying notes)
F-5
<PAGE> 28
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED PREFERRED COMMON COMMON SPECIAL ACCUMULATED
SHARES STOCK SHARES STOCK WARRANTS DEFICIT
------ ----- ------ ----- -------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, MAY 31, 1994 --- --- 3,012,447 $20,940,396 $2,020,639 $(17,171,959)
Net loss (4,630,446)
Issuance of common stock:
Exercise of stock options 21,900 87,567
Exercise of special warrants 160,000 2,020,639 (2,020,639)
Acquisition of ACPS 100,000 937,500
Private placement 298,775 2,604,945
Exchange for interest in
subsidiary 1,194 15,145
------ ---------- ----------- ----------- --------- -------------
BALANCE, MAY 31, 1995 --- --- 3,594,316 26,606,192 --- (21,802,405)
------ ---------- ----------- ----------- --------- -------------
Net loss (9,444,651)
Issuance of preferred stock
on acquisition of XLCC 30,000 $ 3,000,000
Issuance of common stock:
Issued in payment for
services 63,000 300,000
Issued in settlement of
liabilities 76,978 363,455
Conversion of debentures 1,809,477 4,814,655
Conversion of preferred
stock (15,000) (1,500,000) 400,000 1,500,000
Beneficial conversion feature
of convertible debt 2,159,234
Dividends on preferred stock (46,000)
------ ---------- ----------- ----------- --------- -------------
BALANCE, MAY 31, 1996 15,000 1,500,000 5,943,771 35,743,536 --- (31,293,056)
------ ---------- ----------- ----------- --------- -------------
Net loss (6,491,603)
Issuance of common stock:
Conversion of debentures 1,393,186 3,911,880
Conversion of preferred
stock (15,000) (1,500,000) 400,000 1,500,000
Private placement 195,331 530,100
Exercise of options 100,000 300,000
Acquisition earn-out 18,113 90,020
Beneficial conversion feature
of convertible debt 895,213
Dividends on preferred stock (40,667)
------- ------------ ----------- ----------- --------- -------------
BALANCE, DECEMBER 31, 1996 --- $ --- 8,050,401 $42,970,749 $ --- $(37,825,326)
======= ============ ============ =========== ========= =============
</TABLE>
(See accompanying notes)
F-6
<PAGE> 29
CYCOMM INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1: NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Cycomm International Inc. (the "Company"), prior to its acquisition of XL
Computing Corporation ("XLCC") in March 1996 and XL Computing (Canada) Inc.
("XL Canada") in June 1996, was exclusively a provider of communications
security products and services for wireless and landline applications. The
Company's product line was primarily focused on enabling secure voice
communications over cellular phones. The Company's product line includes two
methods to secure communications; scrambling and encryption.
Effective March 15, 1996, the Company acquired XLCC and effective June 21, 1996
acquired XL Canada. These companies, which are wholly-owned subsidiaries, are
engaged in the design, manufacture, sale and support of value added, secure,
ruggedized computer equipment, communications systems and related services.
The Company's consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business. The Company
incurred a net loss of $6,491,603 for the seven months ended December 31, 1996
and as of that date had an accumulated deficit of $37,825,326. These factors
raise substantial doubt about the Company's ability to continue as a going
concern.
Until the Company recognizes the benefits of the restructuring of the
operations of the communications security products segment, this business
segment will be required to rely upon existing cash and raise additional
capital to fund operations.
The Company expects the computer equipment segment to be able to fund
operations from working capital, secured lines of credit and parent company
financing. In the event that sales are less than anticipated during fiscal
1997, the Company may be required to seek additional financing through
borrowings or sales of equity securities.
These consolidated financial statements do not give effect to any adjustments
which would be necessary should the Company be unable to continue as a going
concern and therefore be required to realize its assets and discharge its
liabilities in other than the normal course of business and at amounts
different from those reflected in the accompanying consolidated financial
statements.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RESTATEMENTS
On October 12, 1995, the Company received shareholder approval to redomicile,
effective November 1, 1995, to the United States from Canada. The change was
made as the Company's operations are conducted primarily in the United States.
As a result, the Company has adopted the U.S. dollar as its functional and
reporting currency. This change represents a change in circumstance and the
consolidated financial statements have been translated into U.S. currency
effective June 1, 1994.
The Company and its consolidated subsidiaries employ accounting policies that
are in accordance with generally accepted accounting principles in the United
States. The consolidated financial statements of the Company have historically
been presented in accordance with generally accepted accounting principles in
Canada. The 1995 consolidated financial statements included a reconciliation to
generally accepted accounting principles of the United States in the notes to
the consolidated financial statements. The 1995 consolidated financial
statements have been restated in accordance with generally accepted accounting
principles in the United States.
The Company has restated their May 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 become
convertible. This prior period adjustment resulted in additional interest
expense of $1,660,046 in the year ended May 31, 1996 or $0.41 per share.
F-7
<PAGE> 30
FISCAL YEAR
Effective December 31, 1996, the Company changed its fiscal year end from May
31 to December 31. Accordingly, the Company has reported its results of
operations, stockholders' equity and cash flows for the transition period
relating to the seven months ended December 31, 1996.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
subsidiary companies more than 50 percent owned after elimination of
inter-company accounts and transactions.
CASH AND CASH EQUIVALENTS
The Company considers all short-term deposits with a maturity of three months
or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method. Market is determined by the replacement
cost method for raw materials and the net realizable value method for work in
process and sub-assemblies and finished goods. Inventories also include
certain capitalized project costs and demonstration equipment which are stated
at amortized cost, which approximates net realizable value.
USE OF ESTIMATES IN THE PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts receivable, accounts payable, accrued
liabilities, capital lease obligations, notes payable and convertible
debentures approximate their fair values.
FIXED ASSETS AND DEPRECIATION
Fixed assets are carried at the lower of cost or market less accumulated
depreciation and amortization. Depreciation is calculated on a straight line
basis over the estimated useful lives of the fixed assets as follows:
<TABLE>
<S> <C>
Equipment under capital lease Term of the respective lease
Furniture and fixtures 5 to 7 years
Research equipment 3 to 10 years
Computer equipment 3 to 7 years
Marketing equipment 2 to 7 years
Office equipment 5 to 7 years
Manufacturing equipment 3 to 7 years
</TABLE>
Amortization of leasehold improvements is calculated on a straight line basis
over the term of the respective lease.
LONG-TERM INVESTMENTS
As of May 31, 1996, the investment in 25.5% owned Sistemas de Recepcion de
Satellite Galactica C.A. ("Galactica") was recorded at cost as management was
of the opinion the Company did not exercise significant influence over the
operations of Galactica as the remaining 74.5% of Galactica was owned by a
single shareholder actively involved in the day-to-day operations of Galactica
and the audited financial statements of Galactica were not available on a
timely basis. Additionally, the Company had only one representative on a five
member Board of Directors of which the other four directors were related to the
majority shareholder. The Company has disposed of this investment and has
written it down to its net realizable value. (See Note 6).
