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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-KSB
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO _________________
Commission file number 1-11686
CYCOMM INTERNATIONAL INC.
(Name of Small Business Issuer in Its Charter)
Wyoming 54-1779046
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1420 Springhill Road, Suite 420, McLean, Virginia 22102
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number, including area code: (703) 903-9548
Securities registered under Section 12(b) of the Exchange Act:
Common Stock, without par value
(Title of Class)
Securities registered under Section 12(g) of the Exchange Act: None
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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. $15,678,667
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant on March 1, 1998 was approximately $22,297,892
(based on the closing price of $2.38 per share at which the stock was sold on
that date).
The number of shares outstanding of the issuer's class of Common Stock, no par
value, as of March 1, 1998, 10,053,257 shares
DOCUMENTS INCORPORATED BY REFERENCE
(1) Definitive Proxy Statement for 1997 Annual Meeting of Stockholders --- Part
III - Items 9, 10, 11 and 12.
Transitional Small Business Disclosure Format (check one):
Yes No X
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TABLE OF CONTENTS
PAGE
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PART I
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Item 1. Description of Business .............................................................. 3
Item 2. Description of Property............................................................... 18
Item 3. Legal Proceedings..................................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders................................... 18
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.............................. 19
Item 6. Management's Discussion and Analysis or Plan of Operation............................. 20
Item 7. Financial Statements.................................................................. 25
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure.......................................................... 25
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act............................................. 26
Item 10. Executive Compensation................................................................. 26
Item 11. Security Ownership of Certain Beneficial Owners and Management......................... 26
Item 12. Certain Relationships and Related Transactions......................................... 26
Item 13. Exhibits and Reports on Form 8-K....................................................... 27
Signatures....................................................................................... 29
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
Cycomm International Inc. (hereinafter referred to as "Cycomm
International" and together with its subsidiaries, the "Company") develops,
manufactures and markets value-added secure computing and telecommunications
products and rugged computer products. The Company's rugged computer products
are designed to function in adverse environments under extreme weather, shock,
moisture and vibration operating conditions. The Company's secure computer
products are designed to protect users against the unauthorized interception of
electromagnetic emissions emanating from computer systems. The Company's secure
telecommunications products are designed to protect users against the
unauthorized interception of wireless conversation from cellular communications.
The Company's historical business focus had been on developing and
manufacturing products and services that provide security for voice and data
transmission over wireless systems, particularly to cellular telephone end
users. In 1997, the Company shifted its business strategy related to wireless
security from the manufacturing of scrambling and encryption products to an
emphasis on licensing of its existing technology in this area.
Through its recently acquired subsidiaries, the Company has leveraged
its core competencies to design, manufacture and sell a full line of secure,
ruggedized computer products presently sold into the public safety, U.S.
military, intelligence community, friendly governments and utility markets.
Consequently, the Company has allocated resources to its secure and rugged
computing product line, which has the most near term profitability potential.
During the present fiscal year, the Company will continue to integrate the
various divisions resulting in a single secure, rugged telecommunications and
computing product company.
HISTORY
The Company was formed on April 30, 1986 by the amalgamation of two
Ontario corporations under the laws of Ontario. Historically, the Company has
operated under various names; however, it changed its name to Cycomm
International Inc. on February 20, 1992. The Company continued its incorporation
on October 31, 1995 from Ontario, Canada to the State of Wyoming pursuant to the
Articles of Continuance.
At its formation in 1986, the Company was involved in the manufacturing
and marketing of certain sonar activated marine buoyancy devices. In 1987, the
Company became involved in certain technologies related to telecommunication
systems. In May 1990, the Company acquired Cycomm Corporation, an entity engaged
in the development and marketing of specialized voice privacy communications
products for the secure communications market. In November 1993, the Company
acquired Val-Comm, Inc., a company engaged in performing classified government
contracting for various communications projects.
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The Company continued to develop the voice privacy and encryption
technologies through 1996. The Company made two strategic acquisitions that
allowed it to leverage existing technologies and to participate in the larger
mobile and secure computer market. Specifically, the Company acquired XL
Computing Corporation in March 1996 and XL Computing Canada Inc. in June 1996.
XL Computing Corporation is engaged in the design, manufacture and marketing of
secure computer systems. XL Computing Canada is engaged in the design,
manufacture and marketing of rugged mobile computer systems.
In 1997, the Company recognized that the market for cellular voice
security technologies and products was still immature and would not develop to
the extent required to justify additional development. Additionally, the Company
began to experience the market for its mobile computers growing much faster than
the market for voice privacy technologies. Accordingly, the Company initiated a
strategy which resulted in a shifting of development resources to the mobile
computer products.
The Company currently has four active wholly-owned
subsidiaries as follows:
- XL Computing Canada Inc. ("XL Canada"), incorporated in Quebec, Canada on
June 3, 1996.
- XL Computing Corporation ("XL Computing"), incorporated in Delaware,
on February 26, 1996.
- Val-Comm, Inc. ("Val-Comm"), incorporated in New Mexico, on July 12, 1984.
- Cycomm Corporation ("Cycomm"), incorporated in Oregon, on January 1, 1985.
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Cycomm International Inc.
McLean, Virginia
Executive Office
(100% owned) (100% owned) (100% owned) (100% owned)
XL Computing Canada Inc. XL Computing Corporation Val-Comm, Inc. Cycomm Corporation
Montreal, Canada Sebastian, Florida Albuquerque, New Mexico Portland, Oregon
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EXECUTIVE OFFICE. The Company's principal executive offices are located
in McLean, Virginia. Management of all subsidiaries and the Company's growing
number of strategic relationships is conducted from this location, along with
overall administration, financial, investment, and investor relations
responsibilities.
XL COMPUTING CANADA INC. Located in Montreal, Canada, this subsidiary
designs, manufactures and markets ruggedized mobile computing and communications
systems primarily to the public safety and utility markets. XL Canada has
expanded the Company's ruggedized computer product line by adding state, local
and commercial markets to XL Computing's core government and military business.
XL COMPUTING CORPORATION. Located in Sebastian, Florida, this
subsidiary designs, tests, manufactures, and markets ruggedized, TEMPEST
specified computer and communication equipment for niche markets worldwide.
TEMPEST is the name given to the classified specification, NSTISSAM/ 1-95, for
securing computer equipment and peripherals against
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electromagnetic eavesdropping on the electromagnetic radiation emanating from
all electronic equipment.
VAL-COMM, INC. Located in Albuquerque, New Mexico, this subsidiary is a
communications, engineering and consulting company which provides feasibility
studies for possible development projects and custom communications equipment
developed for classified U.S. government agencies. These activities can include
prototype development but generally involve the modification of one or more
products available from unrelated companies into an integrated communications
system to meet its customers' requirements. Such work involves classified U.S.
government contracts for which Val-Comm maintains U.S. government facilities
security clearances.
CYCOMM CORPORATION. Located in Portland, Oregon, this subsidiary has
developed security products using both encryption and scrambling of voice and
data signals for the wireless and wireline telecommunications industry.
MARKET FOR THE COMPANY'S PRODUCTS AND SERVICES
RUGGEDIZED COMPUTERS. The Company, through its XL Canada subsidiary, has
developed a ruggedized laptop computer called the PCMobile that is specifically
designed for the public safety market. The Company currently markets the
PCMobile to local and state police and fire departments and other public safety
agencies as well as utility, commercial and industrial markets. The PCMobile has
been designed to withstand the specific extreme operating conditions of the
public safety market.
'Ruggedization' or 'rugged' or 'ruggedized computers' are terms used to
describe computers that are built to withstand certain environmental and
operational hazards with which standard commercial computers functioning indoors
would not typically have to contend. The ruggedization of the computer is an
attempt to protect or insulate it fully from such hazards or at least minimize
their adverse impact so that the computer can function to accomplish the
specific tasks of its operating requirements. Computers are ruggedized by the
selection and mounting of certain components, the design, configuration and
fabrication of enclosures and electronics and the application of special
casings, seals and coatings. The design and fabrication of the computer
encasement and keyboard with tougher materials, full closure and special
sealants also protect it against moisture, humidity, particles and temperature
extremes.
From a strictly environmental point of view, these hazards are usually
weather-related or climatic in nature and can encompass temperature extremes
ranging from -22 to +140 degrees Fahrenheit, as well as severe moisture and
humidity conditions and the infiltration by flying or wind-borne debris, such as
sand, dust or other particles. In the operational area, the hazards involve
strong vibrations and shocks that result from rough handling and transportation
as well as electric interference or internal thermal conditions. In certain
situations, the signals emitted by other electronic equipment may interfere with
and distort the proper functioning of computers. In addition, as increasingly
more computing power is inserted into small spaces and containers, the heat
generated by the computer itself may cause the processor to malfunction or fail.
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A significant market for ruggedized computers is the public safety
market. New computer and ruggedization technologies have enabled public safety
organizations to advance into mobile computing as a way to increase
effectiveness and efficiency of the officers on the street. It is estimated that
there are approximately 330,000 public safety vehicles in approximately 17,000
local police, sheriff and special police agencies.
The growth in the public safety market for rugged mobile computers is
driven by several factors. There has been an increase in federal funding made
available to local public safety agencies through the COPS MORE and other
programs which are designed to increase the number of police on the street.
There is also an effort to integrate dispatch, field data and communications
systems. Also, there are currently more rugged mobile computer options,
including the PCMobile, available to public safety organizations. As public
safety officers become more familiar and comfortable with the use and benefits
of new technology, the market will continue to grow.
COMPUTER SECURITY. All electronic equipment, including computers,
monitors, keyboards, printers and related peripherals produce electromagnetic
emanations through the air or through conductors. As early as the 1950s,
government and industry observers began to become concerned about the
possibility that electronic eavesdroppers could intercept emanations, decipher
them, obtain information about the signals used inside the emanating electronic
equipment, and use this information to reconstruct the data being processed by
the equipment. They speculated that eavesdroppers could breach security even
some distance from the equipment.
Studies of signal interception and decoding have borne out these
speculations. With virtually no risk of detection, eavesdroppers using
relatively unsophisticated equipment can intercept and decipher signals from an
electronic source. Modern listening devices allow an eavesdropper to detect
emissions and reproduce data streams or video screen images - for example, to
read the computer display screens on the desktops in a remote building. It is
estimated that the components needed to perform such a penetration would cost as
little as $300, would be available at a local electronics store, and would leave
no evidence of penetration during or after the intrusion.
In the late 1950s, the U.S. government established a program called
TEMPEST aimed at attacking the emanations problem. TEMPEST has become an
umbrella name for the technology that contains or suppresses signal emanations.
An unclassified government publication describes TEMPEST emanations as
"unintentional, intelligence-bearing signals which might disclose sensitive
information transmitted, received, handled, or otherwise processed by an
information processing system."
Accordingly, users of computer equipment and peripherals that are
processing top secret or classified information use equipment specifically
designed to suppress or contain the electromagnetic emanations of potentially
compromising information. Customers for TEMPEST computers are typically United
States and foreign military and government agencies.
The Company, through its XL Computing subsidiary, manufactures a full
line of TEMPEST and EMI ("electromagnetic interference) computers, both
stationary and portable, and related products that protect against the
interception of electromagnetic emanations.
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WIRELESS SECURITY. Cellular telephone service is a form of
telecommunications designed to provide high quality wireless telephone service
to a large number of simultaneous users from hand held, vehicle mounted or fixed
radio telephones. Beginning in the early 1990s, public awareness of the ease of
unauthorized cellular telephone monitoring increased. The Company, through its
Cycomm subsidiary, began to develop its cellular security products in 1992 in
response to government and commercial cellular security concerns.
Between 1992 and 1996, Cycomm introduced a series of cellular security
products incorporating security measures that provide industry leading voice
quality and protection against unwanted eavesdropping on cellular calls. These
products are a critical protection to business, governmental and professional
groups which need to protect industrial secrets and clients' confidential
information. Cycomm's sophisticated voice security technology scrambles or
encrypts cellular and landline calls so that an eavesdropper hears only garbled
speech or "white noise".
In 1996, Cycomm completed the development of the Slice CSD product,
which provides full encryption over analog cellular systems and is compatible
with the Lucent Telephone Security Device product line. The U.S.
Government purchased a number of Slice CSDs during 1997.
In 1997, the Company determined that the commercial market for cellular
security had not developed to a degree that demand for the Company's products
would support the continuing engineering required to advance the product line.
In addition, continued U.S. Government restrictions on the export of encryption
technology severely limited the global market potential for these products.
During 1997, Cycomm discontinued development and further production of cellular
security products and is instead concentrating on licensing the patented Slice
design. While two license agreements have been executed, royalty payments during
1998 are expected to remain immaterial as the related products are now only in
the initial phases of market introduction. At this point, the Company's
projected profitability is not dependent on the receipt of substantial royalty
income from any licensing agreements.
THE COMPANY'S PRODUCT LINES AND SERVICES
The Company manufactures and sells a complete line of secure and rugged
computers and peripherals from a ruggedized laptop computer to an "office in a
suitcase" for the mobile field office market. Transmission options include both
wired and a variety of wireless modes including satellite links and cellular
packet data ("CDPD"). Security options range from encryption to a "TEMPEST"
configuration.
PCMOBILE. The PCMobile is a "ruggedized" mobile computer specifically
developed for optimal mobility, flexibility and performance under severe
operating conditions. It is ideal for public safety and field service. 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. The
screens are either transflective monochrome or color and can be seen in direct
sunlight. Rubber gaskets are fitted around door
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openings and between case mating parts. All external connectors have been
rain-tested. The PCMobile also stands up to vibration and meets the standards
for protection from electrostatic discharge. The 586 model of the PCMobile was
delivered in mid-1997 and the Pentium model of the PCMobile is expected to be
delivered in mid-1998.
TEMPEST PENTIUM COMPUTER. The TEMPEST Pentium Computers, model
205MX,and 210MX are 133MHz and 166MHz products based on the Intel Pentium TM
microprocessor with the industry standard ISA/PCI bus packaged in the exclusive
XL Computing TEMPEST cabinet. Both products include a 3.5" 1.44MB floppy drive
and can be configured as a desktop, or rack mount unit. It can accommodate up to
4 storage devices including floppy drives, removable IDE and SCSI hard drives,
cartridge drives and tape backup systems. High speed 32 bit I/o is provided by 3
PCI slots.
TEMPEST PENTIUM LAPTOP COMPUTER. The new XL 425LT uses an Intel Pentium
TM 200MHz MMX microprocessor with an optional upgrade to a 233MHz processor with
memory upgrades up to 128MB. The display is identical to the 405LT. Removable
disk drives available range from 2.1 to 4.0 GB with larger models on the way. In
the tradition of XL Computing's strategy to listen to our customers and design
and build to their needs, the 425LT has two serial ports and supports both the
1.44MB floppy and the 20X CDROM drive simultaneously. Housed in an aluminum
alloy chassis, this laptop is significantly more rugged than standard commercial
units and can be classified as a COTS ("commercial off-the-shelf") Rugged
product.
TEMPEST LAPTOP COMPUTER. The TEMPEST Pentium Laptop computer, Model
405LT is powered by a 166MHz Intel Pentium TM microprocessor. This laptop has a
12.1" display with 2MB VRAM and 800 x 600 resolution while offering 1280 x 1024
resolution for external monitors. This laptop uses a modular design so a number
of options can be selected to allow for the addition of such options as a CD-ROM
or a second Lithium Ion battery. One of the new features of this model is its
ability to allow user installation of a FORTEZZA card while maintaining TEMPEST
integrity, while also allowing a second communications device. The 405LT meets
the most stringent TEMPEST requirement while operating with AC power, automobile
power, or from the internal battery. Housed in an aluminum alloy chassis, this
laptop is significantly more rugged than standard commercial units and can be
classified as a COTS Rugged product.
TEMPEST/INKJET PRINTER. The 3416T is the XL TEMPEST version of the
popular HP 340 Inkjet printer. The products supports both monochrome and color
versions. The color capability of this product is 3 pages per minute at 300dpi.
Housed in an aluminum chassis, this printer is significantly more rugged than
standard commercial units and can be classified as a COTS Rugged product.
TEMPEST COLOR GRAPHIC PORTABLE SCANNER. The 9414T is a high resolution
TEMPEST portable scanner suitable for notebook travel use. It is based on the
UMAX Page Office Color Scanner and connects via the Centronics Parallel
Interface. With it's integrated PageManager bundled software, you can copy, fax,
E-mail and file text and graphics documents with the click of a button. In
addition, complete image editing software allows you to edit 24 bit full color
photos at 300 dpi.
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EMI PENTIUM PERSONAL COMPUTER. The XL 205E delivers the power of a
Pentium CPU with the Industry Standard ISA/PCI bus packaged in CL Computing's
new EMI tested cabinet. It incorporates a 3.5" 1.44MB floppy drive and can be
configured as a desktop, or rack mount unit. It can accommodate up to 4 storage
devices including floppy drives, removable IDE and SCSI hard drives, cartridge
drives and tape backup systems. High speed 32 bit I/O is provided by 3 PCI
slots.
EMI PENTIUM LAPTOP COMPUTER. The XL 405E delivers the power of Intel
Pentium TM 166MHz MMX microprocessor power combined with a modular design to
allow a wide range of option selection including large hard drives, CD-ROMs and
additional Lithium Ion batteries The design accommodates the user installation
of the FORTEZZA card while still allowing a second communications device. The
405E meets the most stringent EMI requirements while operating with AC power,
vehicle power, or from the internal battery. Housed in an aluminum alloy
chassis, the 405E printer is significantly more rugged than standard commercial
units and can be classified as a COTS Rugged product.
XL COMPUTING CUSTOMER SERVICE GROUP. XL Computing offers a full range of
security services including our worldwide Customer Service Group. This group has
been providing superior on-site and return-to-factory product support in excess
of twenty (20) years. XL Computing requires that all XL Field Technicians and
Engineers complete "A+ Certification". With A+ Certification as a basis, these
field service personnel are then factory trained to repair all XL Computing
products. XL Computing is an experienced organization in dealing with security
issues in equipment maintenance. As such, all field service personnel are also
trained in the specific requirements of maintenance operations in secure
environments to ensure that the security of the equipment is not compromised. XL
Computing provides 24 hour toll free technical support to ensure our customers'
problems are resolved in a timely manner.
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.
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.
CELLULAR SECURITY DEVICE ("SLICE CSD"). The Slice CSD incorporates
voice encryption security for use with the Motorola MicroTAC line of cellular
phones. The Slice CSD uses Lucent Surity(TM) encryption technology, licensed
from Lucent in 1995, and is compatible with Lucent's Telephone Security Device
3600 family of products ("TSD"). Encryption technology provides a higher level
of communications security when compared to more common analog
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scrambling technologies. Encryption level security is required by most
government and law enforcement users.
The Company determined in 1997 that the market demand for the Slice CSD
product line was inadequate to support further development. Engineering and
production have been terminated. As of early 1998, the remaining inventory of
new Slice CSD units were completely sold out. Warranty and repair continue to be
supported.
MANUFACTURING AND SUPPLY
The Company designs and engineers substantially all of its rugged and
secure computers, purchases components from third parties or Original Equipment
Manufacturers ("OEM") and tests and assembles the final products. As part of
this process, the Company specifically designs for its computers (with the
exception of the Company's secure computer, for which the Company uses
commercial products from other manufacturers), the electronics or printed
circuit board, which is the most important, sophisticated and complex element
thereof. At times, the board can be composed of as many as twelve layers. The
Company uses surface mount technology ("SMT") to attach components to the
computer boards which enhances durability and ruggedness over the older mounting
technology. In SMT, the components are glued to the board by means of a chemical
adhesion process and are then soldered instead of being inserted into holes in
the board and soldered. SMT is a more precise manufacturing technique and offers
better insulation against vibration and shock. The Company fabricates the
prototype of the board, tests it, purchases all the necessary components for the
board and then provides them in kit form to a specialized board fabricator for
both pilot and production runs.
This approach to outsourcing differs from that followed by most other
rugged computer manufacturers which, the Company believes, operate on a turn-key
basis with their board fabricators, who handle the design, testing and purchase
of all components themselves and then furnish the manufacturer with the
completed boards. In contrast, the Company's approach to board fabrication
allows it to maintain better control of the quality and delivery of the boards.
In addition, the Company's personnel serve as on-site inspectors at the plants
of the board fabricator. The fabricator employed by the Company applies surface
mount technology in the fabrication of its printed circuit boards.
The Company anticipates that it will continue to outsource board
fabrication. Given the rapid changes in computer technology, the Company is not
capable of keeping abreast of the costly purchase requirements for new
production equipment necessary in the precise placement of electronic components
on boards. Outsourcing allows the Company's products to receive the benefit of
the latest technological development at an acceptable cost. Once the boards are
completed, they are tested by the fabricator and, upon satisfactory completion
of such tests, are shipped to the Company. When delivered, the Company further
tests the complete boards and other components and then assembles the computers.
Apart from the printed circuit boards, the components that the Company purchases
from external sources include chassis, wire harnesses, computer chips,
keyboards, displays and metal cases.
The Company does not assemble its products on a continuous
mass-production basis. Instead, its computers are usually assembled on a batch
basis in which products move irregularly from station to station. Because the
Company's production runs rarely reach the volume levels
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of commercial production, there are no or few economies of scale and related
cost reductions that are achievable. Tests are performed at various stages of
the process according to the Company's standards or as requested by specific
customers. Further testing of products is generally accomplished at the end of
the assembly process. The Company's manufacture of computers is done pursuant to
specific purchase orders or for general inventory purposes.
The Company utilizes modern equipment for the design, engineering,
assembly and testing of its products. The Company has utilized a portion of the
funds from various financings to acquire additional equipment to enhance its
operating efficiency in such areas and to increase its capacity in order to
facilitate increased production, when and if required, as well as to obtain
better control of quality, inventory and order processing.
Generally, the Company is not a party to any formal written contract
regarding the deliveries of its hardware, supplies and components or their
fabrication. It usually purchases such items pursuant to written purchase orders
of both individual and blanket variety. Blanket purchase orders usually entail
the purchase of a larger amount of items at fixed prices for delivery and
payment on specific dates.
The Company relies on one board fabricator located within the same
geographical area as its design, engineering and assembly facilities. Certain
components used in its computers are obtained from sole sources, such as LG
Technologies and Northern Die Cast. The Company has also licensed its software
from sole sources, including Microsoft and Phoenix Technology. The Company has
occasionally experienced delays in deliveries of components and may experience
similar problems in the future. In an attempt to minimize such problems, the
Company has developed and keeps an inventory of parts that are generally more
difficult to obtain. However, any interruption, suspension or termination of
component deliveries from the Company's suppliers could have a material adverse
effect on it business. Although management believes that in nearly every case
alternate sources of supply can located, inevitably a certain amount of time
would be required to find substitutes. During any such interruption in supplies,
the Company may have to curtail the production and sale of its computers for an
indefinite period.
The Company's design, engineering and assembly facilities are located
in Brossard, Quebec, Canada for the rugged PCMobile laptops and Sebastian,
Florida for the secure computer products. The Sebastian, Florida facility
complies with certain classified contracts specifications necessary for the
manufacture and assembly of products supplied and meets the quality management
and assurance standards of an international rating organization (ISO-9001). Some
measures, such as the installation of a new business computer system, have been
taken by the Company to improve such standards. During 1997, the Company has
expended significant effort in implementing new structures, procedures and
disciplines that contribute towards the goal of achieving more efficient
manufacturing operations.
The Company has entered into licensing arrangements for certain
hardware and software elements contained in, or used in conjunction with, its
computers. These agreements are usually non-exclusive, provide for minimum fees
and royalties related to sales to be paid by the Company to the particular
licenser, run for a limited term and are subject to other terms, conditions and
restrictions.
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The Company receives its basic operating software system MS-DOS with
various Windows versions from Microsoft, Inc. pursuant to such licensing
arrangements. It also obtains from Phoenix Technologies, Inc. its BIOS (Basic
Input/Output System) pursuant to a separate license agreement. Under either
arrangement, the Company may modify such software and occasionally alter the
BIOS for special situations. The termination, suspension or curtailment of these
or other licensing arrangements to which the Company is a party may have a
material adverse impact on its business and operations.
Although the Company relies on a limited number of companies in the
manufacture of its products, it believes that the specific parts employed in the
manufacturing process are available from a variety of suppliers. Further, the
Company believes that additional manufacturing sources could be found if
necessary. The Company believes its relationship with its suppliers is
satisfactory.
MARKETING AND SALES
The Company markets and sells its secure computer products through an
internal sales force of two individuals, approximately five resellers in the
United States and approximately ten resellers abroad. The Company markets and
sells its rugged products through an internal sales force of nine individuals,
approximately thirty resellers in the United States and approximately four
resellers abroad. Its resellers cover approximately all fifty states, including
Washington, DC, and its foreign distributors operate in ten countries, including
England, France, Japan, Germany, South Korea and Portugal.
The Company's relationship with its resellers is generally governed by
a written contract, terminable on 30 days' prior notice. These contracts usually
provide for non-exclusive territorial and product representation and discounts
of between 20% to 30% of the list price on standard products based on the
individual resellers annual sales volume. Discounts on non-standard products and
custom engineering are usually subject to negotiation between the parties in
accordance with the terms of the contract and are priced on a case-by-case basis
dependent upon the level of effort in design, test, manufacture, warranty and
support. However, they tend to range from 25% to 35% in practice. The Company's
reseller contracts are subject to certain other terms and conditions.
The Company's resellers typically purchase the Company's products and
then resell them to their customers. These resellers accounted for an aggregate
of approximately 90% of the Company's secure computer and rugged computer sales.
The Company has reseller agreements with Ericcson, GE Capital, PRC, Unisys, NTT,
GTE and Matra for its rugged computers. The Company has reseller agreements with
Dulles Networking, Office Solutions, EDS Ltd., Bedriftssystemer, Boeing and GTE
for its secure computers. The loss of certain of such resellers may have a
material negative effect on the Company's business.
Sales of the Company's products or services to foreign resellers are
also generally made pursuant to written contracts. Under such contracts, the
distributor is granted either an exclusive or non-exclusive territorial and
product representation as well as discounts based on the list price ranging from
20% to 30%, depending on the type or annual amount of products sold. In some
cases, there are minimum order requirements. Due to the custom nature of the
Company's products and specifically U.S. Governmental International Traffic in
Arms Regulation (ITAR)
<PAGE> 13
controls for secure computing products, its foreign resellers generally do not
keep its computer in their inventory until specific orders are obtained. The
term of these agreements generally run from 1 to 3 years but are terminable on
60 days advance notice. Payment is due in U.S. dollars within 30 days after
delivery. These contracts are subject to other terms and conditions. No one
international distributor accounted for a material portion of the Company's
total sales in any period referred to above.
The Company promotes its rugged and secure computer products through
the dissemination of product literature, attendance and exhibition at trade
shows and the distribution of news releases on special developments to trade
magazines and newsletters to an extensive customer list. The Company does some
advertising in trade periodicals. Management believes that, to date, most of the
Company's sales leads have been generated by trade shows, its web sites and
word-of-mouth referrals. The Company intends to expand its sales and marketing
efforts in all of its markets as follows: (i) increase its presence at trade
shows with larger booths and more extensive exhibits; (ii) increase the number
of trade shows in which Company personnel attend and products are presented;
(iii) hire additional sales personnel and consultants to gather leads and
promote sales; (iv) expand sales and marketing activities in the utility and
commercial markets; and (v) invest in research and development in order to
increase its product offering.
In the public safety and government market, the sales cycle for the
Company's products usually entails a number of complicated steps and can take
from three months to one year. Sales to the public safety and government markets
are greatly influenced by special budgetary and spending factors pertinent to
these organizations.
WARRANTY AND CUSTOMER SERVICE
The Company usually provides one-year warranties on all its products
covering both parts and labor, however extended warranties may be purchased by
customers. Additionally, the Company offers a lifetime warranty on the cases of
the PCMobile. At its option, the Company repairs or replaces products that are
defective during the warranty period if the proper usage and preventive
maintenance procedures have been followed by its customers. Repairs that are
necessitated by misuse of such products or are required beyond the warranty
period are not covered by its normal warranty.
In cases of defective products, the customer typically returns them to
the Company's facility. Service personnel replace or repair the defective items
and ship them back to the customer. Generally, all servicing is done at the
Company's plant and customers are charged a fee for those service items that are
not covered by warranty. In addition to its extended warranties, the Company
offers its customers maintenance and service contracts on both its PCMobile and
TEMPEST products.
The Company's customer service personnel answer technical questions
from customers and offer solutions to their specific applications problems. In
certain instances, other personnel receive and process orders for product
demonstrations, disseminate pricing information and accept purchase orders for
computers.
<PAGE> 14
BACKLOG
On December 31, 1997, the Company had a backlog of contracts and
purchase orders of approximately $7.6 million in its computer equipment segment
as compared to $3.3 million at December 31, 1996. This backlog consists of
contracts and purchase orders for computer equipment and peripherals to be
manufactured and delivered usually during the upcoming 12 months. The contracts
and purchase orders define the price and specifications of the equipment to be
delivered. However, due to the nature of the business, the backlog at any
particular date may not be indicative of the Company's revenues or other
operating results for any subsequent fiscal period. The Company cannot,
therefore, assure that the backlog will be realized as revenue. Subsequent to
December 31, 1997, the Company received contracts and purchase orders of
approximately $5.3 million for computer equipment which is not included in the
above backlog amount.
On December 31, 1997, the Company had a backlog of purchase orders and
contracts of approximately $1.0 million in its communications security products
segment as compared to $635,000 at December 31, 1996. This segment also includes
backlog as a prime or subcontractor on several government contracts.
RELIANCE UPON CERTAIN CUSTOMERS
The Company is not dependent upon any single customer that purchases its
products. However, sales to two major customers comprise 9% and 9% respectively,
of sales for the year ended December 31, 1997. Sales to two major customers
comprise 30% and 25% respectively, of sales for the seven months ended December
31, 1996. Sales to three major customers comprise 25%, 20% and 9% respectively,
of sales for the year ended May 31, 1996.
RESEARCH AND DEVELOPMENT
The markets served by the Company are characterized by rapid
technological advances, changes in customer requirements and frequent new
product introductions and enhancements. The Company's business requires
substantial ongoing research and development efforts and expenditures. Its
future success will depend in large measure on its ability to enhance its
current products, and develop and introduce new products that keep pace with
technological developments in response to evolving customer requirements. The
Company's research and development activities are primarily accomplished on an
in-house basis, sometimes supplemented by third-party subcontractors and
consultants.
During fiscal year 1997, the Company continued to make relatively large
research and development investments on the PCMobile product line. These
significant changes mainly focused on redesigns to implementing faster
processors such as 586 and Pentium chips, new functionality and new screens. The
Company also invested in the development of a new secure laptop computer
product.
<PAGE> 15
During the year ended December 31, 1997, seven months ended December 31,
1996 and the fiscal year ended May 31, 1996, the Company spent $1,307,720,
$841,103 and $749,041, respectively, on research and product development,
primarily for development of new products and products complementary to the
existing line of secure and rugged computer products. The Company anticipates
additional research and development expenditures on future development of
products.
INTELLECTUAL PROPERTY AND PATENTS
Proprietary information and technical know-how are important to the
Company's success. The Company holds various patents, as detailed below, and has
certain trademark protections for its products. The Company currently has patent
protection for certain of its principal proprietary technologies. There can be
no assurance that any patents issued are or will be valid, or that others will
not develop functionally equivalent or superior technology that does not
infringe the Company's patents. There can also be no assurance that the
Company'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 January 20, 1998, Cycomm received, as assignee, U.S. Patent No.
5,711,013 entitled "Conforment Compact Portable Cellular Phone Case System and
Connector." This patent covers Cycomm's Slice packaging and functionality, as it
applies to a number of potential applications for the Motorola MicroTAC line of
cellular phones. Cycomm's Slice products, the Series 300 Slice HPU and Series
500 Slice CSD, now have full patent protection. The Company plans to pursue
licensing opportunities to exploit the Slice technology, and to protect against
any infringement of the Slice patent.
During 1997, the Company let two prior patents, Patent Nos. 4,864,566
and 4,972,479 expire due to a lack of any further technical utility. The
technologies covered in these patents were superseded by advances in
communications hardware and encryption technology.
REGULATORY APPROVALS
Certain of the Company's products are subject to approval by the Federal
Communications Commission ("FCC") in the United States. The FCC requires 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 Company's products have received
FCC approval for both radiation and telephone connection.
<PAGE> 16
In general, the FCC and its approval process is objective. Product
designs are required to meet these objective criteria and specifications. In the
event that a Company privacy product failed a test, the introduction of the
product would be delayed.
Under certain circumstances, the Company is also subject to certain
U.S. State Department and U.S. Department of Commerce requirements involving
prior clearance of foreign sales. Such export control laws and regulations
either ban the sale of certain equipment to specified countries or require U.S.
manufacturers and others to obtain necessary federal government approvals and
licenses prior to export. As a part of this process, the Company generally
requires its foreign distributors to provide documents that indicate that the
equipment is not being transferred to, or used by, unauthorized parties abroad.
The Company and its agents are also governed by the restrictions of the
Foreign Corrupt Practices Act of 1977, as amended ("FCPA"), which prohibits the
promise or payments of any money, remuneration or other items of value to
foreign government officials, public office holders, political parties and
others with regard to the obtaining or preserving of commercial contracts or
orders. These restrictions may hamper the Company in its marketing efforts
abroad.
To date, the Company has been able to comply with all governmental
requirements without incurring significant costs. However, the Company cannot
determine the extent to which future earnings may be affected by new legislation
or regulations affecting its industry.
COMPETITION
The Company competes in the rugged portable and secure computer
business with a wide variety of computer manufacturers and repackagers, some of
which are larger, better known and have more resources in finance, technology,
manufacturing and marketing. The Company competes based on customization
capabilities, price, performance, delivery and quality. In some situations, the
Company is the highest priced bidder.
Typically, the companies that market and sell ruggedized computers are
repackagers having little or no input in the design of their electronics and the
selection and mounting of components on printed circuit boards. They usually
purchase the computer boards and sub-assemblies in an "as is" condition from
commercial manufacturers. The major contribution of the repackagers to the
protection of the computer is a tougher box in which the computer is housed.
However, in many cases even this stronger covering fails to shield the computer
from the penetration of rain, snow, fog, dust or other particles. In contrast,
the Company uses industrial-type or highly selected commercial components for
most of its computers rather than strictly ordinary commercial ones, as do many
of its competitors. The company also applies SMT to the fabrication of most of
its computer boards. In addition, the Company designs such boards, the
computer's outer case, keyboards, subassemblies and other elements in order to
maximize the ruggedness of its products, to furnish customization of electronics
and software to give the customer greater control over configuration and
components.
With respect to its secure computer business, the Company encounters
competition from Wang Laboratories, Secure Computer Systems, and NAI. As for its
PCMobile rugged laptops, the Company encounters competition from Panasonic and
Badger. Certain large manufacturers of commercial notebook computers such as
Panasonic and IBM have introduced commercial
<PAGE> 17
notebooks that have been sealed and ruggedized to some extent. These companies
are presently offering such products at prices from approximately one-third to
one-half the Company's more rugged versions.
Management believes that the Company's ability to increase market
penetration in the commercial sector will be limited substantially by the entry
of such manufacturers into the ruggedized computer market.
In the public safety and secure computer markets, the Company will
often be engaged, directly or indirectly, in the process of seeking competitive
bid or negotiated contracts with government departments and agencies. These
government contracts are subject to specific rules and regulations with which
the Company must comply. However, the Company is often one of only a few
companies whose products meet the required specifications designated by such
customers.
In most cases, the Company tends to be the higher priced bidder for
public safety bids. The reasons for this situation are numerous. The Company
designs its computers on an overall basis to assure their ruggedness and use in
the most demanding circumstances. Accordingly, it generally employs more
expensive components than its competitors. These generally more expensive
components consist of industrial or higher-level commercial type instead of
ordinary commercially available parts. The Company's computers are enclosed in
sealed containers. Moreover, the Company makes extensive modifications and
refinements of its computers for its customers pursuant to their specifications
and special needs. Consequently, the Company's products generally function at a
higher level of performance and reliability than its competitors.
For those applications in which harsh environmental and operational
conditions prevail, customers are sometimes willing to pay higher prices,
especially where few, if any, other companies offer similar devices. In those
less demanding circumstances, the Company's products sell at a competitive
disadvantage and often are not purchased because the applications do not justify
its higher prices.
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 156 people, of which
approximately 101 are employed in the United States and 55 in Canada.
Approximately 28 employees work in customer sales and service, 24 employees work
in administration, 33 employees work in research and development and 71
employees work in manufacturing.
None of its employees is covered by a collective bargaining agreement
or is represented by a labor union. The Company considers its relationship with
its employees to be satisfactory.
The design and manufacture of the Company's equipment requires
substantial technical capabilities in many disparate disciplines from mechanics
and computer science to electronics
<PAGE> 18
and mathematics. While management believes that the capability and experience of
its technical employees compares favorably with other similar manufacturers,
there can be no assurance that it can retain existing employees or attract and
hire the highly capable technical employees necessary in the future on terms
deemed favorable to the Company, if at all.
ITEM 2. DESCRIPTION OF PROPERTY
As of December 31, 1997, 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 4,000
Sebastian, FL Manufacturing, R&D Excellent 44,000
and Distribution
Montreal, QB Manufacturing, R&D and Excellent 10,300
Distribution
Portland, OR Corporate Office Excellent 1,000
Albuquerque, NM Manufacturing, R&D Excellent 7,500
and Sales
</TABLE>
Management believes that its manufacturing facilities at Sebastian, FL
and Montreal, QB will meet its operational needs for the foreseeable future. In
the event that additional facilities are needed to accommodate the continued
growth in revenues and market share, such facilities are available in the
immediate vicinity of the current locations.
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
The Company did not submit any matters to a vote of security holders
during the fourth quarter of the fiscal year ended December 31, 1997.
<PAGE> 19
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on The American Stock Exchange
("AMEX") under the symbol "CYI". The following tables set forth the reported
high and low sales prices as reported by AMEX for the periods indicated:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
YEAR ENDED MAY 31, 1996
First quarter * $11.25 $ 4.38
Second quarter* 6.75 3.75
Third quarter 5.63 3.19
Fourth quarter 7.25 2.88
SEVEN MONTHS ENDED DECEMBER 31, 1996
First quarter $ 7.31 $ 3.25
Second quarter 5.44 3.13
Month of December 1996 3.69 2.56
YEAR ENDED DECEMBER 31, 1997
First quarter $ 4.00 $ 2.63
Second quarter 3.31 2.00
Third quarter 3.50 2.50
Fourth quarter 2.69 1.25
</TABLE>
* restated to reflect the 1 for 5 Reverse Split of the outstanding
shares of common stock, effective October 19, 1995.
On March 1, 1998, as reported by the Company's transfer agent, shares
of common stock were held by 1,072 persons, based on the number of record
holders, including several holders who are nominees for an undetermined number
of beneficial owners.
