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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, 1999
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:
Common Stock without par value
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. $3,263,178
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant on March 31, 2000 was approximately $56,517,127
(based on the closing sale price of $2.31 per share at which the stock was sold
on March 31, 2000).
The number of shares outstanding of the issuer's class of Common Stock, no par
value, as of March 31, 2000, 24,466,289 shares
Documents Incorporated by Reference
(1) Definitive Proxy Statement for 2000 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>
TABLE OF CONTENTS
PAGE
Part I
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Item 1. Description of Business ............................... 3
Item 2. Description of Property................................ 13
Item 3. Legal Proceedings...................................... 13
Item 4. Submission of Matters to a Vote of Security Holders.... 13
Part II
Item 5. Market for Common Equity and Related Stockholder Matters 14
Item 6. Management's Discussion and Analysis or Plan of Operation 15
Item 7. Financial Statements................................... 18
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure........................... 18
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section16(a) of the Exchange Act...... 19
Item 10. Executive Compensation.................................. 19
Item 11. Security Ownership of Certain Beneficial Owners and Management 19
Item 12. Certain Relationships and Related Transactions.......... 19
Item 13. Exhibits and Reports on Form 8-K........................ 19
Signatures........................................................ 22
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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 wireless rugged computer products and provides wireless
services.
Rugged computers are designed to function in harsh environments such as
extreme weather, shock, moisture and vibration, and are sold primarily to police
agencies, fire departments, utilities, field services and other mobile
applications. All of Cycomm's products are designed for wireless use. Cycomm
offers and is developing a wireless platform and solution for public safety and
other mobile worker vertical markets. During 1999, Cycomm sold its secure
computing and secure services divisions. The proceeds of the sales were used to
pay down debt and to provide working capital. The sale also reduced overhead
costs and focused the Company on the wireless services and rugged computer
markets.
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 sonar activated marine buoyancy devices. In 1987, the Company
became involved in 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.
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 (later named Cycomm Secure Solutions Inc.) in March 1996
and XL Computing Canada Inc. (later named Cycomm Mobile Solutions Inc.) in June
1996. Cycomm Secure Solutions ("CSS") was engaged in the design, manufacture
and marketing of secure computer systems. Cycomm Mobile Solutions ("CMS") is
engaged in the design, manufacture and marketing of rugged mobile computer
systems.
During 1997, the Company shifted its resources to expand its mobile and
secure computer products subsidiaries. The Company closed its Cycomm
Corporation subsidiary and increased its capital expenditures on its CMS and CSS
subsidiaries. The market for the Company's mobile computers grew much faster
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than the market for secure computers. Accordingly, the Company initiated a
strategy which resulted in a further shifting of development resources to the
mobile computing products.
Cycomm's mobile computing division experienced significant growth in 1998.
The secure computing division, however, generated substantial losses for the
year ended December 31, 1998. Val-Comm, the Company's secure telecommunications
division experienced immaterial losses for the year ended December 31, 1998.
In January of 1999, the American Stock Exchange ("AMEX") notified the
Company that it no longer met the AMEX continued listing criteria, and that the
Company would be delisted. The Company underwent a significant restructuring,
selling its secure computing division and its Val-Comm subsidiary in order to
focus on the wireless mobile computing market. Proceeds from the sales were
used to repay debt and to provide working capital for the mobile computing
division.
Locations
Executive Office. The Company's principal executive offices are located
in McLean, Virginia. Management of the Company is conducted from this location,
along with sales, marketing, customer support, administration, financial,
investment, and investor relations.
Cycomm Mobile Solutions Inc. This subsidiary has two facilities, one
located in Montreal, Quebec and the other in Melbourne, Florida. The Montreal
facility designs and manufactures the Company's ruggedized wireless computers.
Repair and maintenance is done at the Company's Melbourne, Florida facility.
Product Description and Market
Ruggedized Computers.
Cycomm has developed a wireless ruggedized laptop computer line branded
under the name "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 is designed to withstand the
specific extreme operating conditions in which off the shelf products would fail
or become inoperable.
The ruggedization of the computer protects it from extreme conditions, or
at least minimizes their adverse impact, enabling the computer to function
normally. 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
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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.
Public Safety Market
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. The Company's
market research indicates that there the addressable market represents
approximately 330,000 public safety vehicles in approximately 17,000 local
police, sheriff and special police agencies. This represents a market of over
$1.8 billion.
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, management believes that the market will continue to grow.
Product Lines and Services
The Company manufactures and sells a complete line of rugged computers and
peripherals. Transmission options include both wired and a variety of wireless
modes including satellite and terrestrial links such as cellular packet data
("CDPD") and Specialized Mobile Radio ("SMR").
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 openings and between case
mating parts. All external connectors have been rain-tested. The PCMobile also
stands up to vibration and protects against electrostatic discharge.
Wireless Services
The Company's products are wireless communications devices with secure
capabilities. During 1999, the Company began to develop a radio frequency
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("RF") independent internet protocol ("IP") wireless platform for public safety
agencies with less than 50 vehicles. Because small agencies rarely possess the
technical expertise to develop and build out an entire automated system, the
Company is designing this platform to be a turn key solution. The Company will
begin offering the IP platform in the second quarter of 2000.
The Company has signed a partnership agreement to provide internet
services, purchase wireless bulk time, and development integration. In
addition, the Company has designed the wireless platform to support a number of
applications in other markets, such as real estate, financial services and
automotive. The Company believes that the market for these services is growing
and will be an integral part of the Company in the future.
Repair Services
Cycomm Mobile Solutions Customer Service Group. CMS provides superior
on-site and return-to-factory product support for its PCMobiles through its
Customer Service Group. All CMS Field Technicians and Engineers are required to
complete "A+ Certification" and in-house factory training courses in order to
repair CMS products. CMS provides 24 hour toll free technical support to ensure
our customers' problems are resolved in a timely manner.
Cycomm currently has an installed base of over 5,000 PCMobiles, many of
which are reaching the end of the original warranty. The Customer Services
Group is actively pursuing extended warranty agreements with this installed
base, and is planning to provide training and installation services for new
PCMobile customers. The Company is also researching the potential of the
Customer Services Group to repair products other than the PCMobile. With these
expanded services, the Company expects the Customer Services Group to provide
increased revenue to the Company.
Manufacturing and Supply
Cycomm's design, engineering and manufacturing facilities are located in
Montreal, Quebec, Canada. The Company designs, engineers and tests its rugged
computers in-house. The Company designs its own printed circuit boards, which
are manufactured by Original Equipment Manufacturers ("OEM"). Cycomm purchases
its circuit boards and other components from OEM's and tests and assembles the
final products.
The Company uses surface mount technology ("SMT") to attach components to
the computer boards which enhances durability and ruggedness over conventional
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.
The Company's approach to design and outsourcing differs from that
followed by most other rugged computer manufacturers which, the Company
believes, purchase more commercial off the shelf circuit boards and components,
then attempt to "ruggedize" the boards and components. Cycomm's approach to
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board fabrication allows it to maintain better control of the quality and
delivery of the boards, and to produce a computer that can withstand more
extreme operating conditions.
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 developments 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 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 uses 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 operating
efficiency and to increase capacity in order to facilitate increased production
and 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 C-MAC
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 be 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.
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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.
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 rugged products through an internal
sales force of nine individuals, approximately fifty resellers in the United
States and approximately four resellers internationally. Its resellers cover
approximately all fifty states, including Washington, DC, and its foreign
distributors operate in ten countries, including England, France, Israel, 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
off 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.
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 56% of the Company's sales. The Company has reseller agreements
with Unisys, TRW, Ericcson, GE Capital, PRC/Litton, NTT, GTE and Matra for its
ruggedcomputers. The loss of certain of such resellers may have a material
negative effect on the Company's business.
The Company promotes its rugged 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 also advertises 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 is expanding its sales and marketing efforts in all of
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its markets as follows: (i) increasing its presence at trade shows with larger
booths and more extensive exhibits; (ii) increasing the number of trade shows
in which Company personnel attend and products are presented; (iii) hiring
additional sales personnel and consultants to gather leads and promote sales;
(iv) expanding sales and marketing activities in the utility and commercial
markets; and (v) investing 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 a one to three year limited warranty 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 magnesium cases of the PCMobile. The Company repairs or replaces products
that are defective during the warranty period if 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 repair and maintenance 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.
The Company's customer service personnel answer technical questions from
customers and offer solutions to their specific applications problems. In
certain instances, customer service personnel receive and process orders for
product demonstrations, disseminate pricing information and accept purchase
orders for computers.
Backlog
On December 31, 1999, the Company had a backlog of contracts and purchase
orders of approximately $3.1 million in its mobile computing segment as compared
to $3.3 million at December 31, 1998. 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.
Reliance Upon Certain Customers
The Company is not dependent upon any single customer that purchases its
products. However, sales to three major customers comprise 22%, 15% and 13%
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respectively, of sales for the year ended December 31, 1999. Sales to two major
customers comprised 23% and 22% respectively, of sales for the year ended
December 31, 1998.