F-8
<PAGE> 31
RESEARCH AND PRODUCT DEVELOPMENT COSTS
Research and product development costs are expensed as incurred.
PATENTS
Costs relating to obtaining patents are deferred when management is reasonably
certain the patent will be granted. Upon granting of the patent, such costs
will be amortized to operations over the life of the patent. If management
determines that development of products to which patent costs relate is not
reasonably certain, or that deferred patent costs exceed net recoverable value,
such costs are charged to operations.
TECHNOLOGY COSTS
Costs relating to obtaining technology are deferred when management is
reasonably certain the costs will be recovered. Such costs are amortized to
operations on a straight line basis over five years. If management determines
that such costs exceed net recoverable value, the unamortized balance will be
charged to operations.
DEFERRED FINANCING COSTS
Costs relating to obtaining debt financing are deferred and amortized on a
straight line basis over the term of the debt. The unamortized portion of the
deferred financing costs related to convertible debentures is recorded against
stockholders' equity at the time of conversion.
LEASES
Fixed assets acquired under leases which transfer substantially all of the
benefits of ownership to the lessee are recorded as the acquisition of assets
and the assumption of a related obligation. Under this method, assets are
depreciated over their expected useful lives, and obligations, including
interest thereon, are extinguished over the life of the lease.
All other leases are accounted for as operating leases wherein rental payments
are charged to operations as incurred.
REVENUE RECOGNITION
Product sales, less estimated returns and allowances, are recorded at the time
of shipment.
PRODUCT WARRANTY
Warranties of twelve months from date of sale are provided for most products
sold. A reserve is established to cover estimated warranty costs during this
period.
FOREIGN CURRENCY TRANSLATION
The financial statements of foreign subsidiaries have been translated into U.S.
dollars in accordance with generally accepted accounting principles. Assets
and liabilities denominated in foreign currencies are translated to U.S.
dollars at the exchange rate on the balance sheet date. Revenues, costs and
expenses are translated at the average rates of exchange prevailing during the
year. Translation adjustments resulting from this process are shown separately
in stockholders' equity. Exchange adjustments from foreign currency
transactions are recognized in income.
GOODWILL
The excess of the purchase price over the fair market value of the net assets
of subsidiaries acquired is being amortized on a straight line basis over
periods varying from three to ten years. Goodwill is written down to fair
value when declines in value are considered to be other than temporary based
upon an assessment of undiscounted future cash flows of the respective
subsidiaries.
STOCK OPTIONS GRANTED
The Company records compensation expense for all stock-based compensation plans
using the intrinsic value method prescribed by APB Opinion No. 25, Accounting
for Stock Issued to Employees. In October 1995, the Financial Accounting
Standards Board issued Statement No. 123, Accounting for Stock-Based
Compensation, which encourages companies to
F-9
<PAGE> 32
recognize expense for stock-based awards based on their estimated fair value on
the date of the grant. Statement No. 123, effective for the period ended
December 31, 1996, does not require companies to change their existing
accounting for stock-based awards, but if the new fair value method is not
adopted, pro forma income and earnings per share data must be provided in the
footnotes to the financial statements. The Company supplementally discloses the
required pro forma information as if the fair value method had been adopted
effective June 1, 1995. (See Note 10).
RECLASSIFICATION
Certain items previously reported in specific financial statement captions have
been reclassified to conform with the December 31, 1996 presentation.
NOTE 3: ACQUISITIONS
XL COMPUTING (CANADA) INC.
On June 21, 1996, the Company completed the Asset Purchase Agreement by and
among the Company and 9036-8028 Quebec, Inc., a wholly-owned subsidiary, and
M3i Technologies Inc. and M3i Systems Inc. (collectively the "Seller") whereby
9036-8028 Quebec, Inc. acquired substantially all of the assets of M3i
Technologies Inc., for an aggregate purchase price, subject to earn-out
provisions, of a maximum of $5,000,000. Subsequent to the asset acquisition,
9036-8028 Quebec, Inc. was renamed XL Computing Canada, Inc. ("XL Canada"). XL
Canada is based in Montreal, Quebec and is engaged in the design, manufacture,
sale and support of mobile computing and communications systems.
The aggregate purchase price consists of cash of $1,000,000 and common stock of
the Company valued at a maximum of $4,000,000 for an aggregate purchase price,
subject to earn-out provisions, of a maximum of $5,000,000. The amount of the
common stock is subject to earn-out provisions based on the achievement of
certain unit sales volumes for a five year period. Any common stock issued
under the earn-out provisions will be issued at the average current market
price of the last month for the quarter in which it was earned. The earn-out
provisions will be fully satisfied upon the Company recording approximately
$31 million in revenues from the sales of computer units over five years.
The acquisition of the assets by XL Canada was accounted for as a purchase.
Accordingly, the purchase price was allocated to the net assets acquired based
on their estimated fair market value. The fair market value of the monetary
and nonmonetary assets acquired was $2,182,527 and the fair value of the
liabilities assumed was $147,160. After an allocation to reduce nonmonetary
assets acquired to zero, the remaining excess of the estimated fair market
value of net assets acquired over the purchase price amounted to $1,035,367,
which has been accounted for as a deferred credit and is being amortized over
ten years using a straight line basis. The value of common stock issued to the
Seller as the contingent consideration is earned subject to the earn-out
provisions will be recorded against the deferred credit. For the period ended
December 31, 1996, the contingent consideration earned was $380,656 which was
paid in 18,113 shares of common stock issued in the seven months ended December
31, 1996 and 93,754 shares of common stock issued subsequent to December 31,
1996. The accompanying consolidated statements of operations reflect the
operating results of XL Canada since the effective date of the acquisition.
Pro forma unaudited consolidated operating results of the Company and XL Canada
for the years ended May 31, 1996 and 1995, assuming the acquisition had
occurred as of June 1, 1994, are summarized below:
<TABLE>
<CAPTION>
Years Ended May 31,
-------------------
1996 1995
------ ------
<S> <C> <C>
Sales $6,951,715 $1,381,394
Net Loss $(10,645,943) $(4,600,386)
Net Loss per Share $(2.66) $(1.42)
</TABLE>
The pro forma financial information is for illustrative purposes only, and does
not purport to be indicative of the actual results which would have occurred
had the XL Canada acquisition been completed as of June 1, 1994, nor is it
necessarily indicative of future operating results.
F-10
<PAGE> 33
XL COMPUTING CORPORATION
Effective March 15, 1996, the Company acquired 100% of the stock of XL
Computing Corporation ("XLCC") of Sebastian, Florida. The purchase price
consisted of $2,000,000 in cash, a $635,165 promissory note, 30,000 shares of
Series A Convertible Redeemable Preferred Stock valued at $3,000,000 and
acquisition costs of $150,000, for an aggregate purchase price of $5,785,165.
The Company also granted warrants to purchase 500,000 common shares of the
Company at $3.75 to the seller. XLCC is engaged in the design, manufacture,
sale and support of secure, ruggedized computer equipment and related services.
