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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB/A-2
(Mark One)
/X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED MAY 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ________ TO ________
Commission file number 1-11686
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CYCOMM INTERNATIONAL INC.
(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
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. $4,985,036
The aggregate market value of the voting stock held by non-affiliates of the
registrant on August 30, 1996 was approximately $30,508,411 (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 August 30, 1996, --- 6,973,351 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
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PART I
Item 1. Description of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Description of Property . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . 12
PART II
Item 5. Market for Common Equity and Related Shareholder Matters . . . . . . . . . . . 12
Item 6. Management's Discussion and Analysis or Plan of Operation . . . . . . . . . . 13
Item 7. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section16(a) of the Exchange Act . . . . . . . . . . . . . . . . . . . . 15
Item 10. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 11. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . 16
Item 12. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . 16
Item 13. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . 16
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
Cycomm International Inc. (hereinafter referred to as "Cycomm
International" or "Cycomm" 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. The Company has operated under other names and
changed its name to its current name on February 20, 1992. The Company
continued its incorporation on October 31, 1995 pursuant to Articles of
Continuance from Ontario, Canada to the State of Wyoming.
The Company has four active wholly-owned subsidiaries as follows:
- Cycomm Corporation, incorporated in Oregon, on January 1, 1985.
- Val-Comm, Inc., incorporated in New Mexico, on July 12, 1984.
- XL Computing Corporation, incorporated in Delaware, on February 26,
1996.
- XL Computing Canada Inc., incorporated in Quebec, Canada on June 3,
1996.
The Company has an equity investment in Sistemas de Recepcion de Satelite
Galactica C.A., a 25.5% investment, incorporated in Venezuela on July 21, 1987.
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Cycomm International Inc.
McLean, Virginia
Executive Office
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(100% owned) (100% owned) (100% owned) (100% owned) (25.5 owned)
XL Computing Canada, Inc. XL Computing Corporation Val-Comm, Inc. Cycomm Corporation Sistem as de Recepcion
Montreal, Canada Sebastian, Florida Albuquerque, New Mexico Portland, Oregan de Satellite Galactica, C.A.
Caracas, Venezuela
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SIGNIFICANT DEVELOPMENTS DURING FISCAL YEAR ENDED MAY 31, 1996
XL COMPUTING CORPORATION. Effective March 15, 1996, the Company
completed the Stock Purchase Agreement by and among the Company and XL Vision,
Inc., ("XLV") and XL Computing Corporation ("XL Computing") whereby the Company
acquired 100% of the outstanding stock of XL Computing from XLV, a Safeguard
Scientific, Inc. partnership company, for an aggregate purchase price, of
$5,785,165. XLCC is based in Sebastian, Florida and is engaged in the design,
manufacturing, sale and support of secure, ruggedized computer products and
related services.
The Company acquired XL Computing in exchange for cash of $2,000,000,
a promissory note in the amount of $635,165 payable in installments with a
balloon to be paid on December 31, 1996, 30,000 shares of Series A Convertible
Redeemable Preferred Stock ("Series A Preferred Stock") valued at $3,000,000
and acquisition costs of $150,000 for an aggregate
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purchase price, of $5,785,165. The Company also granted XLV warrants to
purchase 500,000 common shares of the Company at $3.75 per share.
The Series A Preferred Stock has a Conversion Value, as defined, of
$100 per share. The holder of each share of Series A Preferred Stock is
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 have 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 shall
have the right to convert all or part of the Series A Preferred Stock into
Common Stock of the Company at $3.75 per share of Common Stock. Additionally,
at any time after March 21, 1999, the holder of any shares of Series A
Preferred Stock shall have the right to convert all of the shares into Common
Stock of XLCC at its fair value, as defined. At May 15, 1996, 15,000 shares
of Series A Preferred Stock were converted into 400,000 shares of Common Stock.
SIGNIFICANT DEVELOPMENTS SUBSEQUENT TO FISCAL YEAR ENDED MAY 31, 1996
M3i TECHNOLOGY INC. (NOW XL COMPUTING CANADA INC.). On June 21,
1996, the Company acquired substantially all of the assets of M3i Technologies
Inc., now XL Computing Canada Inc. ("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 Cycomm 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 booking
approximately $31 million in revenues from the sales of the PCMobile product.
BUSINESS OF THE COMPANY
Cycomm is at the forefront of a sector of the telecommunications
industry in the United States and Canada, and is expanding its business
opportunities in South America, Europe, Asia and elsewhere. The historical
business focus is on providing security for voice and data transmission over
wireless systems, particularly to cellular telephone end users. In addition,
through its recently acquired subsidiaries, the Company manufactures and sells
a full line of secure, ruggedized computer products presently sold into the
military, utility and public safety markets.
Cycomm has been a pioneer in the wireless security field and holds
patents and rights for a growing family of technologies and products it is
delivering to market. Simultaneously, Cycomm has pioneered an industry
concept for roaming cellular security through an 800-number service.
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Also, the Company has expanded operations into the manufacture and
design of classified telecommunications products for military and public safety
agencies. It is also positioned to enter the South America marketplace through
an equity investment in Venezuela.
HEADQUARTERS. Cycomm'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 facsimile signals for the wireless and wireline telecommunications
industry. Cycomm Corporation is a leader in cellular security products and is
developing new technologies to meet the rapid expansion of wireless
applications and customer demands.
XL COMPUTING CORPORATION. Effective March 15, 1996, Cycomm acquired
XL Computing Corporation of Sebastian, Florida. XL Computing 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 Cycomm's secure communication
business, implements Cycomm's secure technology into its products and shares
sales and distribution channels.