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 the years ended December 31, 1999 and December 31, 1998, the
Company spent $824,353 and $929,998, respectively, on research and product
development, primarily for development of new products and products
complementary to the existing line of wireless rugged computer products. The
Company anticipates additional research and development expenditures on future
development of products.
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.
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 payment of any money, remuneration or other items of value to foreign
government officials, public office holders, political parties and others with
regard to theobtaining 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.
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Competition
The Company competes in the wireless rugged 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.
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 customized components for most of its
computers rather than strictly ordinary commercial components, which are used by
many of the Company's competitors. 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.
In the public safety 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.
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Employees
The Company currently employs approximately 70 people, of whom
approximately 20 are employed in the United States and 50 are employed in
Canada. Approximately 15 employees work in customer sales and service, 18
employees work in administration, 14 employees work in research and development
and 23 employees work in manufacturing.
Cycomm's employees are not covered by a collective bargaining agreement or
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 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.
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ITEM 2. DESCRIPTION OF PROPERTY
As of December 31, 1999, the Company leased the following facilities:
Approximate
Location Type of Facility Condition Square Ft.
McLean, VA Executive Office Excellent 4,000
Melbourne, FL Repair and Service Excellent 6,200
Montreal, QB Manufacturing, R&D Excellent 10,300
and Distribution
Management believes that its manufacturing facility in Montreal, QB and
its repair facility in Melbourne, FL 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, facilities are
available in the immediate vicinity of the current locations. See the
accompanying financial statements for further discussion of leased facilities.
ITEM 3. LEGAL PROCEEDINGS
On May 24, 1999 the Company entered into a settlement agreement with the
trustee in bankruptcy of M3i Technologies, Inc., a Quebec corporation. The
Company was the defendant in a case alleging breach of contract and
misrepresentation in connection with the "earn out" provision of the asset
purchase agreement in the Company's purchase of its Cycomm Mobile Solutions
subsidiary. Under the terms of the agreement, the Company can fulfill its
obligation to the Seller if payments are made before certain dates as specified
in the agreement. The Company can elect to pay $700,000 by April 30, 2000,
$1,100,000 by April 30, 2001 or $1,500,000 prior to April 30, 2002.
On June 15, 1999 the Company entered into a settlement agreement with
Infotech International, a Florida corporation involved in the resale of the
Company's PCMobile computers. The Company was the plaintiff in a case alleging
breach of contract and conversion of funds. The Company agreed to a payment
plan in which Infotech would pay $592,959 plus interest and costs according to a
fixed schedule prior to September 15, 2000. Infotech is currently in default of
this payment schedule.
A lawsuit was instituted against the Company on August 3, 1999 in the
Circuit Court of the Nineteenth Judicial Circuit in and for Indian River County,
FL by G.T. Gangemi, former President of the Company's Cycomm Secure Solutions
subsidiary. The lawsuit alleges breach of contract in connection with the
severance provisions of Mr. Gangemi's employment agreement with Cycomm Secure
Solutions, and seeks damages of approximately $77,000 and other relief. The
Company denies any wrongdoing and liability and intends to vigorously defend the
allegations.
ITEM 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, 1999.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of December 31, 1998, the Company's common stock was traded on The
American Stock Exchange ("AMEX") under the symbol "CYI". However, on January
21, 1999, the Company was notified by the AMEX that the Company did not satisfy
the continued listing criteria for trading. Specifically, the Company did not
meet the minimum stockholder's equity requirement and had incurred consistent
net losses in the prior five fiscal years. The Company was delisted from the
AMEX on April 30, 1999 and began trading on the Over-the-Counter Bulleting Board
("OTCBB") on May 5, 1999 under the symbol "'CYII".
The following tables set forth the reported high and low sales prices as
reported by AMEX or OTCBB for the periods indicated:
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High Low
Year Ended December 31, 1999
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First quarter $1.88 $0.63
Second quarter $0.81 0.25
Third quarter 0.90 0.38
Fourth quarter 0.72 0.40
Year Ended December 31, 1998
First quarter $2.69 $1.63
Second quarter 3.56 1.88
Third quarter 4.06 1.56
Fourth quarter 2.31 1.69
</TABLE>
On March 1, 2000, as reported by the Company's transfer agent, shares of
common stock were held by 1,023 persons, based on the number of record holders,
including 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. The Company is required to pay dividends on its 10% convertible
redeemable preferred stock. Dividends on the preferred stock can be paid in
either cash or in shares of the Company's common stock. To date, all dividends
have been paid in shares of common stock.
<PAGE>
15
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
The following discussion should be read in conjunction with the
financial statements and related notes, which are included elsewhere in this
report. Statements made below which are not historical facts are forward-
looking statements. Forward-looking statements involve a number of risks and
uncertainties including, but not limited to, general economic conditions, our
ability to ability to execute our plans to increase revenues and market share,
competitive factors and other risk factors, not all of which are detailed here/
Results of Continuing Operations
On June 21, 1999 the Company completed the sale of its secure computing
segment, Cycomm Secure Solutions Inc. ("CSS"). CSS incurred over $4 million in
losses in the year ended December 31, 1998, and incurred an additional $1.6
million in losses from operations in the period before the date of the sale. The
CSS subsidiary caused a significant drain on the Company's cash resources. The
operating results of CSS for the year ended December 31, 1999 are not included
in results from continuing operations, and are classified on a separate line
item on the income statement.
The Company completed the sale of its secure communications equipment
subsidiary, Val-Comm Inc. to an Albuquerque, NM businessman on August 21, 1999.
Val-Comm had been profitable in 1998, and had net income of $112,163 prior to
the date of sale. Results of operations from Val-Comm have been excluded from
results from continuing operations, and are classified separately on the income
statement.
The results of continuing operations for the years ended December 31, 1999
and December 31, 1998 reflect only the results of the Company's PCMobile product
line and the results of the parent company.
The revenues for the year ended December 31, 1999 were $3,263,178, which
represents a decrease of $9,970,494 from revenues of $13,233,672 for the prior
year. The decrease in sales was a result of reduced production of PCMobile units
caused primarily by limited financial resources available to the Company.
Cost of sales for the year ended December 31, 1999 was $3,012,410 as
compared to cost of sales of $9,830,620 for the prior year. Gross margin for
the Company decreased to 8% for the year ended December 31, 1999 from 26% in the
prior year. The decrease in gross margin is directly attributable to the
decrease in sales volume from the prior period. The Company prices its
PCMobiles to attain gross margins within a range of 30% to 40%. Lower levels of
production cause manufacturing overhead to be spread over fewer products, which
increases the cost of production per unit and lowers margins.
<PAGE>
16
Operating expenses decreased to $5,325,866 for the year ended December 31,
1999 as compared to $7,546,466 for the prior year. Selling, general and
administrative ("SG&A") expenses were $3,888,437 for the year ended December 31,
1999, a decrease of 26% from SG&A expenses of $5,234,503 for the year ended
December 31, 1998. The decrease was a result of reductions in managerial and
overall headcount, lower facilities costs from the relocation of Cycomm's repair
and maintenance facility and other cost reductions. Depreciation and
amortization decreased from $1,471,493 in 1998 to $612,213 in 1999. The decrease
of $859,280 is largely the result of depreciation of PCMobile demonstration
units, which decreased from $680,571 in 1998 to $208,075 in 1999, and the
amortization of convertible debt issue costs, which decreased from $173,105 in
1998 to $31,700 in 1999. Research and development ("R&D") costs were $824,353
for the year ended December 31, 1999 as compared to $929,998 for the year ended
December 31, 1998. The 1999 R&D expenditures consisted of the completion of the
Pentium II PCMobile development, early stages of Pentium III PCMobile
development, and the design and testing of a multimedia docking station for
the PCMobile.
Interest expense for continuing operations for the year ended December 31,
1999 was $456,651 as compared to $292,176 for the prior year. In 1998, total
interest expense for both continuing and discontinued operations was $778,065.
The increase in interest expense for continuing operations is a result of a
restructuring of the Company's line of credit. In 1998, interest on the
revolving line of credit was allocated between the Company's mobile computing
and secure computing subsidiaries. Following the Company's June 21, 1999 sale of
its secure computing subsidiary, all interest expense on the revolving line of
credit was allocated to the Company's mobile computing subsidiary.
In 1999, Cycomm made the determination that the goodwill related to the
purchase its Cycomm Mobile Solutions ("CMS") subsidiary was impaired. CMS had a
history of operating losses and negative cash flows from operations. Cycomm
wrote off $838,202 related to the impairment of CMS goodwill in the year ended
December 31, 1999.
Net loss from continuing operations was $6,241,703, or $0.46 per share,
for the year ended December 31, 1999 as compared to $4,367,709, or $0.40 per
share for the year ended December 31, 1998. The increase in net loss from
continuing operations is a result of the significant decrease in PCMobile sales
and margins from the prior period, offset by the Company's reductions in
selling, general and administrative expenses.