The acquisition of XLCC was accounted for as a purchase. Accordingly, the
purchase price was allocated to the net assets acquired based on their
estimated fair market value. The excess of purchase price over the estimated
fair value of net assets acquired amounted to $1,814,584, which has been
accounted for as goodwill and is being amortized over ten years using a
straight line basis. The accompanying consolidated statements of operations
reflect the operating results of XLCC since the effective date of the
acquisition.
Pro forma unaudited consolidated operating results of the Company and XLCC for
the years ended May 31, 1996 and 1995, assuming the acquisition had occurred as
of June 1, 1994, are summarized below:
<TABLE>
<CAPTION>
Years Ended May 31,
-------------------
1996 1995
------ ------
<S> <C> <C>
Sales $11,770,363 $10,707,359
Net Loss $(10,101,999) $(4,543,229)
Net Loss per Share $(2.52) $(1.41)
</TABLE>
The pro forma financial information is for illustrative purposes only, and does
not purport to be indicative of the actual results which would have occurred
had the XLCC acquisition been completed as of June 1, 1994, nor is it
necessarily indicative of future operating results.
ADVANCED CELLULAR PRIVACY SYSTEM
On March 15, 1995, as amended on April 11, 1995, Cycomm Corporation, a
wholly-owned subsidiary, entered into an agreement with Datotek, Inc.
("Datotek"), a wholly-owned subsidiary of AT&T Corp. ("AT&T"), under which
Cycomm Corporation acquired certain assets and products of Datotek's Advanced
Cellular Privacy System ("ACPS") business. ACPS is an analog-based scrambler
system which provides privacy for cellular communications. Cycomm Corporation
also obtained an exclusive perpetual royalty-free license for the use of ACPS
technology, and certain licenses, agreements, customers and sales contracts of
ACPS. AT&T also agreed not to compete with Cycomm Corporation with regard to
certain ACPS technology for a period of five years. AT&T will support the
integration of ACPS's existing systems into Cycomm Corporation's privacy
products. AT&T also granted Cycomm Corporation a non-exclusive, royalty-free
license for its current and future Telephone Security Device ("TSD") technology
which is currently used in AT&T's wireless and wireline products. Cycomm
Corporation will utilize the TSD technology in its existing and future cellular
telephone privacy systems in order to make them compatible with AT&T's current
and future TSD-encrypted voice systems.
Total consideration for the acquisition was $1,617,500 and consisted of
$250,000 cash, a $430,000 promissory note payable and 100,000 common shares of
the Company with an assigned value of $937,500. The acquisition was accounted
for as a purchase. Accordingly, the purchase price was allocated to the net
assets acquired based on their estimated fair market value. The excess of
purchase price over the estimated fair value of net assets acquired amounted to
$820,674, which has been accounted for as goodwill and was being amortized over
three years on a straight line basis. During the year ended May 31, 1996, the
Company determined that the realization of the unamortized portion of goodwill
of $501,523 was uncertain and accordingly, included an additional charge to
amortization to reflect the acceleration of the goodwill amortization.
F-11
<PAGE> 34
NOTE 4: INVENTORIES
Inventories by categories are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MAY 31,
1996 1996
--------------- ----------
<S> <C> <C>
Raw materials $3,859,242 $1,486,645
Work in process and sub-assemblies 1,593,705 941,989
Finished goods 366,905 262,366
---------- ----------
$5,819,852 $2,691,000
========== ==========
</TABLE>
NOTE 5: FIXED ASSETS
Fixed assets and accumulated depreciation and amortization by categories are as
follows:
<TABLE>
<CAPTION>
ACCUMULATED
DEPRECIATION AND NET BOOK
COST AMORTIZATION VALUE
------------------- ------------------- ------------------
<S> <C> <C> <C>
DECEMBER 31, 1996
Land $48,000 $ --- $48,000
Equipment under capital leases 206,913 117,755 89,158
Furniture and fixtures 163,107 40,556 122,551
Research equipment 773,218 274,619 498,599
Computer equipment 569,615 266,892 302,723
Marketing equipment 61,432 26,999 34,433
Office equipment 89,148 9,843 79,305
Manufacturing equipment 640,568 178,049 462,519
Leasehold improvements 33,462 7,574 25,888
---------- -------- ----------
$2,585,463 $922,287 $1,663,176
========== ======== ==========
MAY 31, 1996
Land $ 48,000 $ --- $ 48,000
Equipment under capital leases 111,424 95,634 15,790
Furniture and fixtures 173,709 31,670 142,039
Research equipment 761,276 190,186 571,090
Computer equipment 514,023 199,635 314,388
Marketing equipment 54,570 26,581 27,989
Office equipment 42,072 4,772 37,300
Manufacturing equipment 554,061 118,995 435,066
Leasehold improvements 8,482 6,472 2,010
---------- -------- ----------
$2,267,617 $673,945 $1,593,672
========== ======== ==========
</TABLE>
NOTE 6: OTHER ASSETS
LONG-TERM INVESTMENTS
<TABLE>
<CAPTION>
DECEMBER 31, MAY 31,
1996 1996
--------------- --------------
<S> <C> <C>
Sistemas de Reception de Satellite Galactica C.A. ("Galactica") $513,500 $1,175,859
</TABLE>
On October 29, 1993, the Company acquired, for cash of $596,800 [60 million
bolivars], a 25.5% interest in the common shares of Galactica, a
telecommunication systems integration and distribution company. During the
year ended May 31, 1994, the Company advanced an additional $521,150 as 10%
promissory notes receivable, due on demand. During the years ended May 31,
1996 and 1995, the shareholders of Galactica agreed to convert notes receivable
and accrued interest thereon, on a pro-rata basis, into additional equity of
Galactica. At December 31, 1996, May 31, 1996 and 1995,
F-12
<PAGE> 35
the promissory note receivable amounted to $18,443, $18,443, and$138,505,
respectively. In November 1996, the Company received a return of its equity
investment in an amount of $117,711.
In March 1997, the Company sold its investment in Galactica to the majority
shareholder for an aggregate consideration of $1,027,000, consisting of
$513,500 cash at closing and a $513,500 Contingent Promissory Note (the
"Note"). The payment of the Note is contingent on the future earnings of
Galactica. While management currently believes that the Note will be fully
paid, the contingencies that require payments on the Note are undeterminable
and not controllable by the Company. Therefore the Company has fully reserved
for the Note and an amount of $513,500 is included in the results of operations
for the seven months ended December 31, 1996.