XL COMPUTING CANADA INC. On June 21, 1996, Cycomm acquired
substantially all the assets of M3i Technologies Inc. of Montreal, Canada,
which designs and markets ruggedized mobile computing and communications
systems primarily to the utility and public safety markets. Subsequent to
completing the transaction, Cycomm renamed the subsidiary XL Computing Canada
Inc.
XL Canada 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 Cycomm 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. Val-Comm is a communications, engineering and
consulting company, located in Albuquerque, New Mexico, 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.
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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. On March 27, 1996, the Voting
Trust governing Val-Comm, Inc. was dissolved subsequent to the Company's
continuance from Canada to the State of Wyoming.
SISTEMAS DE RECEPCION DE SATELITE GALACTICA C.A. Cycomm entered into
a Stock Purchase Agreement with Corporation Inc., S.A., a subsidiary of
Inelectra, S.A. ("Inelectra") on October 29, 1993 and acquired a 25.5% interest
in Galactica. Inelectra is a large diversified Venezuelan corporation with
interests in engineering and construction as well as the telecommunications
industry. Galactica is a telecommunications systems integration and
distribution company located in Venezuela, which specializes in the design,
supply, installation and maintenance of digital telecommunications networks for
voice, data and video through the use of digital links (microwave, UHF,
satellite and fiber optics) as well as television reception and retransmission
systems utilizing satellites in UHF-VHF bands. CANTV, the Venezuelan national
telephone company, has advised a consortium of companies, of which Galactica is
a member, that it has been selected as one of the few groups to act as a
primary supplier of outside plant telecommunications and related equipment to
CANTV. In April 1994, Corporation Inc. S.A. purchased the remaining 49% of
Galactica, giving Inelectra majority control with a 74.5% interest.
Cycomm International does not anticipate any future funding
requirements in connection with its investment in Galactica and will continue
to focus on developing its current relationships and investments to position
the Company in South America.
MARKET FOR THE COMPANY'S PRODUCTS AND SERVICES
GENERAL. 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.
WIRELESS SECURITY. 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
intercepted. Cellular conversations generally take place within a single cell
site, so cell site switching offers little, if any, additional protection.
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Cycomm's full line of products provide an array of 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 scrambles or encrypts the cellular and landline calls so that all an
eavesdropper hears is garbled speech.
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.
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 manufacturers a full line of TEMPEST and EMI
(Electro-Magnetic Interface) computers, both stationary and portable and
related products that protect against the interception of emissions.
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 manufacturers a full line of ruggedized computers and
peripherals for operation under harsh environments. This ruggedized technology
is an extension of the TEMPEST and EMI manufacturing process from which the
Company produces a product line that is both rugged and TEMPEST compliant.
THE COMPANY'S BUSINESS STRATEGY
CYCOMM Cycomm has 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. It also has pursued a strategy of 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 is the Fall 1996 roll out of its "Slice" CSD technology developed
with Bell Laboratories and resold by Lucent Technologies, Inc.
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The Company's marketing strategy envisions the installation by the
various cellular carriers of the Company's Privacy Rack Mobile Telephone
Switching Office (MTSO), which allows any cellular telephone call to be sent in
scrambled form over the air without the need for special decoders at the
receiving telephone end. Currently, the Company has installed more than 30
cellular security systems in various cities in North America, Mexico and
Africa. Sales of Cycomm cellular security products, primarily MTSOs, have been
made to major cellular service carriers throughout North America, including
Bell Cellular of Canada, McCaw Cellular Communications, Inc. (now AT&T
Wireless) through its various Cellular One subsidiaries, Bellsouth Cellular
Corp., Rochester Mobile, Air Touch, Southern New England Bell, Alltel Cellular
and Nynex Cellular.
In addition, the Company believes that the establishment of an 800
number privacy service through PrivaCall will supplement the cellular carriers'
service offering. An 800 number privacy service will allow a subscriber,
having a Cycomm privacy device on the cellular telephone, to call an 800 number
while roaming outside the owner's home area. The radio link between the
cellular phone and PrivaCall's facility is secured while the signal to the
called phone is in the clear.
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 five 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. The Company has developed
the Slice CSD technology as a platform to provide security for voice, fax and
data transmissions that utilize digital cellular service.
XL COMPUTING AND XL CANADA. 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"). A substantial portion of revenues is derived from
foreign customers, which is expected to continue and grow.
CYCOMM'S PRODUCT LINE AND SERVICES
Cycomm has developed the Series 300 Privacy system as an integrated
set of products that, working together, provide a complete privacy solution for
individuals, corporations and cellular carriers. Individual needs are
addressed through privacy units for cellular phones that secure communication
from cellular phone to cellular phone, or cellular phone to landline phone,
with no involvement or support from the cellular carrier. In this case, each
user must have a privacy unit on their phone. Corporations use the Privacy
Rack to secure calls into a building switch board or PBX, negating the
requirement to have a privacy unit on each phone in the
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building. In this case, calls are secure from the cell phone to the PBX.
Finally, the Mobile Telephone Switching Office ("MTSO") Privacy Rack is
available for cellular carriers to incorporate into their switching equipment
and offer a privacy service to their subscribers. With the carrier service,
each individual cellular subscriber need only purchase one device for their
cell phone. They are able to call anyone through the carrier's service, with
no need for the called party to have a privacy unit on their phone, and still
have a secure cellular line.
HANDHELD PRIVACY UNIT OR HPU-300 ("SLICE HPU"). The Slice HPU
provides voice privacy for the Motorola MicroTACTM series of hand-held cellular
telephones using signal scrambling technology. The Slice attaches easily
between the MicroTAC telephone and the battery. Privacy is activated and
deactivated from the phone keypad, providing flexible operation and protection
of sensitive information.
CELLULAR PRIVACY UNIT OR CPU-300 ("CPU"). The CPU is a small box that
connects between the handset and the phone transceiver of many mobile and
transportable cellular phones, such as car phones and bag phones. Privacy is
activated and deactivated through the handset keypad.