The loss from discontinued operations from the Company's Cycomm Secure
Solutions ("CSS") subsidiary was $1,613,044 for the year ended December 31,
1999, as compared to $4,087,890 in the prior period. The 1999 results are for
the period ended March 4, 1999, the date of the decision to sell the assets of
CSS. Prior to the date of the sale, production was decreased and certain cost
reductions were made. The loss on the sale of Cycomm Secure Solutions' assets
was $1,535,643.
Income from discontinued operations from the Company's Val-Comm subsidiary
was $112,163 for the year ended December 31, 1999 as compared to $159,550 in the
prior period. The 1999 results are for the period ended August 21, 1999, the
date of the sale of Val-Comm. Cycomm recognized a gain of $265,746 on the
disposal of Val-Comm Inc.
<PAGE>
17
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, 1999, the Company had cash and cash equivalents of $22,867.
In the year ended December 31, 1999, cash used in operations amounted to
$2,037,193. Cash provided by investing activities was $494,034, which was
comprised of $496,034 from the sale of marketable securities related to the sale
of the Company's Val-Comm subsidiary, offset by a net of $2,000 used in notes
receivable activity. Cash provided by financing activities was $1,684,938 for
the year ended December 31, 1999. The Company obtained cash totaling
$1,738,842 as a result of eight separate private equity placements of common
stock. Additionally, during 1999 the Company obtained $247,500 from the
issuance of its Series C convertible redeemable preferred stock, and $268,500
from the issuance of its Series D convertible redeemable preferred stock.
Cycomm issued a convertible debenture during 1999 for total proceeds of
$500,000. The Company had a net decrease of $1,044,441 in borrowings under the
secured credit facility during 1999.
The Company's net working capital decreased to ($2,886,204) at December
31, 1999, from ($2,419,330) at December 31, 1998 as a result of several factors.
The Company's production levels decreased significantly from 1998 due to limited
financial resources available to the Company. As a result, cash on hand
decreased $545,110, accounts receivable decreased $1,051,047 and inventories
decreased $928,804 from December 31, 1998 to December 31, 1999. Additionally,
during 1999 the Company sold its Cycomm Secure Solutions ("CSS") subsidiary in
an asset sale transaction. The assets of CSS had a carrying value of $2,333,779
and were sold for gross proceeds of $800,000. Proceeds of the sale were used to
pay down a portion of the Company's revolving line of credit. As of December
31, 1999 the Company carried liabilities related to its CSS subsidiary of
$1,310,837. The decreases in current assets were offset by the reclassification
of $3,000,000 of convertible debentures from short term to long term liabilities
and repayments on the revolving line of credit of $1,395,786.
Cycomm's auditors have issued a going concern qualification to their
opinion on the Company. Management is addressing the going concern issue with
several actions, including expanding its sales force, adding resellers,
evaluating potential acquisitions and strategic partnerships, and further
capitalizing the Company through borrowings and private equity placements.
Impact of Year 2000
In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 ready. In late 1999, Cycomm completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
the Company experienced no significant disruptions in critical information
technology and non-information technology systems and believes those systems
successfully responded to the Year 2000 date change. Cycomm is not aware of any
material problems resulting from Year 2000 issues, either with its products, its
internal systems, or the products and services of third parties. The Company
<PAGE>
18
will continue to monitor its critical computer applications and those of its
suppliers and vendors throughout the year 2000 to ensure that any latent Year
2000 matters that may arise are addressed promptly.
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSRUES ABOUT MARKET RISK
While the Company is exposed to changes in interest rates as a result of its
outstanding debt, the Company does not currently utilize any derivative
financial instruments related to its interest rate exposure. Total debt
outstanding at December 31, 1999 was $4,415,104, consisting of $3,500,000 in
fixed rate, 7% convertible debentures, and $915,104 in a variable rate secured
line of credit. At this level of variable rate borrowing, a hypothetical 10%
increase in interest rates would have increased the Company's net loss by
approximately $26,000 for the year December 31, 1999.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
<PAGE>
19
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, 2000.
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, 2000.
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, 2000.
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, 2000.
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, 1999.
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. No individual items included in accrued expenses on the
balance sheet was greater than 5% of the respective total on the
balance sheet.
(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.
<PAGE>
20
Page Number
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 ___
10.6 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)
10.11 Commercial Revolving Loan, Additional Loan and
Security Agreement by and among the Company
and American Commercial Finance Corp. (7)
10.12 Cycomm International Inc. 1997 Stock Option Plan (7)
10.13 Stock Purchase Agreement and Certificate of
Designation of Series B Convertible Redeemable
Preferred Stock (7)
21.1 Subsidiaries of the Registrant ___
27 Financial Data Schedule ___
(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 filed as an Exhibit to Form 10-KSB for the year ended December
31, 1997 dated March 31, 1998 and incorporated by reference herein.
b) Reports on Form 8-K:
None
<PAGE>
21
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: April__, 2000 By: /s/ Albert I. Hawk
Albert I. Hawk
President and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Robert M. Hutton
Robert M. Hutton
Vice President of Finance
(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.
By: /s/ Albert I. Hawk April ___, 2000
Albert I. Hawk, President and
Chief Executive Officer
By: /s/ Hubert Marleau April __, 2000
Hubert Marleau, Director
By: /s/ Ret. Gen. Thomas A. Stafford April __, 2000
Lt. Gen. Thomas A. Stafford, Director
(USAF - ret)
By: /s/ Steven Sparks April __, 2000
Steven Sparks, Director
RobH/1999 Audit/10K 12-31-99
<PAGE>
22
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: April __, 2000 By:
Albert I. Hawk
President and
Chief Executive Officer
(Principal Executive Officer)
By:
Robert M. Hutton
Vice President of Finance
(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.
By: April __, 2000
Albert I. Hawk, President and
Chief Executive Officer
By: April __, 2000
Hubert Marleau, Director
By: April __, 2000
Lt. Gen. Thomas A. Stafford, Director (USAF - ret)
By: April __, 2000
Steven Sparks, Director
<PAGE>
Cycomm International Inc. and Subsidiaries
Index to Consolidated Financial Statements
For the Year Ended December 31, 1999,
and the Year Ended December 31, 1998
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 (Deficit) F-6
Notes to Consolidated Financial Statements F-7
<PAGE>
F-2
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Cycomm International Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Cycomm
International Inc. and subsidiaries as of December 31, 1999 and 1998 and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the two years in the period ended December 31, 1999.
These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Cycomm International Inc. and subsidiaries at December 31, 1999 and 1998 and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As more fully
described in Note 1, the Company has incurred recurring losses from operations
and has a working capital deficiency and an accumulated deficit. Further, the
Company was not in compliance with the terms of its debt agreements at December
31, 1999. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The consolidated financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that might result from the outcome of this uncertainty.