NOTE 7: NOTES PAYABLE AND CONVERTIBLE DEBENTURES
Notes payable and convertible debentures are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MAY 31,
1996 1996
---------------- ----------------
<S> <C> <C>
12% promissory note payable, due December 31, 1996 $230,000 $ 330,000
7% promissory note payable, due December 31, 1996 99,401 635,165
10% convertible debentures, due December 4, 1997 --- 100,000
9.5% convertible debentures, due March 19, 1998 49,999 984,001
10% convertible debentures, due May 21, 1998 --- 1,750,000
10% convertible debentures, due May 29, 1998 275,000 475,000
10% convertible debentures, due June 11, 1998 350,000 ---
10% convertible debentures, due September 30, 1998 400,000 ---
10% convertible debentures, due October 18, 1998 2,000,000 ---
Revolving credit facility, prime + 1 1/2, due on demand 1,138,933 ---
8% note payable, due October 1, 1996 --- 35,109
Other notes payable --- 32,668
---------- ----------
4,543,333 4,341,943
Less current portion 1,468,334 1,032,942
---------- ----------
$3,074,999 $3,309,001
========== ==========
</TABLE>
Scheduled maturities of notes payable and convertible debentures are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
<S> <C>
1997 $1,468,334
1998 3,074,999
----------
$4,543,333
==========
</TABLE>
The 12% promissory note payable was incurred in conjunction with the
acquisition of the Datotek assets and was due on April 12, 1996. The Company
restructured the note payable so that principal, and accrued interest thereon,
is due in installments of $100,000 due on April 11, 1996, July 11, 1996 and
October 11, 1996, with the remaining $130,000 principal due on December 31,
1996. This note is collateralized by all the assets acquired in the Datotek
acquisition. The Company is in default on this note and currently is in
negotiations with the lender to restructure this obligation.
The 7% promissory note payable was incurred in conjunction with the acquisition
of XLCC. This note is collateralized by
F-13
<PAGE> 36
certain accounts receivable of XLCC. Principal payments, with accrued interest
thereon, were due in the amount of $75,000 each month from July 21, 1996 to
October 21, 1996, with the remaining principal balance of $335,165 due on
December 31, 1996. This note was restructured and the final payment of $99,401
was paid on January 31, 1997.
The Company issued $1,400,000 of 10% convertible debentures due September 22,
1997 which are convertible at the option of the holders into common stock of
the Company at the lesser of $6.25 per share or 75% of the average closing bid
price of the Company's common stock prior to conversion. During the year ended
May 31, 1996, principal and accrued interest in an amount of $1,428,377 were
converted into 427,632 shares of common stock.
The Company issued $3,000,000 of 10% convertible debentures due December 4,
1997 which are convertible at the option of the holders into common stock of
the Company at the lesser of $4.50 per share or 75% of the average closing bid
price of the Company's common stock prior to conversion. During the seven
months ended December 31, 1996, principal and accrued interest in an amount of
$106,712 were converted into 42,314 shares of common stock. During the year
ended May 31, 1996, principal and accrued interest in an amount of $2,994,490
were converted into 1,119,211 shares of common stock.
The Company issued $1,800,000 of 9.5% convertible debentures due March 19, 1998
which are convertible at the option of the holders into common stock of the
Company at the lesser of $3.125 per share or a range of 79% to 81% of the
average closing bid price of the Company's common stock prior to conversion.
During the seven months ended December 31, 1996, principal and accrued interest
in an amount of $960,891 were converted into 325,992 shares of common stock.
During the year ended May 31, 1996, principal and accrued interest in an amount
of $828,459 were converted into 262,634 shares of common stock.
The Company issued $1,750,000 of 10% convertible debentures due May 21, 1998
which are convertible at the option of the holders into common stock of the
Company at the lesser of $4.06 per share or a range of 80% to 82% of the
average closing bid price of the Company's common stock prior to conversion.
The debentures were fully eligible for conversion after August 21, 1996. During
the seven months ended December 31, 1996, principal and accrued interest in an
amount of $1,797,626 were converted into 560,991 shares of common stock.
The Company issued $475,000 of 10% convertible debentures due May 29, 1998
which are convertible at the option of the holders into common stock of the
Company at the lesser of $6.00 per share or a range of 80% to 82% of the
average closing bid price of the Company's common stock prior to conversion.
The debentures were fully eligible for conversion after September 2, 1996.
During the seven months ended December 31, 1996, principal and accrued interest
in an amount of $207,908 were converted into 78,272 shares of common stock.
On June 11, 1996, the Company issued $1,500,000 of 10% convertible debentures
due June 11, 1998 which are convertible at the option of the holders into
common stock of the Company at the lesser of $5.34 per share or a range of 79%
to 85% of the average closing bid price of the Company's common stock prior to
conversion. The debentures are fully eligible for conversion after October 9,
1996. During the seven months ended December 31, 1996, principal and accrued
interest in an amount of $1,183,932 were converted into 385,617 shares of
common stock.
On September 30, 1996, the Company issued $400,000 of 10% convertible
debentures due September 30, 1998 which are convertible at the option of the
holders into common stock of the Company at the lesser of $4.80 per share or a
range of 80% to 82% of the average closing bid price of the Company's common
stock prior to conversion. The debentures are fully eligible for conversion
after February 2, 1997.
On October 18, 1996, the Company issued $2,000,000 of 10% convertible
debentures due October 18, 1998 which are convertible at the option of the
holders into common stock of the Company at the lesser of $4.50 per share or a
range of 80% to 82% of the average closing bid price of the Company's common
stock prior to conversion. The debentures are fully eligible for conversion
after February 20, 1997.
XLCC obtained a revolving credit facility from a bank under which XLCC may, at
its option, borrow and repay amounts up to a maximum of $1,500,000, of which
$1,138,933 was outstanding at December 31, 1996. Borrowings under this credit
facility bear interest at prime plus 1 1/2 %. The credit facility is
collateralized by XLCC's trade accounts receivable and inventory and is
guaranteed by the Company. As of December 31, 1996, XLCC was in non-compliance
with certain debt covenants, namely a minimum equity covenant and an interest
coverage covenant. XLCC has obtained a waiver for these debt covenants from
the lender as at December 31, 1996.
Subsequent to December 31, 1996, convertible debentures and accrued interest
thereon in an amount of $2,537,615 were converted into 990,004 shares of common
stock.
F-14
<PAGE> 37
NOTE 8: COMMITMENTS
LEASE COMMITMENTS
The Company leases equipment, included in fixed assets, under leases which are
classified as capital leases. Total payments under these capital leases are
due in monthly installments including imputed interest from 7.86% to 13.33%
through December 31, 2001. The Company occupies office space at various
locations under operating leases. Future minimum lease payments under the
Company's capital and non-cancellable operating leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
<S> <C> <C>
1997 $ 89,803 $ 626,821
1998 37,236 581,500
1999 16,194 401,520
2000 16,194 391,659
2001 15,774 151,020
-------- ----------
175,201 $2,152,520
Less: amount representing interest on capital leases 21,805 ==========
--------
Present value of future minimum capital lease payments $153,396
========
</TABLE>
Long-term interest on capital leases amounted to $4,271, $6,315 and $2,792 for
the seven months ended December 31, 1996 and the fiscal years ended May 31,1996
and 1995, respectively. Total rental expense under the various operating
leases amounted to $309,982, $224,376 and $181,182 for the seven months ended
December 31, 1996 and the fiscal years ended May 31, 1996 and 1995,
respectively.