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, acquired from Lucent in 1995, and is compatible with Lucent's
Telephone Security Device 3600 family of products ("TSD"). Over 10,000 TSDs
are installed in various agencies of the US Government. The Slice CSD has been
under development since late 1995 with contract support from Bell Laboratories,
and began initial shipments in August, 1996.
TELEPHONE PRIVACY UNIT OR TPU-300 ("TPU"). This is a landline
telephone version of the CPU. It attaches to a landline telephone simply by
plugging the telephone into the TPU and then plugging the TPU into the
telephone wall outlet. It allows private communications to take place between
cellular and landline telephones or between landline telephones without the
necessity for the cellular service provider having installed an MTSO Privacy
Rack.
MTSO PRIVACY RACK. This is a standard 19-inch telephone rack with
power supplies and digital network interface modules which would be purchased
by the cellular service carrier. It is a universal platform that connects to
the 24-channel digital telephone network in North America (in its 24-channel
form) or to the 30-channel format used in Europe and other parts of the world
(in its 30-channel form). The MTSO rack holds up to 24 voice privacy cards.
Multiple racks may be used for larger customer bases. The digital interconnect
is accomplished via the T-1, 24 Channel Digital Interface Module. Cycomm has
also developed a modified version of the MTSO Privacy Rack for use by Regional
Bell Operating Companies to satisfy their requirements for providing cellular
security service connections.
PRIVACALL NETWORK. PrivaCall provides secured roaming, or 800-number
communications by exclusively utilizing Cycomm's privacy products. PrivaCall
utilizes a customized version of Cycomm's MTSO Privacy Rack equipment to allow
telephone users with Cycomm's privacy
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products to place secure cellular telephone calls anywhere in North America by
dialing a special 800 number. Any user of the service can place a secure
cellular or landline telephone call to another party without that called party
having a decoding device at the receiving end. As with the MTSO equipment
developed by Cycomm for cellular service carriers, the cellular transmission is
protected from unauthorized monitoring and the call is transferred in a decoded
format over the telephone line portion of the communications link from the MTSO
to the called party.
Cycomm views the PrivaCall operation as a key marketing service since
it can be utilized anywhere, is cost effective to the customer and requires no
interaction with a particular cellular service carrier. Cycomm also believes
this concept provides an enhancement to the services provided by cellular
service carriers who have purchased Cycomm's MTSO privacy products for local
city areas as these carriers, acting as re-sellers for such 800 privacy
services, can now offer roaming capabilities outside their own protected MTSO
territories.
XL COMPUTING AND XL CANADA PRODUCT LINES AND SERVICES
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 Pentium(TM) 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.
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
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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 replacable 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 486. The PCMobile 486 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.
RELIANCE UPON CERTAIN CUSTOMERS/SUPPLIERS
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, management
believes that additional manufacturing sources could be found if necessary.
The Company believes its relationship with all of its suppliers to be
satisfactory.
The Company is not dependent upon any single customer that purchases its
products. However, sales to three major customers comprise 25%, 20% and 9%
respectively, of sales for the year ended May 31, 1996. These sales represent
customers of XL Computing during the ten week period ended May 31, 1996 and
are not necessarily indicative of the reliance upon customers for a full year
period. Sales to one major customer amounted to 20% of sales for the year
ended May 31, 1995.
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RESEARCH AND DEVELOPMENT
During fiscal 1996 and 1995, the Company spent $749,041 and $502,505
respectively, on research and product development, primarily for development of
products complementary to the existing line of cellular voice privacy products.
The Company anticipates additional research and development expenditures on
future development of products.
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 143 people, of which approximately
125 are employed in the United States and 18 in Canada. Approximately 16
employees work in customer sales and service, 22 work in administration, 30
work in research and development and 75 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". The 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. Management plans
to pursue new products and licensing opportunities to exploit the Slice
technology, and to protect against any infringement of the Slice patent.
10
<PAGE> 13
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. Management believes that
the lack of patent protection 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" (the "Patent"). The 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 approval processes 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
11
<PAGE> 14
compete directly with the Company. In this regard, the Company believes that
its focus on niche markets which it has developed various strategic
relationships, its proprietary technology and the uncertainty of the developing
markets provide barriers to entry against competitors.
ITEM 2. DESCRIPTION OF PROPERTY
As of May 31, 1996 the Company leased the following facilities:
<TABLE>
<CAPTION>
Approximate
-----------
Location Type of Facility Condition Square Ft.
-------- ---------------- --------- ----------
<S> <C> <C> <C>
McLean, VA Executive Office Excellent 1,500
Portland, OR R&D and Good 6,500
Distribution
Boston, MA Sales Good 500
Sebastian, FL Corporate, R&D, Excellent 44,000
Manufacturing
and Distribution
Montreal, QB Corporate and Excellent 5,000
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
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 1996.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company's Common Shares are traded on The American Stock Exchange ("AMEX")
and The Alberta Stock Exchange ("ASE") under the symbol "CYI". The following
tables set forth the reported high and low sales prices as reported by AMEX for
the periods indicated:
12
<PAGE> 15
<TABLE>
<CAPTION>
American Stock Exchange
High Low
---- ---
<S> <C> <C>
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 $4.375
Second quarter* 6.75 3.75
Third quarter 5.625 3.188
Fourth quarter 7.25 2.88
</TABLE>
* reflects 1 for 5 Reverse Split of the outstanding shares of Common
Stock, effective October 19, 1995.
The approximate number of record holders of the Common Stock as of August 8,
1996 was 989.