McLean, Virginia
April 6, 2000 /s/ Ernst & Young LLP
<PAGE>
F-3
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1999 1998
<S> <C> <C>
Sales $3,263,178 $13,233,672
Cost of sales 3,012,410 9,830,620
--------- ---------
Gross profit 250,768 3,403,052
Expenses:
Selling, general and administrative 3,888,437 5,234,503
Research and product development 824,353 929,998
Depreciation and amortization 612,213 1,471,493
Other 863 (89,528)
-------- ---------
5,325,866 7,546,466
--------- ---------
Loss from Operations (5,075,098) (4,143,414)
Other Income (Expense)
Interest income 18,248 67,881
Interest expense (456,651) (292,176)
Goodwill impairment (838,202) ---
Other income
110,000 ---
--------- -------
(1,166,605) (224,295)
---------- --------
Loss from Continuing Operations (6,241,703) (4,367,709)
Discontinued Operations:
Income from operations of discontinued
operation: Val-Comm, Inc. 112,163 159,550
Gain on disposal of discontinued operation:
Val-Comm, Inc. 265,746 ---
Loss from operations of discontinued
operation: Cycomm Secure Solutions Inc. (1,613,044) (4,087,890)
Loss on disposal of discontinued operation:
Cycomm Secure Solutions Inc. (1,535,643) ---
--------- ---------
Net loss (9,012,481) (8,296,049)
Beneficial return on preferred shares (100,000) (150,000)
--------- ---------
Net loss attributable to common stockholders $(9,112,481) $(8,446,049)
=========== ===========
Earnings per share - basic and diluted
Loss per share from continuing operations $(0.46) $(0.40)
Income per share from discontinued operation
Val-Comm, Inc. 0.01 0.01
Income per share on disposal of Val-Comm, Inc. 0.02 ---
Loss per share from discontinued operation
Cycomm Secure Solutions Inc. (0.12) (0.38)
Loss per share on disposal of Cycomm Secure
Solutions Inc. (0.11) ---
Net loss per share attributable to beneficial
return on preferred shares (0.01) (0.01)
----- -----
Net loss per share attributable to common
stockholders $(0.67) $(0.78)
====== ======
Shares used in the calculation of basic and
diluted net loss per share 13,694,064 10,835,688
========== ==========
</TABLE>
(See accompanying notes)
<PAGE>
F-4
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1999 1998
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $22,867 $567,977
Accounts receivable, less allowance for doubtful
accounts of $254,000 and $61,000, respectively 1,200,771 2,251,818
Inventories, net of allowance for obsolete
inventory of $131,339 and $172,096, respectively 844,057 1,772,861
Net assets held for sale from discontinued
operation: Cycomm Secure Solutions Inc. --- 1,457,151
Net assets held for sale of discontinued
operation: Val Comm, Inc. --- 374,913
Other current assets 576,894 407,011
--------- ---------
Total current assets 2,644,589 6,831,731
Equipment, net 269,780 363,264
Goodwill, net of accumulated amortization of
$2,115,907 for the year ended December 31, 1998 --- 2,175,400
Other assets:
Deferred financing costs, net of accumulated
amortization of $407,978 for the year ended
December 31, 1998 --- 31,701
Other 30,648 224,850
---------- ---------
Total assets $3,005,528 $9,695,858
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable - trade $2,416,883 $2,191,026
Accrued liabilities 692,324 394,014
Acquisition earn-out obligation 700,000 700,000
Deferred revenue 770,122 934,948
Dividends payable on preferred stock 33,575 33,333
Current portion of capital lease obligations 2,785 22,418
Revolving credit facility 915,104 1,959,545
Current portion of notes payable and convertible
debentures --- 3,015,777
--------- ---------
Total current liabilities 5,530,793 9,251,061
Capital lease obligations, less current portion 8,041 10,826
Convertible debentures, subsequently converted into
preferred stock 3,000,000 ---
Convertible debentures, subsequently converted into
common stock 500,000 ---
Stockholders' equity (deficit):
Preferred stock, $50,000 par value, unlimited
authorized shares, 7 and 8 shares issued
and outstanding at December 31, 1999 and
December 31, 1998, respectively 296,250 360,000
Common stock, no par value, unlimited authorized
shares, 16,807,696 and 12,210,311 shares issued
and outstanding at December 31, 1999 and
December 31, 1998, respectively 54,315,402 51,674,618
Notes receivable - stockholders (60,511) (68,912)
Accumulated deficit (60,644,958) (51,600,647)
----------- -----------
Total stockholders' equity (deficit) (6,093,817) 365,059
---------- ---------
Total liabilities and stockholders' equity (deficit) $2,945,017 $9,626,946
========== ==========
</TABLE>
(See accompanying notes)
<PAGE>
F-5
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1999 1998
Operating activities
<S> <C> <C>
Net loss $(6,241,703) $(4,367,709)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 612,213 1,471,493
Non-cash compensation 263,458 450,000
Goodwill impairment 838,202 ---
Change in operating assets and liabilities 2,490,637 970,027
--------- ---------
Cash used in operating activities (2,037,193) (1,476,189)
---------- ----------
Investing activities
Acquisition of equipment --- (162,469)
Increase in notes receivable (4,000) (66,000)
Decrease in notes receivable 2,000 50,249
Proceeds from sale of marketable securities 496,034 ---
Other --- (112,874)
------- --------
Cash provided by (used in) investing activities 494,034 (291,094)
======= ========
Financing activities
Issuance of common stock, net of issuance costs 1,738,842 2,895,750
Issuance of preferred stock, net of issuance 516,000 900,000
costs
Net borrowings under revolving credit (1,044,441) (318,417)
facilities
Proceeds from issuance of convertible 500,000 ---
debentures
Repayment of notes payable and convertible (15,777) (173,575)
debentures
Deferred financing costs on convertible --- (30,000)
debentures
Repayment of obligations under capital leases (9,686) (3,998)
--------- ---------
Cash provided by financing activities 1,684,938 3,269,760
--------- ---------
Proceeds from sale of discontinued operation:
Cycomm Secure Solutions Inc. 800,000 ---
Cash provided by (used in) discontinued
operation: Cycomm Secure Solutions Inc. (1,743,677) (1,518,424)
Proceeds from sale of discontinued operation:
Val-Comm, Inc. 188,000 ---
Cash provided by discontinued operation:
Val-Comm, Inc. 68,788 74,344
-------- -------
(Decrease) increase in cash and cash equivalents
during the year (545,110) 58,397
Cash and cash equivalents, beginning of year 567,977 509,580
------- -------
Cash and cash equivalents, end of year $22,867 $567,977
======= ========
</TABLE>
(See accompanying notes)
<PAGE>
F-6
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Preferred Preferred Common Common Accumulated
Shares Stock Shares Stock Deficit
<S> <C> <C> <C> <C> <C>
Balance,
December 31, 1997 --- $ --- 9,816,877 $47,491,611 ($43,247,978)
Net Loss --- --- --- --- (8,296,049)
Issuance of
common stock:
Conversion
of debentures --- --- 236,380 273,970 ---
Private placement -
Common stock --- --- 1,870,000 2,895,750 ---
Value of options
issued to
non-employees --- --- --- 450,000 ---
Issuance of preferred
stock:
Private placement -
Preferred stock 20 900,000 --- --- ---
Conversion of
preferred stock (12) (540,000) 287,054 563,287
Dividends on
preferred stock --- --- --- --- (56,620)
--- ------- ---------- ---------- -----------
Balance,
December 31, 1998 8 $360,000 12,210,311 $51,674,618 ($51,600,647)
=== ======= ========== ========== ===========
Net Loss (9,012,481)
Issuance of
common stock:
Private placement -
Common stock --- --- 3,626,907 1,765,987 ---
Value of options
issued to
non-employees --- --- --- 263,458 ---
Issuance of
preferred stock:
Issuance - Series C
preferred stock 6 247,500 --- --- ---
Issuance - Series D
preferred stock 6 268,500 --- --- ---
Reversal of
conversion of
Series B preferred
stock 1 45,000 (21,745) (46,753) ---
Conversion of
preferred stock (14) (624,750) 992,223 658,092 ---
Dividends on
preferred stock --- --- --- --- (31,830)
--- -------- ---------- ----------- -----------
Balance,
December 31, 1999 7 $296,250 16,807,696 $54,315,402 ($60,644,958)
=== ======= ========== =========== ===========
</TABLE>
(See accompanying notes)
<PAGE>
F-7
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1: NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Cycomm International Inc. (the "Company") is a manufacturer of wireless,
ruggedized mobile computers, branded under the name "PCMobile". The Company is
based in McLean, Virginia, with a manufacturing facility in Montreal, Quebec and
a repair and maintenance facility in Melbourne, Florida.
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 from continuing operations of $6,241,703 for the year ended
December 31, 1999 and as of that date had a working capital deficit of
$2,886,204 and an accumulated deficit of $60,644,958. Further, the Company was
not in compliance with the terms of its debt agreements at December 31, 1999.
These factors raise substantial doubt about the Company's ability to continue as
a going concern.
Management has taken several steps towards addressing the going concern issue.
In 1999, Cycomm sold two of its subsidiaries, Cycomm Secure Solutions Inc.
("CSS"), which was based in Sebastian, Florida, and Val-Comm, Inc. ("Val-Comm")
which was based in Albuquerque, New Mexico. The sale of these divisions
provided capital to repay debt and allowed the Company to focus exclusively on
its PCMobile division, which has shown potential for future growth and
profitability. Cycomm has raised additional capital, which has been used to
expand production capabilities and to fund operations. The Company has also made
reductions in overhead and managerial headcount. Looking forward, Cycomm
intends to grow its PCMobile division by implementing plans to increase market
share and revenue. The Company plans to fund its operations through working
capital, borrowings on its secured line of credit and through private equity
placements.
The Company's secured line of credit is a $4,000,000 revolving loan
collateralized by the Company's accounts receivable, inventory and all other
assets. The line of credit is a demand facility, which is callable by the
lender.
Cycomm has historically been able to raise capital through private equity
placements and debenture issuances. During 1999, the Company raised $2,254,842
in private equity placements and $500,000 through the issuance of a convertible
debenture. Subsequent to December 31, 1999, Cycomm has raised $3,026,000 in
private equity placements (See Note 22: Subsequent Events for further detail).
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.
In the event that the Company is unable to achieve its plans to fund operations,
the Company will consider further cost reductions and may be required to seek
protection under the United States Bankruptcy Code.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries after elimination of intercompany accounts and
transactions.
Cash and Cash Equivalents
The Company considers all short-term deposits with a maturity of three months
or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out method. Market is determined by the replacement cost
method for raw materials and the net realizable value method for work in process
and sub-assemblies and finished goods. Inventories also include demonstration
equipment, which is stated at amortized cost, which approximates net realizable
<PAGE>
F-8
value. Demonstration equipment was fully depreciated at December 31, 1999, and
had a net amortized cost of $208,075 as of December 31, 1998.
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.
Equipment and Depreciation
Equipment is 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:
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
Office equipment 5 to 7 years
Manufacturing equipment 3 to 7 years
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.
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
Equipment acquired under leases which transfer substantially all of the benefits
of ownership to the lessee are recorded as the acquisition of assets and the
assumption of a related obligation. Under this method, assets are depreciated
over their expected useful lives, and obligations, including interest thereon,
are extinguished over the life of the lease.
All other leases are accounted for as operating leases wherein rental payments
are charged to operations as incurred.
Revenue Recognition
Product sales, less estimated returns and allowances, are recorded at the time
of shipment.