The Company has not paid any dividends and has no present intention of
paying dividends on the common stock in the foreseeable future as it intends to
retain any future earnings to fund operations and the continued development of
its business. The declaration and payment of dividends and the amount paid, if
any, is subject to the discretion of the Company's Board of Directors and will
be dependent on the earnings, financial condition, and capital requirements of
the Company and any other factors the Company's Board of Directors may consider
relevant. However, the Company was required to pay an 8% cumulative dividend on
all outstanding Series A Preferred Stock. As of September 30, 1996, all
outstanding shares of Series A Preferred Stock have been converted to common
stock.
<PAGE> 20
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
In December 1996, the Company changed its fiscal year ended May 31 to a
fiscal year ended December 31. The following comparisons are based on the
company's new fiscal year end. The seven month transition period ended December
31, 1996 bridges the gap between the Company's old and new fiscal year ends. A
comparison of this transition period to the similar period in 1995 is presented
beginning on page 20. In addition, a comparison of the years ended May 31, 1996
and 1995 is also presented beginning on page 21.
Financial information relating to the year ended December 31, 1997 has
been derived from the audited financial statements. The results of operations
for periods ended November 30, 1996 and 1995 have been restated from the
previous May 31 year end to produce comparable period to the new fiscal year
basis. These restated periods are unaudited and are presented for informational
purposes only.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED NOVEMBER 30, 1996
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, November 30,
1997 1996
---- ----
<S> <C> <C>
Sales $ 15,678,667 $ 11,816,319
Cost of Sales 11,257,321 8,613,571
------------ ------------
Gross Profit 4,421,346 3,202,748
------------ ------------
Selling, general & administrative 6,653,643 7,611,766
Research & development 1,307,720 1,110,153
Depreciation & amortization 1,050,998 1,279,848
Other 658 871,185
------------ ------------
9,013,019 10,872,952
------------ ------------
Loss from operations (4,591,673) (7,670,204)
Interest expense (946,235) (2,638,080)
Other income, net
115,255 265,994
------------ ------------
(830,979) (2,373,086)
------------ ------------
Net loss $ (5,422,652) $(10,042,290)
============ ============
Net loss per share $ (0.59) $ (1.78)
============ ============
</TABLE>
The revenues for the year ended December 31, 1997 were $15,678,667
which represents an increase of 33% over revenues of $11,816,319 for the prior
period. The increased revenues are partially related to the inclusion of a full
year of the revenues of XL Computing and XL Canada which were acquired in March
1996 and June 1996, respectively. Of these revenues, sales of the PCMobile
rugged laptop computers accounted for $7,978,366 as compared to $602,956 in the
prior period. However, sales of secure computing products decreased to
$5,873,586 as compared to $9,741,887 in the prior period. These recently
acquired subsidiaries
<PAGE> 21
accounted for $13,851,952, or 88% of total revenues. The remaining revenue of
$1,832,631 related to the communications security products segment and reflected
an approximate 25% increase from the prior period.
Cost of sales for the year ended December 31, 1997 were $11,257,332 as
compared to cost of sales of $8,613,571 for the prior period. The increase is
partially related to the acquisitions of XL Computing and XL Canada with the
remaining increase due to increased sales volumes. These subsidiaries, which
form the computer products segment, contributed $10,068,659 to total cost of
sales which resulted in a gross margin of 27% for sales in this segment as
compared to 28% in the prior period. The current period gross margin is lower
than desired as a result of the Company's efforts to establish market share
through pricing and certain inventory adjustments. The gross margin for sales in
the communications security products segment was 36%, as compared to 22% in the
prior period. The increase in gross margin in the communications products
segment is due to the sale of higher margin products in the current period.
Operating expenses decreased to $9,013,018 for the year ended December
31, 1997 as compared to $10,872,952 for the prior period. The decrease is mainly
due to certain non-recurring charges in the prior period. Selling, general and
administrative ("SG&A") expenses decreased to $6,656,270 for the period ended
December 31, 1997 as compared to $7,611,766 from the prior period. This decrease
is due in part to management's cost reduction efforts offset by increased
personnel, facilities and operating costs. Research and development costs
increased 18% to $1,307,720 for the period ended December 31, 1997. This
increase reflects the Company's expenditures on the enhancements of the TEMPEST
line of computers and the development of the PCMobile computer. Depreciation and
amortization decreased 18% to $1,050,998 for the year ended December 31, 1997
and reflects the increased depreciation and amortization of capital assets and
goodwill related to the acquisitions offset by accelerated goodwill amortization
in the prior period.
Interest expense for the year ended December 31, 1997 was $946,235 as
compared to $2,638,080 for the prior period. This decrease is due to reduced
non-cash interest expense offset by increased debt financing obtained by the
Company in the form of convertible debentures, acquisition debt and credit
lines. Included in interest expense are charges of $478,720 and $2,256,347 for
the years ended December 31, 1997 and November 30, 1996, respectively. These are
non-recurring, non-cash charges related to convertible debt financing that give
effect to beneficial conversion features.
The net loss of $5,422,652, or ($0.59) per share, for the year ended
December 31, 1997 represents a decrease from $10,042,290, or ($1.78) per share
for the year ended November 30, 1996. The decrease is net loss in largely due to
the losses generated in the prior periods by the acquired subsidiaries and the
non-recurring write-downs of inventories and the non-recurring interest charges.
The loss per share is computed on weighted average number of shares outstanding
of 5,632,800 at November 30, 1996 and 9,108,335 December 31, 1997.
<PAGE> 22
SEVEN MONTHS ENDED DECEMBER 31, 1996 COMPARED TO SIX MONTHS ENDED NOVEMBER 30,
1995
The Company has changed its fiscal year end from May 31 to December 31
effective December 31, 1996. Accordingly, the results of operations reported for
the transition period of the seven months ended December 31, 1996 are compared
to the most applicable period from the previous fiscal year which is the six
months ended November 30, 1995.
<TABLE>
<CAPTION>
Seven Months Six Months
ended ended
December 31, November 30,
1996 1995
---- ----
<S> <C> <C>
Sales $ 8,588,845 $ 852,428
Cost of Sales 6,763,463 448,298
----------- -----------
Gross Profit 1,825,382 404,130
----------- -----------
Selling, general & administrative 4,462,434 1,942,806
Research & development 841,103 289,059
Depreciation & amortization 535,162 276,567
Other 1,033,653 368,591
----------- -----------
6,872,352 2,877,023
----------- -----------
Loss from operations (5,046,970) (2,472,893)
Interest expense (1,499,781) (524,195)
Other income, net 55,148 12,934
----------- -----------
(1,444,633) (511,261)
----------- -----------
Net loss $(6,491,603) $(2,984,154)
=========== ===========
Net loss per share $ (0.92) $ (0.83)
=========== ===========
</TABLE>
The revenues for the seven months ended December 31, 1996 were
$8,588,845 which represents an increase of 907% over revenues of $852,428 for
the prior period. The increased revenues are related to the inclusion of the
revenues of XL Computing and XL Canada from March 1996 and June 1996,
respectively. These newly acquired subsidiaries accounted for $7,705,374, or 90%
of total revenues. The remaining revenue of $883,471 related to the
communications security products segment and reflected an approximate 4%
increase from the prior period.
Cost of sales for the seven months ended December 31, 1996 were
$6,763,463 as compared to cost of sales of $448,298 for the prior period. The
increase is related to the acquisitions of XL Computing and XL Canada. These
subsidiaries, which form the computer products segment, contributed $6,240,046
to total cost of sales which resulted in a gross margin of 19% for sales in this
segment. The current period gross margin is low as a result of non-recurring
write-offs of certain deferred project costs and certain inventory adjustments.
The gross margin for sales in the communications security products segment was
41%, as compared to 47% in the prior period. The decrease in gross margin in the
communications products segment is due to the sale of written down products in
the prior period.
<PAGE> 23
In connection with the Company's goal of achieving profitable
operations, the Company elected to incur certain expenses and one time charges
in the period ended December 31, 1996. Operating expenses increased to
$5,046,970 for the seven months ended December 31, 1996 as compared to
$2,472,893 for the prior period. The increase is mainly due to the acquisition
of XL Computing and XL Canada. Selling, general and administrative ("SG&A")
expenses increased to $4,462,434 for the period ended December 31, 1996 as
compared to $1,942,806 from the prior period. This increase is due to the
acquisitions and represents increased personnel, facilities and operating costs.
Research and development costs increased 191% to $841,103 for the period ended
December 31, 1996. This increase reflects the Company's expenditures developing
the CSD cellular security device, the enhancements on the TEMPEST line of
computers and the development of the PCMobile computer. Depreciation and
amortization increased 94% to $535,162 for the seven months ended and reflects
the increased depreciation and amortization of capital assets and goodwill
related to the acquisitions. During the seven months ended December 31, 1996,
the Company recorded a write-down of inventories in the communications security
segment totaling $476,099. The write-downs covered certain raw materials and
finished goods related to analog scrambling products no longer produced.
Additionally, the Company recorded a write-down of $544,648 related to the sale
of its investment in Galactica. This write-down reflects the full reserve of a
contingent promissory note received as consideration in the sale of Galactica.
However, it is possible the Company will receive payment on all or a portion of
the contingent promissory note in the future and is expected to account for this
as other income at the time of receipt.
Interest expense for the seven months ended December 31, 1996 was
$1,499,781 as compared to $524,195 for the prior period. This increase is due to
increased debt financing obtained by the Company in the form of convertible
debentures, acquisition debt and credit lines. Included in interest expense are
charges of $1,235,125 and $466,666 for the seven months ended December 31, 1996
and the six months ended November 30, 1995, respectively. These are
non-recurring, non-cash charges related to convertible debt financing that give
effect to beneficial conversion features.
The net loss of $6,491,603, or ($0.92) per share, for the seven months
ended December 31, 1996 represents an increase from $2,984,154, or ($0.83) per
share for the six months ended November 30, 1995. The increase in net loss is
largely due to the losses generated by the acquired subsidiaries and the
non-recurring write-downs of inventories and the investment in Galactica and the
non-recurring interest charges. The loss per share has remained relatively
steady as the weighted average number of shares outstanding has increased from
3,613,192 at November 30, 1995 to 7,040,356 December 31, 1996.
YEAR ENDED MAY 31, 1996 COMPARED TO MAY 31, 1995
Sales increased to $4,985,036 from $1,283,081 during the same period
for the prior year. The increase is attributable to the aggressive
commercialization of Cycomm's privacy product line and revenue generated by XL
Computing which was acquired as of March 15, 1996. XL Computing's revenue during
the period was $3,396,294. For the year ended May 31, 1996, the Company
experienced a loss of $9,444,651, an increase of $4,814,205 from the loss of
$4,630,446 experienced for the year ended May 31, 1995.
<PAGE> 24
For the year ended May 31, 1996, cost of sales was $3,634,254, an
increase from $855,414 for fiscal year 1995. Administrative and operating
expenses increased to $8,943,261, an increase of $3,870,347 from the fiscal 1995
total of $5,072,914. The increase in cost of sales is due to the inclusion in
cost of sales of $2,774,646 attributable to XL Computing. The increase in
administrative and operating expenses is due in part to the inclusion of XL
Computing expenses of $808,442. Severance cost made up the balance of the
difference. Depreciation and amortization increased by $853,311 largely due to
the accelerated write-off of $501,523 of goodwill in the Communications Security
Product segment related to the Datotek acquisition. Inventory write-downs
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 approximately $1,000,000.
Most of the increase is due to XL Computing costs for the period. The remaining
increase is attributable to administrative services.
Research and product development costs increased by $246,536 due to
development and preproduction costs associated with Slice CSD technology and
upgrading existing product lines.
Interest expense for the year ended May 31, 1996 was $1,895,236 as
compared to $41,767 for the prior period. Included in interest expense for the
year ended May 31, 1996 is a non-recurring, non-cash charge of $1,660,046
related to convertible debt financings that give effect to beneficial conversion
features.
Notes payable and convertible debentures increased by $3,273,892. This
debt was incurred to fund working capital obligations. In addition, $1,500,000
of preferred stock was issued to help fund the acquisition of XL Computing.
LIQUIDITY AND CAPITAL RESOURCES
The Company has satisfied working capital requirements through cash on
hand, available lines of credit and various debt and equity related financings.
At December 31, 1997, the Company had cash and cash equivalents of $617,636.
In the year ended December 31, 1997, cash used in operations amounted
to $4,947,861. Cash used in investing activities was $194,387 during the year
ended December 31, 1997 with the major activity being the sale of the Company's
investment in Galactica which generated cash of $513,000 offset by capital
expenditures and an increase in notes receivable. Cash provided by financing
activities was $4,539,340. The issuance of convertible debentures resulted in
net proceeds of $2.7 million. Additionally, the Company obtained equity
financing of $180,000 in the form of a private placement. The Company obtained a
new secured credit facility in an aggregate amount of $4.0 million in December
1997 which included a credit line of $3,432,000 secured by accounts receivable
and inventory and a term loan of $568,000 secured by machinery and equipment.
The Company utilized the proceeds of the new credit facility to repay existing
bank lines in an amount of $2.1 million and for working capital. At December 31,
1997, an amount of $3.2 million was outstanding under the new credit facility.
Various notes payable of $329,401 related to acquisitions were repaid during the
year ended December 31, 1997.
<PAGE> 25
The Company's net working capital decreased to $3,000,652 at December
31, 1997, from $4,451,698 at December 31, 1996, as short-term debt was incurred
to fund working capital for the growth of the manufacturing operations.
Significant items affecting cash and cash equivalents subsequent to
December 31, 1997, include the issuance of $1.0 million in convertible preferred
stock. The proceeds will provide working capital for operations during the 1998
fiscal year.
The Company has restructured the operations of secure communications
products so that this business segment will not require material 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, secured
lines of credit and funding from the parent company. However, until the Company
can operate the computer products divisions profitability and manage the working
capital requirements of significant growth, it may require additional funding.
The Company believes that it has the capital resources to raise funds through
additional debt and equity financings, to develop and market its products and to
make acquisitions. In this regard, the Company believes that it will be able to
meet its obligations during the remainder of the present fiscal year. There can,
however, be no assurance that the above will be successfully accomplished, or
will be possible on terms acceptable to the Company.
IMPACT OF YEAR 2000
Management is beginning to study the implications of the Year 2000 on
its information systems. However, based on the business risk associated with the
Company's information systems, management does not anticipate that the Year 2000
will have a significant impact on its information systems or result in a
significant commitment of resources to resolve potential problems associated
with this event.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company are set forth in a separate
section of this Annual Report on Form 10-KSB. See Item 13. Exhibits and Reports
on Form 8-K and the Financial Statements commencing on page F-1 of this Annual
Report on Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE> 26
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 1997 Annual Meeting of Shareholders
to be filed with the Securities and Exchange Commission (the "Commission") no
later than April 30, 1998, and is incorporated by reference herein.
SECTION 16 REPORTS
The information required by this Item is present under the caption
"Other Matters -- Compliance with Section 16(a) of the Exchange Act" of the
Company's definitive Proxy Statement to be filed with the Commission no later
than April 30, 1998, and is 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 April 30, 1998, and is incorporated by
reference herein.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 11 is present under the caption
"Security Ownership of Certain Beneficial Owners and Management" of the
Company's definitive Proxy Statement to be filed with the Commission no later
than April 30, 1998, and is incorporated by reference herein.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 12 is presented under the caption
"Certain Transactions" of the Company's definitive Proxy Statement to be filed
with the Commission no later than April 30, 1998, and is incorporated by
reference herein.
<PAGE> 27
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(1) See the financial statements of the Company and the report thereon
included in Item 7 of Part II of this Annual Report on Form 10-KSB.
(2) 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> <C> <C>
1.1 Certificate of Incorporation (1)
1.2 Certificate of Incorporation on Change of Name (1)
1.3 Certificate of Continuance (1)
1.4 Amended Articles of Incorporation ___
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 (5)
10.4 Management Services Agreement - Gordon Collett (1)
10.5 Stock Purchase Agreement by and among the Company (3)
and XL Vision Inc. and XL Computing Corporation
dated March 21, 1996
10.6 Asset Purchase Agreement among and between (4)
9036-8028 Quebec, Inc., Cycomm International Inc.
and M3i Technologies, Inc. and M3i Systems Inc.
date June 21, 1996
10.7 Management Services Agreement - Albert I. Hawk (5)
10.8 Employment Agreement - Michael R. Skoff (6)
10.9 Management Services Agreement - Rick E. Mandrell ___
10.10 Management Services Agreement - G.T. Gangemi ___
10.11 Commercial Revolving Loan, Additional Loan and
Security Agreement by and among the Company
and American Commercial Finance Corp. ___
10.12 Cycomm International Inc. 1997 Stock Option Plan ___
10.13 Stock Purchase Agreement and Certificate of
Designation of Series B Convertible Redeemable
</TABLE>
<PAGE> 28
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Preferred Stock ___
21.1 Subsidiaries of the Registrant ___
27 Financial Data Schedule ___
</TABLE>
(1) Previously filed as an Exhibit to Form 20-F Registration Statement (as
amended), Form 20-F Annual Reports and Form 6-K Reports of Foreign
Issuer and incorporated by reference herein.
(2) Previously filed as an Exhibit to Form F-1 Registration Statement filed
on May 9, 1995 and incorporated by reference herein.
(3) Previously filed as an Exhibit to Form 8-K dated March 21, 1996 and
incorporated by reference herein.
(4) Previously filed as an Exhibit to Form 8-K dated June 21, 1996 and
incorporated by reference herein.
(5) Previously filed as an Exhibit to Form 10-KSB for the year ended May
31, 1996 dated September 12, 1996 and incorporated by reference herein.
(6) Previously files as an Exhibit to form 10-KSB for the seven months
ended December 31, 1996 dated April 11, 1997 and incorporated by
reference herein.
(b) Reports on Form 8-K:
The Company did not file any Reports on Form 8-K during the fourth
quarter of the fiscal year ended December 31, 1997.
<PAGE> 29
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant had duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CYCOMM INTERNATIONAL INC.
Date: March 31, 1998 By: /s/ Albert I. Hawk
-------------------------------------
Albert I. Hawk
President and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Michael R. Skoff
-------------------------------------
Michael R. Skoff
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting 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 capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C>
By: /s/ Albert I. Hawk March 31, 1998
-----------------------------------------------
Albert I. Hawk, President and
Chief Executive Officer
By: /s/ Hubert Marleau March 31, 1998
------------------------------------------------
Hubert Marleau, Director
By: /s/ Rick E. Mandrell March 31, 1998
------------------------------------------------
Rick E. Mandrell, Secretary and
Director
By: /s/ Ret. Gen. Thomas A. Stafford March 31, 1998
-------------------------------------------------
Ret. Gen. Thomas A. Stafford, Director
</TABLE>
<PAGE> 30
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CYCOMM INTERNATIONAL INC.
Date: March __, 1998 By:
-------------------------------------
Albert I. Hawk
President and
Chief Executive Officer
(Principal Executive Officer)
By:
-------------------------------------
Michael R. Skoff
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting 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 capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C>
By: March _, 1998
--------------------------------------------------------
Albert I. Hawk, President and
Chief Executive Officer
By: March __, 1998
---------------------------------------------------------
Hubert Marleau, Director
By: March _, 1998
----------------------------------------------------------
Rick E. Mandrell, Secretary and
Director
By: March _, 1998
----------------------------------------------------------
Ret. Gen. Thomas A. Stafford, Director
</TABLE>
<PAGE> 31
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997,
SEVEN MONTHS ENDED DECEMBER 31, 1996
AND THE YEAR ENDED MAY 31, 1996
<TABLE>
<CAPTION>
<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>
F-1
<PAGE> 32
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
We have audited the accompanying consolidated balance sheets of Cycomm
International Inc. and subsidiaries as of December 31, 1997 and December 31,
1996 and the related consolidated statements of operations, stockholders' equity
and cash flows for the year ended December 31, 1997, the seven months ended
December 31, 1996 and the year ended May 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Cycomm International Inc. and subsidiaries at December 31, 1997 and December 31,
1996 and the consolidated results of their operations and their cash flows for
the year ended December 31, 1997, the seven months ended December 31, 1996 and
the year ended May 31, 1996, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company has incurred recurring
losses from operations and has an accumulated deficit that raises substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
As discussed in Note 2, the Company's consolidated financial statements
for the year ended May 31, 1996, have been restated to reflect a change in their
method of accounting for their convertible debentures.
Vienna, Virginia
March 20, 1998 /s/ Ernst & Young LLP
F-2
<PAGE> 33
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SEVEN MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MAY 31,
1997 1996 1996
---- ---- ----
(Restated Note 2)
<S> <C> <C> <C>
Sales $ 15,678,667 $ 8,588,845 $ 4,985,036
Cost of sales 11,257,321 6,763,463 3,634,254
------------ ------------ ------------
Gross profit 4,421,346 1,825,382 1,350,782
------------ ------------ ------------
Expenses:
Selling, general and administrative 6,653,643 4,462,434 5,730,671
Research and product development 1,307,720 841,103 749,041
Depreciation and amortization 1,050,998 535,162 1,228,295
Foreign exchange loss(gain) 658 12,906 14,797
Write-down of inventories to net realizable value -- 476,099 1,220,457
Write-down of investments to net realizable value -- 544,648 --
------------ ------------ ------------
9,013,019 6,872,352 8,943,261
------------ ------------ ------------
LOSS FROM OPERATIONS (4,591,673) (5,046,970) (7,592,479)
------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest income 55,046 51,540 64,345
Interest expense (946,235) (1,499,781) (1,895,236)
Gain (loss) on sale of fixed assets -- (898) (27,300)
Realized gain (loss) on investments 38,825 -- --
Other income 21,385 4,506 6,019
------------ ------------ ------------
(830,979) (1,444,633) (1,852,172)
------------ ------------ ------------
NET LOSS $ (5,422,652) $ (6,491,603) $ (9,444,651)
============ ============ ============
NET LOSS PER SHARE $ (0.59) $ (0.92) $ (2.36)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 9,168,335 7,040,356 4,002,289
============ ============ ============
</TABLE>
(See accompanying notes)
F-3
<PAGE> 34
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, December 31,
1997 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 617,636 $ 1,220,544
Accounts receivable, less allowance for doubtful accounts of
$41,000 and $12,000, respectively 5,171,402 2,170,518
Inventories 5,374,511 5,819,852
Prepaid expenses 96,029 76,785
------------ ------------
Total current assets 11,259,578 9,287,699
------------ ------------
Fixed assets, net 1,582,475 1,663,176
Goodwill, net of accumulated amortization of $1,676,574 and
$1,398,555, respectively 2,534,733 1,673,835
Other assets:
Notes receivable - affiliates 183,185 41,521
Long-term investments -- 513,500
Deferred technology costs, net of accumulated amortization of
$971,345 and $927,620, respectively 6,502 50,227
Deferred financing costs, net of accumulated amortization of
$234,878 and $42,675, respectively 179,460 264,825
Unearned discount 13,889 159,276
Other 191,454 94,699
------------ ------------
574,490 1,124,048
------------ ------------
$ 15,951,276 $ 13,748,758
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 3,386,543 $ 1,871,815
Accrued liabilities 1,481,427 1,167,337
Due to affiliate 318,603 160,321
Dividends payable on preferred stock -- 86,667
Current portion of capital lease obligations 29,468 81,527
Revolving credit facility 2,629,308 1,138,933
Current portion of notes payable and convertible debentures 413,575 329,401
------------ ------------
Total current liabilities 8,258,924 4,836,001
------------ ------------
Capital lease obligations, less current portion 54,294 71,869
Notes payable and convertible debentures, less current portion 3,394,425 3,074,999
Deferred credit -- 620,466
Commitments
Stockholders' equity:
Common stock, no par value, unlimited authorized shares, 9,816,877
and 8,050,401 shares issued and outstanding at December 31,
1997 and December 31, 1996, respectively
47,491,611 42,970,749
Accumulated deficit (43,247,978) (37,825,326)
------------ ------------
Total stockholders' equity 4,243,633 5,145,423
------------ ------------
$ 15,951,276 $ 13,748,758
============ ============
</TABLE>
(See accompanying notes)
F-4
<PAGE> 35
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SEVEN MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MAY 31,
1997 1996 1996
---- ---- ----
<S> <C> <C> <C>
Operating activities (Restated - Note 2)
Net loss $(5,422,652) $(6,491,603) $(9,444,651)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,050,998 535,162 1,228,295
Loss (gain) on sale of fixed assets -- 898 27,300
Realized loss (gain) on marketable securities (38,825) -- --
Write-down of inventories to net realizable value -- 476,099 1,220,457
Write-down of investments to net realizable value -- 544,648 --
Non-cash expenses 533,081 1,360,125 1,835,046
Deferred technology costs 43,725 107,527 184,333
Change in operating assets and liabilities (1,114,188) (1,405,538) 609,653
----------- ----------- -----------
Cash used in operating activities (4,947,861) (4,872,682) (4,339,567)
----------- ----------- -----------
INVESTING ACTIVITIES
Increase in long-term investments (106,500) -- --
Decrease in long-term investments 513,500 117,711 --
Acquisition of fixed assets (473,449) (192,425) (135,907)
Proceeds on disposal of fixed assets 127,086 5,997 24,389
Payment for acquisitions, net of cash acquired:
- XL (Canada) Inc. -- (1,000,000) --
- XL Computing Corporation -- -- (2,150,000)
Increase in notes receivable (184,000) (15,000) (20,000)
Decrease in notes receivable 49,167 42,661 1,427
Other (120,191) (90,820) 5,466
----------- ----------- -----------
Cash used in investing activities (194,387) (1,131,876) (2,274,625)
----------- ----------- -----------
FINANCING ACTIVITIES
Issuance of common stock 180,000 830,100 --
Net borrowings under revolving credit facilities 2,058,375 -- --
Borrowings under notes payable -- 1,138,933 38,349
Repayment of notes payable and convertible debentures (329,401) (703,541) (315,336)
Borrowings under convertible debentures 3,000,000 3,900,000 8,425,000
Deferred financing costs on convertible debentures (300,000) (390,000) (842,500)
Repayment of obligations under capital leases (69,634) (27,657) (5,774)
----------- ----------- -----------
Cash provided by financing activities 4,539,340 4,747,835 7,299,739
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents
during the period (602,908) (1,256,723) 685,547
Cash and cash equivalents, beginning of period 1,220,544 2,477,267 1,791,720
----------- ----------- -----------
Cash and cash equivalents, end of period $ 617,636 $ 1,220,544 $ 2,477,267
=========== =========== ===========
</TABLE>
(See accompanying notes)
F-5
<PAGE> 36
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED PREFERRED COMMON COMMON ACCUMULATED
SHARES STOCK SHARES STOCK DEFICIT
------ ----- ------ ----- -------
<S> <C> <C> <C> <C> <C>
BALANCE, MAY 31, 1995 --- --- 3,594,316 $26,606,192 $(21,802,405)
Net loss (9,444,651)
Issuance of preferred stock
on acquisition of XLCC 30,000 $ 3,000,000
Issuance of common stock:
Issued in payment for services
63,000 300,000
Issued in settlement of liabilities
76,978 363,455
Conversion of debentures 1,809,477 4,814,655
Conversion of preferred stock
(15,000) (1,500,000) 400,000 1,500,000
Beneficial conversion feature of
convertible debt
2,159,234
Dividends on preferred stock (46,000)
--------- ------------ --------- ------------ ------------
BALANCE, MAY 31, 1996 15,000 1,500,000 5,943,771 35,743,536 (31,293,056)
--------- ------------ --------- ------------ ------------
Net loss (6,491,603)
Issuance of common stock:
Conversion of debentures 1,393,186 3,911,880
Conversion of preferred stock (15,000) (1,500,000) 400,000 1,500,000
Private placement 195,331 530,100
Exercise of options 100,000 300,000
Acquisition earn-out 18,113 90,020
Beneficial conversion feature of
convertible debt
895,213
Dividends on preferred stock (40,667)
--------- ------------ --------- ------------ ------------
BALANCE, DECEMBER 31, 1996 -- -- 8,050,401 42,970,749 (37,825,326)
--------- ------------ --------- ------------ ------------
Net Loss (5,422,652)
Issuance of common stock:
Conversion of debentures 1,219,727 2,742,753
Private placement 120,000 180,000
Acquisition earn-out 426,749 1,264,776
Beneficial conversion feature
of convertible debt 333,333
--------- ------------ --------- ------------ ------------
BALANCE, DECEMBER 31, 1997 -- $ -- 9,816,877 $ 47,491,611 $(43,247,978)
========= ============ ========= ============ ============
</TABLE>
(See accompanying notes)
F-6
<PAGE> 37
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1: NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Cycomm International Inc. (the "Company") is a manufacturer of value added,
secure, ruggedized computer equipment and communications systems, and a provider
of related services. The Company is based in McLean, Virginia, with wholly-owned
subsidiaries in Montreal, Quebec, Sebastian, Florida, Albuquerque, New Mexico
and Portland, Oregon.
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 $5,422,652 for the year ended December 31, 1997 and as of
that date had an accumulated deficit of $43,247,978. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The Company anticipates that operations will be funded from working capital,
secured lines of credit and from additional financing through borrowings or
sales of equity securities.
These consolidated financial statements do not give effect to any adjustments
which would be necessary should the Company be unable to continue as a going
concern and therefore be required to realize its assets and discharge its
liabilities in other than the normal course of business and at amounts different
from those reflected in the accompanying consolidated financial statements.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RESTATEMENTS
On October 12, 1995, the Company received shareholder approval to redomicile,
effective November 1, 1995, to the United States from Canada. The change was
made as the Company's operations at that time were 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 has restated their May 31, 1996 financial statements to recognize 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 become convertible. This prior period
adjustment resulted in additional interest expense of $1,660,046 in the year
ended May 31, 1996 or $0.41 per share.
FISCAL YEAR
Effective December 31, 1996, the Company changed its fiscal year end from May 31
to December 31. Accordingly, the Company has reported its results of operations,
stockholders' equity and cash flows for the twelve months ended December 31,
1997, the transition period of the seven months ended December 31, 1996 and the
twelve months ended May 31, 1996.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries 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> 38
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out method. Market is determined by the replacement cost
method for raw materials and the net realizable value method for work in process
and sub-assemblies and finished goods. Inventories also include certain
capitalized project costs and demonstration equipment which are stated at
amortized cost, which approximates net realizable value.
USE OF ESTIMATES IN THE PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts receivable, accounts payable, accrued
liabilities, capital lease obligations, notes payable and convertible debentures
approximate their fair values.
FIXED ASSETS AND DEPRECIATION
Fixed assets are carried at the lower of cost or market less accumulated
depreciation and amortization. Depreciation is calculated on a straight line
basis over the estimated useful lives of the fixed assets as follows:
<TABLE>
<CAPTION>
<S> <C> <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.
RESEARCH AND PRODUCT DEVELOPMENT COSTS
Research and product development costs are expensed as incurred.
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 is charged
to operations.
DEFERRED FINANCING COSTS
Costs relating to obtaining debt financing are deferred and amortized on a
straight line basis over the term of the debt. The unamortized portion of the
deferred financing costs related to convertible debentures is recorded against
stockholders' equity at the time of conversion.
LEASES
Fixed assets acquired under leases which transfer substantially all of the
benefits of ownership to the lessee are recorded as the acquisition of assets
and the assumption of a related obligation. Under this method, assets are
depreciated over their expected useful lives, and obligations, including
interest thereon, are extinguished over the life of the lease.
All other leases are accounted for as operating leases wherein rental payments
are charged to operations as incurred.
F-8
<PAGE> 39
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, with limited lifetime warranties on certain components. A reserve is
established to cover estimated warranty costs during this period.
FOREIGN CURRENCY TRANSLATION
The financial statements of foreign subsidiaries have been translated into U.S.
dollars in accordance with generally accepted accounting principles. Assets and
liabilities denominated in foreign currencies are translated to U.S. dollars at
the exchange rate on the balance sheet date. Revenues, costs and expenses are
translated at the average rates of exchange prevailing during the year.
Translation adjustments resulting from this process are shown separately in
stockholders' equity. Exchange adjustments from foreign currency transactions
are recognized in income.
GOODWILL
The excess of the purchase price over the fair market value of the net assets of
subsidiaries acquired is being amortized on a straight line basis over periods
varying from three to ten years. Goodwill is written down to fair value when
declines in value are considered to be other than temporary based upon an
assessment of undiscounted future cash flows of the respective subsidiaries.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share", which was required to be adopted on December 31,
1997. Under the new standard, companies are required to report basic earnings
per share (EPS) and diluted EPS, instead of the primary and fully diluted
earning EPS disclosures which were previously required. Basic EPS is calculated
by dividing net earnings by the weighted average number of common shares
outstanding during the year. Diluted EPS is calculated by dividing net earnings
by the weighted average number of common shares outstanding during the year plus
the incremental shares that would have been outstanding upon the assumed
exercise of eligible stock options, warrants and the conversion of certain
debenture issues. For the periods ended December 31, 1997, December 31, 1996 and
May 31, 1996, the effect of the exercise of stock options, warrants and the
conversion of debentures would be anti-dilutive, and therefore, diluted earnings
(loss) per share is equal to basic earnings (loss) per share as disclosed in the
consolidated statements of operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (Statement 131), which is effective for
years beginning after December 15, 1997. Statement 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers. Statement 131 is effective
for financial statements for fiscal years beginning December 15, 1997, and
therefore the Company will adopt the new requirements retroactively in 1998.
Management has not completed its review of Statement 131, but does not
anticipate that the adoption of this statement will have a significant effect on
the Company's reported segments.
RECLASSIFICATION
Certain items previously reported in specific financial statement captions have
been reclassified to conform with the December 31, 1997 presentation.
NOTE 3: ACQUISITIONS
XL COMPUTING (CANADA) INC.
On June 21, 1996, the Company completed the Asset Purchase Agreement by and
among the Company and 9036-8028 Quebec, Inc., a wholly-owned subsidiary, and M3i
Technologies Inc. and M3i Systems Inc. (collectively the "Seller") whereby
9036-8028 Quebec, Inc. acquired substantially all of the assets of M3i
Technologies Inc., for an
F-9
<PAGE> 40
aggregate purchase price, subject to earn-out provisions, of a maximum of
$5,000,000. Subsequent to the asset acquisition, 9036-8028 Quebec, Inc. was
renamed XL Computing Canada, Inc. ("XL Canada"). XL Canada is based in Montreal,
Quebec and is engaged in the design, manufacture, sale and support of
ruggedized, mobile computing and communications systems.
The aggregate purchase price consisted of cash of $1,000,000 and common stock of
the Company valued at a maximum of $4,000,000 for an aggregate purchase price,
subject to earn-out provisions, of a maximum of $5,000,000. The amount of the
common stock is subject to earn-out provisions based on the achievement of
certain unit sales volumes for a five year period. Any common stock issued under
the earn-out provisions will be issued at the average current market price of
the last month for the quarter in which it was earned.
The acquisition of the assets by XL Canada was accounted for as a purchase.
Accordingly, the purchase price was allocated to the net assets acquired based
on their estimated fair market value. The fair market value of the monetary and
nonmonetary assets acquired was $2,182,527 and the fair value of the liabilities
assumed was $147,160. After an allocation to reduce nonmonetary assets acquired
to zero, the remaining excess of the estimated fair market value of net assets
acquired over the purchase price amounted to $1,035,367, which has been
accounted for as a deferred credit and is being amortized over ten years using a
straight line basis. The value of common stock issued to the Seller as the
contingent consideration is earned subject to the earn-out provisions has been
recorded against the deferred credit. For the period ended December 31, 1997,
the contingent consideration earned was $1,594,640 which was paid in 332,995
shares of common stock issued in the year ended December 31, 1997 and 224,809
shares of common stock to be issued subsequent to December 31, 1997. The
computation of the earn-out consideration is subject to interpretation regarding
eligible units requiring earn-out payments. There exists a potential dispute
between the Company and the Seller regarding the amount of earn-out
consideration due. The Company has recorded the full amount of earn-out based on
its interpretation of the Asset Purchase Agreement. The accompanying
consolidated statements of operations reflect the operating results of XL Canada
since the effective date of the acquisition.
Pro forma unaudited consolidated operating results of the Company and XL Canada
for the year ended May 31, 1996, assuming the acquisition had occurred as of
June 1, 1995, are summarized below:
<TABLE>
<CAPTION>
Year Ended
May 31,
1996
----
<S> <C>
Sales $6,951,715
Net Loss $(10,645,943)
Net Loss per Share $(2.66)
</TABLE>
The pro forma financial information is for illustrative purposes only, and does
not purport to be indicative of the actual results which would have occurred had
the XL Canada acquisition been completed as of June 1, 1995, nor is it
necessarily indicative of future operating results.
XL COMPUTING CORPORATION
Effective March 15, 1996, the Company acquired 100% of the stock of XL Computing
Corporation ("XLCC") of Sebastian, Florida. The purchase price consisted of
$2,000,000 in cash, a $635,165 promissory note, 30,000 shares of Series A
Convertible Redeemable Preferred Stock valued at $3,000,000 and acquisition
costs of $150,000, for an aggregate purchase price of $5,785,165. The Company
also granted warrants to purchase 500,000 common shares of the Company at $3.75
to the seller. XLCC is engaged in the design, manufacture, sale and support of
secure, ruggedized computer equipment and related services.
The acquisition of XLCC was accounted for as a purchase. Accordingly, the
purchase price was allocated to the net assets acquired based on their estimated
fair market value. The excess of purchase price over the estimated fair value of
net assets acquired amounted to $1,814,584, which has been accounted for as
goodwill and is being amortized over ten years using a straight line basis. The
accompanying consolidated statements of operations reflect the operating results
of XLCC since the effective date of the acquisition.
Pro forma unaudited consolidated operating results of the Company and XLCC for
the year ended May 31, 1996, assuming the acquisition had occurred as of June 1,
1995, are summarized below:
F-10
<PAGE> 41
<TABLE>
<CAPTION>
Year Ended
May 31,
1996
----
<S> <C>
Sales $11,770,363
Net Loss $(10,101,999)
Net Loss per Share $(2.52)
</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, 1995, nor is it necessarily
indicative of future operating results.
NOTE 4: INVENTORIES
Inventories by categories are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
---- ----
<S> <C> <C>
Raw materials $1,988,897 $3,859,242
Work in process and sub-assemblies 2,591,442 1,593,705
Finished goods 794,172 366,905
---------- ----------
$5,374,511 $5,819,852
========== ==========
</TABLE>
NOTE 5: FIXED ASSETS
Fixed assets and accumulated depreciation and amortization by categories are as
follows:
<TABLE>
<CAPTION>
ACCUMULATED
DEPRECIATION AND NET BOOK
COST AMORTIZATION VALUE
---- ------------ -----
<S> <C> <C> <C>
DECEMBER 31, 1997
Land $ 48,000 $ -- $ 48,000
Equipment under capital leases 121,328 60,379 60,949
Furniture and fixtures 41,467 18,623 22,844
Research equipment 490,586 110,566 380,020
Computer equipment 400,053 99,994 300,059
Office equipment 165,926 99,885 66,041
Manufacturing equipment 926,783 274,532 652,251
Leasehold improvements 66,498 14,187 52,311
---------- ---------- ----------
$2,260,641 $ 678,166 $1,582,475
========== ========== ==========
DECEMBER 31, 1996
Land $ 48,000 $ -- $ 48,000
Equipment under capital leases 206,913 117,755 89,158
Furniture and fixtures 163,107 40,556 122,551
Research equipment 773,218 274,619 498,599
Computer equipment 569,615 266,892 302,723
Marketing equipment 61,432 26,999 34,433
Office equipment 89,148 9,843 79,305
Manufacturing equipment 640,568 178,049 462,519
Leasehold improvements 33,462 7,574 25,888
---------- ---------- ----------
$2,585,463 $ 922,287 $1,663,176
========== ========== ==========
</TABLE>
Depreciation expense for the year ended December 31, 1997, the seven months
ended December 31, 1996 and the year ended May 31, 1996 was $636,702, $274,049
and $177,874, respectively.