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 is required to pay an 8% cumulative dividend on all outstanding Series
A Preferred Stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
RESULTS OF OPERATIONS
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
13
<PAGE> 16
$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 by about $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 are non-recurring,
non-cash charges of $1,660,046 related to the convertible debt financing 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 May 31,
1996, the Company had cash balances of $2,477,267 which were invested in
short-term money market funds.
In fiscal year 1996, cash used in operations amounted to $4,339,567.
Investing activities used $2,274,625 in fiscal 1996, the major activity being
the acquisition of XL Computing as of March 15, 1996. Cash provided by
financing activities was $7,299,739. The issuance of convertible debentures
resulted in net proceeds of $7,582,500
The Company's net working capital increased to $3,584,335 at May 31, 1996, from
$1,927,658, as funds were raised to make acquisitions and fund working capital
needs.
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 equipment segment to be able to
fund operations from working capital and secured lines of credit. 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 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.
14
<PAGE> 17
ITEM 7. FINANCIAL STATEMENTS
CYCOMM INTERNATIONAL INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR 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 September 30, 1996, 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
September 30, 1996 and is hereby incorporated by reference herein.
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 September 30, 1996 and is hereby incorporated by
reference herein.
15
<PAGE> 18
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
September 30, 1996 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 September 30, 1996 and is hereby incorporated by
reference herein.
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 ___
</TABLE>
16
<PAGE> 19
<TABLE>
<S> <C> <C>
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.
(b) Reports on Form 8-K:
1. Current Report on Form 8-K was filed on April 5, 1996
reporting the acquisition of XL Computing under Item 2. -
Acquisition or Disposition of Assets.
2. Current Report on Form 8-K was filed on July 8, 1996 reporting
the acquisition of substantially all the assets of M3i
Technologies, Inc. under Item 2. - Acquisition or Disposition
of Assets.
17
<PAGE> 20
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: June 25, 1997 By: /s/ Albert I. Hawk
--------------------
Albert I. Hawk
President and
Chief Executive 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.
<TABLE>
<S> <C>
By: /s/ Albert I. Hawk June 25, 1997
--------------------------------------
Albert I. Hawk, President and
Chief Executive Officer
By: /s/ Hubert Marleau June 25, 1997
---------------------------------------
Hubert Marleau, Director
By: /s/ Rick E. Mandrell June 25, 1997
---------------------------------------
Rick E. Mandrell, Director
By: /s/ Gen. Thomas Stafford June 25, 1997
---------------------------------------
Gen. Thomas Stafford, Director
</TABLE>
18
<PAGE> 21
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996 AND 1995
F-1
<PAGE> 22
INDEPENDENT AUDITORS' REPORT
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 May 31, 1996 and 1995 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended. 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 auditing standards
generally accepted in the United States. 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 as of May 31, 1996 and
1995 and the consolidated results of their operations and their cash flows for
each of the years then ended in conformity with accounting principles generally
accepted in the United States.
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 suffered
recurring losses from operations and has an accumulated deficit that raise
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.
Vancouver, Canada,
September 5, 1996. /s/ ERNST & YOUNG
Chartered Accountants
F-2
<PAGE> 23
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MAY 31,
<TABLE>
<CAPTION>
1996 1995
------------------ -------------------
(RESTATED - NOTE 2) (RESTATED - NOTE 2)
<S> <C> <C>
Sales $ 4,985,036 $ 1,283,081
Cost of sales 3,634,254 855,414
------------- -------------
Gross profit 1,350,782 427,667
------------- -------------
Expenses
Selling, general and administrative 5,730,671 3,671,854
Research and product development 749,041 502,505
Depreciation and amortization (Note 3) 1,228,295 374,984
Foreign exchange loss(gain) 14,797 (19,326)
Write-down of inventories to net realizable value 1,220,457 542,897
------------- -------------
8,943,261 5,072,914
------------- -------------
LOSS FROM OPERATIONS (7,592,479) (4,645,247)
------------- ------------
OTHER INCOME (EXPENSE)
Interest income 64,345 111,590
Interest expense (1,895,236) (41,767)
Equity in losses of long-term investments --- (69,580)
Gain (loss) on sale of fixed assets (27,300) 3,871
Other income 6,019 10,687
------------ ------------
(1,852,172) 14,801
------------ ------------
NET LOSS $(9,444,651) $(4,630,446)
============ ============
LOSS PER SHARE
Net loss per share $(2.36) $ (1.43)
======= ========
Weighted average number of common shares outstanding 4,002,289 3,233,467
============ ============
</TABLE>
(See accompanying notes)
F-3
<PAGE> 24
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31,
<TABLE>
<CAPTION>
1996 1995
------------------ -------------------
(RESTATED - NOTE 2) (RESTATED - NOTE 2)
<S> <C> <C>
ASSETS
Current
Cash and cash equivalents $ 2,477,267 $ 1,791,720
Accounts receivable, less allowance for doubtful accounts
of $20,864 and $8,048, respectively (Notes 7 and 17) 1,782,982 55,798
Inventories (Notes 4 and 17) 2,691,000 1,374,005
Prepaid expenses 186,451 46,001
------------- -------------
Total current assets 7,137,700 3,267,524
------------- -------------
Notes receivable 69,182 170,672
Fixed assets, net (Note 5) 1,593,672 335,210
Goodwill, net of accumulated amortization of $1,223,278 and $265,884,
respectively (Note 3) 1,849,114 991,924
Other assets
Long-term investments (Note 6) 1,175,859 1,055,796
Deferred technology costs, net of accumulated amortization of
$820,093 and $635,760, respectively 157,754 342,087
Deferred financing costs, net of accumulated amortization of $14,816 316,084 ---
Unearned discount 499,188 ---
Patents, net of accumulated amortization of $2,500 22,500 ---
Prepaid royalties --- 30,466
------------ -------------