Product Warranty
Cycomm provides a three year warranty for its PCMobile computers which excludes
certain components. The rechargeable batteries and some hard drives are covered
by a one year warranty, while the magnesium casing of the PCMobile comes with a
limited lifetime warranty. A reserve is established to cover estimated warranty
costs during this period. Warranty reserves for the years ended December 31,
1999 and 1998 were $233,739 and $250,155 respectively.
Advertising Costs
The Company expenses advertising costs as incurred. Such costs were
insignificant in 1999 and 1998.
<PAGE>
F-9
Foreign Currency Transactions
The Company considers the functional currency of its foreign subsidiary to be
the U.S. dollar. Exchange adjustments from foreign currency transactions are
recognized in income and were insignificant in 1999 and 1998.
Earnings Per Share
The Financial Accounting Standards Board's Statement No. 128, "Earnings per
Share", requires companies to report basic earnings per share (EPS) and diluted
EPS. 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. Included in EPS for 1999
and 1998 are charges of $100,000 and $150,000 related to the beneficial
conversion feature of the Company's convertible preferred stock. For the years
ended December 31, 1999 and 1998, the effect of the exercise of stock options,
warrants and the conversion of preferred stock and 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.
Goodwill
Goodwill is amortized on a straight line basis over a period of ten years.
Cycomm continually evaluates whether events or circumstances have occurred that
indicate that the remaining useful life of goodwill may warrant revision or that
the remaining balance may be unrecoverable. When factors indicate that goodwill
should be evaluated for possible impairment, the Company assesses the impairment
in accordance with Statement of Financial Statements No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of
("SFAS 121"). SFAS 121 requires impairment losses to be recognized for long-
lived assets when indicators of impairment are present and the undiscounted cash
flows, excluding interest, of the related business activities. The impairment
loss of goodwill is measured by comparing the carrying amount of the asset to
its fair value with any excess of carrying value over fair value written off.
Fair value is based on market prices where available, an estimate of market
value, or determined by various valuation techniques including discounted cash
flow.
Stock-based compensation
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 under
Accounting Principles Board Statement No, 25 ("APB 25"), and to provide
the required pro forma information for stock options and warrants granted
after June 1, 1995. Under APB 25, 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 exercise price.
Reclassification
Certain items previously reported in specific financial statement captions have
been reclassified to conform with the 1999 presentation.
NOTE 3: DISCONTINUED OPERATIONS
Cycomm Secure Solutions Inc.
On March 4, 1999, the Company signed a letter of intent for the sale of the
assets of its secure computing subsidiary, Cycomm Secure Solutions Inc. ("CSS"),
in a management buy out ("MBO") transaction to a group of investors led by CSS
management. On May 3, 1999, prior to the closing of the sale, the MBO group
signed an agreement with Cycomm allowing the MBO group to operate the business
for the period prior to the closing of the sale. The agreement allowed the MBO
group to operate the assets of CSS and generate revenues for the benefit of the
MBO group, and made the MBO group responsible for all expenses incurred and
liabilities generated on and after May 3, 1999.
In May of 1999, the MBO group informed Cycomm that it would be unable to
complete the purchase of the assets of CSS. The MBO group identified a company
<PAGE>
F-10
called Cortron Inc. ("Cortron") as another potential buyer for the assets of
CSS. Cycomm signed a letter of intent for the sale of the assets of CSS to
Cortron Inc. for a purchase price of $800,000. On June 21, 1999 Cycomm's secured
lender foreclosed on the assets of CSS and sold the assets to Cortron.
The results of operations for CSS are reported as discontinued operations for
all periods presented. For the year ended December 31, 1999, the results of CSS
include a write-off of goodwill of $1,220,190. The results of operations for
Cycomm Secure Solutions Inc. are summarized as follows:
<TABLE>
<CAPTION>
January 1, 1999 to Year Ended
March 4, 1999 December 31, 1998
<S> <C> <C>
Revenue $1,837,889 $4,348,376
Cost of Sales 1,354,200 4,534,110
--------- ---------
Gross profit (loss) 483,689 (185,734)
Operating Expenses 2,096,733 3,902,156
---------- ----------
Net loss ($1,613,044) ($4,087,890)
=========== ===========
Net loss per share ($0.12) ($0.38)
====== ======
</TABLE>
The assets sold included inventory, fixed assets and various intangibles and
other assets and had a carrying value of $2,333,779 as of June 21, 1999.
Proceeds on the sale of CSS's assets were used to repay a portion of CSS' bank
debt and to satisfy CSS' lease and property tax obligations. The Company
recognized a net loss on disposal of $1,535,643 on the sale of CSS' assets.
Included in the net loss is a gain of $278,297 on the settlement of an operating
lease obligation. Included in accounts payable at December 31, 1999 are
$1,310,837 of unpaid amounts due to vendors of CSS.
Val-Comm Inc.
In April 1999, the Company entered into an agreement to sell its secure
telecommunications subsidiary, Val-Comm Inc. to an individual investor in
Val-Comm's geographical area. The transaction was structured as a stock
purchase, and was completed on August 21,1999. The results of operations for
Val-Comm are reported as discontinued operations for all periods presented, and
are summarized as follows:
<TABLE>
<CAPTION>
January 1, 1999 to Year Ended
August 21, 1999 December 31, 1998
<S> <C> <C>
Revenue $1,001,733 $1,409,539
Cost of Sales 570,510 817,127
------- -------
Gross profit (loss) 431,223 592,412
Operating Expenses 319,060 432,862
------- -------
Net income 112,163 159,550
======= =======
Net income per share $0.01 $0.01
===== =====
</TABLE>
The net book value of Val-Comm's assets as of August 21, 1999 was $484,254. The
selling price of Val-Comm consisted of an initial payment of $750,000 and a
contingent promissory note of $1.5 million. The promissory note is contingent
upon Val-Comm getting a follow-on award to an existing contract. Val-Comm's
management is optimistic that they will receive this award. The contingent
promissory note bears interest at 7%, and is payable over two years should
payment be required, with 50% of the note due on August 21, 2000 and the balance
of the note due on August 21, 2001. As of December 31, 1999, the Company has
recorded a gain on the sale of Val-Comm of $265,746.
The initial payment of $750,000 was made with $188,000 in cash and with stock in
the purchaser's company that was valued at $900,000 at the time of the purchase.
The stock was to be sold by an independent third party, and the proceeds were to
be paid to Cycomm. As of December 31, 1999 the Company had received proceeds
of $496,034 from the sale of the purchaser's stock. The total amount due from
the purchaser on the initial payment is $65,966 as of December 31, 1999 and is
included in other current assets.
<PAGE>
F-11
NOTE 4: ACQUISITION EARN-OUT
XL Computing (Canada) Inc.
In connection with the purchase price paid for the Company's acquisition of its
Cycomm Mobile Solutions subsidiary, the Company entered into an acquisition
earn-out agreement with the seller, M3i Technologies Inc. and M3i Systems Inc.
(collectively the "Seller"). The earn-out provision of the purchase price was to
be paid in Cycomm common stock, up to a maximum value of $4,000,000, subject to
provisions based on the achievement of certain unit sales volumes for a five
year period. Common stock issued under the earn-out provisions was to be issued
at the average current market price of the last month for the quarter in which
it was earned. As of December 31, 1999, Cycomm had paid $1,354,796 of contingent
consideration, which was paid in 444,862 shares of common stock.
The Company and the seller were parties to a lawsuit regarding the
interpretation of the earn-out agreement. On May 24, 1999, the Company and the
seller entered into a complete settlement of the litigation. Under the terms of
the agreement, the Company could fulfil its obligation to the Seller if payments
were made before certain dates as specified in the agreement. The Company could
elect to pay $700,000 by April 30, 2000, $1,100,000 by April 30, 2001 or
$1,500,000 prior to April 30, 2002. The settlement agreement was amended on
February 3, 2000 to allow Cycomm until December 31, 2000 to pay $700,000 in full
and final settlement of the obligation, to be paid in accordance with a payment
schedule. See Note 22: Subsequent Events for further description of the amended
agreement. Management anticipates that the liability to the Seller will be paid
prior to December 31, 2000 in accordance with the payment schedule, and has
recorded an accrued liability of $700,000 as of December 31, 1999. In
conjunction with the settlement, the Company issued 200,000 warrants to the
seller with a fair value on the date of issuance of $88,000. It was considered
part of the purchase price and subsequently written off in conjunction with the
goodwill impairment charge.
NOTE 5: DELISTING FROM THE AMERICAN STOCK EXCHANGE
On January 21, 1999, Cycomm was notified by the American Stock Exchange that it
no longer met continued listing criteria and would be delisted. Specifically,
Cycomm had incurred losses in its last five fiscal years and therefore failed to
meet the American Stock Exchange listing requirement of pre-tax income of at
least $750,000 in its last fiscal year, or in two of its last three fiscal
years. Additionally, Cycomm failed to satisfy the minimum stockholders' equity
requirement of $4 million. Trading of Cycomm's stock was suspended on April 13,
1999 and Cycomm was delisted from the AMEX on April 30, 1999. The Company began
trading on the Over-the-Counter Bulletin Board (OTCBB) on May 5, 1999 under
the symbol "CYII".