F-11
<PAGE> 42
NOTE 6: OTHER ASSETS
LONG-TERM INVESTMENTS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
---- ----
<S> <C> <C>
Sistemas de Reception de Satellite Galactica C.A. ("Galactica") --- $513,500
</TABLE>
During 1993 and 1994, the Company acquired for total consideration of
$1,117,950, a 25.5% interest in Galactica, a telecommunication systems
integration and distribution company. In March 1997, the Company sold its
investment in Galactica to the majority shareholder for an aggregate
consideration of $1,027,000, consisting of $513,500 cash at closing and a
$513,500 Contingent Promissory Note (the "Note"). The payment of the Note is
contingent on the future earnings of Galactica. While management currently
believes that the Note will be fully paid, the contingencies that require
payments on the Note are undeterminable and not controllable by the Company.
Therefore, the Company fully reserved for the Note and an amount of $513,500 was
included in the results of operations for the seven months ended December 31,
1996.
NOTE 7: NOTES PAYABLE AND CONVERTIBLE DEBENTURES
Notes payable and convertible debentures are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
---- ----
<S> <C> <C>
10% convertible debentures, due February 28, 1999 $3,000,000 $ --
10% convertible debentures, due June 11, 1998 200,000 350,000
10% convertible debentures, due May 29, 1998 40,000 275,000
10% convertible debentures, due October 18, 1998 -- 2,000,000
10% convertible debentures, due September 30, 1998 -- 400,000
9.5% convertible debentures, due March 19, 1998 -- 49,999
12% promissory note payable, due December 31, 1996 -- 230,000
7% promissory note payable, due December 31, 1996 -- 99,401
Revolving credit facility, prime + 11/2%, due on demand -- 1,138,933
Revolving credit facility, prime + 3% 2,629,308 --
Term note payable, prime + 3%, due January 1, 2001 568,000 --
---------- ----------
6,437,308 4,543,333
Less current portion 3,042,883 1,468,334
---------- ----------
$3,394,425 $3,074,999
========== ==========
</TABLE>
F-12
<PAGE> 43
Scheduled maturities of notes payable and convertible debentures are as follows:
YEAR ENDING DECEMBER 31,
<TABLE>
<CAPTION>
<S> <C>
1998 $3,042,883
1999 3,189,324
2000 189,324
2001 15,777
----------
$6,437,308
==========
</TABLE>
On February 28, 1997, the Company issued $3,000,000 of 10% convertible
debentures due February 28, 1999 which are convertible at the option of the
holders into common stock of the Company at 10% of the average closing bid price
of the Company's common stock prior to conversion provided, however the
conversion price shall not be greater than $6.00 per share nor less than $3.00
per share. The debentures are fully eligible for conversion after February 28,
1998.
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 were fully eligible for conversion after October 9,
1996. During the year ended December 31, 1997, principal and accrued interest in
an amount of $162,425 were converted into 79,006 shares of common stock. During
the seven months ended December 31, 1996, principal and accrued interest in an
amount of $1,183,932 were converted into 385,617 shares of common stock.
On May 29, 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. During the year ended December 31, 1997, principal and accrued interest in
an amount of $259,912 were converted into 142,674 shares of common stock. During
the seven months ended December 31, 1996, principal and accrued interest in an
amount of $207,908 were converted into 78,272 shares of common stock.
On October 18, 1996, the Company issued $2,000,000 of 10% convertible debentures
due October 18, 1998 which are convertible at the option of the holders into
common stock of the Company at the lesser of $4.50 per share or a range of 80%
to 82% of the average closing bid price of the Company's common stock prior to
conversion. The debentures were fully eligible for conversion after February 20,
1997. During the year ended December 31, 1997, principal and accrued interest in
an amount of $ 2,070,556 were converted into 800,507 shares of common stock.
On September 30, 1996, the Company issued $400,000 of 10% convertible debentures
due September 30, 1998 which are convertible at the option of the holders into
common stock of the Company at the lesser of $4.80 per share or a range of 80%
to 82% of the average closing bid price of the Company's common stock prior to
conversion. The debentures were fully eligible for conversion after February 2,
1997. During the year ended December 31, 1997, principal and accrued interest in
an amount of $413,895 were converted into 167,523 shares of common stock.
On March 19, 1996, 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 December 31, 1997, principal and accrued
interest in an amount of $57,300 were converted into 30,017 shares of common
stock. During the seven months ended December 31, 1996, principal and accrued
interest in an amount of $960,891 were converted into 325,992 shares of common
stock. During the year ended May 31, 1996, principal and accrued interest in an
amount of $828,459 were converted into 262,634 shares of common stock.
The 12% promissory note payable was incurred in conjunction with the acquisition
of certain assets from Datotek and was due on April 12, 1996. The Company
restructured the note payable so that principal, and accrued interest thereon,
was 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 was collateralized by all the assets acquired in the Datotek
acquisition. The Company paid this note in full on July 1, 1997.
The 7% promissory note payable was incurred in conjunction with the acquisition
of XLCC. This note was collateralized by certain accounts receivable of XLCC.
Principal payments, with accrued interest thereon, were due in the amount of
$75,000 each month from July 21, 1996 to October 21, 1996, with the remaining
principal balance of $335,165 due on
F-13
<PAGE> 44
December 31, 1996. This note was restructured and the final payment of $99,401
was paid on January 31, 1997.
The Company obtained a revolving credit facility from a lender under which the
Company may, at its option, borrow and repay amounts up to a maximum of
$3,432,000, of which $2,629,308 was outstanding at December 31, 1997. Borrowings
under this credit facility bear interest at prime plus 3%. The credit facility
is collateralized by trade accounts receivable and inventory and restricts the
Company from paying dividends in certain circumstances. In conjunction with this
credit facility, the Company obtained a term loan in the amount of $568,000
collateralized by certain machinery and equipment. This term loan bears interest
at prime plus 3% and is payable in equal installments of $15,777 per month
through January 1, 2001.
Subsequent to December 31, 1997, convertible debentures and accrued interest
thereon in an amount of $278,625 were converted into 236,380 shares of common
stock.
NOTE 8: COMMITMENTS
LEASE COMMITMENTS
The Company leases equipment, included in fixed assets, under leases which are
classified as capital leases. Total payments under these capital leases are due
in monthly installments including imputed interest from 7.86% to 13.33% through
December 31, 2003. The Company occupies office space at various locations under
non-cancellable operating leases. Certain leases contain escalation clauses and
require the Company to pay its share of any increase in operation expenses and
real estate tax. Future minimum lease payments under the Company's capital and
non-cancellable operating leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
------ ------
<S> <C> <C>
1998 $34,991 $ 475,544
1999 19,133 404,914
2000 19,133 388,414
2001 19,133 148,045
2002 4,867 ---
2003 1,333 ---
------- ----------
98,590 $1,416,917
(14,828) ==========
Less: amount representing interest on capital leases $83,762
Present value of future minimum capital lease payments =======
</TABLE>
Long-term interest on capital leases amounted to $9,307, $4,271 and $6,315 for
the year ended December 31, 1997, the seven months ended December 31, 1996 and
the year ended May 31,1996, respectively. Total rental expense under the various
operating leases amounted to $623,010, $309,982 and $224,376 for the year ended
December 31, 1997, the seven months ended December 31, 1996 and the year ended
May 31, 1996, respectively.
NOTE 9: CAPITAL STOCK
AUTHORIZED CAPITAL
The authorized capital of the Company consists of an unlimited number of common
shares without par value and an unlimited number of preferred shares without par
value, issuable in series.
COMMON STOCK
The issued common stock of the Company consisted of 9,816,877 and 8,050,401
shares as of December 31, 1997 and December 31, 1996, respectively. In October
1995, the Company effected a 1 for 5 reverse stock split. All per share
information has been adjusted to reflect the stock split. Basic loss per
share is calculated based on the weighted average number of common shares
outstanding during each period. Diluted net loss per share was equal to basic
loss per share in each of the periods presented as the effect of potentially
dilutive securities was antidilutive.
During the twelve months ended December 31, 1997, convertible debentures and
accrued interest thereon were converted into 1,219,727 shares of common stock.
Subsequent to December 31, 1997, convertible debentures and accrued interest
F-14
<PAGE> 45
thereon were converted into 236,380 shares of common stock. If these conversions
had occurred on January 1, 1997, the reported net loss per common share for the
twelve months ended December 31, 1997 would have decreased $(.02) to $(.57) per
share.
PREFERRED STOCK
In March 1996, the Company issued 30,000 shares of Series A Convertible
Redeemable Preferred Stock ("Series A Preferred Stock"). The Series A Preferred
Stock had a Conversion Value, as defined, of $100 per share. The holder of each
share of Series A Preferred Stock was entitled to receive dividends at a rate of
8% of the Conversion Value per annum, such dividends to be cumulative from the
date of issuance. The holder of the Series A Preferred Stock had no voting
rights with respect to any vote of the common stockholders of the Company. The
Company may redeem any or all shares of Series A Preferred Stock at a redemption
price per share equal to the Conversion Value. The holder of any shares of
Series A Preferred Stock had the right to convert all or part into common stock
of the Company at $3.75 per share of common stock. As of September 30, 1996, the
holder of the 30,000 shares of Series A Preferred Stock had converted all shares
to common stock pursuant to the conversion terms.
NOTE 10: STOCK OPTIONS AND WARRANTS
STOCK OPTIONS
The Company has historically granted non-qualified stock options to directors,
officers, employees and other parties which generally become exercisable
immediately and have expiration terms ranging from two to five years. The
options are granted at an exercise price that equals the fair market value on
the date each option is granted.
In November 1997, the Company adopted the 1997 Stock Option Plan ("1997 Plan")
under which a maximum aggregate of 1,000,000 shares were reserved for grant to
all eligible employees of the Company. The stock options granted under the 1997
Plan are exercisable at the fair market value of the common stock on the date of
grant with 25% vesting on each of the four successive anniversary dates from the
date of grant. The stock options have a term of ten years. In the year ended
December 31, 1997, a total of 240,000 stock options under the 1997 Plan were
granted and 760,000 stock options were available.
The following table summarizes the activity in common shares subject to options
for the relevant periods ended December 31, 1997:
<TABLE>
<CAPTION>
SHARES OPTION PRICE RANGE
------ ------------------
<S> <C> <C>
BALANCE, MAY 31, 1995 447,367 $4.05 - $14.58
Granted 980,000 $3.00 - $6.00
Exercised --- ---
Terminated (113, 367) $5.87 - $14.58
---------
BALANCE, MAY 31, 1996 1,314,000 $3.00 - $10.95
Granted 597,500 $3.50 - $4.00
Exercised (100,000) $3.00
Terminated (410,000) $5.00 - $10.00
---------
BALANCE, DECEMBER 31, 1996 1,401,500 $3.00 - $10.95
Granted 1,395,000 $2.00 - $3.31
Exercised --- ---
Terminated (344,000) $3.50 - $10.95
---------
BALANCE, DECEMBER 31, 1997 2,452,500 $2.00 - $8.10
=========
</TABLE>
The number and exercise price of all options outstanding have been retroactively
adjusted to recognize the effects of the 1 for 5 reverse stock split which was
approved by stockholders in October 1995. Options were exercisable with respect
to 1,532,500 shares at December 31, 1997. Subsequent to December 31, 1997, a
total of 70,000 options to purchase common shares with an exercise price of
$2.38 and an expiration date of March 2, 2001 were granted.
F-15
<PAGE> 46
The Company adopted Financial Accounting Standard No. 123 entitled "Accounting
for Stock-Based Compensation" ("FAS 123") as of June 1, 1995. The provisions of
FAS 123 allow companies to either expense the estimated fair value of stock
options or to continue their current practice but disclose the pro forma
effects on net income and earnings per share had the value of the options been
expensed. The Company has elected to continue its practice of recognizing
compensation expense for its stock option and warrant incentive plans using the
intrinsic value based method of accounting and to provide the required pro
forma information for stock options and warrants granted after June 1, 1995.
Under the terms of the intrinsic value method, compensation cost is the excess,
if any, of the quoted market price of the stock at the grant date, or other
measurement date, over the amount an employee must pay to acquire stock. Had
compensation expense for the Company's stock options and warrants granted after
June 1, 1995 been determined based on the fair value at the grant dates for
awards under those plans, the Company's pro forma net loss and net loss per
share for the reported periods would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEVEN MONTHS ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 MAY 31, 1996
----------------- ----------------- ------------
<S> <C> <C> <C>
Net loss $ (5,422,652) $ (6,491,603) $ (9,444,651)
Compensation expense (1,130,679) (1,113,273) (1,360,318)
------------ ------------ ------------
Pro forma net loss $ (6,553,331) $ (7,604,876) $(10,804,969)
============ ============ ============
Pro forma loss per share $ (0.71) $ (1.08) $ (2.70)
============ ============ ============
</TABLE>
The effects on pro forma net loss per share of expensing the estimated fair
value of stock options and warrants are not necessarily representative of the
effects on reported net income for future years due to such things as the
vesting period of the stock options and warrants and the potential for issuance
of additional stock options and warrants in future years.
The fair value of options and warrants granted after June 1, 1995, used as a
basis for the above pro forma disclosures, was estimated at the date of grant
using the Black-Scholes option pricing model. The option and warrant pricing
assumptions include a dividend yield of 0%; an expected volatility of .787; a
risk free interest rate within a range of 5.84% to 6.38%; and an expected life
of half the period from grant to expiration.
The weighted average fair values and exercise prices are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEVEN MONTHS ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 MAY 31, 1996
----------------- ----------------- ------------
<S> <C> <C> <C>
Weighted-average fair value per option granted $1.53 $2.02 $2.09
Weighted-average exercise price per option granted $2.34 $3.51 $3.88
</TABLE>
COMMON SHARE PURCHASE WARRANTS
The Company has granted common share purchase warrants to directors, officers
and other parties which become exercisable immediately and have expiration terms
ranging from one year to five years. The warrants are generally granted at an
exercise price that equals fair market value of the common stock at the date
each warrant is granted. However, certain warrants are granted with an exercise
price in excess of the fair market value of the common stock at the date each
warrant is granted. At December 31, 1997, the following warrants to purchase the
Company's common stock were outstanding:
F-16
<PAGE> 47
<TABLE>
<CAPTION>
EXERCISE EXPIRATION
SHARES PRICE DATE
------ ----- ----
<S> <C> <C> <C>
75,000 $ 4.63 December 4, 1998
500,000 $ 3.75 March 20, 1999
100,000 $ 3.65 May 16, 1999
281,100 $ 8.00 June 11, 1999
5,000 $ 4.75 November 30, 2000
75,000 $ 3.38 February 28, 1999
---------
1,036,100
=========
</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. Subsequent to December
31, 1997, a total of 70,000 warrants to purchase common shares with an exercise
price of $2.50 and an expiration date of February 26, 2000 were granted.
NOTE 11: SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the relevant periods are summarized as
follows:
<TABLE>
<CAPTION>
SEVEN MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MAY 31,
1997 1996 1996
---- ---- ----
<S> <C> <C> <C>
Cash flow effects of changes in operating assets and
liabilities, net of acquisitions:
Accounts receivable $(3,007,716) $ (202,709) $ (395,301)
Purchases of marketable securities (267,991) -- --
Proceeds on sale of marketable securities 306,816 -- --
Inventories 245,341 (1,686,255) 402,985
Prepaid expenses (19,244) (15,334) 27,651
Accounts payable - trade 1,514,729 125,724 500,081
Accrued liabilities 42,262 272,844 (31,892)
Due to affiliate 158,282 100,192 60,129
Dividends payable on preferred stock (86,667) -- 46,000
----------- ----------- -----------
$(1,114,188) $(1,405,538) $ 609,653
=========== =========== ===========
Non-cash investing and financing activities:
Conversion of convertible debentures to common stock $ 2,742,753 $ 3,911,880 $ 4,814,655
Conversion of preferred stock to common stock -- 1,500,000 1,500,000
Conversion of notes receivable to long-term investments -- -- 120,063
Capital lease obligations incurred -- 84,482 --
Acquisition earn-out 1,264,776 380,656 --
Details of acquisitions:
Fair value of assets acquired -- $ 2,182,527 $ 7,513,966
Liabilities assumed -- (147,160) (1,728,801)
Stock issued -- -- (3,000,000)
Note payable to seller -- -- (635,165)
Deferred credit -- (1,035,367) --
----------- ----------- -----------
Cash paid for acquisition $ -- $ 1,000,000 $ 2,150,000
=========== =========== ===========
Cash paid during the period:
Interest paid $ 370,691 $ 82,643 $ 32,128
Income taxes paid -- -- --
</TABLE>
F-17
<PAGE> 48
NOTE 12: INCOME TAXES
The Company accounts for income taxes under the liability method required by FAS
Statement No. 109, "Accounting for Income Taxes". Deferred income taxes reflect
the net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. For consolidated financial statement purposes, a change in
valuation allowance has been recognized to offset certain deferred tax assets
for which realization is uncertain. Significant components of the Company's
deferred tax liabilities and assets as of December 31 and May 31 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MAY 31,
1997 1996 1996
---- ---- ----
<S> <C> <C> <C>
Deferred tax liabilities
Inventory adjustment $ -- $ -- $ 103,338
Bad debt expense -- -- 5,136
------------ ------------ ------------
Total deferred tax liabilities -- -- 108,474
------------ ------------ ------------
Deferred tax assets
Book over tax depreciation and amortization 303,813 286,523 11,794
Inventory capitalization and reserves 620,765 751,066 771,430
Net operating loss carryforward 12,954,863 10,546,180 7,702,742
Investment reserves -- 206,966 --
Other 85,383 80,223 9,066
------------ ------------ ------------
Total deferred tax assets 13,964,824 11,870,958 8,701,901
Valuation allowance for deferred tax assets (13,964,824) (11,870,958) (8,593,427)
------------ ------------ ------------
Net deferred tax asset -- -- 108,474
------------ ------------ ------------
Net deferred tax $ -- $ -- $ --
============ ============ ============
</TABLE>
There was no provision for income taxes in the year ended December 31, 1997,
seven months ended December 31, 1996 and the year ended May 31, 1996 as the
Company incurred losses in those years.
A reconciliation between federal statutory income tax rates and the effective
tax rate of the Company at December 31 and May 31 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MAY 31,
1997 1996 1996
---- ---- ----
<S> <C> <C> <C>
US federal statutory benefit rate (35.0)% (35.0)% (35.0)%
Tax net operating loss carryovers 39.0 39.0 39.0
US state tax benefit, net of federal income tax effect (4.0) (4.0) (4.0)
------- ------ ------
Effective rate on operating loss --- --- ---
======= ====== ======
</TABLE>
The Company has US net operating loss carryfowards available at December 31,
1997 of approximately $33,200,000 for US tax purposes to offset income in future
years. These carryfowards will expire in the years 2000 through 2012, 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. The Company has Canadian net operating loss carryforwards
available at December 31, 1997 of approximately $621,000; these carryforwards
will expire in the years 2003 and 2004 if not used.
In addition, the Company has future deductible research and development costs
for Canadian federal tax purposes of $480,000. These costs have an indefinite
carryover period.
NOTE 13: RELATED PARTY TRANSACTIONS
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 December 31, 1997,
the seven months ended December 31, 1996 and the year ended May 31, 1996, XLCC
F-18
<PAGE> 49
incurred $900,085, $674,407 and $302,244, respectively, of rental expense and
administrative services due to XL Vision, Inc. XL Vision, Inc. incurred $77,015,
$277,219 and $111,532, respectively, of rental expenses and administrative
services due to XLCC. The balance due to XL Vision, Inc. is $318,603 at December
31, 1997.
In April 1997, the Company loaned certain officers, directors and employees an
aggregate of $184,000 in order to purchase 92,000 shares of the Company's common
stock in a private transaction. The loans are secured by the common stock, bear
interest at 5.9% and are due April 30, 2000. At December 31, 1997, amounts
outstanding under these loans total $172,354 in principal and $6,831 in accrued
interest receivable.
The Company retained the consulting services of Corstone Corporation which
previously employed the current Chief Executive Officer and Chief Financial
Officer. The current Chief Executive Office and Chief Financial Officer have no
direct or indirect ownership interest in Corstone Corporation. These consulting
services included financial, legal and administrative services. The consulting
services had been provided to the Company during the twelve months ended
December 31, 1997, the seven month period ended December 31, 1996 and the year
ended May 31, 1996 both prior to and after the appointment of the current Chief
Executive Officer on May 15, 1996. Consulting fees paid to this entity were
$26,750, $150,000, and $329,000 during the twelve months ended December 31,
1997, the seven months ended December 31, 1996 and the year ended May 31, 1996,
respectively. Additionally, a finder's fee of $150,000 was paid to this
consulting firm in conjunction with the acquisition of XLCC in the year ended
May 31, 1996.
The Company paid management and consulting fees to entities affiliated with
certain officers and directors in an amount $527,373 for the fiscal year ended
May 31, 1996.
NOTE 14: INDUSTRY SEGMENT AND GEOGRAPHIC AREA INFORMATION
The Company is in the business of providing security for voice and data
transmission over wireless systems, primarily to cellular phone users. In
addition, the Company develops, manufactures and markets a full line of secure,
ruggedized computer equipment. These products have been classified into the
following business segments:
Communications Security Products - Included are an integrated set of products
and services that provide a complete privacy solution for individuals,
corporations, government and law enforcement agencies and cellular carriers.
Computer Equipment - Included are a broad array of ruggedized computer equipment
communications systems and related services to the military and government and
law enforcement agencies, primarily through third party resellers and original
equipment manufacturers.
F-19
<PAGE> 50
In the following tables, financial information is presented by industry segment
and geographic region.
<TABLE>
<CAPTION>
INDUSTRY SEGMENT DATA DECEMBER 31, DECEMBER 31, MAY 31,
1997 1996 1996
---- ---- ----
<S> <C> <C> <C>
Sales
Communications security products $ 1,826,715 $ 883,471 $ 1,588,742
Computer equipment 13,851,952 7,705,374 3,396,294
------------ ------------ ------------
$ 15,678,667 $ 8,588,845 $ 4,985,036
============ ============ ============
Loss from Operations
Communications security products $ (269,142) $ (1,830,906) $ (5,205,988)
Computer equipment (2,805,146) (1,655,341) (222,125)
Corporate (1,517,385) (1,560,723) (2,164,366)
------------ ------------ ------------
$ (4,591,673) $ (5,046,970) $ (7,592,479)
============ ============ ============
Identifiable Assets
Communications security products $ 819,104 $ 756,004 $ 1,334,272
Computer equipment 12,349,194 11,306,491 7,093,937
Corporate 2,782,978 1,013,487 2,699,354
Non-consolidated investments -- 513,500 1,194,302
------------ ------------ ------------
$ 15,951,286 $ 13,589,482 $ 12,321,865
============ ============ ============
Depreciation and Amortization
Communications security products $ 37,683 $ 210,991 $ 1,042,187
Computer equipment 844,151 227,547 91,266
Corporate 169,164 96,624 94,842
------------ ------------ ------------
$ 1,050,998 $ 535,162 $ 1,228,295
============ ============ ============
Capital Expenditures
Communications security products $ 7,326 $ 34,484 $ 123,137
Computer equipment 420,126 157,655 10,524
Corporate 45,997 286 2,246
------------ ------------ ------------
$ 473,449 $ 192,425 $ 135,907
============ ============ ============
GEOGRAPHIC REGION DATA DECEMBER 31, DECEMBER 31, MAY 31,
1997 1996 1996
---- ---- ----
Sales
United States $ 12,583,557 $ 7,877,913 $ 4,985,036
Canada 3,095,110 710,932 --
------------ ------------ ------------
$ 15,678,667 $ 8,588,845 $ 4,985,036
============ ============ ============
Loss from Operations
United States $ (3,999,957) $ (4,496,970) $ (7,592,479)
Canada (591,716) (550,000) --
------------ ------------ ------------
$ (4,591,673) $ (5,046,970) $ (7,592,479)
============ ============ ============
Identifiable Assets
United States $ 9,933,593 $ 9,206,469 $ 11,127,563
Canada 6,017,683 3,869,513 --
South America -- 513,500 1,194,302
------------ ------------ ------------
$ 15,951,276 $ 13,589,482 $ 12,321,865
============ ============ ============
</TABLE>
Included in United States sales are export sales of $3,986,814, $3,708,531 and
$2,326,063 for the twelve months ended December 31, 1997, the seven months ended
December 31, 1996 and the year ended May 31, 1996, respectively.
F-20
<PAGE> 51
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 major customers in the computer
equipment segment comprise of 9% and 9%, respectively of consolidated sales for
the twelve months ended December 31, 1997. Sales to two major customers in the
computer equipment segment comprise 30% and 25%, respectively, of consolidated
sales for the seven months ended December 31, 1996. Sales to three major
customers in the computer equipment segment comprise 25%, 20% and 9%,
respectively, of consolidated sales for the year ended May 31, 1996.
NOTE 16: CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally trade receivables. Concentration of credit risk
with respect to trade receivables exists at year end as approximately $2.4
million or 46% 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: EMPLOYEE 401(K) PLAN
The Company maintains an employee 401(k) plan. The plan, which covers all
permanent U.S. employees 21 years of age or older, stipulates that participating
employees may elect to contribute up to 20% of their total compensation to the
plan, not to exceed the maximum amount allowable by Internal Revenue Service
regulations. The Company matches these contributions in an amount up to 3% of
the employee's salary. Participants contributions vest immediately and Company
contributions vest over a six year period. Company contributions to the plan
charged to operations for the year ended December 31, 1997, the seven months
ended December 31, 1996 and the year ended May 31, 1996 totalled $77,030,
$55,784 and $38,721, respectively.
NOTE 18: SUPPLEMENTAL INFORMATION OF RESULTS OF OPERATIONS
In conjunction with the change in fiscal year end from May 31 to December 31, as
follows is supplemental unaudited information of the results of operations for
the year ended November 30, 1996, a period in the previous fiscal year that best
approximates the current fiscal year period:
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
1996
----
(Unaudited and Restated)
<S> <C>
Sales $11,816,319
Gross profit 3,202,748
Loss from operations (7,670,204)
Net loss (10,042,290)
Loss per share ($1.78)
</TABLE>
NOTE 19: SUBSEQUENT EVENTS
In February 1998, the Company issued $1,000,000 of Series B Convertible
Redeemable Preferred stock ("Series B Preferred"). The Series B Preferred has no
voting rights and will pay a cumulative dividend of 10% per annum. After May 27,
1998 up to 25% of the Series B Preferred is convertible into common stock of the
Company at the lesser of $2.38 per common share or the average closing bid of
the Company's common for the five trading days preceding the conversion with up
to a further 25% convertible every thirty days thereafter. The Series B
Preferred is redeemable at the option of the Company at an amount equal to the
conversion value. Net proceeds to the Company were $900,000, after commission.
F-21
<PAGE> 1
Exhibit 1.4
ARTICLES OF AMENDMENT TO ARTICLES OF
INCORPORATION OF CYCOMM INTERNATIONAL INC.
The undersigned corporation, by and through its Board of Directors
as authorized by W.S. Section 17-16-602(d), adopts the following amendment
to its Articles of Incorporation:
FIRST: The name of the corporation is Cycomm International Inc.
SECOND: The following Amendment to the Articles of Incorporation
was adopted by the Board of Directors on February 19, 1998 in accordance with
the provisions of W.S. Section 17-16-602:
Section 9 of the Articles of Incorporation of Cycomm International
Inc. was amended to read as follows:
"9. The aggregate number of shares or other ownership units which it
has the authority to issue, itemized by classes, par value of shares,
shares without par value and series, if any, within a class is:
<TABLE>
<CAPTION>
NUMBER OF SHARES CLASS SERIES PAR VALUE
PER SHARE
<S> <C> <C> <C>
Unlimited Common N/A Without par value
30,000 Preference A-Convertible
Redeemable
Preferred
Stock Without par value
20 Preference B-Convertible
Redeemable
Preferred
Stock Without par value
Unlimited Preference N/A Without par value"
</TABLE>
<PAGE> 2
THIRD: The text of the Amendment determining the terms of the class or
series of shares is: "The designation of its Series B of twenty (20) shares of
Convertible Preferred Stock, no par value per share, created by the Board of
Directors of the Corporation pursuant to the authority granted it by the
Corporation's Articles of Incorporation, as amended, is 'Series B Convertible
Redeemable Preferred Stock'".
Dated: 19 February 1998.
CYCOMM INTERNATIONAL INC.
S E A L
ATTEST:
BY: /s/ ALBERT I. HAWK
---------------------------------------
/s/ MICHAEL R. SKOFF ALBERT I. HAWK, President
- ------------------------------
MICHAEL R. SKOFF,
Assistant Secretary
-2-
<PAGE> 1
Exhibit 10.9
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of the 20th day of November, 1997, by and
between Cycomm International Inc. (the "Corporation"), a corporation
organized under the laws of the State of Wyoming, and Rick E. Mandrell
("Employee").
In consideration of the mutual covenants herein contained, and upon the
other terms and conditions hereinafter provided, the parties hereby agree as
follows:
1. POSITION AND RESPONSIBILITIES. Effective as of the date hereof and
during the period of his employment hereunder, Employee agrees to serve as Chief
Operating Officer.
2. TERMS AND DUTIES.
(a) The term of this Agreement shall be deemed to have commenced as
of the effective date of this Agreement, and shall continue for one (1) year.
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 $125,000, payable in equal bi-monthly installments. In
addition to the salary provided in this paragraph 3(a), the Corporation shall
provide Employee, at no additional 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, the aggregate monthly cost of which will not
exceed $400.
(d) The Corporation shall grant an option for Employee to purchase
200,000 shares of stock, as set forth in the Stock Option Agreement dated the
date hereof and incorporated herein by reference. Employee agrees to the
cancellation of the stock options and
<PAGE> 2
-2-
warrants totaling 120,000 shares which were granted as part of Employee's
initial employment agreement dated May 15, 1995.
(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 the Employee upon one month's notice.
(b) In the event that Employee's employment is terminated by the
Corporation for any reason other than for willful misconduct, Employee shall
receive a lump sum payment equal to six (6) months salary and continue to
receive 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 Portland, Oregon or 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.
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,
<PAGE> 3
-3-
encumbrance, charge, pledge, or hypothecation, or to execution, attachment,
levy, or similar process or assignment by operation of law, and any attempt,
voluntary or involuntary, to affect any such action shall be null, void, and of
no effect.
(b) This Agreement shall be binding upon, and inure to the benefit
of, Employee and the Corporation and their respective successors and assigns.
8. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have
been waived, nor shall there by any estoppel against the enforcement of any
provision of this Agreement, except by written instrument of the party charged
with such waiver or estoppel. No such written waiver shall be deemed a
continuing waiver unless specifically stated therein, and each such waiver shall
operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or as to any other
than that specifically waived.
9. SEVERABILITY. If, for any reason, any provision of this Agreement, or
any part of any provision, is held invalid, such invalidity shall not affect any
other provision of this Agreement or any part of such provision not held so
invalid, and each such other provision and part thereof shall to the full extent
consistent with law continue in full force and effect.
10. HEADINGS FOR REFERENCE ONLY. The headings of paragraphs herein are
included for convenience of reference and shall not control the meaning or
interpretation of any of the provisions of this Agreement.
11. GOVERNING LAW. This Agreement has been executed and delivered in
Virginia, and its validity, interpretation, performance, and enforcement shall
be governed by the laws of Virginia.
12. PAYMENT OF LEGAL FEES. All legal fees paid or incurred by Employee
pursuant to any dispute or question of interpretation relating to this Agreement
shall be paid or reimbursed by the Corporation, if Employee is successful.
<PAGE> 4
-4-
SIGNATURES. IN WITNESS WHEREOF, the Corporation has caused this Agreement
to be executed and its seal to be affixed hereunto by its directors thereunto
duly authorized, and Employee has signed this Agreement, all as of the day and
year first above written.
ATTEST: Cycomm International Inc.
/s/ Michael R. Skoff By: /s/ Albert Hawk
- --------------------------- ---------------------------------
Name: Albert Hawk
Title:President and CEO
WITNESS: EMPLOYEE
/s/ Darcy Gray /s/ Rick E. Mandrell
- -------------------------- ------------------------------------
Rick E. Mandrell
<PAGE> 1
Exhibit 10.10
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of the 7th day of November, 1997, by and
between Cycomm International Inc., through its subsidiaries XL Computing
Corporation and XL Computing (Canada) Inc. (collectively the "Corporation"),
and G. T. Gangemi, Sr. ("Employee").
In consideration of the mutual covenants herein contained, and upon the
other terms and conditions hereinafter provided, the parties hereby agree as
follows:
1. POSITION AND RESPONSIBILITIES. Effective as of the date hereof and
during the period of his employment hereunder, Employee agrees to serve as Chief
Executive Officer and President of XL Computing Corporation and Chief Executive
Officer of XL Computing (Canada) Inc.
2. TERMS AND DUTIES.
(a) The period of Employee's employment under this Agreement shall
be deemed to have commenced as of December 1, 1997, and shall continue for one
year. 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 $150,000, payable in equal bi-monthly installments and an
annual minimum bonus of $25,000. In addition to the salary provided in this
paragraph 3(a), the Corporation shall provide Employee, at no additional cost to
Employee, with all such other benefits as are provided to executives of the
Corporation. Employee at his option may elect COBRA health benefits coverage
which will be paid by the Company.
(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 shall grant an option for Employee to purchase
100,000 shares of stock, as set forth in the Stock Option Agreement dated the
date hereof and incorporated herein by reference.
<PAGE> 2
-2-
(d) 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.
(e) The Employee shall be entitled to take vacation(s) not exceeding
four weeks in any one fiscal year.
(f) Employee shall receive a car allowance not to exceed $350 per
month.
(g) Employee shall be provided temporary housing in the Sebastian,
Florida area until such time Employee relocates to Sebastian, Florida. Employee
shall receive the customary and reasonable relocation package in connection with
his redomicile from Massachusetts to Florida.
(h) Employee shall receive a bonus of $20,000 if his employment
commences on or before December 1, 1997.
4. TERMINATION; PAYMENTS TO EMPLOYEE UPON TERMINATION.
(a) This Agreement, subject to paragraph 5 below, may be terminated
by the employee upon notice.
(b) In the event that Employee's employment is terminated for any
reason other than for willful misconduct, Employee shall receive a lump sum
payment equal to six (6) months salary and benefits set forth in paragraph 3
hereof.
5. CHANGE IN DUTIES.
This Agreement shall be deemed to be terminated pursuant to paragraph 4(b)
if (i) without his consent, the Employee is assigned any duties or
responsibilities that are inconsistent with his position, duties,
responsibilities or status at the commencement of this Agreement; (ii) without
his consent, the Employee's salary and benefits set forth in paragraph 3 hereto
are reduced in any year by a percentage greater than the average reduction in
the salary and benefits experienced by similar executives of the Corporation; or
(iii) without his consent, the Employee is transferred to a location which is an
unreasonable distance from any current location from which the Corporation or
its subsidiary conducts business or is required to engage in an unreasonable
amount of travel.
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
<PAGE> 3
-3-
Agreement shall be interpreted to mean that Employee is subject to receiving
fewer benefits than those available to him without reference to this Agreement.
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 either party
pursuant to any dispute or question of interpretation relating to this Agreement
shall be paid or reimbursed by the other party if the prevailing party is
successful.
<PAGE> 4
-4-
SIGNATURES. IN WITNESS WHEREOF, the Corporation has caused this Agreement
to be executed and its seal to be affixed hereunto by its directors thereunto
duly authorized, and Employee has signed this Agreement, all as of the day and
year first above written.
ATTEST: Cycomm International Inc.
/s/ Michael R. Skoff By: /s/ Albert Hawk
- --------------------------- ---------------------------------
Name: Albert I. Hawk
Title: President and CEO
WITNESS: EMPLOYEE
/s/ G. T. Gangemi /s/ G. T. Gangemi, Sr.
- --------------------------- ------------------------------------
G. T. Gangemi, Sr.
<PAGE> 1
Exhibit 10.11
COMMERCIAL REVOLVING LOAN, ADDITIONAL LOAN
AND SECURITY AGREEMENT
This Commercial Revolving Loan, Additional Loan and Security Agreement
dated December 17, 1997 is by and among CYCOMM INTERNATIONAL, INC. a Wyoming
corporation with its chief executive office and principal place of business at
1420 Springhill Road, Suite 420, McLean, Virginia 22102 ("CYCOMM"), XL COMPUTING
CORP., INC., a Delaware corporation with its chief executive office and
principal place of business at 10305 102nd Terrace, Sebastian, Florida 32958
("XL"), XL COMPUTING (CANADA) INC., a Quebec, Canada corporation with its chief
executive office and principal place of business at 7900 Taschereau, Suite
C-100, Brossard (Quebec) Canada J4X1C2 ("XL CANADA" and, together with Cycomm
and XL, collectively referred to as the "BORROWERS") and AMERICAN COMMERCIAL
FINANCE CORPORATION, a Delaware corporation with an office at 433 South Main
Street, West Hartford, Connecticut 06110 ("LENDER").
PREAMBLE
WHEREAS, Borrowers have requested Lender to extend to Borrowers (a) a
revolving loan in the maximum aggregate principal amount of up to $4,000,000
(the "REVOLVING LOAN") and (b) an additional loan in the original principal
amount of $568,000 (the "ADDITIONAL LOAN" and, together with the Revolving Loan,
the "LOANS"); and
WHEREAS, Lender has agreed to extend the Loans to Borrowers on the
conditions set forth below.
NOW, THEREFORE, for the mutual considerations contained in this Agreement,
Borrowers and Lender agree as follows:
ARTICLE I. DEFINITIONS
SECTION 1.1. ACCOUNTING TERMS; ETC. Unless otherwise defined, all
accounting terms shall be construed, and all computations or
classifications of assets and liabilities and of income and expenses shall
be made or determined in accordance with generally accepted accounting
principles consistently applied. As used herein, or in the Financing
Agreements (as hereinafter defined) or in any certificate, document or
report delivered pursuant to this Agreement or any other Financing
Agreement, the following terms shall have the following meanings:
(a) "Account" and "Accounts" shall have the meanings assigned in
Section 8.1(a) hereof.
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(b) "Account Debtor" and "Account Debtors" shall mean the person or
entity or persons or entities obligated to Borrowers upon the Accounts.
(c) "Additional Loan" shall have the meaning assigned in Section 3.1
hereof.
(d) "Additional Loan Promissory Note" shall have the meaning
assigned in Section 3.1 hereof.
(e) "Agreement" shall mean this Commercial Revolving Loan,
Additional Loan and Security Agreement as the same may from time to time
be amended, supplemented or otherwise modified.