NOTE 9: 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 8,050,401 and 5,943,771
shares as of December 31, 1996 and May 31, 1996, respectively. In October 1995,
the Company effected a 1 for 5 reverse stock split. All per share information
has been adjusted to reflect the stock split. Loss per common share is
calculated based on the weighted average number of common shares outstanding
during each period. The computation of fully diluted net loss per share was
antidilutive in each of the periods presented.
During the seven months ended December 31, 1996, convertible debentures and
accrued interest thereon were converted into 1,393,178 shares of common stock.
Subsequent to December 31, 1996, convertible debentures and accrued interest
thereon were converted into 990,004 shares of common stock. Additionally, on
September 30, 1996 the remaining shares of Series A Preferred Stock were
converted into 400,000 shares of common stock. If these conversions had
occurred on June 1, 1996, the reported net loss per common share for the seven
months ended December 31, 1996 would have decreased $0.15 to $0.60 per share.
PREFERRED STOCK
At May 31, 1996, the Company had outstanding 15,000 shares of Series A
Convertible Redeemable Preferred Stock ("Series A Preferred Stock"). The
Series A Preferred Stock had a Conversion Value, as defined, of $100 per share.
The holder of each share of Series A Preferred Stock was entitled to receive
dividends at a rate of 8% of the Conversion Value per annum, such dividends to
be cumulative from the date of issuance. The holders of the Series A Preferred
Stock had no voting rights with respect to any vote of the common stockholders
of the Company. The Company may redeem any or all shares of Series A Preferred
Stock at a redemption price per share equal to the Conversion Value. The
holder of any shares of Series A Preferred Stock had the right to convert all
or part into common stock of the Company at $3.75 per share of common stock. On
September 30, 1996, the holder of the 15,000 shares of Series A
F-15
<PAGE> 38
Preferred Stock converted all shares to common stock pursuant to the conversion
terms.
SPECIAL WARRANTS
On September 30, 1993, the Company completed the issuance, by way of private
placement, of 500,000 Series A special warrants and 160,000 Series B special
warrants at a price of $12.66 per special warrant for cash proceeds of
$8,355,600. Each special warrant entitled the holder, upon exercise and
without further payment, to be issued one common share. On February 7, 1994,
500,000 Series A special warrants were deemed to be exercised. On July 1,
1994, 160,000 Series B special warrants were deemed to be exercised.
NOTE 10: STOCK OPTIONS AND WARRANTS
STOCK OPTIONS
The Company has granted stock options to directors, officers, employees and
other parties which become exercisable immediately and have expiration terms
ranging from two to five years. The options are granted at an exercise price
that equals the fair market value on the date each option is granted. The
following table summarizes the activity in common shares subject to options for
the relevant periods ended December 31, 1996:
<TABLE>
<CAPTION>
SHARES OPTION PRICE RANGE
------ ------------------
<S> <C> <C>
BALANCE, MAY 31, 1994 185,467 $3.83 - $14.58 (1)
Granted 310,000 $4.05 - $8.10
Exercised (21,900) $3.83
Terminated (26,200) $5.00 - $10.00
---------
BALANCE, MAY 31, 1995 447,367 $4.05 - $14.58
Granted 980,000 $3.00 - $6.00
Exercised --- ---
Terminated (113, 367) $5.87 - $14.58
---------
BALANCE, MAY 31, 1996 1,314,000 $3.00 - $10.95
Granted 597,500 $3.50 - $4.00
Exercised (100,000) $3.00
Terminated (410,000) $5.00 - $10.00
---------
BALANCE, DECEMBER 31, 1996 1,401,500 $3.00 - $10.95
=========
</TABLE>
(1) The option price range includes the effects of the repricing of 80,400
options with an exercise price range of $11.60 - $12.95 to a reduced exercise
price range of $3.83 - $10.00 during the year ended May 31, 1995.
The number and exercise price of all options outstanding have been
retroactively adjusted to recognize the effects of the 1 for 5 reverse stock
split which was approved by stockholders in October 1995. Options were
exercisable with respect to 1,401,500 shares at December 31, 1996. Subsequent
to December 31, 1996, a total of 75,000 options to purchase common shares with
an exercise price ranging from $3.00 to $3.31 and expiration dates ranging from
December 31, 1998 to February 1, 2002 were granted.
The Company adopted Financial Accounting Standard No. 123 entitled "Accounting
for Stock-Based Compensation" ("FAS 123") as of June 1, 1995. The provisions
of FAS 123 allow companies to either expense the estimated fair value of stock
options or to continue their current practice but disclose the pro forma
effects on net income and earnings per share had the value of the options been
expensed. The Company has elected to continue its practice of recognizing
compensation expense for its stock option and warrant incentive plans using
the intrinsic value based method of accounting (see Note 2) and to provide the
required pro forma information for stock options and warrants granted after
June 1, 1995. Under the terms of the intrinsic value method, compensation
cost is the excess, if any, of the quoted market price of the stock at the
grant date, or other measurement date, over the amount an employee must pay to
acquire stock. Had compensation expense for the Company's stock options and
warrants granted after June 1, 1995 been determined on
F-16
<PAGE> 39
a based on the fair value at the grant dates for awards under those plans, the
Company's pro forma net loss and net loss per share for the reported periods
would have been as follows:
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 MAY 31, 1996 MAY 31, 1995
------------------ ----------------------- -------------------
<S> <C> <C> <C>
Net loss $(6,491,603) $(9,444,651) $(4,630,446)
Compensation expense (1,113,273) (1,360,318) (1,224,115)
------------ ------------- ------------
Pro forma net loss $(7,604,876) $(10,804,969) $(5,854,561)
============ ============= ============
Pro forma loss per share $(1.08) $(2.70) $(1.81)
======= ======= =======
</TABLE>
The effects on pro forma net loss per share of expensing the estimated fair
value of stock options and warrants are not necessarily representative of the
effects on reported net income for future years due to such things as the
vesting period of the stock options and warrants and the potential for issuance
of additional stock options and warrants in future years.
The fair value of options and warrants granted after June 1, 1995, used as a
basis for the above pro forma disclosures, was estimated at the date of grant
using the Black-Scholes option pricing model. The option and warrant pricing
assumptions include a dividend yield of 0%; an expected volatility of 1.009; a
risk free interest rate of 6.13%; and an expected life of half the period from
grant to expiration.