2,171,385 1,428,349
------------ -------------
$ 12,821,053 $ 6,193,679
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Accounts payable - trade $ 1,700,330 $ 414,584
Accounts payable - other 45,763 118,606
Accrued liabilities 658,841 158,597
Due to affiliate (Note 13) 60,129 ---
Dividends payable on preferred stock 46,000 ---
Current portion of capital lease obligations (Note 8) 9,360 8,424
Current portion of notes payable and convertible debentures (Note 7) 1,032,942 639,655
------------ -------------
Total current liabilities 3,553,365 1,339,866
------------ -------------
Capital lease obligations (Note 8) 8,207 14,917
Notes payable and convertible debentures (Note 7) 3,309,001 35,109
Commitments and contingencies (Notes 1, 8 and 17)
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,
5,943,771 and 3,594,316 shares issued and outstanding
at May 31, 1996 and 1995, respectively (Notes 9, 10 and 17) 33,743,536 26,606,192
Deficit (31,293,056) (21,802,405)
-------------- --------------
Total stockholders' equity 5,950,480 4,803,787
-------------- --------------
$ 12,821,053 $ 6,193,679
============== ==============
</TABLE>
(See accompanying notes)
F-4
<PAGE> 25
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31,
<TABLE>
<CAPTION>
1996 1995
--------------- -----------------
(RESTATED - NOTE 2) (RESTATED - NOTE 2)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(9,444,651) $(4,630,446)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 1,228,295 374,984
Loss (gain) on sale of fixed assets 27,300 (3,871)
Write-down of inventories to net realizable value 1,220,457 542,897
Non-cash expenses 1,835,046 ---
Research and product development 184,333 186,666
Equity in losses of long-term investments --- 69,580
Change in operating assets and liabilities
(Note 11) 609,653 (339,729)
------------ ------------
Cash (used in) operating activities (4,339,567) (3,799,919)
------------ -----------
INVESTING ACTIVITIES
Long-term investments --- (32,311)
Prepayment of royalties 30,466 (404)
Acquisition of fixed assets (135,907) (26,464)
Proceeds on disposal of fixed assets 24,389 19,803
Payment for acquisitions, net of cash acquired:
- XL Computing Corporation (Note 3) (2,150,000) ---
- Advanced Cellular Privacy System (Note 3) --- (250,000)
Increase in notes receivable (20,000) (56,364)
Decrease in notes receivable 1,427 ---
Acquisition of patents (25,000) ---
------------ ------------
Cash (used in) investing activities (2,274,625) (345,740)
------------ ------------
FINANCING ACTIVITIES
Issuance of common stock --- 2,692,512
Borrowings under notes payable 38,349 8,000
Repayment of notes payable and convertible debentures (315,336) (81,549)
Borrowings under convertible debentures 8,425,000 130,000
Deferred financing costs on convertible debentures (842,500) ---
Obligations under capital leases --- 11,731
Repayment of obligations under capital leases (5,774) (25,119)
------------ -------------
Cash provided by financing activities 7,299,739 2,735,575
------------ ------------
Increase (decrease) in cash and cash equivalents during the year 685,547 (1,410,084)
Cash and cash equivalents, beginning of year 1,791,720 3,201,804
------------ ------------
Cash and cash equivalents, end of year $ 2,477,267 $ 1,791,720
============ ============
</TABLE>
(See accompanying notes)
F-5
<PAGE> 26
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MAY 31,
<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
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
Dividends on preferred
stock (46,000)
Beneficial conversion feature
of convertible debt 2,159,234
--------- ---------- ------------ ------------ ----------- ------------
BALANCE, MAY 31, 1996 15,000 $1,500,000 5,943,771 $35,743,536 $ --- (31,293,056)
========= ========== ============ ============ =========== =============
</TABLE>
(See accompanying notes)
F-6
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 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") effective March 15, 1996, was a provider of an
array 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. Research and product development efforts are now focused upon the
more sophisticated encryption technologies.
Effective March 15, 1996, the Company acquired XLCC and subsequent to year-end
acquired M3i Technologies Inc. These companies 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 $9,444,651 for the year ended May 31, 1996 and as of
that date had an accumulated deficit of $31,293,056. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Until the operations of the communications security products segment achieve
profitability, this business segment will be required to rely upon existing
cash balances or raise additional capital to fund operations. 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.
The Company expects the computer equipment segment to be able to fund
operations from working capital and secured lines of credit.
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 adopted a position by the staff of the Securities and Exchange
Commission regarding the accounting for the issuance of debt that can be
converted at a discount to the market price of the Company's common stock. In
this regard, the implicit return provided by the conversion terms of the debt
is accounted for as additional interest expense and accreted over the period
between the date of issuance of the debt and the date the debt first becomes
covertible. This change in accounting methods resulted in additional interest
expense of $1,660,046 in the year ended May 31, 1996 or $0.41 per share.
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.
F-7
<PAGE> 28
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.
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 cost less amounts written off and 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
The investment in 25.5% owned Sistemas de Recepcion de Satellite Galactica C.A.
("Galactica") is recorded at cost as management is of the opinion the Company
does not exercise significant influence over the operations of Galactica as the
remaining 74.5% of Galactica is owned by a single shareholder actively involved
in the day-to-day operations of Galactica and the audited financial statements
of Galactica are not available on a timely basis. Additionally, the Company
has only one representative on a five member Board of Directors of which the
other four directors are related to the majority shareholder. If the Company
determines there is evidence of an other than temporary decline in carrying
value, the investment will be written down to its estimated market value.
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.