(f) "Arrangement" and "Arrangements" shall have the meaning assigned
in Section 5.1(n) hereof.
(g) "Borrowers" shall have the meaning assigned in the first
paragraph hereof.
(h) "Borrowing Base" shall mean an amount equal to the lesser of (i)
the amount by which FOUR MILLION DOLLARS ($4,000,000) exceeds the
outstanding indebtedness under the Additional Loan and (ii) an amount
equal to the sum of (1) the Eligible U.S. Borrower Accounts Amount plus
(2) the Eligible Canadian Accounts Amount plus (3) the Eligible Foreign
Accounts Amount plus (4) the Eligible XL Inventory Account Amount plus (5)
the Eligible Canadian Inventory Amount.
(i) "Business Day" shall mean any day other than a day on which
commercial banks in Hartford, Connecticut are required or permitted by law
to close.
(j) "Canadian Conversion Rate" shall mean such conversion or
currency exchange rate as may be selected by Lender in its sole discretion
to convert Canadian currency into United States currency, which exchange
rate is .72 as of the date hereof.
(k) "Collateral" shall mean the property of Borrowers described in
Section 8.1 hereof.
(l) "Commitment Letter" shall mean that certain commitment letter
issued by Lender to Borrower and dated November 17, 1997.
(m) "Company" and "Companies" shall mean Borrowers and any entities
affiliated with Borrowers in connection with any Plan.
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(n) "Cycomm" shall have the meaning assigned in the first paragraph
hereof.
(o) "Cycomm Revolving Loan Account" shall have the meaning assigned
in Section 2.3 hereof.
(p) "Defaulting Event" shall mean the occurrence of an Event of
Default or the occurrence of any condition or event which but for the
giving of notice or passage of time or both would constitute an Event of
Default.
(q) "Dollar" and the sign "$" shall mean lawful money of the United
States of America.
(r) "Eligible Accounts" shall mean those Accounts of Borrowers which
arise from the sale of inventory or rendition of services in the ordinary
course of Borrowers' business, are subject to Lender's perfected, first
lien security interest and no other lien or security interest, and are
evidenced by an invoice or other documentary evidence reasonably
satisfactory to Lender. Further, no Account shall be an Eligible Account
if:
(i) it arises out of a sale made by Borrowers to any
affiliate, division, subsidiary or parent of Borrowers or to any
person or entity controlled by or under common control with an
affiliate, division, subsidiary or parent of Borrowers;
(ii) it is due or unpaid more than ninety (90) days after its
original invoice date;
(iii) the account debtor is also a creditor or supplier of any
Borrower, has disputed liability or made any claim with respect to
any other account due from such account debtor to Borrowers, or the
account is otherwise subject to any defense, counterclaim or offset
of or by the account debtor;
(iv) the account debtor is located outside the United States
and Canada (unless (A) such account is supported by a letter of
credit or credit insurance acceptable in form, scope and substance
to Lender in Lender's reasonable discretion or (B) such account is
an Eligible Foreign Account);
(v) the account debtor is located in New Jersey or Minnesota,
unless Borrowers have (x) filed a Notice of Business Activity Report
in the appropriate office or agency for such state in the then
current year, or (y) received a Certificate of Authority to do
business and is in good standing in such state;
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(vi) the sale giving rise to the account is on a
bill-and-hold, guaranteed sale, sale-and-return, sale on approval,
consignment or other repurchase or return basis, or is evidenced by
a note or chattel paper;
(vii) Borrowers have made an agreement with the account debtor
for any deduction from the invoice representing said account, except
for discounts or allowances made in the ordinary course of
Borrowers' business for prompt payment, which discounts or
allowances are reflected in the calculation of the face value of
each respective invoice related thereto;
(viii) fifteen percent (15%) or more of the aggregate invoices
for an account debtor are due or unpaid for more than ninety (90)
days after their original invoice date;
(ix) it arises out of a sale made by the Borrowers to an
account debtor that is the United States Government or any agency or
subdivision thereof (collectively the "GOVERNMENT"), unless
Borrowers have complied in all respects with the Federal Assignment
of Claims Act of 1940, or has otherwise satisfied Lender as to the
assignability and collectability of said accounts; or
(x) the Lender in its sole discretion deems the Account to be
unacceptable for any reason.
If there is any dispute as to whether any Account is an Eligible Account,
the determination of Lender shall at all times control.
(s) "Eligible Canadian Accounts" shall mean Accounts which are
otherwise Eligible Accounts and further are accounts in respect of which
the account debtors have been notified in writing to remit payment
directly to Lender or to an address designated by Lender pursuant to a
notice in form and content satisfactory to Lender.
(t) "Eligible Canadian Accounts Amount" shall mean an amount equal
to the lesser of (i) TWO HUNDRED AND FIFTY THOUSAND DOLLARS ($250,000) and
(ii) the product of (1) eighty percent of Eligible Canadian Accounts
multiplied by (2) the Canadian Conversion Rate then in effect.
(u) "Eligible Canadian Inventory Amount" shall mean an amount equal
to the lesser of (i) twenty-five percent of Eligible Inventory of XL
Canada which is valued in U.S. dollars and (ii) FIVE HUNDRED THOUSAND
DOLLARS ($500,000).
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(v) "Eligible Foreign Accounts" shall mean Accounts that are
otherwise Eligible Accounts (except that such Accounts do not satisfy the
conditions set forth in clause (iv) of the definition of Eligible
Accounts) and further (i) are accounts in respect of which the account
debtors have been notified to remit payment directly to Lender or to an
address designated by Lender pursuant to a notice in writing in form and
content satisfactory to Lender in its sole discretion and (ii) are
accounts that have originally been invoiced in, and are payable in,
Dollars only.
(w) "Eligible Foreign Accounts Amount" shall mean an amount equal to
the lesser of (i) eighty percent (80%) of Eligible Foreign Accounts and
(ii) an amount equal to thirty percent (30%) of all Accounts of the
Borrowers.
(x) "Eligible Inventory" shall mean Borrowers' inventory of
computers and electronics components to the extent Lender, in its sole
discretion, determines that such inventory is eligible for advance. In
addition and without limiting Lender's discretion, Eligible Inventory
shall be valued in Dollars, net of reserves and returns, valued at the
lower of cost or market, and subject to Lender's perfected first security
interest and to no other lien or security interest. Further and without
limiting Lender's discretion, no inventory shall be eligible if it is:
(i) deemed by Lender as slow moving or obsolete;
(ii) not otherwise in good condition and salable through
normal trade channels; or
(iii) not salable in the ordinary course of Borrower's
business.
(y) "Eligible Inventory of XL" shall mean the Eligible Inventory
owned by XL and located at XL's principal place of business in Sebastian,
Florida.
(z) "Eligible Inventory of XL Canada" shall mean the Eligible
Inventory owned by XL Canada and located at 7900 Taschereau, Suite G100,
Brossard (Quebec) Canada J4X 1C2, XL Canada's principal place of business.
(aa) "Eligible U.S. Borrower Accounts" shall mean, collectively, the
Eligible Accounts of Cycomm and the Eligible Accounts of XL.
(bb) "Eligible U.S. Borrower Accounts Amount" shall mean an amount
equal to eighty percent (80%) of Eligible U.S. Borrower Accounts.
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(cc) "Eligible XL Inventory Amount" shall mean an amount equal to
the lesser of (i) twenty-five percent (25%) of Eligible Inventory of XL
and (ii) FIVE HUNDRED THOUSAND DOLLARS ($500,000).
(dd) "Environmental Laws" shall mean any and all applicable foreign,
federal, state and local statutes, laws, regulations, rules, ordinances,
orders, guidances, policies or common law (whether now existing or
hereafter enacted or promulgated) pertaining to the environment, of any
and all federal, state or local governments and governmental and
quasi-governmental agencies, bureaus, subdivisions, commissions or
departments which may now or hereafter have jurisdiction over either
Borrower and all applicable judicial and administrative and regulatory
decrees, judgments and orders, including common law rulings and
determinations, relating to injury to, or the protection of, real or
personal property or human health or the environment, including, without
limitation, all requirements pertaining to reporting, licensing,
permitting, investigation, remediation and removal of emissions,
discharges, releases or threatened releases of Hazardous Materials,
chemical substances, pollutants or contaminants whether solid, liquid or
gaseous in nature, into the environment or relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of such Hazardous Materials, chemical substances, pollutants or
contaminants.
Without limiting the generality of the foregoing, the term "Environmental
Laws" shall encompass each of the following statutes, and regulations
promulgated thereunder, and amendments and successors to such statutes and
regulations, as may be enacted and promulgated from time to time: Federal
Occupational Safety and Health Act ("OSHA"); the Clean Air Act ("CAA"); the
Toxic Substances Control Act ("TSCA"); the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), as amended by the Superfund
Amendments and Reauthorization Act of 1986 ("SARA"); the Clean Water Act
("CWA"); the Resource Conservation and Recovery Act, as amended by the Hazardous
and Solid Waste Amendments of 1984 ("RCRA"); the Hazardous Materials
Transportation Act; the Nuclear Liability Act (Canada); An Act Respecting
Occupational Health and Safety (Quebec); the Canadian Environmental Protection
Act (Canada); the Environment Quality Act (Quebec); the Hazardous Materials
Information Review Act (Canada); the Transportation of Dangerous Goods Act
(Canada); the Use of Petroleum Products Act (Canada); and all applicable
Environmental Laws of each state and municipality in which any Borrower conducts
business or locates assets and all rules and regulations thereunder and
amendments thereto, and all similar state and local laws, rules and regulations.
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(ee) "ERISA" shall mean the Employee Retirement Income Security Act
of 1974 and all rules and regulations promulgated pursuant thereto, as the
same may from time to time be supplemented or amended.
(ff) "Event of Default" and "Events of Default" shall have the
meanings assigned in Section 9.1 hereof.
(gg) "Fidelity Guarantor" shall have the meaning assigned in Section
6.1(d) hereof.
(hh) "Fidelity Guaranty" shall have the meaning assigned in Section
6.1(d) hereof.
(ii) "Financing Agreement" or "Financing Agreements" shall mean this
Agreement, the Notes, the Fidelity Guaranty, the Guaranties, the Province
of Quebec Security Documents and any and all other instruments, agreements
and documents executed in connection herewith or therewith or related
hereto or thereto, together with any amendments, supplements or
modifications hereto or thereto.
(jj) "Fixed Assets" shall mean equipment and other assets of
Borrowers which, by generally accepted accounting principles, must be
treated as fixed assets in financial statements of Borrowers.
(kk) "Further Loans" shall have the meaning assigned in Section 6.2
hereof.
(ll) "Guaranty" and "Guaranties" shall have the meaning assigned in
Section 6.1(h) hereof.
(mm) "Hazardous Material" shall mean any chemical, compound,
material, mixture or substance: (i) the presence of which requires or may
hereafter require notification, investigation, monitoring or remediation
under any Environmental Law; (ii) which is or becomes defined as a
"hazardous waste", "hazardous material" or "hazardous substance" or "toxic
substance" or "pollutant" or "contaminant" under any present or future
applicable federal, state or local law or under the rules and regulations
adopted or promulgated pursuant thereto, including, without limitation,
the Environmental Laws; (iii) which is toxic, explosive, corrosive,
reactive, ignitable, infectious, radioactive, carcinogenic, mutagenic or
otherwise hazardous and is or becomes regulated by any governmental
authority, agency, department, commission, board, agency or
instrumentality of any foreign country, the United States, any state of
the United States, or any political subdivision thereof to the extent any
of the foregoing has or had jurisdiction over any Borrower; (iv) which
contains without limitation, gasoline, diesel fuel or other petroleum
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products, asbestos or polychlorinated biphenyls ("PCBS"); or (v) any other
chemical, material or substance, exposure to, or disposal of, which is now
or hereafter prohibited, limited or regulated by any federal, state or
local governmental body, instrumentality or agency.
(nn) "Indemnifiable Liability" shall have the meaning assigned in
Section 14.1(a) hereof.
(oo) "Indemnitee" and "Indemnitees" shall have the meanings
assigned in Section 14.1(a) hereof.
(pp) "Lender" shall have the meaning assigned in the first
paragraph hereof.
(qq) "Lessor's Agreements" shall have the meaning assigned in
Section 6.1(e) hereof.
(rr) "Liabilities and Expenses" shall have the meaning assigned in
Section 11.1(b) hereof.
(ss) "Loan" means a Revolving Loan or the Additional Loan and
"Loans" means the Revolving Loans and the Additional Loan.
(tt) "Minimum Balance" shall have the meaning assigned in Section
4.1(a) hereof.
(uu) "Minimum Interest Amount" shall have the meaning assigned in
Section 13.1(c) hereof.
(vv) ""Movable Hypothec" shall have the meaning assigned in
Section 7.13 hereof.
(ww) "Notes" shall mean the Revolving Promissory Note and the
Additional Loan Promissory Note.
(xx) "Notice of Borrowing" shall have the meaning assigned in
Section 2.3 hereof.
(yy) "Obligation" and "Obligations" shall mean and include all
loans, advances, interest, indebtedness, liabilities, obligations, fees,
charges, expenses, guaranties, covenants and duties at any time owing by
Borrowers to Lender of every kind and description, whether or not
evidenced by any note or other instrument, whether or not for the payment
of money, whether direct or indirect, absolute or contingent, due or to
become due, now existing or hereafter arising, including, but not limited
to, the Loans, the Termination Fee, all other indebtedness,
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liabilities and obligations of Borrowers arising under this Agreement and
the other Financing Agreements or otherwise, and all costs, expenses,
fees, charges incurred by Lender hereunder or otherwise with respect to
Borrowers, including without limitation, reasonable fees and expenses of
attorneys, paralegals and other professionals incurred in connection with
any of the foregoing, or in any way connected with, involving or relating
to the preservation, enforcement, protection or defense of, or realization
under this Agreement, any of the other Financing Agreements, any related
agreement, document or instrument, the Collateral and the rights and
remedies hereunder or thereunder, including without limitation, all
reasonable costs, expenses and fees incurred in inspecting or surveying
mortgaged real estate, if any, or conducting Environmental studies or
tests, and all reasonable costs, expenses and fees incurred in connection
with any "workout" or default resolution negotiations involving legal
counsel or other professionals and further in connection with any
modification, renegotiation or restructuring of the indebtedness evidenced
by this Agreement and/or any of the other Financing Agreements and/or
Obligations.
(zz) "Plan" shall mean any employee benefit plan or other plan
maintained by Borrowers or any entity affiliated with Borrowers for
employees covered by Title I of ERISA.
(aaa) "Premises" shall mean the real property located at (i) 1420
Springhill Road, McLean, Virginia, (ii) 10305 102nd Terrace, Sebastian,
Florida and (iii) 7900 Taschereau, Suite C-100, Brossard (Quebec) Canada.
(bbb) "Prime Rate" shall mean the Prime Rate as published from time
to time in the "Money Rates" section of The Wall Street Journal or any
successor publication, or in the event that such rate is no longer
published in The Wall Street Journal, a comparable index or reference
selected by Lender. The Prime Rate need not and may not necessarily be
Lender's lowest or most favorable rate.
(ccc) "Province of Quebec Security Documents" shall have the meaning
assigned in Section 6.1(g) hereof.
(ddd) "Receivables" shall have the meaning assigned in Section
8.1(a) hereof.
(eee) "Release" shall mean any release, emission, disposal, leaching
or migration into the environment (including, without limitation, the
abandonment or disposal of any barrels, containers, or other closed
receptacles containing any Hazardous Materials) or into or out of any
property owned, occupied or used by Borrowers.
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(fff) "Renewal Term" shall have the meaning assigned in Section 13.1
(a) hereof.
(ggg) "Revolving Loan" and "Revolving Loans" shall have the meanings
assigned in Section 2.1 hereof.
(hhh) "Revolving Loan Account" shall have the meaning assigned in
Section 2.3 hereof.
(iii) "Revolving Promissory Note" shall have the meaning assigned in
Section 2.3 hereof.
(jjj) "Subsidiary" and "Subsidiaries" shall mean any corporation or
corporations of which the majority of outstanding shares of any stock
having ordinary voting power is at the time owned by Borrowers and/or by
one or more Subsidiaries.
(kkk) "Term" shall have the meaning assigned in Section 13.1(a)
hereof.
(lll) "Termination Fee" shall have the meaning assigned in Section
13.1(c) hereof.
(mmm) "XL" shall have the meaning assigned in the first paragraph
hereof.
(nnn) "XL Canada" shall have the meaning assigned in the first
paragraph hereof.
(ooo)) "XL Revolving Loan Account" shall have the meaning assigned
in Section 2.3 hereof.
ARTICLE II. REVOLVING LOANS
SECTION 2.1. AMOUNT. Subject to the terms and conditions contained
in this Agreement, and so long as no Defaulting Event has occurred, Lender
agrees, in its sole discretion, to make loans (collectively, the
"REVOLVING LOANS" and, individually, a "REVOLVING LOAN") to Borrowers from
time to time until terminated as provided below in principal amounts not
exceeding in the aggregate at any one time outstanding the Borrowing Base,
it being agreed and understood that at no time shall the maximum aggregate
principal amount of the Revolving Loans made by Lender exceed the
Borrowing Base. Without limiting Lender's discretion, notwithstanding the
actual net face value of any Eligible Account of Borrowers, for purposes
of computing the Borrowing Base, the value of any Eligible Account with a
net face value in excess of
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$50,000 shall be reduced to $50,000 prior to the application of such
Borrowing Base. Lender may, in its sole discretion, raise or lower the
$50,000 limit set forth in the immediately preceding sentence without in
any way creating a course of conduct which requires Lender to maintain
such raised or lowered limit or to raise or lower such limit again in the
future.
SECTION 2.2. PAYMENT ON DEMAND. ALL OBLIGATIONS OF BORROWERS ARISING
UNDER THE REVOLVING LOANS SHALL BE PAID BY BORROWERS IN FULL UPON DEMAND
BY LENDER, NOTWITHSTANDING LENDER'S RIGHTS UPON THE OCCURRENCE OF AN EVENT
OF DEFAULT AND WHETHER OR NOT SUCH EVENT OF DEFAULT HAS OCCURRED.
SECTION 2.3. PROCEDURE FOR ADVANCES, NOTICE OF BORROWING, REVOLVING
PROMISSORY NOTE, ETC. Within the limits of the Borrowing Base and the
Term, so long as Borrowers are in compliance with all of the terms and
conditions of this Agreement and no Defaulting Event has occurred,
Borrowers may request borrowings, repay and request reborrowings of
Revolving Loans. Whenever any Borrower desires an advance, Cycomm (on
behalf of itself and XL Canada) or XL, as applicable, shall notify Lender
(which notice shall be irrevocable) by telex, telecopy or telephone of the
proposed borrowing. Such notice (each, a "NOTICE OF BORROWING") shall
specify the date of the proposed borrowing and the amount to be borrowed.
Each Notice of Borrowing must be received by Lender no later than 11:00
a.m., Hartford, Connecticut time on the day such borrowing is requested.
In addition to this Agreement, the Revolving Loans shall be evidenced by a
revolving promissory note payable to Lender in the form of Exhibit A
attached hereto (the "REVOLVING PROMISSORY NOTE"). Insofar as Cycomm (on
behalf of itself and XL Canada) or XL may request, and Lender shall make,
Revolving Loans hereunder, Lender shall enter such advances as debits on
the revolving loan account maintained by or on behalf of such Borrower
with Lender (each such account is herein referred to as a "REVOLVING LOAN
ACCOUNT"; such account maintained by Cycomm on behalf of itself and XL
Canada is herein referred to as the "CYCOMM REVOLVING LOAN ACCOUNT"; and
such account maintained by XL is herein referred to as the "XL REVOLVING
LOAN ACCOUNT"). Lender may record to the Cycomm Revolving Loan Account, in
accordance with customary accounting procedures, all accrued and unpaid
interest paid in respect of borrowings by Cycomm on behalf of itself and
XL Canada. Lender may record to the XL Revolving Loan Account, in
accordance with customary accounting procedures, all accrued and unpaid
interest paid in respect of borrowings by XL. Lender may also record to
either the Cycomm Revolving Loan Account or the XL Revolving Loan Account,
in Lender's sole discretion (or Lender may allocate between
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the Revolving Loan Accounts in amounts determined by Lender in its sole
discretion), all fees, late fees, usual and customary charges for the
maintenance and administration of checking and any other accounts
maintained by Borrowers with Lender and other fees and charges which are
properly chargeable to Borrowers under this Agreement; all payments,
subject to collection, made by Borrowers on account of indebtedness
evidenced by either Revolving Loan Account; all proceeds of Collateral
which are finally paid to Lender in its own office in cash or collected
items; and other appropriate debits and credits, including, without
limitation, payments of interest due hereunder; provided that Lender
shall, to the extent practical, apply any proceeds of Collateral first to
the Revolving Loan Account maintained by or on behalf of the Borrower who
previously owned such Collateral.
SECTION 2.4. MONTHLY STATEMENTS. On a monthly basis, Lender shall
render a statement for each Revolving Loan Account, which statement shall
be considered correct and accepted by Borrowers and conclusively binding
upon Borrowers unless Borrowers notify Lender to the contrary twenty (20)
days of the receipt of said statement by Borrowers. Lender shall have the
right to debit each applicable Revolving Loan Account for all interest
charges on the Loan as and when the same shall be due and payable, if not
otherwise paid by Borrowers.
SECTION 2.5. LENDER DISCRETION. Nothing herein shall be construed to
(a) require Lender to make Revolving Loans, and/or (b) prohibit Lender
from lending in excess of the Borrowing Base, it being agreed that all
such loans and advances shall be at Lender's sole discretion and shall not
establish a pattern or custom binding upon Lender.
SECTION 2.6. COLLECTIONS ON CANADIAN ACCOUNTS. The Borrowers agree
that payments on all Accounts with Account Debtors located in Canada shall
be remitted directly by such Account Debtors to Lender or to an address
designated by Lender. Borrowers agree to give irrevocable notice to such
Account Debtors that all payments in respect of such Accounts shall be so
paid directly to such account of Lender. Upon Lender's request, Borrowers
agree to execute a lockbox agreement in form, scope and substance
satisfactory to Lender in its sole discretion.
SECTION 2.7. CONVERSION OF CANADIAN CURRENCY.
(a) Borrowers acknowledge and agree that all Accounts and all
Inventory (including Inventory located in Canada and Inventory owned by XL
Canada) shall be valued and denominated in U.S. Dollars for all purposes
of this Agreement.
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(b) All payments of Accounts in Canadian currency shall be converted
to Dollars by multiplying the amount thereof by the Canadian Conversion
Rate then in effect at the time such payment is received by Lender.
(c) Borrowers acknowledge and agree that any and all fees, taxes and
exchange risks and charges, foreign or otherwise, on or in respect of the
conversion, valuation or determination of any such amounts shall be the
sole responsibility of Borrowers and Lender may charge any such costs to
the Cycomm Revolving Loan Account.
ARTICLE III. ADDITIONAL LOAN
SECTION 3.1. AMOUNT. Subject to the terms and conditions contained
in this Agreement, Lender agrees to make a loan to Borrowers in the
original principal amount of $568,000 (the "ADDITIONAL LOAN"). In addition
to this Agreement, the Additional Loan shall be evidenced by an Additional
Loan Promissory Note payable to Lender in the form of Exhibit B attached
hereto (the "ADDITIONAL LOAN PROMISSORY NOTE").
SECTION 3.2. PAYMENT ON DEMAND. ALL OBLIGATIONS OF BORROWERS ARISING
UNDER THE ADDITIONAL LOAN SHALL BE PAID BY BORROWERS IN FULL UPON DEMAND
BY LENDER, NOTWITHSTANDING LENDER'S RIGHTS UPON THE OCCURRENCE OF AN EVENT
OF DEFAULT AND WHETHER OR NOT SUCH EVENT OF DEFAULT HAS OCCURRED AND, IF
DEMAND IS NOT SOONER MADE, AS SET FORTH IN THE ADDITIONAL LOAN PROMISSORY
NOTE.
SECTION 3.3. MONTHLY STATEMENTS. On a monthly basis, Lender shall
render a statement for the Additional Loan, which statement shall be
considered and accepted by Borrowers and conclusively binding upon
Borrowers unless Borrowers notifies Lender to the contrary within twenty
(20) days of the receipt of said statement by Borrowers. Lender shall have
the right to debit either Revolving Loan Account for all principal,
interest and other charges on the Additional Loan as and when the same
shall be due and payable, if not otherwise paid by Borrowers.
ARTICLE IV. INTEREST, FEES AND OTHER CHARGES
SECTION 4.1. INTEREST.
(a) INTEREST RATES. So long as no Defaulting Event has occurred, the
Loans shall bear interest (from the date made through and including the
date of payment in full), at a floating rate per annum equal to three
percentage points (3.0%) above the Prime Rate, on the greatest of:
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(i) the actual average balance outstanding under the Loans; (ii) the sum
of (A) a minimum assumed average monthly balance outstanding under the
Revolving Loan of $400,000 attributable to borrowings by Cycomm plus (B) a
minimum assumed average monthly balance outstanding under the Revolving
Loan of $1,132,000 attributable to borrowings by XL plus (C) the actual
average balance outstanding under the Additional Loan; (iii) the sum of
(A) a minimum assumed average monthly balance outstanding under the
Revolving Loan of $400,000 attributable to borrowings by Cycomm (on behalf
of itself and XL Canada) plus (B) the actual average balance outstanding
under the Revolving Loan attributable to borrowings by XL plus (C) the
actual average balance outstanding under the Additional Loan; and (iv) the
sum of (A) the actual average balance outstanding under the Revolving Loan
attributable to borrowings by Cycomm (on behalf of itself and XL Canada)
plus (B) a minimum assumed average monthly balance outstanding under the
Revolving Loan of $1,132,000 attributable to borrowings by XL plus (C) the
actual average balance outstanding under the Additional Loan (the "MINIMUM
BALANCE") .
(b) PAYMENT OF INTEREST. So long as any of the Obligations remain
outstanding, interest on the Loans shall be due and payable without notice
or demand monthly in arrears beginning on January 1, 1998 and continuing
on the first Business Day of each and every month thereafter.
(c) DEFAULT INTEREST RATE. Notwithstanding the foregoing, interest
on the Loans, at all times after the occurrence of an Event of Default,
and interest on all payments of interest that are not paid when due, shall
accrue at a rate per annum equal to four percentage points (4.0%) above
the applicable interest rates otherwise in effect under this Agreement.
(d) CALCULATION OF INTEREST. Interest on the Loans shall be
calculated on the basis of a 360-day year and the actual number of days
elapsed.
(e) LATE PAYMENT. If any amount due hereunder or under the Notes are
not paid within ten (10) days after the date it is due and payable,
without in any way affecting Lender's right to make demand hereunder or to
declare an Event of Default to have occurred, Lender may in its sole
discretion assess a late charge equal to five percent (5.0%) of such late
payment against Borrowers, which late charge shall be immediately due and
payable and may be paid by a charge to Borrowers' loan account as
contemplated in Section 2.3 above.
<PAGE> 15
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(f) LAWFUL INTEREST. It being the intent of the parties that the
rate of interest and all other charges to Borrowers be lawful, if for any
reason the payment of a portion of interest, fees or charges as required
by this Agreement would exceed the limit established by applicable law
which a commercial lender such as Lender may charge to commercial
Borrowers such as Borrowers, then the obligation to pay interest or
charges shall automatically be reduced to such limit and, if any amounts
in excess of such limits shall have been paid, then such amounts shall be
applied to the unpaid principal amount of the Obligations or refunded to
Borrowers so that under no circumstances shall interest or charges
required hereunder exceed the maximum rate allowed by law, as aforesaid.
SECTION 4.2. CLOSING FEES. On or before the date hereof, Borrowers
shall pay or have paid to Lender all fees, expenses and other costs
incurred by Lender in connection with the closing of the Loans (including,
without limitation, all reasonable attorney's and other professionals'
fees and expenses).
SECTION 4.3. COMMITMENT FEE. Borrowers shall also pay to Lender a
nonrefundable commitment fee equal to one percent (1%) of the maximum
principal amount of the Loans on the date hereof and on each anniversary
date of this Agreement. It is understood that the determination of the
maximum principal amount of the Loans shall be made without regard to the
components of the Borrowing Base based upon Eligible Accounts and Eligible
Inventory. For example, for purposes of this provision, on the date hereof
the maximum principal amount of the Loans is $4,000,000 and the commitment
fee payable on the date hereof is $40,000.
ARTICLE V. REPRESENTATIONS AND WARRANTIES
SECTION 5.1. REPRESENTATIONS AND WARRANTIES. The Borrowers
jointly and severally represent and warrant to Lender that:
(a) GOOD STANDING AND QUALIFICATION. They are duly organized,
validly existing and in good standing under the laws of the State of
Wyoming in the case of Cycomm, the State of Delaware in the case of XL and
the Province of Quebec and Canada in the case of XL Canada. Each Borrower
has all requisite corporate power and authority to own and operate its
properties and to carry on its business as presently conducted and is duly
qualified to do business and is in good standing as a foreign corporation
in each jurisdiction wherein the character of the properties owned or
leased by it therein or in which the transaction of its business therein
makes such qualification necessary.
<PAGE> 16
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(b) CORPORATE AUTHORITY. They have full power and authority to enter
into this Agreement and the other Financing Agreements to which they are a
party, to make the borrowings contemplated herein, to execute and deliver
the Notes and the other Financing Agreements to which they are a party,
and to incur the obligations provided for herein and therein, all of which
have been duly authorized by all necessary and proper corporate action. No
other consent or approval or the taking of any other action in respect of
shareholders or of any public authority is required as a condition to the
validity or enforceability of this Agreement, the Notes, the other
Financing Agreements or any other instrument, document or agreement
delivered in connection herewith or therewith.
(c) BINDING AGREEMENTS. This Agreement constitutes, and the Notes
and the other Financing Agreements executed and/or delivered in connection
herewith or therewith, when issued and delivered pursuant hereto for value
received shall constitute, valid and legally binding obligations of
Borrowers, enforceable in accordance with their respective terms, except
as enforcement may be limited by principles of equity, bankruptcy,
insolvency, or other laws affecting the enforcement of creditors' rights
generally.
(d) LITIGATION. To the best of Borrowers' knowledge after due and
diligent inquiry by each Borrower's President and Chief Financial Officer,
there are no actions, suits or proceedings pending against Borrowers
before any court or administrative agency, nor are there any actions,
suits or proceedings threatened, which, individually or in the aggregate,
would materially and adversely affect the financial condition, assets or
operations of Borrowers, nor are there any such actions, suits or
proceedings which question the validity of this Agreement, the Notes, any
of the other Financing Agreements, or any action to be taken in connection
with the transactions contemplated hereby or thereby.
(e) NO CONFLICTING LAW OR AGREEMENTS. The execution, delivery and
performance by Borrowers of this Agreement, the Notes and each other
Financing Agreement, as the case may be, does not (i) violate any
provision of any of their Charters, certificates of incorporation, or
By-laws or any order, decree or judgment, or any provision of any statute,
rule or regulation to which any Borrower may be subject; (ii) violate or
conflict with, result in a breach of or constitute (with notice or lapse
of time, or both) a default under any shareholder agreement, stock
preference agreement, mortgage, hypothec, indenture or other contract or
undertaking to which any one of them is a party, or by which any of their
properties may be bound; and (iii) result in the creation or imposition of
any lien, charge or encumbrance of any nature whatsoever upon any
<PAGE> 17
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property or assets of Borrowers except for the liens granted hereunder to
Lender.
(f) TAXES. With respect to all of its taxable periods they have
filed all tax returns which are required to be filed and all federal,
state, provincial, municipal, franchise and other taxes shown on such
filed returns have been paid or are being diligently contested by
appropriate proceedings and have been reserved against, as required by
generally accepted accounting principles, consistently applied.
(g) FINANCIAL STATEMENTS. The Borrowers have heretofore delivered to
Lender and Lender acknowledges receipt of, Borrowers': (i) audited annual
balance sheets as of December 31, 1996, and the related statements of
income, retained earnings and cash flows for the fiscal year or period
then ended. Each of such statements is complete and correct in all
material respects and fairly presents their consolidated financial
condition as of the dates and for the periods referred to therein and has
been prepared in accordance with generally accepted accounting principles
consistently applied by the applicable Borrower throughout the periods
involved. There are no liabilities, direct or indirect, fixed or
contingent, of Borrowers as of the dates of said balance sheets which are
not reflected in such statements or in the notes thereto.
(h) ADVERSE DEVELOPMENTS. Since December 31, 1996 there has been no
material adverse change in their financial condition, business,
operations, affairs or prospects or in any of their properties or assets.
(i) EXISTENCE OF ASSETS AND TITLE THERETO. They have good and
marketable title to all of their properties and assets, including the
properties and assets reflected in the financial statements delivered in
connection herewith. None of such properties or assets are subject to any
mortgage, hypothec, pledge, lien, lease, encumbrance or charge except
those permitted under the terms of this Agreement.
(j) REGULATIONS G, T, U AND X. The proceeds of the borrowings
hereunder are not being used and will not be used, directly or indirectly,
for the purposes of purchasing or carrying any margin stock in
contravention, or which would cause any Borrower or Lender to be in
violation, of Regulations G, T, U or X promulgated by the Board of
Governors of the Federal Reserve System or any applicable Canadian or
Quebec laws.
(k) COMPLIANCE. To the best of Borrowers' knowledge after due and
diligent inquiry by each Borrower's President and Chief Financial Officer,
they are not in default with respect to any order, writ, injunction
<PAGE> 18
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or decree of any court or of any federal, state, provincial, municipal or
other governmental department, commission, board, bureau, agency,
authority or official, nor are they in violation of any law, statute, rule
or regulation to which they or any of their properties are subject and
they have not received notice of any such default from any party and are
not in default in the payment or performance of any of their obligations
to any third parties or in the performance of any mortgage, hypothec,
indenture, lease, contract or other agreement to which they are a party or
by which any of their assets or properties may be bound.
(l) LEASES They enjoy quiet and undisturbed possession under all
leases under which they are operating, and all of such leases are valid
and subsisting and not in default.
(m) PENSION PLANS.
(i) None of the Companies sponsors or maintains any Plan
or has ever sponsored or maintained any Plan;
(ii) To the extent applicable, each of the Companies agrees to
do all acts, including, but not limited to, making all contributions
necessary to maintain compliance with ERISA or the Code, and agrees
not to terminate any Plan in a manner or do or fail to do any act
which could result in the imposition of a lien on any of its
properties pursuant to Section 4068 of ERISA;
(iii) None of the Companies sponsors or maintains, or has ever
contributed to, or has incurred any withdrawal liability under, a
"multi-employer plan" as defined in Section 3 of ERISA and none of
the Companies has any written or verbal commitment of any kind to
establish, maintain or contribute to any "multi-employer plan" under
the Multi-employer Pension Plan Amendment Act of 1980;
(iv) None of the Companies has any unfunded liability in
contravention of ERISA and the Code;
(n) DEFERRED COMPENSATION ARRANGEMENTS. Except as set forth in
Schedule 5.1(n) attached hereto, none of the Companies has entered into
employment contracts or deferred compensation plans, incentive
compensation plans, executive compensation plans, arrangements or
commitments (each, individually, an "ARRANGEMENT"). With respect to each
such Arrangement:
(i) Such Arrangement complies currently, and has complied in
the past, both as to form and operation with its terms
<PAGE> 19
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and the provisions of the Code and ERISA and all applicable laws,
rules and regulations;
(ii) To the extent applicable, the disclosure and reporting
provisions of the Securities Act of 1933 and the Securities Exchange
Act of 1934 have been satisfied;
(iii) Such Arrangement is legally valid and binding and is in
full force and effect;
(iv) The Companies have made all contributions required to be
made under any such Arrangement and no contributions are currently
due and owing;
(v) There are no actions, suits or claims pending (other than
routine claims for benefits) or, to the best of the Companies'
knowledge which could be reasonably expected to be asserted against
any such Arrangement; and
(vi) The Companies have performed all obligations required to
be performed by it under any such Arrangement and the Companies are
not in default or in violation of, and the Companies have no
knowledge of a default or violation by any other party to any such
Arrangement.
(o) CHIEF EXECUTIVE OFFICE. Their chief executive offices and
principal places of business, and the offices where their books and
records concerning Collateral are kept, are set forth in the first
paragraph of this Agreement.
(p) PLACES OF BUSINESS AND LOCATION OF COLLATERAL. They have no
other places of business and locate no Collateral, specifically including
books and records, at any location other than as set forth in the first
paragraph of this Agreement and as set forth on Schedule 5.1(p) attached
hereto. They shall maintain a full and complete set of their books and
records in their offices at the chief executive offices described in the
immediately preceding paragraph.
(q) CONTINGENT LIABILITIES. They are not party to any suretyship,
guaranty or other similar type agreement, nor have they offered their
endorsement to any individual, concern, corporation or other entity or
acted or failed to act in any manner which would in any way create a
contingent liability that does not appear in the financial statements
referred to hereinbefore.
<PAGE> 20
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(r) CONTRACTS. No contract to which any Borrower is a party is
currently being renegotiated or is by its terms subject to renegotiation,
nor is any Borrower in default in any material respect of any contract. No
Borrower is party to any government contract.
(s) UNIONS AND PENSIONS. They are not a party to any collective
bargaining or union agreement.
(t) LICENSES. They have all licenses, permits and other permissions
required by any government, agency or subdivision thereof, or from any
licensing entity to which Borrowers may be subject, if any, necessary for
the conduct of their respective businesses, all of which they represent to
be in good standing and in full force and effect.
(u) COLLATERAL. The Borrowers are and shall continue to be the sole
owners of the Collateral free and clear of all liens, encumbrances,
security interests and claims except the liens granted to Lender hereunder
and the security interests and liens listed on Schedule 5.1(u) attached
hereto; Borrowers are fully authorized to sell, transfer, pledge and/or
grant a security interest in each and every item of the Collateral to
Lender; all documents and agreements related to the Collateral shall be
true and correct and in all respects what they purport to be; all
signatures and endorsements that appear thereon shall be genuine and all
signatories and endorsers shall have full capacity to contract; none of
the transactions underlying or giving rise to the Collateral shall violate
any applicable state, provincial or federal laws or regulations; all
documents relating to the Collateral shall be legally sufficient under
such laws or regulations and shall be legally enforceable in accordance
with their terms; and Borrowers agree to defend the Collateral against the
claims of all persons other than Lender.
(v) TRADENAMES. Except as set forth in Schedule 5.1(v) attached
hereto, they do not have any tradenames.
(w) FINANCIAL INFORMATION. All financial information including, but
not limited to, information relating to the Receivables and Inventory,
submitted by any Borrower to Lender, whether previously or in the future,
is and will be true and correct in all material respects, and is and will
be complete insofar as may be necessary to render it a true and accurate
depiction of the subject matter to which it relates.
(x) PARENT, AFFILIATE OR SUBSIDIARY CORPORATIONS. Except as set
forth in Schedule 5.1(x) attached hereto, Borrowers have no parent
corporation and have no affiliates or Subsidiaries.
(y) ENVIRONMENTAL MATTERS.