NOTE 6: IMPAIRMENT OF GOODWILL
In 1999, Cycomm made the determination that the value of goodwill related to the
acquisition of Cycomm Mobile Solutions ("CMS") was impaired. CMS has a history
of losses and negative cash flows from operations. Cycomm recorded an
impairment charge of $838,202 in the year ended December 31, 1999 to fully write
down goodwill related to CMS.
NOTE 7: INVENTORIES
Inventories by categories are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
<S> <C> <C>
Raw materials $841,910 $990,954
Work in process and sub-assemblies 122,160 712,947
Finished goods 11,326 241,011
Allowance for obsolete inventory (131,339) (172,096)
$844,057 $1,772,816
</TABLE>
Cycomm continually evaluates inventory for obsolescence or impairment in
value. The impairment loss is measured by comparing the carrying amount of
the inventory to its fair value with any excess of carrying value over fair
value reserved. Fair value is based on market prices where available, or on
an estimate of market value, or determined by various valuation techniques
including discounted cash flow.
<PAGE>
F-12
NOTE 8: OTHER CURRENT ASSETS
Other current assets are comprised of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
<S> <C> <C>
Deposits with materials suppliers $283,449 $283,449
Amount due from private placement 125,000 ---
Amount due from sale of Val-Comm 65,966 ---
Other 102,479 123,562
$576,894 $407,011
</TABLE>
NOTE 9: EQUIPMENT
Equipment and accumulated depreciation and amortization by categories are as
follows:
<TABLE>
<CAPTION>
Accumulated
depreciation and Net book
Cost Amortization value
December 31, 1999
<S> <C> <C> <C>
Equipment under capital leases 14,754 5,812 8,942
Furniture and fixtures 23,143 13,325 9,818
Research equipment 3,301 1,706 1,595
Computer equipment 261,050 152,733 108,317
Office equipment 34,331 17,004 17,327
Manufacturing equipment 150,838 60,359 90,479
Leasehold improvements 69,958 36,656 33,302
------- ------- -------
$557,375 $287,595 $269,780
======== ======== ========
December 31, 1998
Equipment under capital leases 14,754 3,129 11,625
Furniture and fixtures 23,143 9,465 13,678
Research equipment 3,301 1,235 2,066
Computer equipment 258,113 103,833 154,280
Office equipment 34,331 12,324 22,007
Manufacturing equipment 149,053 37,833 111,220
Leasehold improvements 69,960 21,571 48,389
------- ------- -------
$552,654 $189,390 $363,264
======== ======== ========
</TABLE>
Depreciation expense for the years ended December 31, 1999 and 1998 was
$92,323 and $112,278, respectively.
<PAGE>
F-13
NOTE 10: NOTES PAYABLE AND CONVERTIBLE DEBENTURES
Notes payable and convertible debentures are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
<S> <C> <C>
7% convertible debentures, due May 1, 2000 $3,000,000 $3,000,000
7% convertible debenture, due September 20,
2004 500,000 ---
Revolving credit facility, prime + 3% 915,104 2,310,890
Term note payable, prime + 3%, due January 1,
2001 --- 394,425
--------- ---------
4,415,104 5,705,315
Less current portion 915,104 5,705,315
---------- ---------
$3,500,000 $ ---
========== =========
</TABLE>
On February 28, 1997, the Company issued $3,000,000 of 10% convertible
debentures due February 28, 1999 which were convertible at the option of the
holders into common stock of the Company at a 10% discount of the average
closing bid price of the Company's common stock prior to conversion, provided
the conversion price was not greater than $6.00 per share nor less than $3.00
per share. On June 15, 1998, the Company entered into an agreement with the
holders of these debentures, under which the holders agreed to waive their
conversion rights in exchange for an increase in the interest rate of the
debentures from 10% to 12%. On March 31, 1999, the Company entered into a new
agreement with the holders of the debentures that amended the terms of the note
and extended the maturity date to May 1, 2000. Pursuant to the terms of the
new agreement, the interest rate on the convertible debentures has been lowered
from 12% per annum to 7% per annum. The debentures are convertible at the
market price of Cycomm's common stock, provided that the market price is not
below $0.50 per share at the time of conversion. The holders of the debentures
were precluded from converting more than 5% of the outstanding debentures before
August 1, 1999, 10% before November 1, 1999, 15% before February 1, 2000 and the
balance before May 1, 2000. Subsequent to December 31, 1999 the Company
arranged for a sale of the debentures from the holders to another party. See
Note 22: Subsequent Events for further discussion of the $3,000,000 convertible
debentures.
On September 20, 1999, the Company issued a $500,000 7% convertible debenture
due September 20, 2004 which is convertible at the option of the holder into
common stock of the Company at the lesser of $0.50 per share or the average
closing bid price of the Company's common stock for the 5 days prior to
conversion. As of December 31, 1999 the debenture had not been converted.
Subsequent to December 31, 1999, the debenture was converted into common stock
of the Company. See Note 22: Subsequent Events for further discussion of the
conversion.
The Company has a revolving credit facility from a lender under which the
Company may, at its option, borrow and repay amounts up to a maximum of
$4,000,000, of which $915,104 was outstanding at December 31, 1999.
Borrowings under this credit facility bear interest at prime plus 3%.
Additionally, the terms of the credit facility prohibit the Company from paying
dividends in certain circumstances. The revolving credit facility was
originally comprised of a $3,432,000 facility collateralized by the trade
accounts receivable and inventory of Cycomm Mobile Solutions and CSS, and a
$568,000 term loan collateralized by certain machinery and equipment of CSS (see
below). After the June 21, 1999 sale of the assets of CSS, the revolving credit
facility was restructured as a $4,000,000 facility collateralized by the trade
accounts receivable and inventory of Cycomm Mobile Solutions, and by the
remaining accounts receivable of CSS. As of December 31, 1999, the Company was
not in compliance with the terms of its loan agreement as total borrowings under
the revolving credit facility exceeded the available borrowing base of the
underlying collateral by $414,323. This was a result of accounts receivable
being disallowed as collateral by the lender because certain invoices were over
90 days past due. As of April 10, 2000, the Company was in compliance with the
terms of its loan agreement.
The Company's revolving credit facility originally contained a term loan in the
amount of $568,000 collateralized by certain machinery and equipment of the
Company's CSS subsidiary. This term loan had an interest rate of prime plus 3%
and was payable in equal installments of $15,777 per month through January 1,
2001. In connection with the Cycomm's sale of its CSS subsidiary (See Note 2:
Discontinued Operations), the Company's secured lender foreclosed on all of the
assets of CSS and sold the assets to the buyer. A portion of the proceeds from
<PAGE>
F-14
the sale of CSS assets was used to pay down the balance of Cycomm's term loan.
At the time of the sale, the term loan had a balance of $378,648. Subsequent
to the sale of CSS assets, the Company's revolving credit facility was
restructured to remove the term loan provision.
NOTE 11: DEFERRED REVENUE
The Company recorded deferred revenue of $770,122 and $934,948 for the years
ended December 31, 1999 and 1998, respectively. Deferred revenue was recorded
as a result of certain sales of PCMobile computers in which customers were
shipped PCMobiles with 586 processors (the "586s") to be used until PCMobiles
with Pentium processors (the "Pentiums") became available. At the time the
shipments were made, Cycomm was still in the process of developing the Pentium
PCMobile, however the customers agreed to take 586s until Cycomm was able to
deliver Pentiums. The customers paid the full price for Pentiums at the time of
the shipment which was recorded as deferred revenue. When the Pentiums became
available, the customers could trade in the 586s for Pentiums at no additional
charge. The customers retain the right to return the 586s at any time before
they receive the Pentiums. Upon the return of the 586s, the customers would be
entitled to a full refund, and the entire sale would be cancelled.
The 586s were classified as demonstration units, and were recorded in inventory
and are depreciated over a one year period. Depreciation expense on the
demonstration units was $208,075 and $680,571 for the years ended December 31,
1999 and 1998. As of December 31, 1999, the demonstration units had been fully
depreciated.
Revenue on the sales is recognized when the Pentium units are shipped to the
customers. For the year ended December 31, 1999, Cycomm has recognized revenue
of $164,826 related to the shipment of Pentium units to customers in exchange
for the 586 units.
NOTE 12: COMMITMENTS AND CONTINGENCIES.
Lease Commitments
The Company leases equipment, included in fixed assets, under leases which are
classified as capital leases. Total payments under these capital leases are due
in monthly installments with imputed interest of 12.67% 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 operating 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>
2000 $3,999 $290,320
2001 3,999 174,425
2002 3,999 146,455
2003 1,332 147,415
2004 --- 145,634
------ --------
13,329 $904,249
====== ========
Less: amount representing interest on
capital leases (2,503)
------
Present value of future minimum capital
lease payments $10,826
=======
</TABLE>
Total rental expense under the various operating leases for continuing
operations amounted to $236,795 and $233,999 for the years ended December 31,
1999 and 1998, respectively.