F-8
<PAGE> 29
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 shareholders' equity. Exchange adjustments resulting 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.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets" and SFAS No. 123, "Accounting for Stock Based
Compensation". SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles be reported at the lower of their carrying amount or
their estimated recoverable amount. The adoption of this statement by the
Company is not expected to have an impact on the financial statements. SFAS
No. 123 encourages the accounting for stock based employee compensation
programs to be reported within the financial statements on a fair value based
method. If the fair value based method is not adopted, then the statement
requires pro-forma disclosure of net income and earnings per share as if the
fair value based method had been adopted. The Company is currently determining
the impact of the adoption of SFAS No. 123 on its disclosures in its financial
statements. Both statements are effective for fiscal years beginning after
December 15, 1995.
NOTE 3: ACQUISITIONS
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 promissory note in the amount of $635,165,
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.
F-9
<PAGE> 30
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
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 a five-year exclusive license for the use of ACPS technology, and
certain licenses, agreements, customers and sales contracts of ACPS. 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.
NOTE 4: INVENTORIES
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Raw materials $1,486,645 $ 295,183
Work in process and sub-assemblies 941,989 296,455
Finished goods 262,366 782,367
---------- ----------
$2,691,000 $1,374,005
========== ==========
</TABLE>
F-10
<PAGE> 31
NOTE 5: FIXED ASSETS
<TABLE>
<CAPTION>
ACCUMULATED
DEPRECIATION AND NET BOOK
COST AMORTIZATION VALUE
---------------- ------------------- ------------------
<S> <C> <C> <C>
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>
<TABLE>
<CAPTION>
ACCUMULATED
DEPRECIATION AND NET BOOK
COST AMORTIZATION VALUE
------------------- ------------------- ------------------
<S> <C> <C> <C>
MAY 31, 1995
Land $ 48,000 $ -- $ 48,000
Equipment under capital leases 108,529 86,175 22,354
Furniture and fixtures 77,517 50,148 27,369
Research equipment 252,014 165,410 86,604
Computer equipment 255,223 187,146 68,077
Marketing equipment 110,709 87,758 22,951
Office equipment 24,502 22,472 2,030
Manufacturing equipment 136,551 82,323 54,228
Leasehold improvements 35,572 31,975 3,597
----------- --------- --------
$1,048,617 $713,407 $335,210
=========== ========= ========
</TABLE>
NOTE 6: OTHER ASSETS
LONG-TERM INVESTMENTS
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
Sistemas de Reception de Satellite Galactica C.A. ("Galactica") $1,175,859 $1,055,796
</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 May 31, 1996 and 1995, the promissory note receivable amounted
to $18,443, and $138,505, respectively.
F-11
<PAGE> 32
NOTE 7: NOTES PAYABLE AND CONVERTIBLE DEBENTURES
Notes payable and convertible debentures are as follows:
<TABLE>
<CAPTION>
1996 1995
-------------- ------------
<S> <C> <C>
12% promissory note payable, due December 31, 1996 $ 330,000 $430,000
10% convertible debenture, due June 15, 1995 --- 130,000
7% promissory note payable, due December 31, 1996 635,165 ---
10% convertible debentures, due December 4, 1997 100,000 ---
9.5% convertible debentures, due March 19, 1998 984,001 ---
10% convertible debentures, due May 21, 1998 1,750,000 ---
10% convertible debentures, due May 29, 1998 475,000 ---
8% note payable, due October 1, 1996 35,109 114,764
Other notes payable 32,668 ---
----------- --------
4,341,943 674,764
Less current portion 1,032,942 639,655
----------- --------
$3,309,001 $ 35,109
=========== ========
</TABLE>
Scheduled maturities of notes payable and convertible debentures are as
follows:
YEAR ENDING MAY 31,
<TABLE>
<S> <C>
1997 $1,032,942
1998 3,309,001
-----------
$4,341,943
==========
</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 10% convertible debenture was collateralized by the Company's rights,
title, interests and ownership in and to its 33.3% shareholdings in OSP de
Venezuela and its 25.5% shareholding in Galactica, and any and all debt
obligations due from Galactica to the Company. The Company retired the
principal and accrued interest on the convertible debenture on June 15, 1995.
The 7% promissory note payable was incurred in conjunction with the acquisition
of XLCC. This note is collateralized by certain accounts receivable of XLCC.
Principal payments, with accrued interest thereon, are 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.
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 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.
F-12
<PAGE> 33
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 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.
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.
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.
Subsequent to May 31, 1996, convertible debentures and accrued interest thereon
in an amount of $2,735,620 were converted into 929,580 shares of common stock.
NOTE 8: COMMITMENTS AND CONTINGENCIES
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 9.79% to 13.33%
through November 30, 1998. 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 MAY 31, LEASES LEASES
<S> <C> <C>
1997 $10,956 $ 372,831
1998 8,366 407,031
1999 787 371,746
2000 --- 320,250
2001 --- 260,000
------- ----------
20,109 $1,731,858
==========
Less: amount representing interest on capital leases 2,542
-------
Present value of future minimum capital lease payments $17,567
=======
</TABLE>
Long-term interest on capital leases amounted to $6,315 and $2,792 for the
fiscal years ended May 31,1996 and 1995, respectively. Total rental expense
under the various operating leases amounted to $224,376 and $181,182 for 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 preference shares without
par value, issuable in series.
F-13
<PAGE> 34
COMMON STOCK
The issued common stock of the Company consisted of 5,943,771 and 3,594,316
shares as of May 31, 1996 and 1995, 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 year.
The computation of fully diluted net loss per share was antidilutive in each of
the periods presented.
During the year ended May 31, 1996, convertible debentures and accrued interest
thereon were converted into 1,809,477 shares of common stock. Subsequent to
the year ended May 31, 1996, convertible debentures and accrued interest
thereon were converted into 929,580 shares of common stock. Additionally, on
May 15, 1995 a portion of the Company's Series A Preferred Stock was converted
into 400,000 shares of common stock. If these conversions had occurred on June
1, 1995, the reported net loss per common share for the year ended May 31, 1996
would have decreased $0.81 to $1.14 per share.