<PAGE> 21
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(i) The Borrowers have obtained all permits, licenses and
other authorizations which are required under all Environmental
Laws, if any. They are in compliance with the terms and conditions
of all such permits, licenses and authorizations, if any, and are
also in compliance with all other limitations, restrictions,
conditions, standards, prohibitions, requirements, obligations,
schedules and timetables contained in any applicable Environmental
Law or in any regulation, code, plan, order, decree, judgment,
injunction, notice or demand letter issued, entered, promulgated or
approved thereunder.
(ii) To the best of Borrowers' knowledge after due and
diligent inquiry by each Borrower's President and Chief Financial
Officer, no notice, notification, demand, request for information,
citation, summons or order has been issued, no complaint has been
filed, no penalty has been assessed and no investigation or review
is pending or threatened by any governmental or other entity with
respect to any alleged failure by any Borrower to have any permit,
license or authorization required in connection with the conduct of
its business or with respect to any Environmental Laws, including
without limitation, Environmental Laws relating to the generation,
treatment, storage, recycling, transportation, disposal or release
of any Hazardous Materials.
(iii) No oral or written notification of a release of any
Hazardous Material has been filed by or against Borrowers and no
property now or previously owned, leased or used by any Borrower,
including without limitation, the Premises, is listed or proposed
for listing on the Comprehensive Environmental Response,
Compensation and Inventory of Sites or National Priorities List
under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, or on any similar state or
federal list of sites requiring investigation or cleanup.
(iv) There are no liens or encumbrances arising under or
pursuant to any Environmental Laws on any of the property or
properties owned, leased or used by the Borrowers, including without
limitation, any of the properties owned or leased by the Borrowers,
and to the best of Borrower's knowledge after due and diligent
inquiry by each Borrower's President and Chief Financial Officer, no
governmental actions have been taken or are in process which could
subject any of such properties to such liens or encumbrances or, as
a result of which Borrowers would be required to place any notice or
restriction relating to the presence of
<PAGE> 22
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Hazardous Materials at any property owned by the Borrowers in any
deed to such property.
(v) Neither it nor, to the best knowledge of Borrowers, any
previous owner, tenant, occupant or user of any property owned,
leased or used by Borrowers, has (i) engaged in or permitted any
operations or activities upon or any use or occupancy of such
property, or any portion thereof, for the purpose of or in any way
involving the release, discharge, refining, dumping or disposal
(whether legal or illegal, accidental or intentional) of any
Hazardous Materials on, under, or in or about such property; or (ii)
transported or had transported any Hazardous Materials to such
property except to the extent such Hazardous Materials are raw
products commonly used in day-to-day manufacturing operations of
such property and, in such case, in compliance with, all
Environmental Laws; (iii) engaged in or permitted any operations or
activities which would allow the facility to be considered a
treatment, storage or disposal facility as that term is defined in
40 CFR 264 and 265; or (iv) constructed, stored or otherwise located
Hazardous Materials on, under, in or about any such property except
to the extent commonly used in day-to-day operations of any such
property and, in such case, in compliance with all Environmental
Laws. Further, to the best knowledge of Borrowers, no Hazardous
Materials have migrated from other properties upon, about or beneath
any such property.
(z) USE OF PROCEEDS. The Borrowers will use the proceeds of the
Loans solely (i) to satisfy in full loans outstanding to Barnett Bank and
Banque Nationale de Paris (Canada) on the date hereof and (ii) for working
capital purposes.
ARTICLE VI. CONDITIONS OF LENDING
SECTION 6.1. CONDITIONS OF THE INITIAL LOANS. Subject to the terms
hereof, the obligation of Lender to make the first Revolving Loan and the
Additional Loan under this Agreement is subject to the fulfillment of the
following conditions precedent at the time of the execution of this
Agreement:
(a) NOTES. Lender shall have received a duly executed Revolving
Promissory Note and a duly executed Additional Loan Promissory Note drawn
to its order.
(b) EVIDENCE OF CORPORATE ACTION. Lender shall have received
certified copies of all corporate action (in form and substance
satisfactory to Lender) taken by Borrowers to authorize the execution,
delivery and
<PAGE> 23
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performance of this Agreement, the Notes and the other Financing
Agreements to which any Borrower is a party, and the borrowings to be made
hereunder and thereunder, together with true copies of Borrowers'
respective Charters and By-laws and such other papers as Lender or its
counsel may require.
(c) OPINIONS OF COUNSEL. Lender shall have received favorable
written opinions of United States and Canadian counsel for the Borrowers
and the Fidelity Guarantor, accompanied by such supporting documents as
Lender or its counsel may require.
(d) FIDELITY GUARANTY. Lender shall have received a duly executed
Fidelity Guaranty (a "FIDELITY GUARANTY") from Michael R. Skoff (the
"FIDELITY GUARANTOR"). The Fidelity Guaranty shall be in form, scope and
substance satisfactory to Lender and its counsel.
(e) LESSOR'S AGREEMENT. Borrowers shall cause to be delivered to
Lender lessor's agreements with respect to the Premises located in
Sebastian, Florida and Quebec, Canada (collectively, the "LESSOR'S
AGREEMENTS") each in form, scope and substance satisfactory to Lender and
its counsel.
(f) UCC-1 FINANCING STATEMENTS, QUEBEC REGISTRATION CERTIFICATES.
Lender shall have received from Borrowers duly executed UCC-1 financing
statements, Quebec registration certificates and such other documents as
Lender deems necessary or proper to perfect its security interest in the
Collateral, all of which shall be in form, scope and substance
satisfactory to Lender and its counsel.
(g) PROVINCE OF QUEBEC SECURITY DOCUMENTS. Lender shall have
received the duly executed Moveable Hypothec and each other document or
instrument Lender deems necessary or proper to perfect its security
interest in the Collateral under Canadian law (the "PROVINCE OF QUEBEC
SECURITY DOCUMENTS"), all of which shall be in form, scope and substance
satisfactory to Lender and its counsel.
(h) GUARANTIES. Lender shall have received from each Borrower a duly
executed Guaranty Agreement (each a "GUARANTY" and collectively, the
"GUARANTIES") each in form, scope and substance satisfactory to Lender and
its counsel.
(i) NOTICE OF ASSIGNMENTS AND POST OFFICE BOX CHANGE OF ADDRESS
CARDS. Lender shall have received a notice of assignment and a post office
change of address cards from each of the Borrowers, which shall be in
form, scope and substance satisfactory to Lender and its counsel; provided
that such documents shall be held by Lender and
<PAGE> 24
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utilized by Lender only after the occurrence of a demand for payment of
the Loans or an Event of Default.
(j) FURTHER DOCUMENTS. Lender shall have received such further
documents, instruments and agreements as Lender may request, including
without limitation, landlord's agreements, warehouse agreements and
evidence that the insurance policies and certificates evidencing adequate
insurance and coverage on each of Borrowers' assets are currently in full
force and effect, continue to name Lender as loss payee or additional
insured, as the case may be, and that the premiums are current.
SECTION 6.2. CONDITIONS OF ADDITIONAL REVOLVING LOANS. In addition
to the conditions in Section 6.1 above, Lender shall make no further
Revolving Loans (collectively, the "FURTHER LOANS") unless the following
conditions shall exist or have been satisfied by Borrowers at the time any
Further Loan is requested:
(a) ABSENCE OF TERMINATION OR DEFAULT. Lender shall not have
terminated the Revolving Loan facility or the Additional Loan hereunder,
nor shall a Defaulting Event exist or have occurred.
(b) COMPLIANCE CERTIFICATES. On the date of each Revolving Loan
hereunder and after giving effect thereto, Borrowers shall have delivered
to Lender, upon Lender's request, a certificate executed by their chief
financial officer which states, among other things, that: (i) Borrowers
have complied, and are then in compliance, with all the terms, covenants
and conditions of this Agreement and the other Financing Agreements to
which they are a party; (ii) there exists no Event of Default or
Defaulting Event; and (iii) the representations and warranties contained
herein and in the other Financing Agreements are true and correct with the
same effect as though such representations and warranties had been made at
the time of each Further Loan.
(c) BORROWING BASE. The indebtedness of Borrowers by virtue of the
making of any Revolving Loan shall not exceed the Borrowing Base.
Borrowers shall not request any Revolving Loan if the effect of such
Revolving Loan shall be to cause the balance of all Revolving Loans to
exceed the Borrowing Base.
(d) FURTHER DOCUMENTS. Lender shall have received such further
documents, instruments and agreements as Lender may reasonably request.
<PAGE> 25
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ARTICLE VII. COVENANTS
A. AFFIRMATIVE COVENANTS.
The Borrowers jointly and severally covenant and agree that from the date
hereof until payment and performance in full of all Obligations, and until the
termination of this Agreement, unless Lender otherwise consents in writing,
Borrowers shall:
SECTION 7.1. FINANCIAL STATEMENTS. Deliver or caused to be delivered
to Lender: (a) within thirty (30) days after the close of each fiscal
month of Borrowers, internally prepared financial statements of Borrowers
including consolidated and consolidating balance sheets as of the close of
each month, and statements of income and retained earnings for such month,
and for that portion of the fiscal year-to-date then ended, which shall be
prepared on a basis consistent with that of the preceding period or
containing disclosure of the effect on financial condition or results of
operations of any change in such preparation, and which shall be certified
by the chief financial officer of Borrowers as being accurate and fairly
presenting the financial condition of Borrowers; (b) within ninety (90)
days after the close of each fiscal year of Borrowers, consolidated
audited financial statements including a balance sheet as of the close of
such fiscal year and statements of income, stockholders' capital and cash
flow for the year then ended, prepared in conformity with generally
accepted accounting principles, applied on a basis consistent with that of
the preceding year or containing disclosure of the effect on financial
condition or results of operations of any change in the application of
accounting principles during the year, and accompanied by a report thereon
of a recognized certified public accounting firm selected by Borrowers and
reasonably satisfactory to Lender, which opinion shall state that such
financial statements fairly present the financial condition and results of
operations of Borrowers in accordance with generally accepted accounting
principles, and also accompanied by a written statement from such
accountants stating that they have reviewed such financial statements and
have found no evidence of an Event of Default having occurred or of an
event which with passage of time and/or giving of notice would constitute
an Event of Default having occurred; (c) within ninety (90) days after the
close of each fiscal year of Borrowers, internally prepared consolidating
financial statements including a balance sheet as of the close of such
fiscal year and statements of income, stockholders' capital and cash flow
for the year then ended, prepared in conformity with generally accepted
accounting principles, applied on a basis consistent with that of the
preceding year or containing disclosure of the effect on financial
condition or results of operations of any change in the application of
accounting principles during the year; (d) within ten (10)
<PAGE> 26
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days of the close of each month, monthly aging of accounts receivable and
accounts payable and inventory status reports in form, scope and substance
satisfactory to Lender; (e) within ten (10) days after filing the same
with the Securities and Exchange Commission, a copy of Cycomm's Annual
Report on Form 10-K, its Quarterly Reports on Form 10-Q, any Current
Reports on Form 8-K and any proxy statements; (f) promptly upon Lender's
written request, such other information about the financial condition and
operations of Borrowers as Lender may, from time to time, reasonably
request; and (g) upon becoming aware of any Event of Default, or the
occurrence or existence of a Defaulting Event, notice thereof in writing.
All reports required hereunder or requested by Lender involving items such
as sales and cash receipts, accounting journals, monthly detailed account
receivable aging reports and accounts payable and inventory status reports
shall be provided by Borrowers to Lender in ASCII readable format either
on disk or via modem transmission to Lender. Borrower agrees to cooperate
fully with Lender to coordinate the timely receipt of all such reports in
such form or format as Lender may reasonably request.
SECTION 7.2. INSURANCE AND ENDORSEMENTS. (a) Keep their properties
and cause the Premises to be insured against fire and other hazards
(pursuant to so-called "All Risk" coverage) in amounts and with companies
reasonably satisfactory to Lender to the same extent and covering such
risks as is customary in the same or a similar business; maintain public
liability coverage, including without limitation, products liability
coverage, against claims for personal injuries or death; and maintain all
worker's compensation, C.S.S.T., employment or similar insurance as may be
required by applicable law; and (b) all insurance shall contain such
terms, be in such form, and be for such periods reasonably satisfactory to
Lender, and be written by carriers duly licensed by the appropriate
governmental authority of each state where any Collateral is located.
Without limiting the generality of the foregoing, such insurance must
provide that it may not be canceled without thirty (30) days' prior
written notice to Lender. Borrowers shall cause Lender to be endorsed as a
loss payee with a long form Lender's Loss Payable Clause, in form and
substance reasonably acceptable to Lender on all such insurance. In the
event of failure to provide and maintain insurance as herein provided,
Lender may, at its option, provide such insurance and charge the amount
thereof to either Revolving Loan Account in Lender's sole discretion.
Borrowers shall furnish to Lender certificates or other satisfactory
evidence of compliance with the foregoing insurance provisions. Borrowers
hereby irrevocably appoint Lender as their attorney-in-fact, coupled with
an interest, to make proofs of loss and claims for insurance, and to
receive payments of the insurance proceeds and execute and endorse all
documents, checks and drafts in connection
<PAGE> 27
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with payment of such insurance. Any insurance proceeds received by Lender
shall be applied to the Obligations in such order and manner as Lender
shall determine in its sole discretion.
SECTION 7.3. TAX AND OTHER LIENS. Comply with all statutes and
government regulations and pay all taxes, assessments, governmental
charges or levies, or claims for labor, supplies, rent and other
obligations made against any of them or their property which, if unpaid,
might become a lien or charge against Borrowers or their properties,
except liabilities being contested in good faith and against which
adequate reserves have been established in accordance with generally
accepted accounting principles.
SECTION 7.4. PLACES OF BUSINESS; LOCATION OF COLLATERAL. Maintain
their chief places of business and chief executive offices at the
addresses set forth in the introductory sentence hereof and their other
places of business and locations of Collateral as set forth in Schedule
5.1(p) hereto unless Borrowers shall have given Lender thirty (30) days'
prior written notice of any change thereof.
SECTION 7.5. INSPECTIONS. Allow Lender by or through any of its
officers, attorneys, and/or accountants designated by it, for the purpose
of ascertaining whether or not each and every provision hereof and of any
related agreement, instrument and document is being performed, to enter
the offices and plants of Borrowers to examine or inspect any of the
properties, books and records or extracts therefrom, to make copies of
such books and records or extracts therefrom and to make complete
environmental studies and/or investigations, and to discuss the affairs,
finances and accounts thereof with Borrowers, all at such reasonable
times, upon reasonable notice (at least 48 hours in advance) and as often
as Lender or any representative of Lender may reasonably request. In
addition, upon Lender's request, Borrowers shall provide Lender with an
environmental site assessment or environmental audit report, or an update
of such an assessment or audit, all in scope, form and content
satisfactory to Lender.
SECTION 7.6. LITIGATION. Promptly advise Lender of the commencement
or threat of litigation, including arbitration proceedings and any
proceedings before any governmental agency (but excluding product
liability claims which are either fully covered by insurance or adequately
covered by insurance and which are not likely to have a material adverse
effect on the business, assets or condition (financial or otherwise) of
Borrowers), which is instituted against any Borrower or, upon receipt of
any information pertaining thereto, and is reasonably
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likely to have a materially adverse effect upon the condition, financial,
operating or otherwise, of Borrowers.
SECTION 7.7. MAINTENANCE OF EXISTENCE. Maintain their corporate
existence and comply with all valid and applicable statutes, rules and
regulations, and maintain their properties in good repair, working order
and operating condition. Borrowers shall immediately notify Lender of any
event causing material loss in the value of their assets.
SECTION 7.8. INVENTORY. Allow Lender to examine and inspect the
Inventory at reasonable times and intervals and upon reasonable notice, at
least 48 hours in advance. Borrowers shall immediately notify Lender of
any event causing material loss or depreciation in value of Inventory and
the amount of such loss or depreciation.
SECTION 7.9. ERISA. Immediately notify Lender of any event
which causes any Borrower not to be in compliance with ERISA in all
material respects.
SECTION 7.10. NOTICE OF CERTAIN EVENTS. Give prompt written
notice to Lender of:
(a) any material dispute that may arise between Borrowers and any
governmental regulatory body or law enforcement agency;
(b) any labor controversy resulting or likely to result in a strike
or work stoppage against Borrowers;
(c) any proposal by any public authority to acquire the assets or
business of Borrowers;
(d) the location of any Collateral other than at Borrowers' places
of business disclosed in this Agreement (other than Collateral in transit
in the ordinary course of Borrowers' business);
(e) any proposed or actual change of the name, identity or corporate
structure of Borrowers;
(f) any circumstance or event by virtue of which or in connection
with which Borrowers may have incurred or may incur any liability, expense
or responsibility under any Environmental Law including, without
limitation: (i) any Release of any Hazardous Material required to be
reported to any federal, state or local governmental authority,
instrumentality or agency under any applicable Environmental Law; (ii) any
and all written communications with respect to claims or suits under
<PAGE> 29
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any applicable Environmental Law or any Release of Hazardous Material
required to be reported to any federal, state or local governmental
authority, instrumentality or agency; (iii) any remedial action taken by
Borrowers or any other person in response to (A) any Hazardous Material
on, under or about the properties or assets of Borrowers, the existence of
which may give rise to a claim or suit resulting in a material change of
Borrowers' business operations or financial condition, or (B) any claim or
suit resulting in a material change of Borrowers' business operations or
financial condition; (iv) Borrowers' discovery of any occurrence or
condition on any real property adjoining or in the vicinity of Borrowers'
business premises which may cause such premises to be in violation of any
Environmental Law or to be subject to any restrictions on the ownership,
occupation, transferability or use thereof under any Environmental Law;
and (v) any request for information from any federal, state or local
governmental authority, instrumentality or agency that indicates such
entity is investigating Borrowers' potential responsibility for a Release
of Hazardous Material;
(g) any other matter which has resulted or is reasonably likely to
result in a material adverse change in the financial condition or
operations of Borrowers;
(h) any information received by Borrowers with respect to any
Receivable that may materially affect the value thereof or the rights and
remedies of Lender with respect thereto; and
(i) any action, suit or claim pending or which could be reasonably
expected to be asserted against Borrowers.
SECTION 7.11. DEFAULTS. Upon the occurrence of an Event of Default
or of a Defaulting Event, give prompt written notice of such occurrence to
Lender signed by the president or chief financial officer of Borrowers
describing such occurrence and the action, if any, being taken to cure the
Event of Default or Defaulting Event.
SECTION 7.12. DUTIES. Borrowers have complied and will continue to
comply with any and all federal, state, provincial and local laws
affecting their businesses, including, but not limited to, payment of all
federal and state taxes with respect to sales to Account Debtors by
Borrowers and disclosures in connection therewith. Borrowers jointly and
severally agree to indemnify Lender against and hold Lender harmless from,
all claims, actions and losses, including reasonable attorney's fees and
costs incurred by Lender arising from any contention, whether well founded
or otherwise, that there has been a failure to comply with such laws.
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SECTION 7.13. COLLATERAL DUTIES. Do whatever Lender may reasonably
request from time to time by way of obtaining, executing, delivering and
filing financing statements, assignments, landlord's or mortgagee's
waivers, warehouse agreements and other notices and amendments and
renewals of any of the foregoing, and Borrowers will take any and all
steps and observe such formalities as Lender may reasonably request, in
order to create and maintain a valid and enforceable first lien upon,
pledge of, and first priority security interest in, any and all of the
Collateral. Lender hereby is authorized to file financing statements
without the signature of Borrowers and to execute and file such financing
statements on behalf of any Borrower as specified by the Uniform
Commercial Code to perfect or maintain its security interest in all of the
Collateral. All reasonable charges, expenses and fees Lender may incur in
filing any of the foregoing, together with reasonable costs and expenses
of any lien search required by Lender, and any taxes relating thereto,
shall be charged to either Revolving Loan Account (or divided between
them) in Lender's sole discretion and added to the Obligations. XL Canada
agrees to sign a moveable hypothec of first rank in favor of Lender and in
form and substance satisfactory to Lender (the "MOVEABLE HYPOTHEC") and
consents to the registration of the Moveable Hypothec at the Office of the
Register of Personal and Moveable Real Rights of the Province of Quebec.
SECTION 7.14. AUDIT AND APPRAISALS BY LENDER; FEES. Permit Lender to
audit the books and records of Borrowers and to conduct or cause to be
conducted appraisals of Borrowers' assets at such times, upon reasonable
notice of at least 48 hours, and in such manner and detail as Lender deems
reasonable. Without limiting the generality of the foregoing, Lender shall
be allowed to verify the Receivables and Inventory of Borrowers and to
confirm with Account Debtors the validity and amount of Receivables.
Borrowers shall promptly pay to Lender reasonable audit fees and any
out-of-pocket expenses incurred in connection with any audit performed by
Lender, or by any third party retained by Lender in its sole discretion if
Lender, in its sole discretion, deems it necessary to hire outside
auditors, after Lender has made a demand for payment of any Obligations
and Borrowers have not immediately paid in full in cash such Obligations
or after the occurrence of an Event of Default. In addition, Borrowers
shall promptly pay or reimburse Lender for the costs of any such
appraisals conducted by or for Lender. Lender may charge any such audit
fees and out-of-pocket expenses to either Revolving Loan Account (or
divide such fees and expenses between the Revolving Loan Accounts) in
Lender's sole discretion.
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SECTION 7.15. BANK ACCOUNTS. Maintain all of their bank accounts,
including without limitation, their operating and depository accounts, at
First Union National Bank of Virginia, Barnett Bank of Central Florida
and/or Banque Nationale de Paris (Canada).
B. NEGATIVE COVENANTS.
The Borrowers joint and severally covenant and agree that from the date
hereof until payment and performance in full of all Obligations, and until the
termination of this Agreement, unless Lender otherwise consents in writing, none
of the Borrowers shall:
SECTION 7.16. ENCUMBRANCES. Incur or permit to exist any lien,
mortgage, hypothec, charge or other encumbrance against any of their
properties or assets, whether now owned or hereafter acquired, except: (a)
liens required or expressly permitted by this Agreement; (b) pledges or
deposits in connection with or to secure worker's compensation, C.S.S.T,
unemployment or liability insurance; (c) those listed on Schedule 5.1(u)
attached hereto.
SECTION 7.17. LIMITATION ON INDEBTEDNESS. Except for (i) amounts
owed by one Borrower to another Borrower arising out of shipments of
inventory in the ordinary course of business; (ii) indebtedness in respect
of loans existing and outstanding as of the date hereof owing to Cycomm by
(A) XL in the aggregate amount of $1,450,000 and (B) XL Canada in the
aggregate amount of $1,743,000 (which loans, if they are repaid in whole
or part, may not be remade or increased from any reduced amount thereof);
and (iii) additional intercompany loans from Cycomm to XL and XL Canada in
a combined amount not to exceed $50,000 in the aggregate outstanding at
any one time, create, incur or guarantee any indebtedness or obligation
for borrowed money (including without limitation, any reimbursement
obligations for any letter of credit issued by any financial institution)
from, or issue or sell any of their obligations to, any lender.
SECTION 7.18. CONTINGENT LIABILITIES. Assume, guarantee, endorse or
otherwise become liable upon the obligations of any person, firm or
corporation, or enter into any purchase or option agreement or other
arrangement having substantially the same effect as such a guarantee,
except by the endorsement of negotiable instruments for deposit or
collection or similar transactions in the ordinary course of business;
provided that, Cycomm may assume, guarantee, endorse or otherwise become
liable upon the obligations of any person, firm or corporation in the
ordinary course of its business consistent with past practices and upon
thirty (30) days prior written notice to Lender of each
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such assumption, guarantee or endorsement so long as: (A) Lender has not
made demand for payment of any of the Obligations (or, if any such demand
has been made, Borrowers have not immediately paid in full in cash such
Obligations) and (B) no Defaulting Event has occurred.
SECTION 7.19. CONSOLIDATION OR MERGER. Merge into or consolidate
with or into any corporation; provided that Cycomm may merge with any
other corporation or entity so long as: (A) Cycomm is the surviving
corporation and has a tangible net worth after giving effect to the merger
that is not less than its tangible net worth immediately prior to such
merger, (B) Lender has not made demand for payment of any of the
Obligations (or, if any such demand has been made, Borrowers have not
immediately paid in full in cash such Obligations) and (C) no Defaulting
Event has occurred.
SECTION 7.20. LOANS, ADVANCES, INVESTMENTS. Make or permit to exist
any loans or advances to, or purchase any stock, other securities or
evidences of indebtedness of, or make or permit to exist any investment
(including without limitation the acquisition of stock of a corporation),
or acquire any assets or any other interest whatsoever, in any other
person; provided that Cycomm may purchase the stock of, or acquire the
assets of, another corporation or other entity in the ordinary course of
its business consistent with past practices so long as: (A) such purchase
or acquisition is made with the proceeds of a debt or equity financing
from a party other than Lender sufficient to acquire such stock or assets
and no liens have been granted on any assets of Borrowers to or for the
benefit of such financing party except as shall have been permitted
pursuant to an intercreditor agreement with Lender in form and substance
satisfactory to Lender, (B) Lender has not made demand for payment of any
of the Obligations (or, if any such demand has been made, Borrowers have
not immediately paid in full in cash such Obligations) and (C) no
Defaulting Event has occurred.
SECTION 7.21. ACQUISITION OF STOCK OF BORROWERS; DIVIDENDS.
Purchase, acquire, redeem or retire, or make any commitment to purchase,
acquire, redeem or retire any of the capital stock of Borrowers, whether
now or hereafter outstanding, or declare or pay any dividend, or make any
distribution to any of their stockholders; provided that Cycomm may
purchase, acquire, redeem or retire, or declare or pay dividends in
respect of Borrowers capital stock so long as: (A) such purchase,
acquisition, redemption, retirement or dividend payment is made from the
proceeds of a financing from a party other than Lender sufficient to pay
the costs of such purchase, acquisition, retirement or dividend payment
and no liens have been granted on any assets of Borrowers to or for the
benefit of such financing party except as shall have
<PAGE> 33
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been permitted pursuant to an intercreditor agreement with Lender in form
and substance satisfactory to Lender, (B) Lender has not made demand for
payment of any of the Obligations (or, if any such demand has been made,
Borrowers have not immediately paid in full in cash such Obligations) and
(C) no Defaulting Event has occurred.
SECTION 7.22. SALE AND LEASE OF ASSETS. Sell or lease any of the
assets of the Borrowers, except for sales of inventory in the ordinary
course of business consistent with past practices and on an arms-length
basis.
SECTION 7.23. NAME CHANGES. Change their names or styles other
than as set forth in this Agreement.
SECTION 7.24. PROHIBITED TRANSFERS. Transfer, in any manner, either
directly or indirectly, any cash, property, or other asset to any parent
or any of their affiliates or Subsidiaries, other than (i) sales made in
the ordinary course of business and for fair consideration on terms no
less favorable than if such sale had been an arms-length transaction
between Borrowers or such Subsidiary and an unaffiliated entity and (ii)
transfers by Cycomm to any Subsidiary in an aggregate amount for all such
transfers not to exceed $250,000 in any calendar year.
SECTION 7.25. NO MANAGEMENT/OWNERSHIP CHANGE. Suffer (i) Albert I.
Hawk, Michael R. Skoff or Rick Mandrell to cease to be employed by and
actively and materially engaged in the management and operation of the
Borrowers' businesses unless each such person ceases to be so employed and
engaged and is replaced within thirty (30) days by someone acceptable to
Lender in its sole discretion, or (ii) any change in the ownership of XL
or XL Canada.
SECTION 7.26. LEASEBACKS. Lease any real estate or other
capital asset from any lessor who shall have acquired such property
from Borrowers.
SECTION 7.27. LOANS TO OFFICERS, DIRECTORS AND/OR SHAREHOLDERS. Make
any loan or advance or make any transfer, in any manner, of any cash,
property or other asset to or on behalf of any of their officers,
directors or shareholders.
ARTICLE VIII. COLLATERAL
SECTION 8.1. GRANT. To secure the prompt payment and performance of
each and all of the Obligations, each of the Borrowers pledges, assigns,
transfers and grants to Lender a continuing, first lien
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security interest in the following property of Borrowers, now owned or
hereafter acquired or arising (the "COLLATERAL"):
(a) All accounts and accounts receivable related to or arising from
the sale or lease of inventory or rendition of services by Borrowers (the
"ACCOUNTS") and all other accounts, bank accounts, contracts, contract
rights, notes, documents, chattel paper, instruments, acceptances, drafts
or other forms of obligations and receivables (collectively with the
Accounts, the "RECEIVABLES"), whether or not the same are listed on any
schedules, assignments or reports furnished to Lender from time to time,
and whether such Receivables are now existing or are created or arise at
any time hereafter, together with all goods, inventory and merchandise
returned by or reclaimed by or repossessed from customers wherever such
goods, inventory and merchandise are located, and all proceeds thereto
including without limitation, proceeds of insurance thereon and all
guaranties, securities, and liens which Borrowers may hold for the payment
of any such Receivables, including without limitation, all rights of
stoppage in transit, replevin, revendication and reclamation and all other
rights and remedies of an unpaid vendor or lienor or, and any liens held
by Borrowers as a mechanic, contractor, subcontractor, processor,
materialman, machinist, manufacturer, artisan, or otherwise;
(b) All documents, instruments, investment property, documents of
title, general intangibles, policies and certificates of insurance,
guaranties, securities, chattel paper, deposits, tax returns, proceeds of
insurance, proceeds of an eminent domain or condemnation award, cash,
liens or other property, which are now or may hereinafter be in the
possession of Borrowers or as to which Borrowers may now or hereafter
control possession by documents of title or otherwise, including, but not
limited to, all property allocable to unshipped orders relating to
Receivables and Inventory;
(c) All books, records, customer lists, supplier lists, ledgers,
evidences of shipping, invoices, purchase orders, sales orders and all
other evidences of Borrowers' business records, including all cabinets,
drawers, etc. that may hold the same; computer records, lists, software,
programs, wherever located, all whether now existing or hereafter arising
or acquired;
(d) All of Borrowers' inventory, whether now owned or hereafter
acquired, including without limitation (collectively, the "INVENTORY"):
(i) all goods manufactured or acquired for sale or lease, and any piece
goods, raw materials, work in process and finished merchandise, findings
or component materials, and all supplies, goods, incidentals, office
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supplies, packaging materials, and any and all items including machinery
and equipment used or consumed in the operation of the business of
Borrowers or which contribute to the finished product or to the sale,
promotion and shipment thereof, in which Borrowers may now or at any time
hereafter may have an interest, whether or not such inventory is listed in
this Agreement on any reports furnished to Lender from time to time; (ii)
all inventory whether or not the same is in transit or in the
constructive, actual or exclusive occupancy or possession of Borrowers or
is held by Borrowers or by others for the Accounts, including without
limitation, all goods covered by purchase orders and contracts with
suppliers and all goods billed and held by suppliers; (iii) all inventory
which may be located on the premises of Borrowers or of any carrier,
forwarding agents, truckers, warehousemen, vendors, selling agents or
third parties; (iv) all general intangibles relating to or arising out of
inventory; (v) all proceeds and products of the foregoing resulting from
the sale, lease or other disposition of inventory, including cash,
accounts receivable, other non-cash proceeds and trade-ins; and (vi) with
respect to after-acquired inventory, the security interest shall be deemed
to be a purchase money security interest;
(e) All general intangibles, including without limitation, tax
refunds, proceeds of insurance, eminent domain awards, condemnation
proceeds, and patents, copyrights, tradenames, trademarks, applications
therefor, and licenses to any patent, copyright, trademark, or tradename
that Borrowers now own, have the right to use or may hereafter own or
acquire the right to use;
(f) All equipment, machinery, appliances, and furniture and
fixtures, now existing or hereafter arising, wherever located, and all
contracts, contract rights and chattel paper arising out of any lease of
any of the foregoing;
(g) All other collateral in which Borrowers may hereafter grant to
Lender a security interest; and
(h) All renewals, substitutions, replacements, additions,
accessions, proceeds and products of any and all of the foregoing,
including without limitation, all proceeds of credit, fire and other
insurance and also including, without limitation, rents and profits
resulting from the temporary use of the Collateral.
ARTICLE IX. EVENTS OF DEFAULT
SECTION 9.1. EVENTS OF DEFAULT. Without affecting the demand nature
of the Loans which shall at all times be due and payable on demand, any
and all Obligations, including without limitation, the
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Obligations arising pursuant to or in connection with the Loans shall, at
the option of Lender and notwithstanding any time or credit allowed by any
note or agreement, become immediately due and payable without notice if
any one or more of the following events (collectively, "EVENTS OF DEFAULT"
and individually, an "EVENT OF DEFAULT") shall occur:
(a) Borrowers' failure to pay principal, interest or any other
sum due hereunder or under the Notes;
(b) Borrowers' failure to pay or perform when due any other
covenant, duty, indebtedness, liability or obligation arising under this
Agreement, the Notes or any of the other Financing Agreements, or any
other Obligation, or such failure by the Fidelity Guarantor;
(c) the making by Borrowers or the Fidelity Guarantor of any
misrepresentation of a material fact to Lender;
(d) loss, theft, or destruction of any Collateral in excess of Fifty
Thousand Dollars ($50,000) in value which is not covered by insurance with
Lender's loss payee endorsement as required herein;
(e) the filing, making or issuance of any lien, levy, seizure,
attachment, garnishment, injunction, execution, tax lien or judgment upon
or against Borrowers or any of the Collateral, or any other property or
assets of Borrowers which lien, levy, seizure, attachment, garnishment,
injunction, executing tax lien or judgment is not released or bonded to
the satisfaction of Lender within thirty (30) days from its initial
issuance or creation;
(f) any of the following of, by, or involving Borrowers: insolvency
(failure to pay debts generally as they mature or where the fair value of
assets is not in excess of liabilities); business failure; appointment of
a receiver or custodian; assignment for the benefit of creditors; calling
of a meeting of creditors; appointment of a committee of creditors, or
liquidating banks, or offering of a composition extension to creditors; or
the commencement of any proceedings under any bankruptcy or insolvency
law;
(g) the ownership of greater than fifty percent (50%) of the capital
or voting stock of any class of Cycomm shall be transferred from the
owners thereof as of the date hereof pursuant to one or more tender
offers;
(h) Borrowers' failure to keep the Collateral insured against loss
by fire or otherwise for the full insurable value thereof with companies
and for coverages (including Lender's Long Form Loss Payable
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Endorsement) reasonably acceptable to Lender and making the loss, if any,
payable to Lender;
(i) the loss, revocation or failure to renew any license and/or
permit now held or hereafter acquired by Borrowers which adversely affects
the ability of Borrowers to continue their operations as presently
conducted;
(j) the occurrence of a default or event of default (howsoever
defined) under any other agreement between Lender and the Fidelity
Guarantor;
(k) the declaration of a default that permits acceleration of
maturity under any obligation of Borrowers to any other creditor; or
(l) the occurrence of any event or circumstance with respect to the
Borrowers such that Lender shall believe in good faith that the prospect
of payment of all or any part of Obligations or the performance by the
Borrowers under this Agreement, or any other agreement between the Lender
and the Borrowers, is impaired or there shall occur any material adverse
change in the business or financial condition of the Borrowers.
Upon the occurrence of any Event of Default, at the option of Lender: (x)
any and all Obligations, including without limitation the Obligations arising
from or in connection with the Loans, shall become immediately due and payable,
and (y) Borrowers' eligibility to request any Further Loans shall automatically
and immediately terminate, without presentment, demand, protest, notice of
protest or other notice or requirements of any kind, all of which Borrowers
expressly waive. Notwithstanding the foregoing sentence, if any Event of Default
under clause (f) occurs, the acceleration of the Obligations and termination of
Borrowers' eligibility to request Further Loans shall be automatic.
At any time after an Event of Default, Lender may proceed to enforce the
rights of Lender whether by suit in equity or by action at law, whether for
specific performance of any covenant or agreement contained in this Agreement,
the Notes or the other Financing Agreements, or in aid of the exercise of any
power granted in either this Agreement or the Notes or any other Financing
Agreement, or it may proceed to obtain judgment or any other relief whatsoever
appropriate to the enforcement of such rights, or proceed to enforce any legal
or equitable right which Lender may have by reason of the occurrence of any
Event of Default hereunder.
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ARTICLE X. COLLECTION OF RECEIVABLES
SECTION 10.1. DEPOSITS. Except as otherwise set forth in Section 2.6
hereof, until Lender exercises its rights to collect the Receivables as
provided for in this Agreement, Borrowers shall continue direct collection
of all Receivables. All collections and other proceeds of Receivables
which Borrowers receive shall be received in trust for Lender and
Borrowers shall: keep all such collections separate and apart from all of
their other funds and property; identify such collections and proceeds as
the property of Lender; and immediately deposit such collections in the
identical form received in such accounts of Lender as designated by Lender
from time to time.
SECTION 10.2. SCHEDULE. All collections of Receivables shall be set
forth on a schedule in form and substance satisfactory to Lender.
Collections of Receivables shall be credited to the Obligations of
Borrowers on the day of their actual receipt by Lender; provided, however,
that all credits shall be conditional credits subject to collection and
that returned items, at Lender's option, may be charged to Borrowers; and
further provided that for purposes of the computation of interest, items
shall not be deemed to be collected until three (3) days after their
actual receipt by Lender; provided further that Receivables in respect of
Eligible Canadian Accounts shall be deemed collected when deposited in and
credited to Lender's Canadian bank account.
ARTICLE XI. RETURNED MERCHANDISE
SECTION 11.1. PROCEDURES. Until Lender exercises its rights to
collect the Receivables as provided for in this Agreement, Borrowers may
continue their present policies for returned merchandise and adjustments,
but shall promptly notify Lender of any credits, adjustments or disputes
arising concerning the goods or services represented by Receivables. In
any event, Borrowers will immediately pay Lender from their own funds (and
not from the proceeds of Receivables), for application to the Revolving
Loans, an amount equal to any credit or adjustment made to any Eligible
Accounts; provided, however, that so long as Borrowers are not in default
hereunder, such payment need not be made if Borrowers shall have, after
making such credit or adjustment, sufficient Receivables to maintain the
aggregate outstanding balance of the Revolving Loans under the Borrowing
Base.
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ARTICLE XII. RIGHTS AND REMEDIES OF LENDER
SECTION 12.1. REMEDIES OF LENDER. Upon Lender's demand for payment
of the Loans or upon the occurrence of any Event of Default, Lender shall
have in any jurisdiction where enforcement of this Agreement, the Notes or
any other Financing Agreement is sought, in addition to all other rights
and remedies which Lender may have under law and equity, the following
rights and remedies, all of which may be exercised with or without further
notice to Borrowers and without a prior judicial or administrative
hearing, which notice and hearing are expressly waived: to occupy any of
Borrowers' premises for up to six (6) months rent free for the purposes of
liquidating Collateral, including without limitation, conducting an
auction thereon; to enforce or foreclose the liens and security interests
created under this Agreement or under any other agreement relating to
Collateral by any available judicial procedure or without judicial
process; to enter any premises where any Collateral may be located for the
purpose of taking possession or removing the same; to sell, assign, lease,
or otherwise dispose of Collateral or any part thereof, either at public
or private sale, in lots or in bulk, for cash, on credit or otherwise,
with or without representations or warranties, and upon such terms as
shall be acceptable to Lender, all at Lender's sole option and as Lender
in its sole discretion may deem advisable; to bid or become purchaser at
any such sale if public; and, at the option of Lender, to apply or be
credited with the amount of all or any part of the Obligations owing to
Lender against the purchase price bid by Lender at any such sale.