The weighted average fair values and exercise prices are as follows:
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 MAY 31, 1996 MAY 31, 1995
------------------ ------------------ -----------------
<S> <C> <C> <C>
Weighted-average fair value
per option granted $2.02 $2.09 $3.49
Weighted-average exercise
price per option granted $3.51 $3.88 $5.61
</TABLE>
COMMON SHARE PURCHASE WARRANTS
The Company has granted common share purchase warrants to directors, officers
and other parties which become exercisable immediately and have expiration
terms ranging from one year to five years. The warrants are generally granted
at an exercise price that equals fair market value of the common stock at the
date each warrant is granted. However, certain warrants are granted with an
exercise price in excess of the fair market value of the common stock at the
date each warrant is granted. At December 31, 1996, warrants to purchase the
following shares of the Company's common stock were outstanding:
<TABLE>
<CAPTION>
EXERCISE EXPIRATION
-------- ----------
SHARES PRICE DATE
------ ----- ----
<S> <C> <C>
298,775 $ 8.75 April 24, 1997
60,000 $ 8.10 April 26, 1998
52,500 $ 5.63 May 20, 1998
75,000 $ 4.63 December 4, 1998
500,000 $ 3.75 March 20, 1999
100,000 $ 3.65 May 16, 1999
281,000 $ 8.00 June 11, 1999
5,000 $ 4.75 November 30,2000
---------
1,372,375
=========
</TABLE>
The number and exercise price of all common share purchase warrants have been
retroactively adjusted to recognize the effects of the 1 for 5 reverse stock
split which was approved by stockholders in October 1995.
F-17
<PAGE> 40
NOTE 11: SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the relevant periods are summarized as
follows:
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED YEARS ENDED MAY 31,
DECEMBER 31, -------------------------------
1996 1996 1995
------------- -------------- --------------
<S> <C> <C> <C>
Cash flow effects of changes in operating assets and
liabilities, net of acquisitions:
Accounts receivable $ (202,709) $(395,301) $ 143,531
Inventories (1,686,255) 402,985 (1,165)
Prepaid expenses (15,334) 27,651 (14,767)
Accounts payable - trade 125,724 500,081 (391,329)
Accrued liabilities 272,844 (31,892) (75,999)
Due to affiliate 100,192 60,129 ---
Dividends payable on preferred stock --- 46,000 ---
------------ ---------- -----------
$(1,405,538) $ 609,653 $ (339,729)
============ ========== ===========
Non-cash investing and financing activities:
Conversion of convertible debentures to common stock $ 3,911,880 $4,814,655 $ ---
Conversion of preferred stock to common stock 1,500,000 1,500,000 ---
Conversion of notes receivable to long-term investments --- 120,063 433,379
Capital lease obligations incurred 84,482 --- 9,094
Acquisition earn-out 380,656 --- ---
Details of acquisitions:
Fair value of assets acquired $ 2,182,527 $ 7,513,966 $1,617,500
Liabilities assumed (147,160) (1,728,801) ---
Stock issued --- (3,000,000) (937,500)
Note payable to seller --- (635,165) (430,000)
Deferred credit (1,035,367) --- ---
------------ ------------ -----------
Cash paid for acquisition $ 1,000,000 $ 2,150,000 $ 250,000
============ ============ ===========
Cash paid during the period:
Interest paid $ 82,643 $ 32,128 $ 12,405
Income taxes paid --- --- ---
</TABLE>
F-18
<PAGE> 41
NOTE 12: INCOME TAXES
The Company accounts for income taxes under the liability method required by
FAS Statement No. 109, "Accounting for Income Taxes". Deferred income taxes
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. For consolidated financial statement
purposes, a change in valuation allowance has been recognized to offset certain
deferred tax assets for which realization is uncertain. Significant components
of the Company's deferred tax liabilities and assets as of December 31 and May
31 are as follows:
<TABLE>
<CAPTION> MAY 31,
DECEMBER 31, ----------------------------
1996 1996 1995
------------- ------------- ------------
<S> <C> <C> <C>
Deferred tax liabilities
Inventory adjustment $ --- $103,338 $ 34,854
Bad debt expense --- 5,136 4,624
------------ ----------- ------------
Total deferred tax liabilities --- 108,474 39,478
------------ ----------- ------------
Deferred tax assets
Book over tax depreciation and amortization 286,523 11,794 15,214
Inventory capitalization and reserves 751,066 771,430 618,430
Net operating loss carryforward 10,546,180 7,702,742 6,507,260
Investment reserves 206,966 --- ---
Other 80,223 9,066 23,707
------------ ----------- ------------
Total deferred tax assets 11,870,958 8,701,901 7,183,962
Valuation allowance for deferred tax assets (11,870,958) (8,593,427) (7,144,484)
------------- ----------- ------------
Net deferred tax asset --- 108,474 39,478
------------- ----------- ------------
Net deferred tax --- --- ---
============= =========== ============
</TABLE>
There was no provision for income taxes in the seven months ended December 31,
1996 and the years ended May 31, 1996 and 1995 as the Company incurred losses
in those years.
A reconciliation between federal statutory income tax rates and the effective
tax rate of the Company at December 31 and May 31 is as follows:
<TABLE>
<CAPTION> MAY 31,
DECEMBER 31, ----------------------------
1996 1996 1995
---------------- ------------- --------------
<S> <C> <C> <C>
US federal statutory benefit rate (35.0)% (35.0)% (35.0)%
Tax net operating loss carryovers 39.0 39.0 39.0
US state tax benefit, net of federal income tax effect (4.0) (4.0) (4.0)
-------- --------- ---------
Effective rate on operating loss --- --- ---
======== ========= =========
</TABLE>
The Company has US net operating loss carryfowards available at December 31,
1996 of approximately $27 million for US tax purposes to offset income in
future years. These carryfowards will expire in the years 2000 through 2011,
unless previously utilized. The tax attributes identified above may be subject
to limitation arising from changes of ownership over the three year statutory
testing period. In addition, the Company has Canadian net operating loss
carryforwards available at December 31, 1996 of approximately $189,000; these
carryforwards will expire in the year 2003 if not used.
F-19
<PAGE> 42
NOTE 13: RELATED PARTY TRANSACTIONS
The Company paid management and consulting fees to entities affiliated with
certain officers and directors in amounts totalling $527,373 and $491,498 for
the fiscal years ended May 31, 1996 and 1995, respectively.
Pursuant to the terms of the acquisition of XLCC in March 1996, XLCC leases a
manufacturing facility from an affiliate of XL Vision, Inc., the seller who is
a current stockholder of the Company. Additionally, XLCC and XL Vision, Inc.
provide certain administrative and manufacturing services to each other with
services charged on a reasonable basis. During the seven months ended December
31, 1996 and the year ended May 31, 1996, XLCC incurred $674,407 and $302,244,
respectively, of rental expense and administrative services due to XL Vision,
Inc. XL Vision, Inc. incurred $277,219 and $111,532, respectively, of rental
expenses and administrative services due to XLCC. The balance due to XL
Vision, Inc. is $160,321 at December 31, 1996.
The Company retains the consulting services of Corstone Corporation which
previously employed the current Chief Executive Officer and Chief Financial
Officer. The current Chief Executive Office and Chief Financial Officer have
no direct or indirect ownership interest in Corstone Corporation. These
consulting services include financial, legal and administrative services. The
consulting services have been provided to the Company during the seven month
period ended December 31, 1996 and the years ended May 31, 1996 and 1995 both
prior to and after the appointment of the current Chief Executive Officer on
May 15, 1996. Consulting fees paid to this entity were $150,000, $329,000 and
$132,500 during the seven months ended December 31, 1996 and the years ended
May 31, 1996 and 1995, respectively. Additionally, a finder's fee of $150,000
was paid to this consulting firm in conjunction with the acquisition of XLCC in
the year ended May 31, 1996.