PREFERRED STOCK
The Company has outstanding 15,000 shares of Series A Convertible Redeemable
Preferred Stock ("Series A Preferred Stock"). The Series A Preferred Stock
shall have a Conversion Value, as defined, of $100 per share. The holder of
each share of Series A Preferred Stock shall be 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 shall have 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 shall
have the right to convert all or part into Common Stock of the Company at $3.75
per share of Common Stock. Additionally, at any time after March 21, 1999, the
holder of any shares of Series A Preferred Stock shall have the right to
convert all of the shares into common stock of XLCC at its fair value. In the
event of liquidation, the holder shall be entitled to be paid out of the assets
of the Company available for distribution to its stockholders before any
payment shall be made to the holders of any stock ranking on liquidation junior
to the Series A Preferred Stock.
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.
F-14
<PAGE> 35
NOTE 10: STOCK OPTIONS AND WARRANTS
STOCK OPTIONS
The Company has granted stock options to directors, officers, employees and
other parties which become exercisable over periods ranging from three years 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 two years
ended May 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
==========
</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.
Subsequent to May 31, 1996, options to purchase 100,000 common shares at $3.00
per share were exercised.
COMMON SHARE PURCHASE WARRANTS
The Company has granted common share purchase warrants to directors, officers
and other parties which become exercisable over periods 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 May 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>
18,781 $ 12.77 August 31, 1996
20,000 $ 5.00 September 7, 1996
100,000 $ 3.65 May 16, 1999
30,000 $ 10.00 November 14, 1996
298,775 $ 8.75 April 24, 1997
60,000 $ 8.10 April 26, 1998
63,000 $ 5.00 October 26, 1996
10,000 $ 5.00 November 21, 1996
5,000 $ 4.75 November 30, 2000
75,000 $ 4.63 December 4, 1998
500,000 $ 3.75 March 20, 1999
52,500 $ 5.63 May 20, 1998
---------
1,233,056
=========
</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-15
<PAGE> 36
Subsequent to May 31, 1996, a total of 38,781 common share purchase warrants
expired unexercised. Additionally, a total of 281,100 common share purchase
warrants with an exercise price of $8.00 per share that expire on June 11, 1999
were granted.
NOTE 11: STATEMENTS OF CASH FLOWS
The cash flow effects of changes in operating assets and liabilities are as
follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Accounts receivable $(395,301) $ 143,531
Inventories 402,985 (1,165)
Prepaid expenses 27,651 (14,767)
Accounts payable - trade 572,924 (411,717)
Accounts payable - other (72,843) 20,388
Accrued liabilities (31,892) (75,999)
Due to affiliate 60,129 ---
Dividends payable on preferred stock 46,000 ---
------------ -----------
$ 609,653 $(339,729)
=========== ==========
</TABLE>
The Company had certain non-cash investing and financing activities as follows:
<TABLE>
<CAPTION>
1996 1995
-------------- -------------
<S> <C> <C>
Conversion of convertible debentures to common stock $4,814,655 $ ---
Conversion of preferred stock to common stock 1,500,000 ---
Conversion of notes receivable to long-term investments 120,063 433,379
Capital lease obligations incurred --- 9,094
</TABLE>
During the year ended May 31, 1996, the Company acquired 100% of the stock of
XLCC for an aggregate purchase price of $5,785,165. In conjunction with the
acquisition, liabilities were assumed as follows:
<TABLE>
<S> <C>
Fair value of assets acquired $7,513,966
Cash paid for the capital stock (2,150,000)
Preferred stock issued (3,000,000)
Note payable to seller (635,165)
------------
Liabilities assumed $1,728,801
============
</TABLE>
During the year ended May 31, 1995, the Company acquired certain assets from
Datotek for an aggregate purchase price of $1,617,500. In conjunction with the
acquisition, liabilities were assumed as follows:
<TABLE>
<S> <C>
Fair value of assets acquired $ 1,617,500
Cash paid for assets (250,000)
Common stock issued (937,500)
Note payable to seller (430,000)
-------------
Liabilities assumed $ ---
=============
</TABLE>
Supplemental cash flow information is as follows:
<TABLE>
<CAPTION>
1996 1995
---------------- ----------------
<S> <C> <C>
Interest paid $32,128 $12,405
Income taxes paid --- ---
</TABLE>
NOTE 12: INCOME TAXES
The Company accounts for income taxes under the liability method required by
FASB 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 of $1,448,943 has been recognized to
offset certain
F-16
<PAGE> 37
deferred tax assets for which realization is uncertain. Significant components
of the Company's deferred tax liabilities and assets as of May 31 are as
follows:
<TABLE>
<CAPTION>
1996 1995
------------ --------------
<S> <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 11,794 15,214
Book over tax amortization 206,869 19,351
Inventory capitalization 771,430 618,430
Warranty reserve 651 15,292
Net operating loss carryforward 7,702,742 6,507,260
Rework reserve 294 294
Vacation accrual 4,893 4,893
Returns reserve 3,228 3,228
----------- -----------
Total deferred tax assets 8,701,901 7,183,962
Valuation allowance for deferred tax assets (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 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 May 31 is as follows:
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
US federal statutory rate 35.0% 35.0%
US federal net operating loss rate (35.0) (35.0)
US state tax rate --- ---
------------ ------------
Effective rate on operating loss --- ---
============= ============
</TABLE>
The Company has US net operating loss carryfowards available at May 31, 1996 of
approximately $22,655,124 for US federal tax purposes to offset income in
future years. These carryfowards will begin to expire in the year 2000, 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.