SECTION 12.2. SPECIFIC POWERS. Lender may at any time, before (with
respect to clauses (iii), (v), (vii) and (x) of this Section 12.2) or
after the occurrence of a demand for payment of the Loans or an Event of
Default, at Lender's sole discretion: (i) give notice of assignment to any
Account Debtor; (ii) collect Receivables directly and charge, or cause to
be charged, the collection costs and expenses to either Revolving Loan
Account (or divided between the Revolving Loan Accounts) in Lender's sole
discretion; (iii) collect receivables submitted by Borrowers to Lender for
collection and charge, or cause to be charged, the collection costs and
expenses to either Revolving Loan Account (or divided between the
Revolving Loan Accounts) in Lender's sole discretion; (iv) settle or
adjust disputes and claims directly with Account Debtors for amounts and
upon terms which Lender considers advisable, and credit, or cause to be
credited, the applicable Revolving Loan Account with the net amounts
received in payment of Receivables; (v) exercise all other rights granted
in this Agreement and the other Financing Agreements; (vi) receive, open
and dispose of all mail addressed to Borrowers and notify the Post Office
authorities to change the address for delivery of Borrowers' mail to an
address designated by Lender; (vii) endorse the name of Borrowers on any
<PAGE> 40
-40-
checks or other evidence of payment that may come into possession of
Lender and on any invoice, freight or express bill, bill of lading or
other document; (viii) in the name of Borrowers or otherwise, demand, sue
for, collect and give acquittance for any and all monies due or to become
due on Receivables; (ix) compromise, prosecute or defend any action, claim
or proceeding concerning Receivables; and (x) do any and all things
necessary and proper to carry out the purposes contemplated in this
Agreement, the other Financing Agreements and any other agreement between
the parties. Neither Lender nor any person acting as its representative
hereunder shall be liable for any acts or omissions or for any error of
judgment or mistake of fact or law, except for gross negligence or willful
misconduct. Borrowers agree that the powers granted hereunder, being
coupled with an interest, shall be irrevocable so long as any Obligation
remains unsatisfied. Notwithstanding the foregoing, it is understood that
Lender is under no duty to take any of the foregoing actions and that
after having made demand upon the Account Debtors for payment, Lender
shall have no further duty as to the collection or protection of
Receivables or any income therefrom and no further duty to preserve any
rights pertaining thereto, other than the safe custody thereof in the
event Lender takes possession thereof.
SECTION 12.3. DUTIES AFTER DEMAND OR DEFAULT. Borrowers will, at
Lender's request, assemble all Collateral and make it available to Lender
at places which Lender may reasonably select, whether at the premises of
Borrowers or elsewhere and will make available to Lender all premises and
facilities of Borrowers for the purpose of Lender taking possession of
Collateral or of removing or putting the Collateral in salable form. In
the event that Lender elects to exercise its right to take possession and
control of any Collateral, and any goods called for in any sales order,
contract, invoice or other instrument or agreement evidencing or
purporting to give rise to any Receivable shall not have been delivered or
shall be claimed to be defective by any customer, Lender shall have the
right in its sole discretion to use and deliver to such customer any goods
of Borrowers to fulfill such order, contract or the like so as to make
good any such Receivable. If any Collateral shall require repairing,
maintenance, preparation, or the like, or is in process or other
unfinished state, Lender shall have the right, but shall not be obligated,
to effectuate such repair, maintenance, preparation, processing or
completion of manufacturing for the purpose of putting the same in such
salable form as Lender shall deem appropriate, provided that Lender shall
nonetheless have the right to sell or dispose of such Collateral without
such processing. The net cash proceeds resulting from the collection,
liquidation, sale, lease or other disposition of Collateral shall be
applied first to the expenses (including all reasonable attorneys' and
professionals' fees) of retaking, holding, storing, processing and
preparing for sale, selling, collecting, liquidating
<PAGE> 41
-41-
and the like such collateral and then to the satisfaction of all
Obligations (application as to particular Obligations or against principal
or interest to be at Lender's sole discretion), and then, upon full and
final payment of the Obligations, and unless otherwise prohibited by court
order or law, to Borrowers, it being agreed that if any such payment made
to Lender is recovered from or repaid by Lender in whole or in part in any
bankruptcy, insolvency or similar proceeding instituted by or against
Borrowers, this Agreement automatically shall be reinstated without any
further action by Borrowers and Lender. Borrowers shall be liable to
Lender and shall pay to Lender on demand any deficiency which may remain
after such sale, disposition, collection or liquidation of Collateral.
SECTION 12.4. CUMULATIVE REMEDIES. The enumeration of Lender's
rights and remedies set forth in this Article XII is not intended to be
exhaustive and the exercise by Lender of any right or remedy hereunder
shall not preclude the exercise of any other rights or remedies, all of
which shall be cumulative and shall be in addition to any other right or
remedy given hereunder or under any other agreement between the parties or
which may now or hereafter exist in law or at equity or by suit or
otherwise. No delay or failure to take action on the part of Lender in
exercising any right, power or privilege shall operate as a waiver
thereof; nor shall any single or partial exercise of any such right, power
or privilege preclude other or further exercise thereof or the exercise of
any other right, power or privilege or shall be construed to be a waiver
of any Event of Default. No course of dealing between Borrowers and Lender
or its employees shall be effective to change, modify or discharge any
provision of this Agreement or to constitute a waiver of any Event of
Default.
ARTICLE XIII. TERM
SECTION 13.1. TERM AND TERMINATION.
(a) REVOLVING LOAN. Unless sooner terminated by Lender as a result
of the occurrence of a demand, an Event of Default, or a Defaulting Event,
Borrowers' eligibility to request Revolving Loans shall commence on the
date hereof and shall continue for a period through and including December
31, 1999 (the "TERM"). Borrowers' eligibility to request Revolving Loans
may be extended after the Term (and after any Renewal Term, as defined
below) only with the express written consent of all Borrowers and Lender.
Any such extension (and any further extension) shall be made only with the
express written consent of all Borrowers and Lender (each being a "RENEWAL
TERM"). At the end of the Term (or at the end of a Renewal Term, if
applicable), Borrowers shall pay the entire balance of the Revolving
Loans, the Additional Loan and all other
<PAGE> 42
-42-
outstanding Obligations. Further, upon termination of the Revolving Loan
facility, all of the rights, interests and remedies of Lender and
Obligations of Borrowers shall survive and Borrowers shall have no right
to receive, and Lender shall have no obligation to make, any further
Revolving Loans. Upon full, final and indefeasible payment of the
Obligations to Lender, all rights and remedies of Borrowers and Lender
hereunder shall cease, so long as any payment so made to Lender and
applied to the Obligations is not thereafter recovered from or repaid by
Lender in whole or in part in any bankruptcy, insolvency or similar
proceeding instituted by or against Borrowers, whereupon this Agreement
shall be automatically reinstated without any further action by Borrowers
and Lender and shall continue to be fully applicable to such Obligations
to the same extent as though the payment so recovered or repaid had never
been originally made on such Obligations.
(b) ADDITIONAL LOAN. Unless sooner terminated by Lender as a result
of the occurrence of a demand, an Event of Default or a Defaulting Event,
the Additional Loan shall be repaid as set forth in the Additional Loan
Promissory Note. The Borrowers may prepay the unpaid principal balance of
the Additional Loan, in whole or in part, at any time without penalty or
premium. Any and all such prepayments shall be applied first to interest
accrued to the date of prepayment and then to the principal balance in
inverse order of maturity and shall not relieve the Borrowers from the
obligation to make the regularly-scheduled payments required thereunder.
(c) TERMINATION FEE AND MINIMUM INTEREST. In the event that (a) this
Agreement is terminated by Borrowers as of any date other than the end of
the Term or the end of a Renewal Term, or (b) this Agreement is terminated
as a result of: (i) a demand by Lender for payment of the Loans related to
(A) Borrowers' financial condition or prospects, (B) Borrowers' failure to
comply with any term or provision of the Financing Agreements or failure
to cooperate fully with Lender in Lender's administration of the Loans; or
(C) the occurrence of an Event of Default or Defaulting Event; or (ii) the
occurrence of an Event of Default or a Defaulting Event, Borrowers shall
pay to Lender on the effective date of such termination, in addition to
the Minimum Interest Amount, if applicable, and in addition to any other
payments Borrowers are required to make hereunder, a termination charge
equal to: five percent (5.0%) of the maximum principal amount of the
Loans, if terminated during the first year of the Loans, and one and
one-half percent (1.5%) of the maximum principal amount of the Loans, if
terminated during the second year of the Loans (the "TERMINATION FEE");
provided, however, that there shall be no Termination Fee if, during the
second year of the Loans, the Loans are paid in full directly or
indirectly from the proceeds of a loan
<PAGE> 43
-43-
from a commercial bank or from the proceeds of a public or private
offering of Borrowers' stock or convertible debentures. It is understood
that the determination of the maximum principal amount of the Loans shall
be made without regard to the components of the Borrowing Base based upon
Eligible Accounts and Eligible Inventory. For example, for purposes of
this provision, on the date hereof the maximum principal amount of the
Loans is $4,000,000 and the Termination Fee would be $200,000 if the Loans
were terminated during the first year. In the event that (x) Borrowers
attempt to breach this Agreement by terminating this Agreement prior to
the expiration of the Term (or prior to the expiration of any Renewal
Term), or (y) Borrowers give to Lender less than sixty (60) days notice
that Borrowers intend to decline to extend the term of this Agreement at
the end of the Term or any Renewal Term, or (z) this Agreement is
terminated as a result of: (i) a demand by Lender for payment of the Loans
related to (A) Borrowers' financial condition or prospects, (B) Borrowers'
failure to comply with any term or provision of the Financing Agreements
or failure to cooperate fully with Lender in Lender's administration of
the Loans; or (C) the occurrence of an Event of Default or Defaulting
Event; or (ii) the occurrence of an Event of Default or a Defaulting
Event, Borrowers shall pay to Lender the Minimum Interest Amount on the
effective date of such termination, in addition to the Termination Fee and
any other payments Borrowers are required to make hereunder. All other
amounts due from Borrowers to Lender prior to or in connection with any
termination of this Agreement, which have not been previously paid, shall
be paid by Borrowers on or before the effective date of the termination.
As used herein, the "MINIMUM INTEREST AMOUNT" means interest upon the
Minimum Balance at the interest rate in effect on the date that express
written notice of such termination is given to Lender (or, if no such
notice is given, the rate in effect on the effective date of termination),
for the period commencing on the date of such written notice of
termination (or, if no such notice is given, commencing on the effective
date of termination) and ending at the end of the Term (or at the end of a
period of sixty (60) days thereafter, if such termination notice is given
by Borrowers during or at the end of a Renewal Term on less than sixty
(60) days notice or if no termination notice is given).
ARTICLE XIV. MISCELLANEOUS
SECTION 14.1. INDEMNIFICATION.
(a) In consideration of Lender's execution and delivery of this
Agreement and Lender's making of the Loans hereunder and in addition to
all other obligations of Borrowers under this Agreement, Borrowers hereby
jointly and severally agree to defend, protect, indemnify and hold
<PAGE> 44
-44-
harmless Lender, its successors, assigns, officers, directors, employees
and agents (including without limitation, those retained in connection
with the transactions contemplated by this Agreement) (individually, an
"INDEMNITEE" and collectively, the "INDEMNITEES") from and against any and
all actions, causes of action, suits, claims, losses, costs, penalties,
fees, liabilities and damages and expenses in connection therewith
(irrespective of whether any such Indemnitees is a party to any action for
which indemnification hereunder is sought), and including reasonable
attorneys' fees and disbursements as and when incurred (collectively, the
"INDEMNIFIABLE LIABILITIES") incurred by the Indemnitees or any of them as
a result of, or arising out of, or relating to the operation of Borrowers'
business from and after the date hereof, including without limitation
those arising under any Environmental Laws. To the extent that the
foregoing undertaking by Borrowers may be unenforceable for any reason,
Borrowers shall make the maximum contribution to the payment and
satisfaction of each of the Indemnifiable Liabilities which is permissible
under applicable law.
(b) Borrowers hereby jointly and severally covenant and agree at all
times to indemnify, hold harmless and defend the Indemnitees, whether as
secured party in possession or as successor in interest to Borrowers as
owner of any personal property assets located on the real property of
Borrowers, by virtue of any action taken by Lender pursuant to the
Financing Agreement, the Uniform Commercial Code (as in effect in any
applicable jurisdiction) or otherwise from and against any and all
liabilities, losses, damages, costs, expenses, penalties, fines, causes of
action, suits, claims, demands or judgments, including without limitation,
reasonable attorneys' fees and expenses (collectively, "LIABILITIES AND
EXPENSES"), suffered or incurred in connection with: (i) the Environmental
Law, including, without limitation, liens or claims of any federal, state
or municipal government or quasi-governmental agency or any third person,
whether arising under any Environmental Law or any other federal, state,
provincial or municipal law or regulation; (ii) any spill or contamination
affecting the Premises or any other property owned, leased, controlled or
used by Borrowers, including without limitation, any Hazardous Material or
other waste-like or toxic substances located on, under, emanating from or
relating to the Premises or such property from and on and after the date
hereof or any portion of any thereof or any property contiguous to the
Premises or such property from and after the date hereof, and including
without limitation, any loss of value of the Premises or such property as
a result of any such spill or contamination; and (iii) the direct or
indirect installation, use, generation, manufacture, production, storage,
release, threatened release, discharge, disposal or presence of any
Hazardous Material, on, under or about the Premises or any other property
owned, leased, controlled or used by Borrowers or any portion of any
thereof, from
<PAGE> 45
-45-
and including all consequential damages, the costs of any required or
necessary repair, cleanup or detoxification, and the costs of the
preparation and implementation of any closure, remedial or other required
plans unless such Liabilities and Expenses arise solely as a result of
Lender's gross negligence or willful misconduct. Further, the mere fact
that such Indemnitee has been declared an "owner" or "operator" (as such
term is defined in any Environmental Law) resulting from such Indemnitee
having taking possession of any of the Collateral (without any negligence
on the part of such Indemnitee) shall not exonerate Borrowers from any
claim by any Indemnitee seeking such indemnification.
SECTION 14.2. PAYMENT SET-ASIDE. To the extent that Borrowers make a
payment or payments to Lender (whether hereunder, under the Notes, or
under the other Financing Agreements) or Lender enforces its security
interests or rights or exercises its right of setoff, and such payment or
payments or the proceeds of such enforcement or setoff or any part thereof
are subsequently invalidated, declared to be fraudulent or preferential,
set aside, recovered from, disgorged by or are required to be refunded,
repaid or otherwise restored to Borrowers, a trustee, receiver or any
other person under any law (including without limitation, any bankruptcy
law, state or federal law, common law or equitable cause of action) in
each case in connection with any bankruptcy or similar proceeding
involving Borrowers, then to the extent of any such restoration the
obligation or part thereof originally intended to be satisfied shall be
revived and continued in full force and effect as if such payment had not
been made or such enforcement or setoff had not occurred.
SECTION 14.3. SET-OFF. The Borrowers hereby grant to Lender a lien
and right of setoff for all their liabilities to Lender upon and against
all their deposits, credits, collateral and property now or hereafter in
the possession or control of Lender or in transit to Lender. Lender may,
upon the occurrence of any Event of Default or Defaulting Event or both,
apply or exercise the right of set-off against any or all of the
foregoing, or any part thereof against any liability of Borrowers to
Lender, regardless whether such liability is matured or unmatured.
SECTION 14.4. COVENANTS TO SURVIVE; BINDING AGREEMENT. All
covenants, agreements, warranties and representations made herein, in the
Notes, in the other Financing Agreements, and in all certificates or other
documents of Borrowers shall survive the advances of money made by Lender
to Borrowers hereunder and the delivery of the Notes and the other
Financing Agreements, and all such covenants, agreements, warranties and
representations shall be binding upon and inure to the
<PAGE> 46
-46-
benefit of Lender and its successors and assigns, whether or not so
expressed.
SECTION 14.5. CROSS-COLLATERALIZATION. All Collateral which Lender
may at any time acquire from Borrowers or from any other source in
connection with Obligations arising under this Agreement and the other
Financing Agreements shall constitute collateral for each and every
Obligation, without apportionment or designation as to particular
Obligations and all Obligations, however and whenever incurred, shall be
secured by all Collateral however and whenever acquired, and Lender shall
have the right, in its sole discretion, to determine the order in which
Lender's rights in or remedies against any Collateral are to be exercised
and which type of Collateral or which portions of Collateral are to be
proceeded against and the order of application of proceeds of Collateral
as against particular Obligations.
SECTION 14.6. CROSS-DEFAULT. Each of the Borrowers acknowledges and
agrees that an Event of Default and/or Defaulting Event under any one of
the Financing Agreements shall constitute an Event of Default or
Defaulting Event under each of the other Financing Agreements.
SECTION 14.7. AMENDMENTS AND WAIVERS. Neither this Agreement, the
Notes, the other Financing Agreements, nor any term, covenant or condition
hereof or thereof may be changed, waived, discharged, modified or
terminated except by a writing executed by the parties hereto or thereto.
No failure on the part of Lender to exercise, and no delay in exercising,
any right, remedy or power hereunder or under the Notes or the other
Financing Agreements shall preclude any other or future exercise thereof,
or the exercise of any other right, remedy or power.
SECTION 14.8. NOTICES. All notices, requests, consents, demands and
other communications hereunder shall be in writing and shall be mailed by
first class mail to the respective parties to this Agreement to the
addresses set forth in the introductory sentence hereof.
SECTION 14.9. TRANSFER OF LENDER'S INTEREST. The Borrowers hereby
agree that Lender, in its sole discretion, may freely sell, assign or
otherwise transfer participations, portions, co-lender interests or other
interests in all or any portion of the indebtedness, liabilities or
obligations arising in connection with or in any way related to the
financing transactions of which this Agreement is a part provided that
such transferee is a recognized financial institution. In the event of any
such transfer, the transferee may, in Lender's sole discretion, have and
enforce
<PAGE> 47
-47-
all the rights, remedies and privileges of Lender. Each of the Borrowers
consents to the release by Lender to any potential transferee of any and
all information (including without limitation, financial information)
pertaining to Borrowers as Lender, in its sole discretion, may deem
appropriate. If such transferee so participates with Lender in making
loans or advances hereunder or under any other agreement between such
Lender and Borrowers, the Borrowers hereby grant to such transferee and
such transferee shall have and is hereby given a continuing lien and
security interest in any money, securities or other property of Borrowers
in the custody or possession of such transferee, including the right of
setoff under circumstances consistent with this Agreement, to the extent
of such transferee's participation in the Obligations of Borrowers to
Lender.
SECTION 14.10. WAIVERS.
(a) THE BORROWERS ACKNOWLEDGE THAT THE LOANS EVIDENCED HEREBY ARE
COMMERCIAL TRANSACTIONS AND WAIVE THEIR RIGHT TO NOTICE AND HEARING UNDER
CHAPTER 903A OF THE CONNECTICUT GENERAL STATUTES, OR AS OTHERWISE ALLOWED
BY ANY STATE OR FEDERAL LAW WITH RESPECT TO ANY PREJUDGMENT REMEDY WHICH
LENDER MAY DESIRE TO USE, AND FURTHER WAIVES THEIR RIGHTS TO REQUEST THAT
LENDER POST A BOND, WITH OR WITHOUT SURETY, TO PROTECT BORROWERS AGAINST
DAMAGES THAT MAY BE CAUSED BY ANY PREJUDGMENT REMEDY SOUGHT OR OBTAINED BY
LENDER. THE BORROWERS FURTHER WAIVE DILIGENCE, DEMAND, PRESENTMENT FOR
PAYMENT, NOTICE OF NONPAYMENT, PROTEST AND NOTICE OF ANY RENEWALS OR
EXTENSIONS.
(b) THE BORROWERS HEREBY WAIVE TRIAL BY JURY IN ANY COURT IN ANY
SUIT, ACTION OR PROCEEDING ON ANY MATTER ARISING IN CONNECTION WITH OR IN
ANY WAY RELATED TO THE FINANCING TRANSACTIONS OF WHICH THIS AGREEMENT IS A
PART AND/OR THE ENFORCEMENT OF ANY OF LENDER'S RIGHTS, INCLUDING WITHOUT
LIMITATION, TORT CLAIMS. BORROWERS ACKNOWLEDGES THAT THEY MAKE THIS WAIVER
KNOWINGLY, VOLUNTARILY, WITHOUT DURESS AND ONLY AFTER CONSIDERATION OF THE
RAMIFICATIONS OF THIS WAIVER WITH THEIR ATTORNEYS. THE BORROWERS FURTHER
ACKNOWLEDGE THAT LENDER HAS NOT REPRESENTED TO BORROWERS THAT THE
<PAGE> 48
-48-
PROVISIONS OF THIS PARAGRAPH WILL NOT BE FULLY ENFORCED IN ALL INSTANCES.
(c) THE BORROWERS JOINTLY AND SEVERALLY ACKNOWLEDGE THAT THEY MAKE
THE FOREGOING WAIVERS IN CLAUSE (a) AND CLAUSE (b) ABOVE, KNOWINGLY,
VOLUNTARILY, WITHOUT DURESS AND ONLY AFTER CONSIDERATION OF THE
RAMIFICATIONS OF SUCH WAIVERS WITH THEIR ATTORNEYS.
SECTION 14.11. SECTION HEADINGS; SEVERABILITY; ENTIRE AGREEMENT.
Section and subsection headings have been inserted herein for convenience
only and shall not be construed as part of this Agreement. Every provision
of this Agreement, the Notes and the other Financing Agreements is
intended to be severable; if any term or provision of this Agreement, the
Notes, the other Financing Agreements, or any other document delivered in
connection herewith shall be invalid, illegal or unenforceable for any
reason whatsoever, the validity, legality and enforceability of the
remaining provisions hereof or thereof shall not in any way be affected or
impaired thereby. All Exhibits and Schedules to this Agreement shall be
annexed hereto and shall be deemed to be part of this Agreement. This
Agreement, the other Financing Agreements, and the Exhibits and Schedules
attached hereto and thereto embody the entire agreement and understanding
between Borrowers and Lender and supersede all prior agreements and
understandings relating to the subject matter hereof unless otherwise
specifically reaffirmed or restated herein.
SECTION 14.12. GOVERNING LAW, NOTICE AND SERVICE OF PROCESS,
PLEADINGS AND OTHER PAPERS. This Agreement and the other Financing
Agreements, and all transactions, assignments and transfers hereunder and
thereunder, and all the rights of the parties, shall be governed as to
validity, construction, enforcement and in all other respects by the laws
of the State of Connecticut (but not its conflicts of law provisions). The
Borrowers hereby designate and appoint, without power of revocation, the
Secretary of the State of Connecticut as Borrowers' agent upon whom may be
served all process, pleadings, notices or other papers which may be served
upon such Borrower as a result of any of its Obligations under this
Agreement or other Financing Agreements. The Borrowers agree that the
Superior Court for the Judicial District of Hartford/New Britain or the
United States District Court for the District of Connecticut shall have
jurisdiction to hear and determine any claims or disputes pertaining to
the financing transactions of which this Agreement is a part and/or to any
matter arising or in any way related to this Agreement or any other
agreement between Lender and Borrowers, and
<PAGE> 49
-49-
each of the Borrowers expressly submits and consents in advance to such
jurisdiction in any action or proceeding.
SECTION 14.13. JOINT AND SEVERAL OBLIGATIONS. Each of the Borrowers
acknowledges that (a) the Obligations are the joint and several
obligations of each Borrower, (b) the Borrowers are affiliate
corporations, and (c) for reasons of simplicity and administrative ease,
the Borrowers desire that the Loans be extended to Cycomm (on behalf of
itself and XL Canada) and XL as co-borrowers. The security interests,
liens and other rights and interests in and relative to any of the real or
personal property of the Borrowers now or hereafter granted to Lender by
the Borrowers or in any instrument or agreement, shall serve as security
for any and all of the Obligations, including but not limited to, the
obligations arising under the Loans and, for the repayment thereof, Lender
may resort to any security held by it in such order and manner as it may
elect. References in this Agreement to the Borrower in the singular shall
include the plural and all obligations herein contained are and shall be
joint and several.
SECTION 14.14. ADDITIONAL ACKNOWLEDGMENTS, AGREEMENTS, ETC. XL
Canada acknowledges that it has granted or will grant security on its
assets, as it is receiving a benefit from the financing contemplated
hereby. XL Canada further agrees that the Movable Hypothec executed in
connection herewith shall be for the amount of $6,530,000.00 Canadian
dollars at 20%, it being understood that the interest rate and the debt
shall be determined by the terms and provisions of this Agreement,
notwithstanding the amount and interest in the Movable Hypothec. It is
hereby agreed and understood that any and all provisions in the Agreement
which are in conflict with any law of public order in the province of
Quebec and Canada shall not affect any other provisions in this Agreement
which will remain unaffected thereby and in full force and effect.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.
NEXT PAGE IS SIGNATURE PAGE].
<PAGE> 50
-50-
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized officers as of the date first above written.
Witnessed:
- ------------------------- CYCOMM INTERNATIONAL, INC.
By: /s/ Michael Skoff
- ------------------------- -------------------------------------
Michael Skoff
Its Chief Financial Officer
- ------------------------- XL COMPUTING CORP., INC.
By: /s/ Michael Skoff
- ------------------------- -------------------------------------
Michael Skoff
Its Assistant Secretary
- ------------------------- XL COMPUTING (CANADA) INC.
By: /s/ Michael Skoff
- ------------------------- -------------------------------------
Michael Skoff
Its Assistant Secretary
AMERICAN COMMERCIAL FINANCE
- ------------------------- CORPORATION
By:
- ------------------------- -------------------------------------
Richard E. Mount
Its President
<PAGE> 51
DISTRICT OF COLUMBIA )
) ss.
)
Before me, the undersigned, this 17th day of December, 1997, personally
appeared Michael Skoff, known to me to be the Chief Financial Officer of Cycomm
International, Inc. and that he as such officer, signer and sealer of the
foregoing instrument, acknowledged the execution of the same to be his free act
and deed individually and as such officer, and the free act and deed of said
corporation.
In Witness Whereof, I hereunto set my hand.
/s/ Clara M. Santos
----------------------------------------
Notary Public
My Commission Expires: April 30, 2001
DISTRICT OF COLUMBIA )
) ss.
)
Before me, the undersigned, this 17th day of December, 1997, personally
appeared Michael Skoff, known to me to be the Assistant Secretary of XL
Computing Corp., Inc. and that he as such officer, signer and sealer of the
foregoing instrument, acknowledged the execution of the same to be his free act
and deed individually and as such officer, and the free act and deed of said
corporation.
In Witness Whereof, I hereunto set my hand.
/s/ Clara M. Santos
----------------------------------------
Notary Public
My Commission Expires: April 30, 2001
<PAGE> 52
DISTRICT OF COLUMBIA )
) ss.
)
Before me, the undersigned, this 17th day of December, 1997, personally
appeared Michael Skoff, known to me to be the Vice President of XL Computing
(Canada) Inc. and that he as such officer, signer and sealer of the foregoing
instrument, acknowledged the execution of the same to be his free act and deed
individually and as such officer, and the free act and deed of said corporation.
In Witness Whereof, I hereunto set my hand.
/s/ Clara M. Santos
----------------------------------------
Notary Public
My Commission Expires: April 30, 2001
STATE OF CONNECTICUT )
) ss.
COUNTY OF HARTFORD )
Before me, the undersigned, this ___ day of December, 1997, personally
appeared Richard E. Mount, known to me to be the President of American
Commercial Finance Corporation and that he as such officer, signer and sealer of
the foregoing instrument, acknowledged the execution of the same to be his free
act and deed individually and as such officer, and the free act and deed of said
corporation.
In Witness Whereof, I hereunto set my hand.
----------------------------------------
Notary Public
My Commission Expires:
Commissioner of the Superior Court
<PAGE> 53
SCHEDULE 5.1(m) - PENSION PLANS
Not Applicable
<PAGE> 54
SCHEDULE 5.1(n) - DEFERRED COMPENSATION ARRANGEMENTS
<TABLE>
<CAPTION>
EMPLOYMENT CONTRACTS
- --------------------
<S> <C>
1. Albert I. Hawk Chief Executive Officer, Cycomm International Inc.
2. Michael R. Skoff Chief Financial Officer, Cycomm International Inc.
3. Richard Mandrell Chief Operating Officer, Cycomm International Inc.
4. G.T. Gangemi President and C.E.O. - XL Computing Corp
Chief Executive Officer - XL Computing (Canada) Inc.
</TABLE>
DEFERRED COMPENSATION PLANS
None
INCENTIVE COMPENSATION PLANS
None
EXECUTIVE COMPENSATION PLANS, ARRANGEMENTS OR COMMITMENTS
None
<PAGE> 55
SCHEDULE 5.1(p) - PLACE OF BUSINESS AND LOCATION OF COLLATERAL
Location of Books and Records:
Cycomm International, Inc.
1420 Springhill Rd., Suite 420
McLean, VA 22102
Location of Collateral:
XL Computing Corporation
10305 102nd Terrace
Sebastian, FL 32958
300 Industrial Park Road
Vero Beach, FL 32960
12198 County Road 512 *
Fellsmere, FL 32948
XL Computing (Canada) Inc.
7900C Taschereau
Suite 100
Brossard, Quebec
Canada J4X 1C2
* Space will be vacant by 12/31/97
<PAGE> 56
SCHEDULE 5.1(u) - SECURITY INTERESTS AND LIENS ON COLLATERAL
CAPITAL LEASES: XL Computing Corporation and XL Computing (Canada) Inc. have
capital leases for various assets. The lessors maintain unperfected security
interests in the leased assets.
XL Computing Corporation
<TABLE>
<CAPTION>
Lessor Description of Asset Lease Inception Lease Term
- ------ -------------------- --------------- ----------
<S> <C> <C> <C>
AT&T Haeger Insertion Press Aug. 1996 65 months
AT&T Accupress Hydr. Brake Sept. 1996 65 months
AT&T 3 Dell Servers Jan. 1997 24 months
</TABLE>
XL Computing (Canada) Inc.
<TABLE>
<CAPTION>
Lessor Description of Asset Lease Inception Lease Term
- ------ -------------------- --------------- ----------
<S> <C> <C> <C>
BNP Mfg., office, comp equip. Oct. 1997 24 months
Telecom Leasing
Canada Telephone System Dec. 1996 24 months
Xerox Canada Photocopier July 1997 24 months
Services Financiers
Commcorp Fax/printer Nov. 1997 24 months
</TABLE>
<PAGE> 57
SCHEDULE 5.1(v) - TRADENAMES
Tradenames
PCMobile
<PAGE> 58
SCHEDULE 5.1(x) - PARENT, AFFILIATE OR SUBSIDIARY CORPORATIONS
SUBSIDIARIES OF CYCOMM INTERNATIONAL INC.
1. Cycomm Corporation. Incorporated on January 1, 1985, in Oregon, USA. A
wholly-owned subsidiary of Cycomm International Inc.
1.a. Val-Comm Inc. Incorporated on July 17, 1984, in New Mexico,
USA. A wholly-owned subsidiary of Cycomm Corporation.
2. XL Computing Corporation. Incorporated on February 26, 1996 in Delaware,
USA. A wholly-owned subsidiary of Cycomm International Inc.
3. XL Computing (Canada) Inc. Incorporated on June 3, 1996 in Quebec, Canada.
A wholly-owned subsidiary of Cycomm International Inc.
4. Cypher Communications de Venezuela CA. Incorporated on July 22, 1993, in
Venezuela. A wholly-owned subsidiary of Cycomm International Inc.
<PAGE> 1
EXHIBIT 10.12
CYCOMM INTERNATIONAL INC.
1997 STOCK OPTION PLAN
AS PROPOSED TO BE EFFECTIVE
UPON STOCKHOLDER APPROVAL
1. PURPOSE OF THE PLAN. The purpose of this Plan is to promote the best
interests of the Company and its stockholders by enabling the Company to attract
and retain highly qualified personnel through rewarding valued employees with
the opportunity, pursuant to Options granted under the Plan, to acquire a
proprietary interest in the Company and thereby encourage them to put forth
their maximum efforts for the continued success and growth of the Company.
2. DEFINITIONS. In addition to such other capitalized terms as are defined
elsewhere in this Plan, the following terms shall, when used in this Plan, have
the respective meanings set forth below:
(a) "Act" means the Securities Exchange Act of 1934, as amended
from time to time.
(b) "Authorized Shares" means the maximum aggregate number of
shares of Common Stock specified in Section 3(a) as being
authorized for issuance and sale under Options granted
pursuant to the Plan, subject to adjustment thereof in
accordance with Section 12 of the Plan.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended
from time to time.
(e) "Commission" means the United States Securities and Exchange
Commission.
(f) "Committee" means the Committee appointed by the Board in
accordance with Paragraph (a) of Section 4 of the Plan, if a
Committee is appointed. If, with respect to any individual
grant of Options under this Plan, any member or members of the
Committee would cause such Committee not to satisfy the
disinterested administration requirement of Rule 16b-3, as
then applicable to the Company under the Act, or the "outside
director" administration requirement of Code Section
162(m)(4)(C) and the regulation thereunder, then in such event
the Committee shall be comprised of the Committee without such
member or members. If no Committee has been appointed, any
reference to the "Committee" shall be deemed a reference to
the "Board".
(g) "Common Stock" means the Common Stock, without par value, of
the Company.
(h) "Company" means Cycomm International Inc., a Wyoming
corporation.
(i) "Continuous Employment" means with respect to any Employee,
the continued employment of such Employee by the Company or
any Subsidiary without interruption or termination after the
grant of an Option to such Employee. Continuous Employment
shall not be considered interrupted in the case of sick leave,
military leave or any other leave of absence approved by the
Board (provided that such leave is for a period of not more
than ninety (90) days or re-employment upon the expiration of
such leave is mandated by contract or statute) or in the case
of transfers between locations of the Company or between the
Company, any Subsidiary or any of their respective successors.
(j) "Employee" means any person, including officers and directors
who are also officers, employed by the Company or any
Subsidiary. The payment of director's fees by the Company
shall not be sufficient to constitute a person as an
"Employee" of the Company.
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<PAGE> 2
(k) "Option" means a right granted to an Employee or a
non-Employee Director pursuant to the Plan to purchase a
specified number of shares of Common Stock at a specified
price during a specified period and on such other terms and
conditions as may be specified pursuant to the Plan. Options
may be granted as Tax Qualified Options or as Options which do
not qualify as Tax Qualified Options.
(l) "Option Agreement" means the written agreement evidencing an
Option by and between the Company and the Optionee as required
by Section 14.
(m) "Optioned Stock" means the Common Stock subject to an Option.
(n) "Optionee" means an Employee or non-Employee Director who
receives an Option.
(o) "Plan" means this 1997 Stock Option Plan, as amended from time
to time.
(p) "Repricing Transaction" means any grant(s) of Option(s)
reasonably related to any prior or potential Option(s),
whether by an exchange of existing Options or Options with new
terms or the grant of new Options in tandem with previously
granted Options that will operate to cancel the previously
granted Options upon exercise, which adjusts or amends the
exercise price of a previously granted Option, or repricing of
previously granted Options or any other grant which would be
required to be reported as repricing under Item 402(i) of
Regulation S-K as then in effect under the Act, but excluding
any repricing occurring through the operation of the
antidilution provisions of Section 12 of the Plan.
(q) "Rule 16b-3" means Rule 16b-3 promulgated by the Commission
under the Act or any similar successor regulation exempting
certain transactions involving stock-based compensation
arrangements from the liability provisions of Section 16 of
the Act, as adopted and amended from time to time and as
interpreted by formal or informal opinions of, and releases
published or other interpretive advice provided by, the Staff
of the Commission.
(r) "Section 16 Person" means an Employee who is subject to
Section 16 of the Act, as interpreted by the rules and
regulations promulgated by the Commission thereunder, as
adopted and amended from time to time, and by formal or
informal opinions of, and releases published or other
interpretive advice provided by, the Staff of the Commission.
(s) "Securities Law Requirements" means the Act and the rules and
regulations promulgated by the Commission thereunder, as
adopted and amended from time to time, including but not
limited to Rule 16b-3, and as interpreted by formal or
informal opinions of, and releases published or other
interpretive advice provided by, the Staff of the Commission,
and the requirements of any stock exchange, automated
interdealer quotation system or other recognized securities
market on which the Common Stock is listed or traded or in
which the Common Stock is included, as adopted and amended
from time to time and as interpreted by formal or informal
opinions of, and other interpretive advice, provided by the
representatives of such stock exchange, quotation system or
other securities market.
(t) "Shares" means the Common Stock as adjusted in accordance with
Section 12 of the Plan.
(u) "Subsidiary" means a corporation of which not less than fifty
percent (50%) of the voting shares are owned by the Company or
a Subsidiary, whether or not such corporation now exists or is
hereafter organized or acquired by the Company or a
Subsidiary.
(v) "Successor" means the estate of an Optionee or a person who
succeeds by will or the laws of descent and distribution to an
Optionee's right to exercise an Option.
(w) "Tax Qualified Option" means an Option which is intended at
the time of grant to qualify for special tax treatment under
Section 422A or other particular provisions of the Code and
the regulations, rulings and procedures promulgated, published
or otherwise provided thereunder, as adopted and amended from
time to time.
2
<PAGE> 3
3. STOCK SUBJECT TO THE PLAN.
(a) Number of Shares Issuable. Subject to adjustment in accordance
with the provisions of Section 12 of the Plan, the maximum
aggregate number of Authorized Shares which may be issued and
sold under Options granted pursuant to the Plan is equal to
the following:
(i) 1997 Authorized Shares. 1,000,000 Shares of Common
Stock (the "1997 Authorized Shares").
The Shares issued and sold upon the exercise of Options may be treasury
Shares, Shares of original issue or a combination thereof.
(b) Computation of Shares Available for Grant. For purposes of
computing the number of Authorized Shares available from time
to time under the Plan for the grant of Options, the number of
Shares subject to each Option granted pursuant to the Plan
shall be provisionally counted against the Authorized Shares
from and after the grant of such Option but only for so long
as and to the extent that such Option shall remain outstanding
and unexercised. Upon the exercise, in whole or in part, of an
Option, the number of Shares issued upon such exercise shall
be permanently deducted from the Authorized Shares, provided
that no such permanent deduction shall be made, and the
provisional deduction against the Authorized Shares shall be
reversed, to the extent that the exercise price and/or the
withholding taxes with respect to such exercise are paid
through the delivery to the Company by the person exercising
the Option of Shares already owned by such person and/or
through the withholding by the Company of Shares from the
total number of Shares with respect to which the Option is
exercised. The provisional deduction against the Authorized
Shares shall likewise be reversed to the extent of the
unexercised portion of an Option upon the expiration, lapse,
cancellation, surrender, forfeiture or other termination of
such Option. The Shares covered by any such reversal of a
provisional deduction against the Authorized Shares shall
immediately become available for the granting of new Options
under the Plan with respect thereto; provided, however, that
any Shares covered by any such reversal which were 1997
Authorized Shares shall be subject to the restrictions set
forth in Section 4(c) of the Plan.