The Company is engaged in ordinary and routine litigation incidental to its
business. Management does not anticipate that any amounts which it may be
required to pay by reason thereof will have a material effect on the Company's
financial position or results of operation.
<PAGE>
F-15
NOTE 13: 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 16,807,696 and 12,210,311
shares as of December 31, 1999 and 1998, respectively.
During 1999, Cycomm raised capital through 8 separate private equity placements
of its common stock. The stock was issued at a discount to the market price on
the date of issuance. In total, Cycomm issued 3,421,190 shares of common stock
for gross proceeds of $1,767,142. Cash proceeds after commissions and issue
costs were $1,738,842. In conjunction with these private placements, the
Company issued 195,833 options with a fair value on the date of issuance of
approximately $263,000 as calculated under the Black-Scholes model.
Additionally, during 1999, Cycomm issued 205,717 shares of common stock in
settlement of an obligation of $27,145.
The Company raised capital during the year ended December 31, 1998 through 5
separate private equity placements of its common stock. The stock was issued at
a discount to the market price on the date of the issuance. In total, the
Company issued 1,870,000 shares of common stock for gross proceeds of
$3,685,000. Cash proceeds, after commissions and issue costs were $2,895,750.
In conjunction with these private placements, the Company issued 370,000
warrants with a fair value on the date of issuance of approximately $592,000 as
calculated under the Black-Scholes model.
Convertible preferred shares and related accrued dividends were converted into
992,223 and 287,054 shares of common stock for the years ended December 31, 1999
and 1998, respectively. No convertible debentures were converted into common
stock during 1999, however convertible debentures and related accrued interest
were converted into 236,380 shares of common stock during the year ended
December 31, 1998.
Preferred Stock
On February 26, 1998, Cycomm issued 20 shares of Series B convertible redeemable
preferred stock ("Series B preferred stock") with a conversion value of $50,000
per share for net proceeds of $900,000. The Series B preferred stock is
convertible at the option of the holder into common stock of the Company. The
conversion price is the lesser of $2.38, or a 15% discount of the five-day
average closing bid price prior to the date of conversion. In the event that
Cycomm's common stock is trading at or below $1.50 per share at the conversion
date, Cycomm has the right to redeem the preferred shares at a premium of 18%
over the conversion price. If Cycomm does not exercise this right, the holder
may convert 10% of its preferred shares, and up to a further 10% every 20 days
thereafter. During 1999, 7 shares of preferred stock and related accrued
dividends were converted into 282,617 shares of common stock. In the year ended
December 31, 1999, Cycomm also reversed an earlier conversion of 1 share of
preferred stock, canceling the 21,745 shares of common stock that had previously
been issued. During 1998, 12 shares of preferred stock and related accrued
dividends were converted into 287,054 shares of common stock. As of December
31, 1999, 18 shares of Series B preferred stock have been converted into 547,926
shares of common stock, and 2 shares of Series B preferred stock are
outstanding.
On May 5, 1999, Cycomm issued 6 shares of Series C convertible redeemable
preferred stock ("Series C preferred stock") with a conversion value of $50,000
per share for net proceeds of $247,500. The Series C preferred stock is
convertible at the option of the holder into common stock pursuant to a
conversion schedule as set forth in the agreement. The holder can convert 50% of
its preferred shares after four months from the issuance date, and the balance
after nine months from the issuance date. The conversion price is the lesser of
$0.63, or a 15% discount of the five-day average closing bid price prior to the
date of conversion. In the event that Cycomm's common stock is trading at or
below $.50 per share at the conversion date, Cycomm has the right to redeem the
preferred shares at a premium of 15% over the conversion price. As of December
31, 1999, 1 share of Series C preferred stock and related accrued dividends had
been converted into 109,606 shares of common stock, and 2 preferred shares were
eligible for conversion.
On July 14, 1999, Cycomm issued 6 shares of Series D convertible redeemable
preferred stock ("Series D preferred stock") with a conversion value of $50,000
per share for net proceeds of $268,500. The Series D preferred stock was
convertible at the option of the holder into common stock pursuant to a
conversion schedule as set forth in the agreement. The holder could convert 25%
<PAGE>
F-16
of its preferred shares after 30 days from the issuance date, and a further 25%
every 30 days thereafter. The conversion price was the lesser of $0.74, or a
20% discount of the five-day average closing bid price prior to the date of
conversion. Cycomm could redeem the Series D preferred shares at any time prior
to conversion at a price equal to the conversion value of the shares. At the
time the Series D preferred stock was issued, Cycomm placed 600,000 shares of
its common stock in an escrow account, to be issued upon conversion of the
preferred shares. On December 31, 1999, Cycomm reached an agreement with the
holders of the Series D preferred stock under which the holders would convert
the 6 shares of preferred stock for the 600,000 shares held in escrow.
NOTE 14: 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.
On June 21, 1999, the Company granted 1,896,438 options to its directors,
officers and employees at $0.375 per share, which approximated the market price
on the date of the grant. These options were not covered under the 1997 plan.
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. For the year ended
December 31, 1998, a total of 230,000 stock options were granted under the 1997
Plan. No options were issued under this plan in 1999. As of December 31, 1999,
530,000 options are available under the 1997 Plan.
The following table summarizes the activity in common shares subject to
options for the relevant periods ended December 31, 1999:
<TABLE>
<CAPTION>
Shares Option Price
Range
<S> <C> <C>
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
---------
Granted 1,405,000 $1.88 - $2.50
Exercised --- ---
Terminated (387,500) $2.50 - $4.05
--------
Balance, December 31, 1998 3,470,000 $1.88 - $8.10
=========
Granted 2,217,271 $0.38 - $0.75
Exercised --- ---
Terminated (1,956,062) $0.38 - $8.10
----------
Balance, December 31, 1999 3,731,209 $0.38 - $8.10
=========
</TABLE>
Options were exercisable with respect to 3,225,367 shares at December 31, 1999.
The weighted average contractual life of options outstanding as of December 31,
1999 was 3.94 years. The weighted average exercise price of options exercisable
at December 31, 1999 was $1.40.
<PAGE>
F-17
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 Year Ended
December 31, 1999 December 31, 1998
<S> <C> <C>
Net loss attributable to common
stockholders $(9,112,481) $(8,446,049)
Compensation expense (5,084,380) (117,292)
---------- ----------
Pro forma net loss attributable to
common stockholders $(14,196,861) $(8,563,341)
============ ===========
Pro forma net loss per share
attributable to common stockholders $(1.04) $(0.79)
====== ======
</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 for 1999 include a dividend yield of 0%, an expected volatility of
1.268 and a risk free interest rate of 6.36% over the life of the options. The
expected life of the options was 4.88 years for 1999. The option and warrant
pricing assumptions for 1998 include a dividend yield of 0%, an expected
volatility of .809 and a risk free interest rate of 6.30% over the life of the
options. The expected life of the options was 5.73 years for 1998.
For the years ended December 31, 1999 and 1998, the Company recognized $263,458
and $450,000 in compensation expense related to stock options issued to
non-employees.
The weighted average fair values and exercise prices are as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1999 December 31, 1998
<S> <C> <C>
Weighted-average fair
value per option
granted $2.63 $1.48
Weighted-average
exercise price per
option granted $0.38 $2.20
</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. During the year ended
December 31, 1998, the Company issued 370,000 warrants to purchase its common
stock for services related to the private placement of common stock with
exercise prices within a range of $2.00 to $3.00. During 1999, the Company
issued 200,000 warrants in conjunction with the purchase of its Cycomm Mobile
Solutions subsidiary from M3i Technologies. At December 31, 1999, the following
warrants to purchase the Company's common stock were outstanding:
<TABLE>
<CAPTION>
Exercise Expiration
Shares Price Date
<S> <C> <C>
5,000 $ 4.75 November 30, 2000
50,000 $ 2.50 February 26, 2000
75,000 $ 2.50 September 17, 2000
20,000 $ 2.50 February 26, 2000
200,000 $0.00005 May 24, 2001
-------
350,000
=======
</TABLE>
<PAGE>
F-18
NOTE 15: SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the relevant periods are summarized as
follows:
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1999 1998
<S> <C> <C>
Cash flow effects of changes in operating assets
and liabilities, net of acquisitions:
Accounts receivable $1,436,066 $1,452,158
Inventories 612,169 (90,191)
Prepaid expenses 15,006 (6,473)
Accounts payable - trade 546,245 (1,486,003)
Accrued liabilities 18,832 165,584
Dividends payable on preferred stock 27,145 ---
Deferred revenue (164,826) 934,948
$2,490,637 $970,023
Non-cash investing and financing activities:
Conversion of convertible debentures to
common stock $ --- $278,625
Conversion of preferred stock to common stock $658,092 $563,287
Marketable securities received from sale of
discontinued operation: Val-Comm, Inc. $496,034 ---
Cash paid during the period:
Interest paid $394,822 $759,169
Income taxes paid --- ---
</TABLE>
<PAGE>
F-19
NOTE 16: 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, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
Deferred tax assets
<S> <C> <C>
Deferred revenue 300,348 ---
Non-employee stock options 278,249 175,500
Book over tax depreciation and amortization 315,513 309,663
Inventory capitalization and related reserves --- 821,479
Net operating loss carryforward 17,234,308 15,073,313
Nondeductible expense and reserves 225,903
160,861
Total deferred tax assets 18,354,321 16,540,816
Valuation allowance for deferred tax assets (18,354,321) (16,540,816)
Net deferred tax asset $ --- $ ---
</TABLE>
There was no provision for income taxes in the years ended December 31, 1999 and
1998 as the Company incurred losses in those years and a valuation allowance was
provided for the increase in the deferred tax asset.