NOTE 13: RELATED PARTY TRANSACTIONS
Management, consulting and directors' fees paid to officers and directors of
the Company were $527,373 and $491,498 during 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 year ended May 31, 1996,
XLCC incurred $302,244 of rental expense and administrative services due to XL
Vision, Inc. XL Vision, Inc. incurred $111,532 of rental expenses and
administrative services due to XLCC. The balance due to XL Vision, Inc. is
$60,129 at May 31, 1996.
The Company retains the consulting services of Corstone Corporation
which previously employed the current President and Chief Executive Officer.
The current President and Chief Executive Officer has 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 years ended May 31, 1996 and 1995 both
prior to and after the appointment of the current President and Chief Executive
Officer on May 15, 1996. Consulting fees paid to this entity were $329,000 and
F-17
<PAGE> 38
$132,500 during 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.
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
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.
In the following tables, financial information is presented by industry segment
and geographic region. Loss from operations does not include general corporate
expenses.
INDUSTRY SEGMENT DATA
<TABLE>
<CAPTION>
1996 1995
----------------- ------------------
<S> <C> <C>
Sales
Communications security products $ 1,588,742 $ 1,283,081
Computer equipment 3,396,294 ---
------------ ------------
$ 4,985,036 $ 1,283,081
============ ============
Loss from Operations
Communications security products $(7,381,623) $(4,645,247)
Computer equipment (210,856) ---
------------ ------------
$(7,592,479) $(4,645,247)
============ ============
Identifiable Assets
Communications security products $ 2,431,398 $ 3,241,547
Computer equipment 5,996,811 ---
Corporate 2,699,354 1,729,211
Non-consolidated investments 1,194,302 1,223,122
------------ ------------
$12,321,865 $ 6,193,679
============ ============
Depreciation and Amortization
Communications security products $ 1,171,925 $ 374,984
Computer equipment 56,370 ---
------------ ------------
$ 1,228,295 $ 374,984
============ ============
Capital Expenditures
Communications security products $ 125,383 $ 26,464
Computer equipment 10,524 ---
------------ ------------
$ 135,907 $ 26,464
============ ============
<CAPTION>
GEOGRAPHIC REGION DATA
1996 1995
----------------- ---------------
<S> <C> <C>
Sales
United States $ 4,985,036 $ 1,283,081
============ ============
Loss from Operations
United States $(7,592,479) $(4,645,247)
============ ============
Identifiable Assets
United States $11,127,563 $ 4,970,557
South America 1,194,302 1,223,122
------------ ------------
$12,321,865 $ 6,193,679
============ ============
</TABLE>
F-18
<PAGE> 39
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 three major customers in the
computer equipment segment comprise 25%, 20% and 9%, respectively, of sales for
the year ended May 31, 1996. Sales to one major customer in the communications
security products segment comprise 20% of 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 May 31,
1996, the Company has $1.9 million in a money market fund at First Union
National Bank of Virginia.
Concentration of credit risk with respect to trade receivables exists at year
end as approximately $1.2 million or 68% 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: SUBSEQUENT EVENTS
(A) 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,
(collectively the "Buyer") and M3i Technologies Inc. and M3i Systems Inc.
(collectively the "Seller") whereby the Buyer acquired substantially all of the
assets of the Seller, for an aggregate purchase price, subject to earn-out
provisions, of a maximum of $5,000,000. The Seller 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 for the quarter of issuance. The earn-out provisions will be fully
satisfied upon the Company recording approximately $31 million in revenues from
the sales of computer units.
In conjunction with the acquisition, the Company provided a letter of credit in
an amount of $1,000,000 on behalf of the Buyer to a manufacturing vendor. On
August 14, 1996, the letter of credit was drawn-down by the manufacturing
vendor in an amount of $843,616. The remaining balance on the letter of credit
expired on August 23, 1996.
(B) Subsequent to May 31, 1996, XLCC obtained a bank line of credit under
which XLCC may, at its option, borrow and repay amounts up to a maximum of
$1,500,000. Borrowings under this agreement bear interest at prevailing market
rates as determined by the lending bank. The line of credit is collateralized
by XLCC's trade accounts receivable and inventory and is guaranteed by the
Company. As at September 3, 1996, an amount of $820,600 was outstanding under
this line of credit.
F-19
<PAGE> 40
EXHIBIT 10.7
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of the 15th day of May, 1996, by and between
Cycomm International Inc. (the "Corporation"), a corporation organized under
the laws of the State of Wyoming, and Albert I. Hawk ("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 President and Chief Executive 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 May 14, 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 $180,000, 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> 41
-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 four 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 twelve (12) 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> 42
-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> 43
-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: /s/ Rick Mandrell
- ---------------------------- -------------------------------
Name: Rick Mandrell
Title: Secretary
WITNESS: EMPLOYEE
/s/ Albert I. Hawk
- ---------------------------- ----------------------------------
Albert I. Hawk
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> JUN-01-1995
<PERIOD-END> MAY-31-1996
<CASH> 2,477,267
<SECURITIES> 0
<RECEIVABLES> 1,803,846
<ALLOWANCES> 20,864
<INVENTORY> 2,691,000
<CURRENT-ASSETS> 7,137,700
<PP&E> 2,267,617
<DEPRECIATION> 673,945
<TOTAL-ASSETS> 12,821,053
<CURRENT-LIABILITIES> 3,553,365
<BONDS> 0
0
1,500,000
<COMMON> 35,743,536
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 12,821,053
<SALES> 4,985,036
<TOTAL-REVENUES> 4,985,036
<CGS> 3,634,254
<TOTAL-COSTS> 8,943,261
<OTHER-EXPENSES> 1,852,172
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,895,236
<INCOME-PRETAX> (9,444,651)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,444,651)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,444,651)
<EPS-PRIMARY> (2.36)
<EPS-DILUTED> (2.36)
</TABLE>