4. ADMINISTRATION OF THE PLAN.
(a) Procedure. The Plan shall be administered by the Board or the
Board may, in its discretion, appoint a Committee to
administer the Plan subject to such terms and conditions as
the Board may prescribe; provided that the terms upon which,
including the time or times at or within which, and the price
or prices at which Shares may be purchased upon the exercise
of Options shall be approved or ratified by such action of the
Board or a committee duly designated by the Board from its
members as may be required by the law of the state of
incorporation of the Company, as amended from time to time.
Once appointed, the Committee shall continue to serve until
otherwise directed by the Board. From time to time, the Board
may increase the size of the Committee and may appoint
additional members thereof, remove members (with or without
cause), fill vacancies however caused and remove all members
of the Committee and thereafter directly administer the Plan.
(b) Powers of the Committee. Subject to the provisions of this
Plan, the Committee shall have the authority, in its sole
discretion:
(i) To determine, upon review of relevant information in
accordance with Section 7(b) of the Plan, the "Fair
Market Value" (as defined in said Section 7(b)) of
the Shares;
(ii) To determine the Employees to whom, and the time or
times at which, Options shall be granted and the
number of Shares subject to purchase upon exercise of
each Option (except as
3
<PAGE> 4
to such restrictions thereon as may be imposed by
applicable tax laws which will have to be observed if
the Committee intends that a particular Option
qualify as a Tax Qualified Option, there is no limit
on the time following the adoption or approval of
this Plan within which Options may be granted under
the Plan so long as it remains in effect, or on the
number of Options which may be granted to any one
Employee or on the aggregate number of Shares subject
to purchase thereunder);
(iii) To determine the terms and provisions of each Option
(which terms and provisions need not be identical),
including, but not limited to, the following;
(A) The exercise price per Share, subject to the
provisions of Section 7 of the Plan; and
(B) Whether Options shall become exercisable
over a period of time and when they shall be
fully exercisable;
(iv) To accelerate the time as of which any Option may be
exercised;
(v) To amend any outstanding Option, subject to the
provisions of Section 19 of the Plan;
(vi) To authorize any person to prepare and execute on
behalf of the Company any instrument deemed by the
Committee to be necessary or advisable to evidence or
effectuate the Plan, any Option granted thereunder or
any amendment to the Plan or any Option;
(vii) To interpret the Plan;
(viii) To prescribe, amend and rescind, if deemed necessary
or appropriate, rules and regulations relating to the
Plan, to the extent not inconsistent with the Plan;
and
(ix) To make all other determinations the Committee may
deem necessary or advisable in connection with the
administration of the Plan.
(c) Certain Limitations Applicable to Options Granted With Respect
to 1997 Authorized Shares. Notwithstanding any other provision
of the Plan, neither the Committee nor the Board shall, with
respect to any Option granted under the Plan with respect to
any 1997 Authorized Shares, provide for an "Option Term" (as
defined in Section 6 of the Plan) of greater than ten (10)
years from the date of grant thereof or approve any Repricing
Transaction.
(d) Effect of Board and Committee Decisions. All decisions,
determinations and actions of the Board and the Committee in
connection with the construction, interpretation,
administration, application, operation and implementation of
the Plan shall be final, conclusive and binding on the
Company, its stockholders and Subsidiaries, all Employees and
Optionees and the respective legal representatives, heirs,
successors and assigns of all of the foregoing and all other
persons claiming under or through any of them.
(e) Exculpation and Indemnification. No member of the Board or the
Committee, and no Employee or other agent acting on behalf of
the Board or the Committee, shall be personally liable for any
decision, determination or action made or taken, or failed to
be made or taken, with respect to this Plan or any Option
granted hereunder, and the Company shall fully protect each
such person in respect of any such decision, determination or
action and shall indemnify each such person against any and
all claims, losses, damages, expenses and liabilities arising
from or in connection with any such decision, determination or
action.
5. ELIGIBILITY. Options may be granted only to Employees who, in the sole
judgment of the Committee, have contributed or will contribute to the success
and growth of the Company. An Employee to whom the Company
4
<PAGE> 5
has previously granted a stock option pursuant to this Plan or otherwise may, if
he is otherwise eligible, be granted additional Options.
The existence of this Plan shall not create in any Employee any right to be
granted an Option hereunder, and neither the existence of this Plan nor the
granting of any Options to any Employee hereunder shall confer upon such
Employee any right with respect to continuation of the employment of such
Employee by the Company or any Subsidiary or shall in any way interfere with or
limit the right which such Employee, the Company or any Subsidiary may otherwise
have to terminate such employment at any time with or without cause. Upon the
termination of any Employee's employment with the Company or any Subsidiary,
neither the Company nor any Subsidiary shall have any liability or obligation to
such Employee under this Plan or any Options granted to such Employee hereunder
except to issue the appropriate number of Shares to such Employee upon the
exercise of any Option granted to such Employee under this Plan prior to such
termination of employment, provided that such exercise is duly and timely made
in accordance with the provisions of this Plan and such Option.
6. TERM OF OPTIONS. Except as may otherwise be specified by the Committee in its
sole discretion at the time of grant thereof and reflected in the Option
Agreement evidencing such Option, the term at the end of which each Option shall
expire (the "Option Term") shall be ten (10) years from the date of grant
thereof, provided that the Committee, if it intends that a particular Option
qualify as a Tax Qualified Option, will have to observe such restrictions on the
term of such Option as may be imposed by the applicable tax laws in order for
such Option so to qualify. Each Option shall continue in effect in accordance
with its terms notwithstanding that the Plan may be terminated prior to the
expiration of the term of such Option.
7. EXERCISE PRICE.
(a) Minimum Price Required. The per Share exercise price for the
Shares subject to an Option shall be such price as is
determined by the Committee at the time of grant of an Option
and reflected in the Option Agreement evidencing the same;
provided that in no event shall such exercise price per Share
be less than the Fair Market Value per Share as of the day
prior to the date of grant of such Option.
(b) Definition of "Fair Market Value". For all purposes under the
Plan, "Fair Market Value" per Share shall be determined by the
Committee in its sole discretion; provided that if the Shares
are listed on the American Stock Exchange or other stock
exchange or quoted on NASDAQ on the date as of which the same
is to be determined, the Fair Market Value per Share shall be
the closing price on such quotation system or exchange which
is the principal trading market for the Shares on the date of
determination or, if no sale price was reported for the Shares
on the date of determination, the closing price on such
principal trading market for the last trading day prior to the
date of determination for which a sale price was reported;
provided further, however, that if the foregoing method of
determining Fair Market Value is inconsistent with the then
existing tax law requirements with respect to any Option which
the Committee intends to qualify as a Tax Qualified Option,
then the Fair Market Value per Share shall be determined by
the Committee in such manner as is required for such Tax
Qualified Option to qualify as such.
8. WITHHOLDING TAXES. Before a stock certificate evidencing the Shares being
acquired through exercise of an Option will be issued to the Optionee, the
Optionee must pay, or make arrangements acceptable to the Company for the
payment of, any and all federal, state and local withholding taxes, whether
domestic or foreign, required to be withheld in connection with the exercise of
an Option.
9. FORM OF PAYMENT.
(a) Acceptable Forms of Consideration. Except as may otherwise be
specified by the Committee in its sole discretion at the time
of grant thereof and reflected in the Option Agreement
evidencing such Option, the following forms of consideration
will be accepted in payment of the exercise price for the
Shares to be issued upon exercise of an Option and of the
taxes required to be withheld in connection with such
exercise: (i) cash, (ii) personal check, (iii) bank cashier's
check, (iv) already owned Shares (duly endorsed for transfer
with signature guaranteed), or (v) any combination of the
foregoing. Except as
5
<PAGE> 6
may otherwise be specified by the Committee in its sole
discretion at the time of grant thereof and reflected in the
Option Agreement evidencing such Option, Shares withheld from
the Shares to be issued upon exercise of the Option, either
alone or in any combination with any of the other acceptable
forms of consideration recited in this Paragraph (a), will
also be an accepted form of consideration for payment of the
taxes required to be withheld in connection with the exercise
of an Option. In addition to the acceptable forms of
consideration hereinabove recited in this Paragraph (a), the
Committee may determine in its sole discretion at the time of
grant of an Option, and if the Committee so determines, shall
provide in the Option Agreement evidencing such Option, that
one or both of the following additional forms of consideration
will be accepted, either alone or in any combination with any
of the other acceptable forms of consideration recited in this
Paragraph (a), in payment of the items specified: (vi) in
payment of the exercise price for the Shares to be issued upon
exercise of the Option, Shares withheld from the Shares to be
issued upon such exercise, and/or (vii) in payment of the
exercise price for the Shares to be issued upon exercise of an
Option and the taxes required to be withheld in connection
with such exercise, a commitment for the delivery to the
Company of proceeds from the sale, pursuant to a brokerage or
similar arrangement approved in advance by the Committee in
its sole discretion, of Shares to be issued upon exercise of
the Option. The forms of consideration which will be accepted
in payment of the exercise price for an Option and related
withholding taxes shall be specified in the Option Agreement
evidencing such Option, the person or persons entitled to
exercise the Option shall be entitled to elect from those so
specified the form(s) to be used in effecting payment with
respect to a particular exercise; provided that any election
by a Section 16 Person to use already owned Shares or have
Shares withheld from those issuable upon such exercise shall
be effective only if made in accordance with the applicable
requirements of Rule 16b-3; and provided further that a
commitment for the delivery to the Company of proceeds from
the sale, pursuant to a brokerage or similar arrangement, of
Shares to be issued upon exercise of an Option will not be
accepted from a Section 16 Person if under Securities Law
Requirements such a sale would be matched with such exercise
to result in "short swing" profit liability under Section
16(b) of the Act on the part of such Section 16 Person with
respect to such transaction.
(b) Withholding Tax Loans. In addition to any one or more of the
acceptable forms of consideration recited in Paragraph (a) of
this Section 9, the Committee may determine in its discretion
at the time of grant of an Option, and if the Committee so
determines shall specifically provide for in the Option
Agreement evidencing such Option, that such Optionee (but not
any Successor) may borrow from the Company an amount
sufficient to pay the taxes required to be withheld in
connection with the exercise of such an Option, with each such
borrowing to be evidenced by a promissory note of the Optionee
payable to the order of the Company. Except as may otherwise
be specified by the Committee in its sole discretion at the
time of grant thereof and reflected in the Option Agreement
evidencing an Option, each such loan shall be for a term of
five (5) years at a rate of interest equal to the Company's
then primary domestic commercial lender's prime or base rate
as in effect from time to time, with payments of interest on
such loan due quarterly and payments toward the principal of
such loan due, to the extent of the net proceeds therefrom,
within fifteen (15) days after any disposition by the Optionee
of any Shares acquired upon exercise of any stock option
granted by the Company to the Optionee pursuant to this Plan
or otherwise (excluding any disposition of such Shares by gift
or to the Company in payment of the exercise price of a stock
option granted by the Company to the Optionee pursuant to this
Plan or otherwise and/or any related withholding taxes),
provided that the entire unpaid principal balance shall be due
at the earlier of (i) the expiration of the five (5) year
term, or (ii) the termination of the Optionee's Continuous
Employment (other than by reason of Optionee's "disability"
(as defined in Section 10(d)) or "retirement" (as defined in
Section 10(e)).
(c) Company Withholding of Taxes. If, upon being notified by the
Company of the amount of the taxes required to be withheld in
connection with an exercise of an Option, the Optionee fails
promptly to pay, or to make arrangements acceptable to the
Company for the payment of such taxes, the Company shall have
the right to elect (but shall be under no obligation) to cover
such taxes through: (i) withholding Shares from those issuable
upon such exercise, provided that any such election so to
withhold Shares with respect to the exercise of an Option by a
Section 16 Person shall be effective only if made in
accordance with the applicable requirements of Rule 16b-3;
and/or (ii) deducting such taxes from any
6
<PAGE> 7
amounts payable in cash to the Optionee by the Company for any
reason as of the time of such exercise or any time thereafter.
(d) Valuation of Shares Delivered or Withheld. Where already owned
Shares, or Shares withheld from those issuable upon such
exercise, are used in payment of the exercise price and/or
related withholding taxes, such Shares shall be valued; (i)
for purposes of payment of the exercise price, at Fair Market
Value as of the day immediately preceding the date of exercise
and (ii) with respect to the payment of withholding taxes, at
Fair Market Value as of the day immediately preceding the date
tax withholding is required to be made.
(e) Optionee Certification of Already Owned Shares. Already owned
Shares which were acquired through a previous exercise of a
stock option granted to an Optionee by the Company pursuant to
this Plan or otherwise may be used in payment of the exercise
price of an Option and/or related withholding taxes only if
the previous exercise through which such Shares were acquired
was made as of a date not less than six (6) months prior to
the date of the exercise of the Option in connection with
which such Shares are being tendered as payment. A tender of
already owned Shares in payment of the exercise price of an
Option and/or related withholding taxes will not be accepted
by the Company unless accompanied by a written statement
signed by the person or persons entitled to exercise such
Option certifying that either (i) the Shares tendered in
payment were acquired other than through the exercise of a
stock option granted by the Company or (ii) the Shares
tendered in payment were acquired through the exercise, on
such date(s) as shall be recited in such statement (which
date(s) shall be not less than six (6) months prior to the
date of tender), of stock option(s) granted by the Company.
(f) Delivery of Already Owned Shares. Where the person exercising
an Option elects to use already owned Shares in full or
partial payment of the exercise price and/or related
withholding taxes, the Committee may, in its sole discretion,
accept, in lieu of physical delivery of the stock certificates
evidencing such Shares, such constructive delivery of such
Shares as may be satisfactory to the Committee.
10. METHOD OF EXERCISE:
(a) Procedure for Exercise; Rights as a Stockholder. Any Option
granted hereunder shall be exercisable at such times and under
such conditions as determined by the Committee and as
permitted under the Plan. An Option may not be exercised for a
fraction of a Share. In order to exercise an Option, the
person or persons entitled to exercise it shall deliver to the
Company written notice of the number of Shares with respect to
which the Option is being exercised, accompanied by payment in
full of the aggregate price for the Shares so to be acquired.
To constitute an effective exercise of an Option, such notice
and payment shall be addressed to the attention of the
Treasurer of the Company and must be received at the principal
executive office of the Company (i) with respect to an Option
that is terminated for "Misconduct" (as defined below)
pursuant to Paragraph (b) of this Section 10 or for
"Prohibited Conduct" (as defined in Section 16(a)) pursuant to
Section 16(a), prior to the time of the occurrence of the
event constituting such Misconduct or Prohibited Conduct or
(ii) with respect to any other Option, by 5:00 p.m., local
time, on the date of expiration or termination of the Option.
Until the issuance (as evidenced by the appropriate entry on
the books of the Company or of a duly authorized transfer
agent of the Company) of the stock certificate evidencing such
Shares, no right to vote or receive dividends nor any other
rights as a stockholder shall exist with respect to the
Optioned Stock notwithstanding the exercise of the Option. No
adjustment will be made for a dividend or other right for
which the record date is prior to the date the stock
certificate is issued, except as provided in Section 12.
Exercise of an Option shall result in a decrease in the number
of Shares which thereafter shall be available for sale under
such Option by the number of Shares as to which the Option is
exercised, including any Shares withheld from the Shares to be
issued pursuant to such exercise to cover the exercise price
and/or related withholding taxes.
(b) Termination of Employment. Except as may otherwise be
specified by the Committee in its sole discretion at the time
of grant thereof and reflected in the Option Agreement
evidencing such Option,
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<PAGE> 8
upon the termination of an Optionee's Continuous Employment
(other than by reason of the Optionee's death, disability or
retirement), he may exercise his Option (to the extent that he
was entitled to exercise it at the time of such termination of
employment) until the earlier of (i) the date sixty (60) days
(or such longer period of time as is determined by the
Committee in its sole discretion at the time of such
termination of employment, provided that if the Committee
intends that a particular Option continue to qualify as a Tax
Qualified Option, the Committee will have to observe such
restrictions as may be imposed by applicable tax laws on the
post-termination period within which a Tax Qualified Option
may be exercised if it wishes to ensure that any
post-termination exercise of such Option is made only within
the period permitted by such laws) after the effective date of
the termination of his employment or (ii) the expiration date
of such Option, and the Option shall terminate on the earlier
of such dates; provided, however, that if the Optionee is
terminated by the Company for Misconduct, then such Option
shall terminate effective as of the time of the conduct
constituting such Misconduct. As used in this Plan,
"Misconduct" means that the Optionee has engaged in Prohibited
Conduct, committed an act of embezzlement, fraud or theft with
respect to the property or business of the Company or a
Subsidiary or deliberately disregarded the rules of the
Company or a Subsidiary in such a manner as to cause material
loss, damage or injury to or otherwise endanger the property,
reputation, employees or business prospects of the Company or
a Subsidiary. The Committee shall determine whether an
Optionee's employment was terminated by reason of Misconduct.
In making such determination, the Committee may, but shall not
be required to, give the Optionee an opportunity to be heard
and to present evidence on his behalf.
(c) Death of Optionee. Except as may otherwise be specified by the
Committee in its sole discretion at the time of grant thereof
and reflected in the Option Agreement evidencing such Option,
upon the death of an Optionee: (i) who is at the time of his
death in the employ of the Company or a Subsidiary and who
shall have been in Continuous Employment since the date of
grant of the Option, the Option may be exercised (to the
extent the Optionee would have been entitled to do so had he
continued living and terminated employment six (6) months
after the date of death) by his Successor until the earlier of
(A) the date six (6) months (or, if the Committee intends that
a particular Option qualify as a Tax Qualified Option, such
lesser period of time within which the applicable tax laws may
require that the Option be exercised in order for such Option
so to qualify) following the date of the Optionee's death or
(B) the expiration date of such Option, and the Option shall
terminate on the earlier of such dates; or (ii) within one (1)
month after the termination of Continuous Employment other
than termination by the Company or a Subsidiary for Misconduct
or due to disability, the Option may be exercised (to the
extent the Optionee was entitled to do so at the date of
termination of Continuous Employment) by his Successor until
the earlier of (A) the date six (6) months following the date
of the Optionee's death (or, if the Committee intends that a
particular Option qualify as a Tax Qualified Option, such
lesser period of time within which the applicable tax laws may
require that the Option be exercised in order for such Option
so to qualify) or (B) the expiration date of such Option, and
the Option shall terminate on the earlier of such dates.
(d) Disability of Optionee. Except as may otherwise be specified
by the Committee in its sole discretion at the time of grant
thereof and reflected in the Option Agreement evidencing such
Option, if an Optionee's Continuous Employment terminates due
to optionee having become permanently and totally disabled
within the meaning of Section 23(e)(3) of the Code
("disability"), the Option may be exercised (to the extent the
Optionee was entitled to do so as of the effective date of the
termination of Optionee's employment by reason of such
disability) until the earlier of (i) the date one (1) year
after the effective date of such termination of his employment
or (ii) the expiration date of such Option, and the Option
shall terminate on the earlier of such dates.
(e) Retirement of Optionee. Except as may otherwise be specified
by the Committee in its sole discretion at the time of grant
thereof and reflected in the Option Agreement evidencing such
Option, if an Optionee's Continuous Employment terminates by
reason of (A) his retirement at any age entitling him to
benefits under the provisions of any retirement plan of the
Company or any Subsidiary in which such Optionee participates;
or (B) retirement at any time after attaining age 65
(whichever circumstance is applicable constituting
"retirement"), the Option may be exercised (to the extent the
Optionee shall be
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entitled to do so as of the effective date of the termination
of his employment by reason of such retirement) until the
earlier of (i) the date three (3) months after the effective
date of the termination of his employment or (ii) the
expiration date of such Option, and the Option shall terminate
on the earlier of such dates.
11. NONTRANSFERABILITY OF OPTIONS. Options may not be sold, pledged, assigned,
hypothecated, transferred or disposed of in any manner by the Optionee except at
death by will or by the laws of descent and distribution and may be exercised
during the life of the Optionee only by the Optionee. No lien, obligation or
liability of an Optionee or a Successor shall attach to or otherwise encumber
the right and interest of such Optionee or Successor in and to any Options
outstanding under the Plan.
12. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER.
(a) Adjustments, in general. Subject to the provisions of
Paragraph (b) of this Section 12 and to any required action by
the stockholders of the Company, the number of Shares covered
by each outstanding Option, and the number of Shares which
have been authorized for issuance under the Plan but as to
which no Options have yet been granted or which due to the
expiration, lapse, cancellation, surrender, forfeiture or
other termination of a stock option under this Plan are again
available for grant, as well as the price per Share covered by
each such outstanding Option, shall be proportionately
adjusted for any increase or decrease in the number of issued
and outstanding Shares resulting from a stock split, reverse
stock split, stock dividend, combination or reclassification
of Shares or any other increase or decrease in the aggregate
number of issued and outstanding Shares effected without
receipt of consideration by the Company; provided, however,
that the issuance of Shares pursuant to the conversion or
exchange of any securities of the Company convertible into or
exchangeable for Shares shall not be deemed to have been
"effected without receipt of consideration." Any fractional
Shares which would otherwise result from any such adjustments
shall be eliminated either by deleting all fractional Shares
or by appropriate rounding to the next higher (fractions of
one-half or more) or lower (fractions of less than one-half)
whole Share. All such adjustments shall be made by the Board
in its sole discretion. Except as expressly provided herein,
no issuance by the Company of shares of stock of any class, or
securities convertible into or exchangeable for shares of
stock of any class, shall affect, and no adjustment by reason
thereof shall be made to, the number of or exercise price for
Shares subject to an Option.
In the event of the proposed dissolution or liquidation of the
Company, all outstanding Options will terminate immediately
prior to the consummation of such proposed action, unless
otherwise provided by the Board. The Board may, in the
exercise of its sole discretion in such instances, declare
that any Option shall terminate as of a date fixed by the
Board and give each Optionee the right to exercise his Option
as to all or any part of the Optioned Stock, including Shares
as to which the Option would not otherwise then be
exercisable.
Subject to the provisions of Paragraph (b) of this Section 12,
in the event of a sale of all or substantially all of the
assets of the Company, or the merger or consolidation of the
Company with or into another corporation, each outstanding
Option shall be assumed or an equivalent option shall be
substituted by such successor corporation or a parent or
subsidiary of such successor corporation, unless the Board, in
the exercise of its sole discretion, determines that, in lieu
of such assumption or substitution, the Optionee shall have
the right to exercise the Option as to all or any part of the
Optioned Stock, including Shares as to which the Option would
not otherwise then be exercisable. If in the event of a
merger, consolidation or sale of assets the Board makes an
Option fully exercisable in lieu of assumption or
substitution, the Company shall notify the Optionee that the
Option shall be fully exercisable for a period of thirty (30)
days from the date of such notice, and the Option will
terminate upon the expiration of such period.
(b) Special Adjustments upon Change in Control. In the event of a
"Change in Control" of the Company (as defined in Paragraph
(c) of this Section 12), unless otherwise determined by the
Board in its sole discretion prior to the occurrence of such
Change in Control, the following acceleration and valuation
provisions shall apply:
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(i) Any Options outstanding as of the date of such Change
in Control that are not yet fully vested on such date
shall become fully vested; and
(ii) The value of all outstanding Options, measured by the
excess of the "Change in Control Price" (as defined
in Paragraph (d) of this Section 12) over the
exercise price, shall be cashed out. The cash out
proceeds shall be paid to the Optionee or, in the
event of death of an Optionee prior to payment, to
his Successor.
(c) Definition of "Change in Control." For purposes of this
Section 12, a "Change in Control" means the happening of any
of the following:
(i) When any "person," as such term is used in Sections
13(d) and 14(d) of the Act (other than the Company, a
Subsidiary or a Company or Subsidiary employee
benefit plan, including any trustee of such a plan
acting as trustee) becomes the "beneficial owner" (as
defined in Rule 13d-3 promulgated by the Commission
under the Act, as adopted and amended from time to
time and as interpreted by formal or informal
opinions of, and releases published or other
interpretive advice provided by, the Staff of the
Commission), directly or indirectly, of securities of
the Company representing fifty percent (50%) or more
of the combined voting power of the Company's then
outstanding securities; or
(ii) The consummation of a transaction requiring
stockholder approval and involving the sale of all or
substantially all of the assets of the Company or the
merger or consolidation of the Company with or into
another corporation.
(d) Definition of "Change in Control Price". For purposes of this
Section 12, "Change in Control Price" shall be, as determined
by the Board, (i) the highest closing sale price of a Share,
as reported by the American Stock Exchange, the NASDAQ
National Market, any stock exchange on which the Shares are
listed or any other recognized securities market on which the
Shares are traded, at any time within the sixty (60) day
period immediately preceding the date of the Change in Control
(the "Sixty-Day Period"), or (ii) the highest price paid or
offered, as determined by the Board, in any bona fide
transaction or bona fide offer related to the Change in
Control, at any time within the Sixty-Day Period.
13. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for all
purposes, be the date on which the Committee makes the determination granting
such Option. Notice of such determination shall be given to each Employee to
whom an Option is so granted within a reasonable time after the date of such
grant.
14. OPTION AGREEMENTS. As a condition to the effectiveness of each grant of an
Option under this Plan, the Optionee shall enter into a written Option Agreement
in such form as may be authorized by the Committee from time to time. Subject to
the provisions of Section 20(a), each such Option Agreement shall contain such
provisions as are required by the terms of this Plan and may contain such
additional provisions not inconsistent with the terms of this Plan as the
Committee in its sole discretion may from time to time authorize. Each Option
Agreement evidencing an Option granted to a Section 16 Person shall also provide
for such minimum waiting period from the date of grant before the Option may be
exercised, and such minimum holding period from the date of the acquisition of
Shares upon exercise of an Option for which such Shares must be held before
making any disposition of such Shares, as may be required by Rule 16b-3.
15. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued with respect
to an Option unless the exercise of such Option and the issuance and delivery of
such Shares pursuant thereto shall comply with all applicable Securities Law
Requirements and all other applicable provisions of law, including, without
limitation, any applicable state "blue sky" laws and foreign (national and
provincial) securities laws and the rules and regulations promulgated under any
of such laws, and shall be further subject to the approval of counsel for the
Company with respect to such compliance.
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As a condition to the exercise of an Option or the issuance of Shares upon
exercise of an Option, the Company may require the person exercising such Option
to make such representations and warranties to the Company as may be required,
in the opinion of counsel for the Company, by any of the aforementioned
Securities Law Requirements and other laws, which may include, without
limitation, representations and warranties that the Shares are being purchased
only for investment and without any present intention to sell or distribute such
Shares.
The Company shall not have any liability to any Optionee in respect of any delay
in the sale or issuance of Shares hereunder until the Company is able to obtain
authority from any governmental authority (domestic or foreign) or
self-regulatory organization having jurisdiction thereover, which authority is
deemed by the Company's counsel to be necessary to the lawful sale and issuance
of such Shares, or any failure to sell or issue such Shares as to which such
requisite authority the Company is unable to obtain.
16. FORFEITURE OF OPTIONS AND REALIZED BENEFITS.
(a) Loss of Unexercised Options. If an Optionee holding an
outstanding Option, without the written consent of the Company
as authorized by the Committee in its sole discretion, engages
in any of the following conduct (any such conduct being
referred to as "Prohibited Conduct") at any time during the
period beginning on the date the Optionee first entered the
employ of the Company or a Subsidiary and continuing for so
long as any portion of such Option remains outstanding and
unexercised (the "Grant Period"):
(i) rendering services for any organization or engaging
directly or indirectly in any business which, in the
sole judgment of the Committee, is or becomes
competitive with the Company or a Subsidiary, or
where such rendering of services or engaging in
business, in the sole judgment of the Committee, is
or becomes otherwise prejudicial to or in conflict
with the interests of the Company or a Subsidiary;
provided that the ownership of a not more than ten
percent (10%) equity interest in any organization or
business whose equity is listed on a recognized
securities exchange or traded over-the-counter shall
not constitute Prohibited Conduct within the meaning
of this Subparagraph (i);
(ii) disclosing to anyone outside the Company or any
Subsidiary, or use in other than the business of the
Company or any Subsidiary, any confidential or
proprietary information relating to the business of
the Company or any Subsidiary, acquired by the
Optionee either during or after employment with the
Company or a Subsidiary;
(iii) except as may otherwise be permitted by any agreement
otherwise made by the Company or a Subsidiary with
the Optionee, failing to disclose fully and promptly
in writing and assign to the Company or to the
Subsidiary by which the Optionee is or was employed
all right, title and interest in any discovery,
invention, process, method, improvement or idea,
whether or not patentable or subject to copyright
protection and whether or not reduced to tangible
form or reduced to practice, made or conceived by
such person during employment by the Company or such
Subsidiary, relating in any manner to the actual or
contemplated business, research or development work
of the Company or such Subsidiary or to do anything
reasonably necessary to enable the Company or such
Subsidiary to secure a patent, copyright or similar
protection in the United States of America and/or in
foreign countries as the Company or such Subsidiary
may elect; or
(iv) inducing or attempting to induce any customer or
supplier of the Company or a Subsidiary to breach any
contract with the Company or a Subsidiary or
otherwise terminate its relationship with the Company
or a Subsidiary;
then the Committee shall have a right, upon determining that
the Optionee has engaged in any Prohibited Conduct at any time
during the Grant Period (in making such determination, the
Committee may, but shall not be required to, give the Optionee
an opportunity to be heard and to present evidence on his
behalf), to declare the Option forfeited and canceled
effective as of the time of the conduct constituting such
Prohibited Conduct.
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(b) Optionee Certification upon Exercise. Each time an Optionee
exercises an Option, the Optionee shall be deemed to certify
to the Company that such Optionee did not, without the written
consent of the Company as authorized by the Committee in its
sole discretion, engage in any Prohibited Conduct at any time
during the period beginning on the date the Optionee first
entered the employ of the Company or a Subsidiary and ending
on the date of such exercise (the "Pre-Exercise Period").
(c) Loss of Realized Benefits. In the event that the Committee
determines with respect to a particular exercise of an Option
that the Optionee engaged in any Prohibited Conduct at any
time during the Pre-Exercise Period or within one (1) year
after such exercise (in making such determination, the
Committee may, but shall not be required to, give the Optionee
an opportunity to be heard and to present evidence on his
behalf), such Optionee shall be liable to the Company (i) to
the extent such Optionee has, prior to his receipt of the
"Forfeiture Notice" (as defined below), disposed of the Shares
acquired through such exercise, for payment to the Company of
an amount in cash equal to the excess of (A) the net cash
proceeds from such disposition (or if such Shares were
disposed of other than for cash, the aggregate Fair Market
Value of such Shares as of the date of disposition) over (B)
that portion of the sum of the cash and the aggregate Fair
Market Value as of the exercise date of any already owned
Shares used by the Optionee to pay the exercise price for such
Shares (such sum being referred to as the "Exercise Payment")
which is allocable to the Shares disposed of in the proportion
that such number of Shares bears to the total number of Shares
issued pursuant to such Option exercise and (ii) to the extent
such Optionee still owns at the time he receives the
Forfeiture Notice the Shares acquired through such exercise,
at the option of the Committee, either (A) for the return of
such Shares to the Company in exchange for a cash refund from
the Company to such Optionee in an amount equal to that
portion of the Exercise Payment which is allocable to the
Shares still owned in the proportion that such number of
Shares bears to the total number of Shares issued pursuant to
such Option exercise (such portion being referred to as the
"Retained Shares Exercise Payment") or (B) for payment to the
Company of an amount in cash equal to the excess of the
aggregate Fair Market Value as of the exercise date of the
Shares still owned over the Retained Shares Exercise Payment.
To enforce such liability against such Optionee, the Committee
shall notify the Optionee thereof in writing within three (3)
years of the date of the affected Option exercise, which
notice (the "Forfeiture Notice") shall include a statement of
the form of payment which the Committee has elected to receive
from the Optionee with respect to Shares still owned by the
Optionee. Within ten (10) days after receiving the Forfeiture
Notice, the Optionee shall make full payment of such liability
to the Company in cash, or to the extent such Optionee still
owns Shares acquired through the affected exercise and the
Committee elects in the Forfeiture Notice to receive such
Shares, stock certificates evidencing such Shares still owned
by the Optionee (duly endorsed for transfer with signature
guaranteed). In the event that the Committee elects to
receive, and the Optionee returns, Shares, the Company shall
make the refund payment required to be made to the Optionee
with respect to such Shares upon the Company's receipt of such
Shares as hereinabove required.
(d) Cumulative Rights. The obligation of an Optionee under this
Section 16 to refrain from Prohibited Conduct is in addition
to, and does not in any way supersede or diminish, any other
obligation of such Optionee with respect to such matters which
such Optionee may owe to the Company, any Subsidiary or any
other person under any agreement, applicable law or otherwise
(a "Similar Obligation"). Any action taken by the Company or
the Committee to enforce, compromise, settle or waive the
provisions of this Section 16 with respect to any particular
event constituting Prohibited Conduct shall not in any way
affect the rights of the Company, the Committee, any
Subsidiary or any person against an Optionee with respect to
any other event constituting Prohibited Conduct or any Similar
Obligation, nor shall any action taken or failed to be taken
by the Company, any Subsidiary or any other person against an
Optionee to enforce, compromise, settle or waive any Similar
Obligation have any effect on the rights of the Company and
the Committee under this Section 16.
17. RESERVATION OF SHARES. The Company, during the term of this Plan, shall at
all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
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18. EFFECTIVENESS OF PLAN. This Plan was adopted by the Board on, and shall be
effective as of November 20, 1997, subject to the approval hereof by the vote of
the Company's stockholders required therefor by Wyoming Law and applicable
Securities Law Requirements within one (1) year of the date of adoption by the
Board. The Plan shall continue in full force and effect until (i) terminated by
resolution of the Board or (ii) both (A) all Options granted under the Plan have
been exercised in full and (B) no Authorized Shares remain available for the
granting of additional Options. The termination of the Plan shall not affect
Options already granted, which Options shall remain in full force and effect in
accordance with their respective terms as if this Plan had not been terminated.
19. AMENDMENT OF PLAN AND OUTSTANDING OPTIONS. The Board may, in its sole
discretion, amend the Plan from time to time, provided that any amendment which
Rule 16b-3 or any other Securities Law Requirement requires be approved by the
stockholders of the Company shall be made only with the approval of such
stockholders. Amendments to the Plan shall apply prospectively to all Options
then outstanding under the Plan, except in the case of any amendment which is
adverse to an Optionee, in which case the amendment shall apply with respect to
the outstanding Options held by the adversely affected Optionee only upon the
consent of such Optionee to such amendment. In exercising its authority under
Section 4(b)(v) to amend outstanding Options, the Committee likewise may make an
amendment which adversely affects the Optionee only upon the consent of such
Optionee to such amendment. Notwithstanding the provisions of this Section 19,
the consent of the Optionee shall not be required with respect to an amendment
to the Plan or to any outstanding Option which is made in order to comply with
Securities Law Requirements or which causes a Tax Qualified Option no longer to
qualify as such.
20. GENERAL PROVISIONS.
(a) Grants to Foreign Employees. Notwithstanding any other
provision of this Plan to the contrary but subject to
applicable Securities Law Requirements and tax laws, to the
extent deemed necessary or appropriate by the Committee in its
sole discretion in order to further the purposes of the Plan
with respect to Employees who are foreign nationals and/or
employed outside the United States of America, an Option
granted to any such Employee may be on terms and conditions
different from those specified in this Plan in recognition of
the differences in the laws, tax policies and customs
applicable to such an Employee, without the necessity of the
Plan being amended to provide for such different terms and
conditions.
(b) Nature of Benefits. Benefits realized by an Optionee under
this Plan or any Option granted hereunder shall not be deemed
a part of such Optionee's regular, recurring compensation for
purposes of the termination, indemnity or severance pay law of
any country and shall not be included in, nor have any effect
on, the determination of benefits under any other employee
benefit plan or similar arrangement provided to such Optionee
by the Company or a Subsidiary unless expressly so provided by
such other plan or arrangement, or except where the Committee
expressly determines in its sole discretion that an Option or
portion thereof should be so included in order to accurately
reflect competitive compensation practices or to recognize
that an Option has been granted in lieu of a portion of
competitive annual cash compensation.
(c) Determination of Deadlines. If any day on or before which
action under this Plan or any Option granted hereunder must be
taken falls on a Saturday, Sunday or Company-recognized
holiday, such action may be taken on the next succeeding day
which is not a Saturday, Sunday or Company-recognized holiday;
provided, however, that the provisions of this Paragraph (c)
shall not apply to, and shall not extend the time for exercise
of, any Option which is terminated for Misconduct pursuant to
Section 10(b) or for Prohibited Conduct pursuant to Section
16(a).
(d) Governing Law. To the extent that federal laws (such as the
Act or the Code) or the laws of the state of incorporation of
the Corporation do not otherwise control, this Plan and all
determinations made and actions taken pursuant hereto shall be
governed by the laws of the state of incorporation of the
Corporation and construed accordingly.
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(e) Gender and Number. Whenever the context may require, any
pronouns used herein shall include the corresponding
masculine, feminine or neuter forms, and the singular form of
nouns and pronouns shall include the plural and vice versa.
(f) Captions. The captions contained in this Plan are for
convenience of reference only and do not affect the meaning of
any term or provision hereof.
Cycomm Stock Option Plan
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EXHIBIT 10.13
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT (the "Agreement") is entered into as of
this 26th day of February 1998 by and among CYCOMM INTERNATIONAL INC., a Wyoming
corporation with offices at 1420 Springhill Road, Suite 420, McLean, Virginia
22102 ("Seller") and Williams de Broe Plc, 6 Broadgate, London, England EC2M 2RP
("Buyer").
WITNESSETH:
WHEREAS, Seller desires to sell Twenty (20) shares of its Series B
Convertible Redeemable Preferred Stock, no par value per share ("Series B
Preferred Stock") to Buyer and Buyer desires to purchase from the Seller, the
Series B Preferred Stock on the terms and subject to the conditions contained in
this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and for other good and valuable consideration, the receipt and legal
sufficiency of which are hereby acknowledged, and intending to be legally bound
hereby, the parties hereto agree as follows:
1. Purchase and Sale. On the terms and subject to the terms and
conditions of this Agreement, at the Closing referred to in Section 2 of this
Agreement, Seller shall sell and deliver to the Buyer and the Buyer shall
purchase from the Seller, an aggregate of Twenty (20) shares of the Series B
Preferred Stock, for the Purchase Price referred to in Section 3 of this
Agreement. A copy of the Certificate of Designation of the Series B Preferred
Stock is attached as Exhibit A hereto.
2. Closing. The closing of the purchase and sale contemplated by this
Agreement shall take place on or before February 26, 1998 at the offices of
Venable, Baetjer, Howard & Civiletti, LLP, 1201 New York Avenue, N.W., Suite
1000, Washington, DC 20005, or at such other date and place as the parties may
mutually agree. The actual date of such closing is referred to herein as the
"Closing." At the Closing, the Seller shall deliver the shares of Series B
Preferred Stock to the Buyer in the number of certificates and for the number of
shares registered in the name of each Buyer, as set forth on Exhibit A hereto,
and the Buyer shall pay to the Seller the Purchase Price referred to in Section
3 of this Agreement.