NOTE 14: INDUSTRY SEGMENT AND GEOGRAPHIC AREA INFORMATION
The Company is in the business of providing security for voice and data
transmission over wireless systems, primarily to cellular phone users. In
addition, the Company develops, manufactures and markets a full line of secure,
ruggedized computer equipment. These products have been classified into the
following business segments:
Communications Security Products - Included are an integrated set of products
and services that provide a complete privacy solution for individuals,
corporations, government and law enforcement agencies and cellular carriers.
Computer Equipment - Included are a broad array of ruggedized computer
equipment communications systems and related services to the military and
government and law enforcement agencies, primarily through third party
resellers and original equipment manufacturers.
F-20
<PAGE> 43
In the following tables, financial information is presented by industry segment
and geographic region.
<TABLE>
<CAPTION> MAY 31,
INDUSTRY SEGMENT DATA DECEMBER 31, -----------------------------------
1996 1996 1995
---------------- ------------- --------------
<S> <C> <C> <C>
Sales
Communications security products $ 883,471 $ 1,588,742 $ 1,283,081
Computer equipment 7,705,374 3,396,294 ---
----------- ----------- -----------
$ 8,588,845 $ 4,985,036 $ 1,283,081
=========== =========== ===========
Loss from Operations
Communications security products $(1,830,906) $(5,205,988) $(3,155,959)
Computer equipment (1,655,341) (222,125) ---
Corporate (1,560,723) (2,164,366) (1,489,288)
----------- ----------- -----------
$(5,046,970) $(7,592,479) $(4,645,247)
=========== =========== ===========
Identifiable Assets
Communications security products $ 756,004 $ 1,334,272 $ 3,249,208
Computer equipment 11,306,491 7,093,937 ---
Corporate 1,013,487 2,699,354 1,721,349
Non-consolidated investments 513,500 1,194,302 1,223,122
----------- ----------- -----------
$13,589,482 $12,321,865 $ 6,193,679
=========== =========== ===========
Depreciation and Amortization
Communications security products $ 210,991 $ 1,042,187 $ 368,787
Computer equipment 227,547 91,266 ---
Corporate 96,624 94,842 6,197
----------- ----------- -----------
$ 535,162 $ 1,228,295 $ 374,984
=========== =========== ===========
Capital Expenditures
Communications security products $ 34,484 $ 123,137 $ 24,205
Computer equipment 157,655 10,524 ---
Corporate 286 2,246 2,259
----------- ----------- -----------
$ 192,425 $ 135,907 $ 26,464
=========== =========== ===========
<CAPTION>
MAY 31,
GEOGRAPHIC REGION DATA DECEMBER 31, --------------------------------------
1996 1996 1995
------------------ ------------------ -------------------
<S> <C> <C> <C>
Sales
United States $ 7,877,913 $ 4,985,036 $ 1,283,081
Canada 710,932 --- ---
----------- ----------- -----------
$ 8,588,845 $ 4,985,036 $ 1,283,081
=========== =========== ===========
Loss from Operations
United States $(4,496,970) $(7,592,479) $(4,645,247)
Canada (550,000) --- ---
----------- ----------- -----------
$(5,046,970) $(7,592,479) $(4,645,247)
=========== =========== ===========
Identifiable Assets
United States $ 9,206,469 $11,127,563 $ 4,970,557
Canada 3,869,513 --- ---
South America 513,500 1,194,302 1,223,122
----------- ----------- -----------
$13,589,482 $12,321,865 $ 6,193,679
=========== =========== ===========
</TABLE>
Included in United States sales are export sales of $3,708,531, $2,326,063 and
$195,253 for the seven months ended December 31, 1996 and the years ended May
31, 1996 and 1995, respectively.
F-21
<PAGE> 44
NOTE 15: MAJOR CUSTOMERS
The Company operates in two major lines of business, the developing and
marketing of communications security products and the manufacturing and
marketing of computer equipment. Sales to two major customers in the computer
equipment segment comprise of 30% and 25%, respectively of consolidated sales
for the seven months ended December 31, 1996. Sales to three major customers
in the computer equipment segment comprise 25%, 20% and 9%, respectively, of
consolidated sales for the year ended May 31, 1996. Sales to one major customer
in the communications security products segment comprise 20% of consolidated
sales for the year ended May 31, 1995.
NOTE 16: CREDIT RISK
Financial instruments which potentially subject the Company to concentrations
of credit risk consist principally of cash and trade receivables. At December
31, 1996, the Company has approximately $1.0 million in a money market fund.
Concentration of credit risk with respect to trade receivables exists at year
end as approximately $1.1 million or 52% of the outstanding accounts receivable
related to four customers. The Company performs ongoing credit evaluations of
its customers and maintains allowances for potential credit losses which, when
realized, have been within the range of management's expectations.
NOTE 17: SUPPLEMENTAL INFORMATION OF RESULTS OF OPERATIONS
In conjunction with the change in fiscal year end from May 31 to December 31,
as follows is supplemental unaudited information of the results of operations
for the six months ended November 30, 1995, a period in the previous fiscal
year that best approximates the current transition period:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
NOVEMBER 30,
1995
-------------------------
(Unaudited and Restated)
<S> <C>
Sales $ 852,428
Gross profit 404,130
Loss from operations (2,472,893)
Net loss $(2,984,154)
Loss per share $(0.83)
</TABLE>
NOTE 18: SUBSEQUENT EVENTS
On February 7, 1997, the Company completed the Asset Purchase Agreement between
the Company and Titan Corporation whereby the Company acquired substantially
all of the assets of Delta Data, an unincorporated division of Titan
Corporation for a purchase price of $205,000. Delta Data is engaged in the
manufacture and sale of secure and ruggedized computer products and services.
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 the greater of $3.00 per share or
90% of the average closing bid price of the Company's common stock prior to
conversion. The debentures are fully eligible for conversion after February
28, 1998.
Subsequent to December 31, 1997, XL Canada obtained a bank line of credit under
which XL Canada may, at its option, borrow and repay amounts up to a maximum of
Cdn$750,000 (approximately $550,000). Borrowings under this agreement bear
interest at prevailing market rates as determined by the lending bank. The
line of credit is collateralized by XL Canada's trade accounts receivable and
inventory and is guaranteed by the Company. As at March 19, 1997, an amount of
$132,355 was outstanding under this line of credit.
F-22
<PAGE> 1
EXHIBIT 10.8
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of the 1st day of February, 1997, by and between
Cycomm International Inc. (the "Corporation"), a corporation organized under
the laws of the State of Wyoming, and Michael R. Skoff ("Employee").
In consideration of the mutual covenants herein contained, and upon the
other terms and conditions hereinafter provided, the parties hereby agree as
follows:
1. POSITION AND RESPONSIBILITIES. Effective as of the date hereof and
during the period of his employment hereunder, Employee agrees to serve as
Chief Financial Officer.