3. Purchase Price. The Purchase Price for the Series B Preferred Stock
shall be One Million United States Dollars ($1,000,000) in the form of cash or
cash equivalent, in the form of a certified check, bank cashier's check, bank
money order or wire transfer payable to, to the Seller.
4. Representations of the Seller. The Seller hereby represents and
warrants to the Buyer that:
4.1 Due Incorporation, etc. The Seller is duly incorporated,
validly existing and in good standing under the laws of Wyoming and has all
requisite power and authority to execute
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and deliver this Agreement and to perform the obligations to be performed by it
hereunder. Neither the execution or delivery of this Agreement nor the
performance by the Seller hereof will constitute a breach of or default under
the governing instruments of the Seller or any agreement, instrument, indenture,
judgment or decree to which it is a party or by which it is bound. Prior to the
Closing, all consents and approvals, if any, required to be obtained by the
Seller for the sale of the Shares to be sold by it hereunder will have been
obtained.
4.2 Due Execution, Validity and Effect. This Agreement has
been duly authorized, executed and delivered by the Seller and, assuming the due
authorization, execution and delivery by the Buyer, this Agreement constitutes
the valid, legal and binding obligation of the Seller, enforceable in accordance
with its terms, except to the extent that enforceability may be limited by
bankruptcy, insolvency, moratorium or similar laws affecting the enforcement of
creditors' rights generally.
4.3 Title to the Shares. At Closing, the Seller shall deliver
to the Buyer the shares of Series B Preferred Stock, with legal and valid title
thereto, free and clear of all liens, charges, pledges, claims and encumbrances
of any kind or nature whatsoever, other than those created by this Agreement.
Such shares shall be registered in the name of Willbro Nominees Limited.
4.4 Board Approval. The Board of Directors of the Seller has
duly approved the transactions contemplated by this Agreement and the Seller has
delivered to the Buyer a copy of the certificate of designation reflecting such
approval, certified by the Secretary of the Seller.
4.5 Full Disclosure. No representation or warranty made by the
Seller in this Agreement and no certificate or document furnished or to be
furnished to the Buyer pursuant to this Agreement contains or will contain any
untrue statement of a material fact, or omits or will omit to state a material
fact necessary to make the statements contained herein or therein not
misleading.
4.6 Certain Fees. The Seller has incurred liability for a fee
of 10% of the Purchase Price payable to Mission Beach Investments Ltd. in
connection with the transactions contemplated by this Agreement for which the
Buyer would not be liable. The Seller agrees to indemnify and hold harmless the
Buyer from and against any commission, fee or claim of any person employed or
retained or claiming to have been employed or retained by the Seller to bring
about the transactions contemplated hereby or to represent the Seller in
connection therewith.
5. Representations of the Buyer. The Buyer hereby represents and
warrants to the Seller that:
5.1 Due Execution, Validity and Effect. This Agreement has
been duly authorized, executed and delivered by the Buyer and, assuming the due
authorization, execution and delivery by the Seller, this Agreement constitutes
the valid, legal and binding obligation of the Buyer, enforceable in accordance
with its terms, except to the extent that enforceability may be limited by
bankruptcy, insolvency, moratorium or similar laws affecting the enforcement of
creditors' rights generally.
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5.2 Full Disclosure. No representation or warranty made by the
Buyer in this Agreement and no certificate or document furnished or to be
furnished to the Seller pursuant to this Agreement contains or will contain any
untrue statement of a material fact, or omits or will omit to state a material
fact necessary to make the statements contained herein or therein not
misleading.
5.3 Certain Fees. The Buyer has incurred no liability for any
brokers' or finders' fees or commissions in connection with the transactions
contemplated by this Agreement for which the Seller is or would be liable. The
Buyer agrees to indemnify and hold harmless the Seller from and against any
commission fee or claim of any person employed or retained by the Buyer to bring
about the transactions contemplated hereby or to represent the Buyer in
connection therewith.
6. Securities Act of 1933 and Holding Period.
6.1 Reporting Issuer. The Seller is a "reporting issuer" as
defined in Regulation S under the United States ("US") Securities Act of 1933
(the "1933 Act"). The Seller warrants that, based only on the facts with respect
to the Buyer set forth in Section 6.3, upon expiration of the Restricted Period
set forth in Regulation S, the offer and sale of any or all of the shares of
Series B Preferred Stock, or any of the shares of Common Stock into which such
Stock is convertible, by the Buyer in the United States or to a United States
person, as defined in Regulation S, will be exempt from the registration
requirements of the 1933 Act as defined in Regulations in accordance with
Section 4(1) thereof.
6.2 Regulation S and Regulation D. The Buyer understands that
the Shares acquired pursuant to this Agreement have not been registered under
the 1933 Act with the United States Securities and Exchange Commission in
reliance upon the exemption from such registration requirements afforded by
either Regulation S or Regulation D under the 1933 Act, governing either the
offer and sale of securities that occur outside the United States or
transactions by an issuer not involving any public offering, respectively, nor
with any state securities commission. The Buyer agrees that there shall be
imprinted an appropriate restrictive transfer legend on the face of the
certificates of the shares of Series B Preferred Stock, and of the shares of
Common Stock into which such Stock is convertible.
6.3 US Person. The Buyer hereby represents and warrants that
the Buyer is not a national or resident of the United States and is not
otherwise deemed to be a "US person" within the meaning of Regulation S under
the 1933 Act.
6.4 Accredited Investor. The Buyer hereby represents and
warrants that the Buyer is an "accredited investor" within the meaning of
Regulation D under the 1933 Act.
6.5 Resales. The Buyer understands and agrees that any
disposition of the shares of Series B Preferred Stock, or of the shares of
Common Stock into which such Stock is convertible, in violation of either this
Agreement, Regulation S or Regulation D shall be null and
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void, and that no transfer of the Shares shall be made by the Seller's secretary
or transfer agent upon the Seller's stock transfer books unless, in the opinion
of counsel satisfactory to Seller, there has been compliance with the terms of
this Agreement, Regulation S or Regulation D. The Buyer also understands and
agrees that the Seller shall issue stop transfer instructions to the Seller's
transfer agent with respect to the transfer restrictions.
6.6 The Securities Act of 1933. The Buyer (i) acknowledge that
the Shares of Series B Preferred Stock have not been registered under the 1933
Act and that the shares of Common Stock into which such Stock is convertible
also have not been registered under the 1933 Act, (ii) represents and warrants
that the Buyer is acquiring and will acquire beneficial ownership of shares for
its own account, and (iii) agrees that the Buyer will not transfer or otherwise
dispose of any of the Shares unless such transfer or other disposition is
registered under the 1933 Act or, in the opinion of counsel satisfactory to the
Seller, is exempt from such registration. The Buyer represents and warrants,
further, that by reason of the Buyer's knowledge and experience in financial and
business matters the Buyer is capable of evaluating the merits and risks of
their purchase hereunder and that the Buyer has had available such information
with respect to Seller as deemed necessary or appropriate to make such
evaluation.
6.7 Registration. The Seller shall file a registration
statement on Form S-3 of the U.S. Securities and Exchange Commission ("SEC") to
register the shares of Common Stock deliverable upon the conversion of the
Series B Preferred Stock immediately following the Closing. In the event such
Form S-3 registration statement is not effective within 90 days after Closing,
the holder of Series B Preferred Stock may resell such shares pursuant to the
provisions of Regulation S of the 1933 Act.
7. Conditions to Obligations of the Seller. All obligations of the
Seller under this Agreement are subject to the fulfillment or satisfaction,
prior to or at Closing, of each of the following conditions precedent (all of
which may be waived by the Seller):
(a) each of the representations and warranties of the Buyer
herein being true and correct in all material respects on the date hereof and as
of the Closing, and the Buyer's having performed or complied with all agreements
and covenants contained in this Agreement to be performed or complied with by
them prior to or at the Closing;
(b) neither the Seller nor the Buyer's being precluded by an
order or preliminary or permanent injunction of a court of competent
jurisdiction from consummating the sale and purchase of the shares of Series B
Preferred Stock pursuant to this Agreement (each party agreeing to use its
reasonable best efforts to have any such injunction lifted); and
(c) there not having been any statute, rule or regulation
enacted or promulgated by any governmental body or agency after the date hereof
which is applicable to the purchase and sale pursuant to this Agreement which
would render the consummation of any such purchase and sale illegal.
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<PAGE> 5
8. Conditions to Obligations of the Buyer. All obligations of the Buyer
under this Agreement are subject to the fulfillment or satisfaction prior to or
at Closing, of each of the following conditions precedent (all of which may be
waived by the Buyer):
(a) each of the representations and warranties of the Seller
herein being true and correct in all material respects on the date hereof and as
of the Closing, and the Seller having performed or complied with all agreements
and covenants contained in this Agreement to be performed or complied with by it
prior to the Closing;
(b) neither the Seller nor the Buyer's being precluded by an
order or preliminary or permanent injunction of a court of competent
jurisdiction from consummating the sale or purchase of the Shares, pursuant to
this Agreement (each party agreeing to use its reasonable best efforts to have
any such injunction lifted);
(c) there not having been any statute, rule or regulation
enacted or promulgated by any governmental body or agency after the date hereof
which is applicable to the purchase and sale of the Shares, pursuant to this
Agreement which would render the consummation of any such purchase and sale
illegal; and
(d) the Seller shall have delivered to the Buyer a certified
copy of the resolution of its Board of Directors, in form reasonably
satisfactory to the Buyer, authorizing the execution and delivery of this
Agreement and the performance by the Seller of its obligations hereunder.
9. Survival of Representation. etc. All representations, warranties and
agreements made herein shall survive any investigation made by the Seller and
the Buyer and shall survive the Closing.
10. Termination. This Agreement may be terminated:
(a) on the date specified in a writing executed by the Seller
and the Buyer;
(b) by the Seller, upon written notice to the Buyer, if any
representation or warranty made in this Agreement by the Buyer shall have been
false or incorrect in any material respect when made or shall have become false
or incorrect in any material respect thereafter, or if the Buyer shall fail to
perform or observe any material covenant or agreement made by the Buyer in this
Agreement; or
(c) by the Buyer, upon written notice to the Seller, if any
representation or warranty made in this Agreement by the Seller shall have false
or incorrect in any material respect when made or shall have become false or
incorrect in any material respect thereafter, or if the Seller shall fail to
perform or observe any material covenant or agreement made by it in this
Agreement.
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11. Miscellaneous.
11.1 Binding Effect: Assignment. This Agreement shall inure to
the benefit of and be binding upon the parties hereto, their respective legal
representatives and successors. This Agreement may not be assigned.
11.2 Further Assurances, Cooperation. Each party shall, upon
reasonable request by the other party, execute and deliver any additional
documents necessary or desirable to complete the sale, conveyance, transfer and
assignment of the Shares acquired by the Buyer, pursuant to and in the manner
contemplated by this Agreement. The parties hereto agree to cooperate and use
their respective best efforts to consummate the transactions contemplated by
this Agreement.
11.3 Entire Agreement: Absence of Representation. This
Agreement constitutes the entire agreement between the parties hereto and
supersedes all prior arrangements, understandings and agreements, oral or
written, between the parties hereto with respect to the subject matter hereof.
The Buyer hereby acknowledges that in acquiring the Shares to be acquired
hereunder the Buyer has relied only upon the representations and warranties
expressly made in this Agreement and upon information contained in public
reports of the Seller, and that no other statements, representations or
warranties, oral or written, expressed or implied, have been made or relied upon
in connection with such acquisition or as an inducement therefor.
11.4 Execution in Counterparts. This Agreement may be executed
in counterparts, each of which shall be deemed an original and all of which
shall be deemed to be one and the same instrument.
11.5 Notices. All notices, requests, permissions, waivers and
communications hereunder shall be in writing and shall be deemed to have been
duly given when delivered in person, by telegram, telex, facsimile transmission
or by mail (registered or certified mail, postage prepaid, return receipt
requested) to the respective parties at the following respective addresses or to
such other address as any party hereto shall specify in a notice to the other
parties hereto in accordance with the terms hereof:
If to the Seller: Cycomm International Inc.
1420 Springhill Road, Suite 420
McLean, Virginia 22102
Attention: Albert I. Hawk, President
Facsimile Transmission: 703-903-9528
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With a copy (which shall not constitute notice) to:
Venable, Baetjer, Howard & Civiletti, LLP
1201 New York Avenue, N.W., Suite 1000
Washington, DC 20005
Attention: David J. Levenson
Facsimile Transmission: 202-962-8300
If to the Buyer: Williams de Broe Plc
6 Broadgate
London, England EC2M 2RP
Attention:
Facsimile Transmission: 011-441-71-588-8797
11.6 Amendments and Waivers. This Agreement may not be
modified or amended except by an instrument or instruments in writing signed by
the party against whom enforcement of any such modification or amendment is
sought. The Seller may, by an instrument in writing, waive compliance by the
Buyer with any term or provision of this Agreement on the part of the Buyer to
be performed or complied with. The Buyer may, by an instrument in writing, waive
compliance by the Seller, with any term or provision of this Agreement on the
part of the Seller to be performed or complied with. Any waiver of a breach of
any term or provision of this Agreement shall not be construed as a waiver of
any subsequent breach.
11.7 Headings; Severability. The headings contained in this
Agreement are for convenience of reference only and shall not affect the
interpretation or construction hereof. Any term or provision of this Agreement
which is invalid or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement or affecting the validity or enforceability of
any of the terms or provisions of this Agreement in any other jurisdiction. If
any provision of this Agreement is so broad as to be unenforceable, such
provision shall be interpreted to be only so broad as is enforceable.
11.8 Governing Law. This Agreement shall be construed (both as
to validity and performance) and enforced in accordance with and governed by the
laws of the District of Columbia applicable to agreements made and to be
performed wholly within such jurisdiction and without regard to conflicts of
laws. The Buyer hereby irrevocably consents to personal jurisdiction within the
District of Columbia solely for the purpose of any litigation with respect to
this Agreement and hereby confirms that upon service of process upon the Buyer,
the Buyer shall be deemed to be under the personal jurisdiction of the
applicable United States federal or local court in the District of Columbia. The
Buyer hereby waives any right it may have to seek a change of venue of such
proceedings.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed on the date first above written.
SELLER:
CYCOMM INTERNATIONAL INC.
By: /s/ Albert I. Hawk
-----------------------------------
Albert I. Hawk, President
BUYER:
Williams de Broe Plc
By: /s/ Williams de Broe Plc
-----------------------------------
Director
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CERTIFICATE OF DESIGNATION
OF
CYCOMM INTERNATIONAL INC.
CYCOMM INTERNATIONAL INC., a corporation organized and existing under
the State of Wyoming, desiring to state the designations, powers, voting rights,
qualifications, limitations, and other special rights, if any, of a Series B of
its class of shares, referred to as Series B Preferred Stock, hereby certifies
as follow:
1. The name of the corporation is CYCOMM INTERNATIONAL INC.
2. The resolution creating and designating the Series B of shares of
the corporation's Preferred Stock, no par value per share, and fixing and
determining the relative rights and preferences thereof is set forth in full in
Exhibit A attached hereto and made a part hereof by reference.
3. The aggregate number of shares of such Series B established and
designated by such resolution is twenty (20) shares.
4. The resolution set forth on the attached Exhibit A was duly adopted
on February 19, 1998 at a meeting of the Board of Directors duly called and held
in accordance with the Wyoming Business Corporation Act.
IN WITNESS WHEREOF, said CYCOMM INTERNATIONAL INC. has caused this
Certificate to be signed by Albert I. Hawk, its President and Chief Executive
Officer, and attested by Michael R. Skoff, its Assistant Secretary, this 26th
day of February, 1998.
Attest: CYCOMM INTERNATIONAL INC.
/s/ Michael R. Skoff By: Albert I. Hawk
- ------------------------------------- ------------------------------------
Michael R. Skoff, Assistant Secretary Albert I. Hawk, President and
Chief Executive Officer
<PAGE> 10
EXHIBIT A
TO THE
CERTIFICATE OF DESIGNATION
OF THE
SERIES B PREFERRED STOCK
OF
CYCOMM INTERNATIONAL INC.
I, Albert I. Hawk, President and Chief Executive Officer of CYCOMM
INTERNATIONAL INC. (the "Corporation"), a corporation organized and existing
under and by virtue of the Wyoming Business Corporation Act, DO HEREBY CERTIFY:
That, pursuant to the authority conferred upon the Board of Directors,
said Articles of Incorporation, as amended, of the Corporation, said Board of
Directors, at a special meeting duly called and held in accordance with the
Wyoming Business Corporation Act on February 19, 1998, adopted a resolution
providing for the creation and designation of a Series B of preferred stock
which resolution is as follows:
RESOLVED that, pursuant to the Articles of Incorporation of the
Corporation, as amended, there be and hereby is created a Series B of preferred
stock, to consist of twenty (20) shares, no par value per share. The
designations, powers, preferences and relative, optional or other special
rights, and the qualifications, limitations and restrictions thereof in respect
of the Series B of Convertible Redeemable Preferred Stock are as follows:
1. Designation and Number of Shares. The designation of its Series B of
Twenty (20) shares of Convertible Redeemable Preferred Stock, no par value per
share, created by the Board of Directors of the Corporation pursuant to the
authority granted to it by the Corporation's Articles of Incorporation, as
amended, is "Series B Convertible Redeemable Preferred Stock". The Corporation
shall not issue or designate any additional shares of Series B Convertible
Redeemable Preferred Stock ("Series B Preferred Stock") without the approval of
the holders thereof as provided in Section 3 hereof. The Series B Preferred
Stock shall have a Conversion Value, as defined, of $50,000 per share.
2. Dividends. At the time of conversion as provided in Section 5
hereof, the holder of each share of Series B Preferred Stock shall be entitled
to receive, when and as declared by the Board of Directors of the Corporation
out of funds legally available for that purpose, dividends at the rate of ten
percent (10%) of the Conversion Value per share per annum; such dividends to be
cumulative from the date of original issuance and to be payable pro rata for
partial year periods. Such dividends may be payable, at the option of the
Corporation, in shares of its Common Stock, at the rate set forth in Section
5(a). In no event, so long as any shares of the Series B Preferred Stock shall
be outstanding, shall the Corporation issue any shares of preferred stock which
do not rank junior to or on a parity with the Series B Preferred Stock as to
rights to dividends, nor shall
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any dividend, whether in cash or property, be paid or declared, nor shall any
distribution be made, on any shares of the common stock, no par value per share,
of the Corporation's Common Stock or any other shares of stock of the
Corporation ranking junior to or on a parity with the Series B Preferred Stock
as to rights to acquire, or permit any subsidiary to purchase or otherwise
acquire any such common, junior or parity shares unless all accrued and unpaid
dividends on the Series B Preferred Stock and any shares of stock of the
Corporation ranking on a parity with the Series B Preferred Stock shall have
been paid, or declared and a sum sufficient for the payment thereof set apart.
The provisions of the preceding sentence shall not, however, apply to a dividend
payable in shares of Common Stock of the Corporation or other shares of stock of
the Corporation ranking junior to the Series B Preferred Stock, or to the
acquisition of any such Common Stock or junior stock through a conversion or any
exchange involving the issuance of Common Stock of the Corporation or of any
other shares of stock of the Corporation ranking junior to the Series B
Preferred Stock.
3. Voting Rights.
(a) Except as otherwise provided in subsections (b) and (c) of
this Section 3, and except as otherwise required by applicable law, the
Corporation's Articles of Incorporation or subsequent resolution of the Board,
the holders of the Series B Preferred Stock shall have no voting rights with
respect to any vote of the stockholders of the Corporation.
(b) Notwithstanding the foregoing, if (i) at any time the
Corporation shall fail to pay, or declare and set apart for payment, full
accrued dividends pursuant to Section 2 hereunder on all outstanding shares of
the Series B Preferred Stock and such dividends shall have been in arrears and
unpaid for sixty (60) days or more, or (ii) the Corporation shall for any reason
fail to redeem any shares of Series B Preferred Stock pursuant to the mandatory
redemption provisions of Section 4(b) hereof or shall in connection with any
such redemption fail timely to pay the Redemption Price, each holder of the
Series B Preferred Stock shall be entitled to such number of votes per share of
Series B Preferred Stock as shall equal the number of shares of the Common Stock
of the Corporation (rounded up to the nearest whole number of shares) into which
each share of Series B Preferred Stock is then convertible pursuant to Section 5
hereunder, and each share of Series B Preferred Stock shall be entitled to vote
on all matters as to which holders of Common Stock shall be entitled to vote, in
the same manner and with the same effect as such holders of Common Stock, voting
together with the holders of Common Stock as one class. At such time as the
Corporation has paid to the holders of Series B Preferred Stock all dividends
accrued and owing, such holders shall cease to have the voting rights provided
in clause (i) of the foregoing sentence by virtue of their ownership of shares
of Series B Preferred Stock. The voting rights of the holders of Series B
Preferred Stock provided in clause (ii) of the first sentence of this subsection
(b) shall be in addition to all other rights and remedies of such holders in
connection with the failure of the Corporation referred to therein.
(c) Holders of Series B Preferred Stock shall vote as a
separate class on, and the affirmative vote of a majority of the outstanding
shares of Series B Preferred Stock shall be required to authorize, any action
which would: (i) in any manner increase the number of authorized shares of
Series B Preferred Stock, or alter or change the qualifications, limitations or
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restrictions of the Series B Preferred Stock; or (ii) reclassify the shares of
Common Stock or any restrictions of the Series B Preferred Stock; or (ii)
reclassify the shares of Common Stock or any other shares of class or Series B
of capital stock hereafter created junior to the Series B Preferred Stock into
shares of any class or Series B of capital stock (i) ranking, either as to
payment of dividends, distribution of assets or redemptions, prior to or on a
parity with the Series B Preferred stock, or (ii) which in any manner adversely
affects the holders of the Series B Preferred Stock.
(d) The special voting rights of the holders of the Series B
Preferred Stock contained in subsections (b) and (c) of this Section 3 may be
exercised either at a special meeting of the holders of Series B Preferred Stock
or at any annual or special meeting of the stockholders of the Corporation or by
written consent of such holders in lieu of a meeting.
4. Redemption
(a) Subject to the provisions of subsections (g) and (h) of
this Section 4, upon not less than thirty (30) days prior written notice given
as provided in subsection (c) of this Section 4, and so long as any shares of
the Series B Preferred Stock shall be outstanding, the Corporation may (unless
otherwise prevented by law) redeem any or all shares of Series B Preferred Stock
at the redemption price per share equal to the Conversion Value (as hereinafter
defined) (the "Redemption Price"). Such redemption shall occur on the date
specified in the notice thereof given pursuant to subsection (d) of this Section
4, which shall not be less than 30 days nor more than 60 days after the giving
of such notice (the "Redemption Date"). The Redemption Price shall be paid in
cash.
(b) On and after the date on which any shares of Series B
Preferred Stock are redeemed pursuant to subsections (a) and (c) of this Section
4 and the payment of the Redemption Price therefor, all rights in respect of the
shares of Series B Preferred Stock so redeemed shall cease and terminate; and
such shares shall no longer be deemed to be outstanding, whether or not the
Certificates representing such shares have been received by the Corporation.
(c) Notice of any Redemption Date shall be sent by
first-class mail, postage prepaid, to the holders of record of the outstanding
shares of Series B Preferred Stock to be redeemed at their respective addresses
as the same shall appear on the books of the Corporation Such notice shall be
mailed not less than 30 nor more than 60 days in advance of the Redemption Date.
On the Redemption Date, the holders of record of shares of Series B Preferred
Stock to be redeemed shall be entitled to receive the applicable Redemption
Price upon actual delivery to the Corporation or its agent of the certificates
representing the shares to be redeemed.
(d) In any case in which less than all of the shares of the
Series B Preferred Stock shall be redeemed, the Corporation shall select those
to be redeemed by lot or a substantially equivalent method.
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(f) No shares of Series B Preferred Stock shall be entitled
to the benefit of a sinking fund or purchase fund.
(g) In the event that the Common Stock trades at or below
$1.50 at the time of conversion, the Corporation has the right to redeem the
shares of Series B Preferred Stock at a premium of 18% over the Conversion
Value.
(h) Unless otherwise provided in subsection (g) of this
Section 4, the holders of shares of Series B Preferred Stock to be redeemed in
accordance with this Section 4 shall have the right, exercisable at any time up
to the close of business on the Redemption Date (unless default shall be made by
the Corporation in the payment of the Redemption Price as herein provided, in
which event such right shall be exercisable until such default is cured), to
convert all of such shares into shares of Common Stock pursuant to Section 5
hereof.
5. Conversion into Common Stock
(a) The holder of any Shares of Series B Preferred Stock
shall have the right at such holder's option, unless and until such shares shall
have been redeemed pursuant to Section 4 above, by the giving of written notice
thereof to the Corporation, which written notice shall have been received by the
Corporation prior to the Redemption Date established pursuant to Section 4(a)
hereof or such later date as may be determined pursuant to Section (4) hereof
(the date of receipt of notice pursuant to this subsection being referred to
herein as the "Conversion Date"), to convert up to 25% of such shares of Series
B Preferred Stock on or after the 90th day after February 26, 1998 ("Closing"),
and up to a further 25% every 30 days thereafter; unless the Common Stock trades
at or below $1.50 at the Conversion Date and the Corporation does not redeem the
Series B Preferred Stock pursuant to Section 4, in which case the holder of any
Shares of Series B Preferred Stock may convert only a maximum of 10% of the
principal invested during a period of consecutive 20 day intervals, into such
number of fully paid and nonassessable shares of Common Stock obtained by
multiplying the Conversion Value per share of Series B Preferred Stock by the
number of shares of Series B Preferred Stock being converted, and dividing such
product by the Conversion Price (as then in effect). The Conversion Price per
share at which shares of Common Stock shall be issuable upon conversion of
shares of Series B Preferred Stock shall be, subject to adjustment as provided
in this Section 5, equal to the lesser of (a) the five-day average closing bid
price of the Common Stock prior to February 26, 1998 or (b) a 15% discount of
the five-day average closing bid price of the Common Stock immediately prior to
the notice of conversion. The holder of any shares of Series B Preferred Stock
converted into shares of Common Stock pursuant to this Section 5 shall be
entitled to payment of all accrued but unpaid dividends, if any, payable with
respect to such shares being converted up to and including the Conversion Date.
(b) In order to exercise the right of conversion of the
Series B Preferred Stock pursuant to subsection (a) of this Section 5, the
holder of any shares of Series B Preferred Stock shall deliver to the
Corporation during regular business hours, at the office of any transfer agent
of the Corporation for the Series B Preferred Stock, at the principal office of
the Corporation or at such other place as may be designated by the Corporation,
the certificate or
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<PAGE> 14
certificates for the shares to be converted, duly endorsed or assigned in blank
or to the Corporation (if required by it), accompanied by written notice stating
the name or names (with address) in which the certificate or certificates for
the shares of Common Stock issuable upon such conversion are to be issued. As
promptly as practicable thereafter, the Corporation shall issue and deliver to
or upon the written order of such holder, to the place designated by such
holder, a certificate or certificates for the number of full shares of Common
Stock to which such holder is entitled, a check or cash in respect of any
fractional interest in a share of Common Stock as provided in subsection (c) of
this Section 5 and, to the extent permissible under law, a check or cash in
payment of all accrued but unpaid dividends, if any, payable in payment of all
accrued but unpaid dividends, if any, with respect to the shares of Series B
Preferred Stock so converted up to and including the Conversion Date. The person
in whose name the certificate or certificates for Common Stock are to be issued
shall be deemed to have become a stockholder of record on the applicable
Conversion Date unless the transfer books of the Corporation are closed on that
date, in which event he shall be deemed to have become a stockholder of record
on the next succeeding date on which the transfer books are open, but the
Conversion Price for the Series B Preferred Stock shall be that in effect on the
Conversion Date.
(c) No fractional shares of Common Stock or scrip shall be
issued upon conversion of shares of Series B Preferred Stock. If more than one
share of Series B Preferred Stock shall be surrendered for conversion at any one
time by the same holder, the number of full shares of Common Stock issuable upon
conversion thereof shall be computed on the basis of the aggregate number of
fractional shares of Common Stock so surrendered. Instead of any fractional
shares of Common Stock which would otherwise be issuable upon conversion of any
shares of Series B Preferred Stock, the Corporation shall pay a cash adjustment
in respect of such fractional interest in any amount equal to the Conversion
Price then in effect per share of Common Stock multiplied by such fractional
interest.
(d) The Corporation shall pay all documentary, stamp or other
transactional taxes attributable to the issuance or delivery of shares of Common
Stock of the Corporation upon conversion of shares of Series B Preferred Stock;
provided, however, that the Corporation shall not be required to pay any taxes
which may be payable in respect of any transfer involved in the issuance or
delivery of any certificate for such shares in a name other than that of the
holder of the shares of Series B Preferred Stock in respect of which such shares
are being issued.
(e) The Corporation shall at all times reserve and keep
reserved, free from preemptive rights, out of its authorized but unissued shares
of Common Stock, solely for the purpose of effecting the conversion of the
shares of Series B Preferred Stock, sufficient shares of Common Stock to provide
for the conversion of all outstanding shares of Series B Preferred Stock.
(f) All shares of Common Stock which may be issued in
connection with the conversion provisions set forth herein will, upon issuance
by the Corporation, be validly issued, fully paid and nonassessable with no
personal liability attaching to the ownership thereof and free from all taxes,
liens or charges with respect thereto.
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(g) (i) If at any time or from time to time while shares of
Series B Preferred Stock are outstanding the Corporation effects a subdivision
of the outstanding Common Stock, the Conversion Price then in effect immediately
before that subdivision shall be proportionately decreased, and conversely, if
at any time or from time to time while shares of Series B Preferred Stock are
outstanding the Corporation combines the outstanding shares of Common Stock, the
Conversion Price then in effect immediately before the combination shall be
proportionately increased. Any adjustment under this clause shall become
effective at the close of business on the date the subdivision or combination
becomes effective.
(ii) If at any time or from time to time while shares of
Series B Preferred Stock are outstanding, the Corporation makes or fixes a
record date for the determination of holders of Common Stock entitled to
receive, a dividend or other distribution payable in shares of Common Stock,
then and in each event the Conversion Price then in effect shall be decreased as
of the time of such dividend or other distribution or, in the event such a
record date is fixed, as of the close of business on such record date, by
multiplying the Conversion Price then in effect by a fraction (a) the numerator
of which is the total number of shares of Common Stock issued and outstanding
immediately prior to the time of such issuance or the close of business on such
record date, and (b) the denominator of which shall be the total number of
shares of Common Stock issued and outstanding immediately prior to the time of
such dividend or other distribution or the close of business on such record date
plus the number of shares of Common Stock issuable in payment of such dividend
or distribution; provided, however, that if such record date is fixed and such
dividend is not fully paid or if such distribution is not fully made on the date
fixed therefore, the Conversion Price shall be recomputed accordingly as of the
close of business on such record date and thereafter the Conversion Price shall
be adjusted pursuant to this subsection 5(g) as of the time of actual payment of
such dividend or distribution.
(iii) If at any time or from time to time while shares of
the Series B Preferred Stock are outstanding the Corporation makes, or fixes a
record date for the determination of holders of Common Stock entitled to
receive, a dividend or other distribution payable in securities of the
Corporation other than shares of Common Stock, then in each such event provision
shall be made so that each holder of shares of Series B Preferred Stock shall
receive upon conversion thereof, in addition to the number of shares of Common
Stock receivable thereupon, the amount of securities of this Corporation which
they would have received had the Series B Preferred Stock been converted into
Common Stock on the date of such event and had they thereafter, during the
period from the date of such event to and including the date of conversion,
retained such securities receivable by them as aforesaid during such period,
subject to all other adjustments called for during such period under this
subsection 5(g) with respect to the rights of the holders of Series B Preferred
Stock.
(iv) If the Common Stock issuable upon the conversion of
the Series B Preferred Stock is changed into the same or a different number of
shares of any class or classes of shares, whether by recapitalization,
reclassification or otherwise (other than a subdivision or combination of shares
or stock dividend or a reorganization, provided for elsewhere in this subsection
5(g), then and in any such event each holder of Series B Preferred Stock shall
have the
6
<PAGE> 16
right thereafter to convert each share of Series B Preferred Stock into the kind
and amount of subsection 5(g), then and in any such event each holder of Series
B Preferred Stock shall have the right thereafter to convert each share of
Series B Preferred Stock into the kind and amount of shares and other securities
and property receivable upon such reorganization, reclassification or other
change, by holders of the number of shares of Common Stock into which each share
of Series B Preferred Stock might have been converted immediately prior to such
reorganization, reclassification or change, all subject to further adjustments
as provided herein.
(v) If at any time or from time to time while shares of the
Series B Preferred Stock are outstanding there is a capital reorganization of
the Common Stock (other than a recapitalization, subdivision, combination,
reclassification or exchange of shares provided for elsewhere in this subsection
5(g)), then, as a part of such reorganization, provision shall be made so that
the holders of Series B Preferred Stock shall thereafter be entitled to receive
upon conversion of each share of Series B Preferred Stock, the number of shares
or other securities or property of the Corporation, to which a holder of Common
Stock deliverable upon conversion would have been entitled on such capital
reorganization. In any such case, appropriate adjustment shall be made in the
application of the provisions of this subsection 5(g) with respect to the rights
of holders of Series B Preferred Stock after the reorganization to the end that
the provisions of this subsection 5(g) (including adjustment of the Conversion
Price then in effect and number of shares purchasable upon conversion) shall be
applicable after that event and be as nearly equivalent to the provisions hereof
as may be practicable.
(vi) The Corporation will not, by amendment of its Articles
of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by it but will at all times in
good faith assist in the carrying out of all the provisions of this subsection
5(g) and in the taking of all such action as may be necessary or appropriate in
order to protect the conversion rights of the holders of shares of Series B
Preferred Stock.
(vii) For the purpose of this subsection 5(g), the term
"Common Stock" shall mean the Common Stock of the Corporation so designated in
accordance with the Articles of Incorporation of the Corporation and any other
class of shares resulting from successive changes or reclassifications of the
Common Stock consisting solely of changes in par value.
6. Rights on Liquidation Dissolution, Winding Up. So long as any shares
of the Series B Preferred Stock shall be outstanding, the Corporation shall not
issue any shares of preferred stock which do not rank junior to or on a parity
with the Series B Preferred Stock as to rights upon liquidation, dissolution or
winding up. In the event of any liquidation (whether voluntary or involuntary),
dissolution or winding up of the Corporation, the holders of shares of Series B
Preferred Stock then outstanding shall be entitled to be paid out of the assets
of the Corporation available for distribution to its stockholders, whether from
capital surplus or earnings, before any payment shall be made to the holders of
any stock ranking on liquidation junior to the Series B Preferred Stock, an
amount per share equal to the Conversion Value per shares thereof, plus an
amount equal to accrued but unpaid dividends, if any, to the date of
7
<PAGE> 17
payment. If upon any liquidation, dissolution or winding up of the Corporation,
the assets of the Corporation available for distribution to its stockholders
shall be insufficient to pay the holders of shares of Series B Preferred Stock
and any stock ranking on a parity with the Series B Preferred Stock as to rights
upon liquidation, dissolution or winding up, the full amounts to which they
respectively shall be entitled, the holders of shares of the Series B Preferred
Stock and of such parity stock shall share ratably, in accordance with the
respective amounts which would have been payable on such shares if all amounts
payable thereon were paid in full, in any distribution of assets. In the event
of any liquidation, dissolution or winding up of the Corporation, after payment
shall have been made to the holders of shares of the Series B Preferred Stock
and such parity stock of the full amount to which they shall be entitled as
aforesaid, the holders of any class or classes of stock ranking on liquidation
junior to the Series B Preferred Stock shall be entitled, to the exclusion of
and without participation by the holders of shares of Series B Preferred Stock,
to share, according to their respective rights and preferences, in all remaining
assets of the Corporation available for distribution to its stockholders.
7. No Preemptive Rights. No holder of the Series B Preferred Stock
shall, as such holder, be entitled as of right to purchase or subscribe for any
shares of stock of the Corporation of any class or any Series B now or hereafter
authorized or any securities convertible into or exchangeable for any shares, or
any warrants, options, rights or other instruments evidencing rights to
subscribe for or purchase any such shares, whether such shares, securities,
warrants, options, rights or other instruments be unissued or issued and
thereafter acquired by the Corporation.
8. Transfer Agent and Registrar. The Corporation may appoint a transfer
agent and registrar for the issuance, transfer and conversion of the Series B
Preferred Stock and for the payment of interest to the holders of the Series B
Preferred Stock.
8
<PAGE> 18
IN WITNESS WHEREOF, the undersigned has hereunto signed his name and
affirms that the statements made herein are true under penalties of perjury this
26th day of February, 1998.
/s/ Albert I Hawk
------------------------------------
Albert I. Hawk, President and
Chief Executive Officer
Attest:
/s/ Michael R. Skoff
-------------------------------------
Michael R. Skoff, Assistant Secretary
9
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF CYCOMM INTERNATIONAL INC.
1. Cycomm Corporation. Incorporated on January 1, 1985, in Oregon, USA. A
wholly-owned subsidiary of Cycomm International Inc.
1.a. Val-Com Inc. Incorporated on July 17, 1984, in New Mexico,
USA. A wholly-owned subsidiary of Cycomm Corporation.
2. XL Computing Corporation. Incorporated on February 26, 1996 in
Delaware, USA. A wholly-owned subsidiary of Cycomm International Inc.
3. XL Computing Canada, Inc. on June 3, 1996 in Quebec, Canada. A
wholly-owned subsidiary of Cycomm International Inc.
4. Cypher Communications de Venezuela CA. Incorporated on July 22, 1993,
in Venezuela. A wholly-owned subsidiary of Cycomm International Inc.
5. Sonatel Communications Research Ltd. Incorporated on July 1, 1987, in
British Columbia, Canada. Cycomm International Inc. has a 75% interest
in this subsidiary which is inactive.
5.a. Integrated Circuit Technologies Ltd. Incorporated on November
5, 1987, in Barbados. Integrated Circuit Technologies is
wholly-owned by Sonatel Communications Research Ltd. and is
inactive.
6. Sonartec North America Ltd. Incorporated on December 8, 1985 in British
Columbia. A wholly-owned subsidiary of Cycomm International Inc. which
is inactive.
7. Sonatel International Inc. Incorporated on July 26, 1988, in Barbados.
A wholly-owned subsidiary of Cycomm International Inc. which is
inactive.
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 617,636
<SECURITIES> 0
<RECEIVABLES> 5,395,587
<ALLOWANCES> 41,000
<INVENTORY> 5,374,511
<CURRENT-ASSETS> 11,259,578
<PP&E> 2,260,641
<DEPRECIATION> 678,166
<TOTAL-ASSETS> 15,951,276
<CURRENT-LIABILITIES> 8,258,924
<BONDS> 6,437,308
0
0
<COMMON> 47,491,611
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 15,951,276
<SALES> 15,678,667
<TOTAL-REVENUES> 15,678,667
<CGS> 11,257,321
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<OTHER-EXPENSES> 9,013,019
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