2. TERMS AND DUTIES.
(a) The period of Employee's employment under this Agreement shall be
deemed to have commenced as of the effective date of this Agreement in
paragraph 1, and shall continue until January 31, 1998. Thereafter, this
Agreement shall be deemed to continue for an additional twelve (12) months and
each succeeding twelve (12) months, unless terminated as provided herein.
(b) During the period of his employment hereunder, except for periods
of absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, Employee shall devote his business time, attention, skill
and effort to the faithful performance of his duties hereunder.
3. COMPENSATION AND REIMBURSEMENT.
(a) The Corporation shall pay Employee as compensation a salary at
the annual rate of $115,000, payable in equal bi-monthly installments. In
addition to the salary provided in this paragraph 3(a), the Corporation shall
provide Employee, at no cost to Employee, with all such other benefits as are
provided to executives of the Corporation.
(b) In addition to the salary and benefits provided for by paragraph
3(a), the Corporation shall pay or reimburse Employee for all reasonable
business class travel and other ordinary and necessary expenses incurred by
Employee performing his obligations under this Agreement and professional
obligations in such form and such amounts as the Board of Directors of the
Corporation may determine.
(c) The Corporation will provide Employee an appropriate automobile
and services related thereto.
<PAGE> 2
-2-
(d) The Corporation shall grant such options as set forth in the
Stock Option Agreement dated the date hereof and incorporated herein by
reference.
(e) The Employee shall be entitled to participate in any stock or
option plan, retirement or pension plan or profit sharing plan on terms no less
favorable than to the other executives.
(f) The Employee shall be entitled to take vacation(s) not exceeding
three weeks in any one fiscal year.
4. TERMINATION; PAYMENTS TO EMPLOYEE UPON TERMINATION.
(a) This Agreement, subject to paragraph 5 below, may be terminated
by either party upon three month's notice.
(b) In the event that Employee's employment is terminated for any
reason other than for willful misconduct, Employee shall continue to receive a
lump sum payment equal to six (6) months salary and benefits set forth in
paragraph 3 hereof.
5. CHANGE IN DUTIES.
This Agreement shall be deemed to be terminated pursuant to paragraph 4(b)
if (i) without his consent, the Employee is assigned any duties or
responsibilities that are inconsistent with his position, duties,
responsibilities or status at the commencement of this Agreement; (ii) without
his consent, the Employee's salary and benefits set forth in paragraph 3 hereto
are reduced in any year by a percentage greater than the average reduction in
the salary and benefits experienced by all executives of the Corporation; (iii)
without his consent, the Employee is transferred to a location which is an
unreasonable distance from McLean, Virginia or is required to engage in an
unreasonable amount of travel; or (iv) a Change of Control, as defined in Item
1(a) of Form 8-K, of the Corporation occurs.
6. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior employment agreement between the Corporation or
any predecessor of the Corporation and Employee, except that this Agreement
shall not affect or operate to reduce any benefit or compensation inuring to
Employee of a kind elsewhere provided. No provision of this Agreement shall be
interpreted to mean that Employee is subject to receiving fewer benefits than
those available to him without reference to this Agreement.
<PAGE> 3
-3-
7. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Employee and the Corporation and their respective successors and assigns.
8. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have
been waived, nor shall there by any estoppel against the enforcement of any
provision of this Agreement, except by written instrument of the party charged
with such waiver or estoppel. No such written waiver shall be deemed a
continuing waiver unless specifically stated therein, and each such waiver
shall operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or as to any other
than that specifically waived.
9. SEVERABILITY. If, for any reason, any provision of this Agreement, or
any part of any provision, is held invalid, such invalidity shall not affect
any other provision of this Agreement or any part of such provision not held so
invalid, and each such other provision and part thereof shall to the full
extent consistent with law continue in full force and effect.
10. HEADINGS FOR REFERENCE ONLY. The headings of paragraphs herein are
included for convenience of reference and shall not control the meaning or
interpretation of any of the provisions of this Agreement.
11. GOVERNING LAW. This Agreement has been executed and delivered in
Virginia, and its validity, interpretation, performance, and enforcement shall
be governed by the laws of Virginia.
12. PAYMENT OF LEGAL FEES. All legal fees paid or incurred by Employee
pursuant to any dispute or question of interpretation relating to this
Agreement shall be paid or reimbursed by the Corporation, if Employee is
successful.
<PAGE> 4
-4-
SIGNATURES. IN WITNESS WHEREOF, the Corporation has caused this Agreement
to be executed and its seal to be affixed hereunto by its directors thereunto
duly authorized, and Employee has signed this Agreement, all as of the day and
year first above written.
ATTEST: Cycomm International Inc.
By:
- ----------------------------- -------------------------
Name:
Title:
WITNESS: EMPLOYEE
- ----------------------------- -----------------------------
Michael R. Skoff
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF CYCOMM INTERNATIONAL INC.
1. Cycomm Corporation. Incorporated on January 1, 1985, in Oregon, USA. A
wholly-owned subsidiary of Cycomm International Inc.
1.a. Val-Com Inc. Incorporated on July 17, 1984, in New Mexico, USA.
A wholly-owned subsidiary of Cycomm Corporation.
2. XL Computing Corporation. Incorporated on February 26, 1996 in Delaware,
USA. A wholly-owned subsidiary of Cycomm International Inc.
3. 9036-8028 Quebec, Inc. Incorporated on June 3, 1996 in Quebec, Canada. A
wholly-owned subsidiary of Cycomm International Inc. This subsidiary was
renamed XL Computing Canada Inc.
4. Sistemas de Recepcion de Satelite Galactica CA. Incorporated on July 21,
1987, in Venezuela. Cycomm International Inc. has a 25.5% investment.
5. Cypher Communications de Venezuela CA. Incorporated on July 22, 1993, in
Venezuela. A wholly-owned subsidiary of Cycomm International Inc.
6. Sonatel Communications Research Ltd. Incorporated on July 1, 1987, in
British Columbia, Canada. Cycomm International Inc. has a 75% interest in
this subsidiary which is inactive.
6.a. Integrated Circuit Technologies Ltd. Incorporated on November
5, 1987, in Barbados. Integrated Circuit Technologies is
wholly-owned by Sonatel Communications Research Ltd. and is
inactive.
7. Sonartec North America Ltd. Incorporated on December 8, 1985 in British
Columbia. A wholly-owned subsidiary of Cycomm International Inc. which is
inactive.
8. Sonatel International Inc. Incorporated on July 26, 1988, in Barbados. A
wholly-owned subsidiary of Cycomm International Inc. which is inactive.
9. Cycomm Aruba AVV. Incorporated on December 1, 1993, in Aruba. A
wholly-owned subsidiary of Cycomm International Inc. which is inactive.
10. Cycomm Holdings Aruba AVV. Incorporated on December 1, 1993, in Aruba. A
wholly-owned subsidiary of Cycomm International Inc. which is inactive.
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