A reconciliation between federal statutory income tax rates and the effective
tax rate of the Company at December 31 is as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
<S> <C> <C>
US federal statutory benefit rate (35.0)% (35.0)%
US state tax benefit, net of federal income
tax effect (4.0) (4.0)
Change in valuation allowance 39.0 39.0
Effective rate on operating loss --- ---
</TABLE>
The Company has US net operating loss carryfowards available at December
31, 1999 of approximately $43 million for US tax purposes to offset income
in future years. These carryfowards will expire in the years 2000 through
2015, 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, 1999 of approximately $4.5
million; these carryforwards will expire in the years 2003 and 2006 if not used.
In addition, the Company has future deductible research and development costs
for Canadian federal tax purposes of $650,000. These costs have an indefinite
carryover period.
NOTE 17: RELATED PARTY TRANSACTIONS
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. At December 31, 1999, amounts outstanding under
these loans total $128,684 in principal and $20,297 in accrued interest
receivable. The loans are secured by the common stock, bear interest at 5.9%
and are due April 30, 2000. The Company has recorded a valuation allowance of
$88,470 against the receivable and the net balance of $60,511 is reflected as a
contra equity account in the accompaning balance sheet.
The Company subleases office space from Corstone Corporation, which previously
employed Cycomm's Chief Executive Officer and former Chief Financial Officer.
Corstone is a merchant banking firm that provided consulting services to Cycomm
prior to 1998. These consulting services included financial, legal and
<PAGE>
F-20
administrative services. No consulting fees were paid to Corstone for the years
ended December 31, 1999 and 1998. The Chief Executive Officer and former Chief
Financial Officer have no direct or indirect ownership interest in Corstone
Corporation.
On September 20, 1999, Cycomm received an investment of $500,000 from Stephen
Sparks in the form of a convertible debenture (See Note 6: Notes Payable and
Convertible Debentures). In connection with this investment, Mr. Sparks was
appointed to Cycomm's Board of Directors. Mr. Sparks owns several businesses in
the Washington, DC area including a temporary employee staffing company. Cycomm
occasionally uses Mr. Sparks' company for temporary employee staffing, and is
charged standard rates for their services.
In June of 1999, Cycomm entered into an employee staff leasing agreement with
ProLease, a company in which Cycomm's Chief Executive Officer holds a minority
ownership interest. Under this agreement, ProLease is the employer of record for
Cycomm's U.S. employees and handles payroll processing, payroll tax and benefit
administration, and other human resources functions. Cyomm's U.S. employees are
eligible to participate in ProLease's 401(K) plans and health insurance benefits
packages. Cycomm is charged standard rates for ProLease's services.
NOTE 18: SEGMENT AND RELATED INFORMATION
In 1998, Cycomm adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, to report the results of its three business
segments: Mobile Computing, Secure Computing and Communications Security.
During 1999, Cycomm sold its Secure Computing and Communications Security
segments (See Note 2: Discontinued Operations). The results from continuing
operations on Cycomm's financial statements for the years ended December 31,
1999 and 1998 present the results of the Mobile Computing segment.
<TABLE>
<CAPTION>
Geographic Region Data December 31, December 31,
1999 1998
Sales
<S> <C> <C>
United States $3,125,903 $12,583,557
Canada 137,275 3,095,110
---------- -----------
$3,263,178 $13,233,672
========== ===========
Loss from Operations
United States $2,877,253 $3,551,698
Canada 2,197,845 591,716
---------- ----------
$5,075,098 $4,143,414
========== ==========
Identifiable Assets
United States $1,842,812 $7,175,815
Canada 1,162,716 3,754,905
---------- -----------
$3,005,528 $10,930,720
========== ===========
</TABLE>
NOTE 19: MAJOR CUSTOMERS
The Company is not dependent upon any single customer that purchases its
products. However, sales to three major customers comprise 22%, 15% and 13%,
respectively of consolidated sales for the year ended December 31, 1999. Sales
to two major customers comprised 23% and 22%, respectively, of consolidated
sales for the year ended December 31, 1998.
NOTE 20: 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 $620,017
or 43% of the outstanding accounts receivable related to one customer. 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.
<PAGE>
F-21
NOTE 21: IMPACT OF THE YEAR 2000
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, Cycomm completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
the Company experienced no significant disruptions in critical information
technology and non-information technology systems and believes those systems
successfully responded to the Year 2000 date change. Cycomm is not aware of any
material problems resulting from Year 2000 issues, either with its products,
its internal systems, or the products and services of third parties. The
Company will continue to monitor its critical computer applications and those of
its suppliers and vendors throughout the year 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly.
NOTE 22: SUBSEQUENT EVENTS
In January 2000, Cycomm raised capital through 3 separate private equity
placements of its common stock. The stock was issued at the market price at the
date of the letter of intent, which was a discount to the market price on the
date of the issuance. In total, the Company issued 6,112,000 shares of common
stock for gross proceeds of $3,126,000. Cash proceeds, after commissions and
issue costs were $3,026,000. In conjunction with these private placements, the
Company issued 5,000,000 warrants with a fair value on the date of issuance of
approximately $8,736,500.
On March 31, 2000, Cycomm entered into an agreement with the holders of the
$3,000,000 7% convertible debentures under which the debentures were sold to a
third party, who was assigned all rights privileges and obligations of the
original holders. Concurrent with the sale, Cycomm entered into an agreement
with the new holders under which the debentures were converted into preferred
stock of the Company. The debentures were converted into 30 shares of Series E
convertible redeemable preferred stock ("Series E preferred stock") with a
conversion value of $100,000 per share. The Series E preferred stock is
convertible at any time at the option of the holder. The conversion price is
equal to the average closing bid price of the Company's stock for the 20 days
prior to the date of conversion. The Series E preferred stock cannot be
converted for less than $2.00 per share. The Series E preferred stock accrues
dividends at 7% per annum, which can be paid in cash or in common stock at the
option of the Company. The Series E preferred stock is redeemable at the
option of the Company at a price equal to conversion price on the date of
redemption. The Series E preferred stock has no mandatory redemption
provisions. The debentures have been classified as long term in the
accompanying financial statements as a result of this transaction.
On March 30, 2000, Stephen Sparks converted his $500,000 7% convertible
debenture into common stock of the Company. At the time of conversion, the
debenture had earned accrued interest of $17,452. The principal and accrued
interest were converted into 1,034,904 shares of common stock. The debentures
have been classified as long term in the accompanying financial statements as a
result of this transaction.
For the three months ended March 31, 2000, Cycomm recognized revenue of $114,391
that was previously deferred. Cycomm completed shipments of Pentium units to
ustomers in exchange for units with 586 processors. On April 3, 2000, Cycomm
reached an agreement with the remaining customer eligible for the 586 for
Pentium swap-out. Under this agreement, the customer agreed to forego the right
to swap 586 units for Pentiums in exchange for the forgiveness of an obligation
and an extension of the warranty period. As of April 3, 2000, the Company has
no future obligations related to the 586 for Pentium swap-out.
On January 21, 2000, Cycomm cancelled 205,717 shares of its common stock that
had been issued in settlement of a vendor obligation of $77,144, and issued
400,000 shares in full settlement of an obligation of $161,223.
Subsequent to December 31, 1999, 5 shares of Series C preferred stock were
converted by the holders. On January 24, 2000, 2 shares of Series C preferred
stock and related accrued dividends were converted into 171,573 shares of common
stock. On March 7, 2000 3 shares of Series C preferred stock and related
accrued dividends were converted into 260,186 shares of common stock.
robh/1998folders/123199 audit/12-31-99 financial statements
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 22,867
<SECURITIES> 0
<RECEIVABLES> 1,200,771
<ALLOWANCES> 254,000
<INVENTORY> 844,057
<CURRENT-ASSETS> 2,644,589
<PP&E> 557,375
<DEPRECIATION> 287,595
<TOTAL-ASSETS> 2,945,017
<CURRENT-LIABILITIES> 5,530,793
<BONDS> 0
296,250
0
<COMMON> 54,315,402
<OTHER-SE> (60,511)
<TOTAL-LIABILITY-AND-EQUITY> 2,945,017
<SALES> 3,263,178
<TOTAL-REVENUES> 3,263,178
<CGS> 3,012,410
<TOTAL-COSTS> 5,325,866
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 456,651
<INCOME-PRETAX> 9,012,481
<INCOME-TAX> 0
<INCOME-CONTINUING> 6,241,703
<DISCONTINUED> 2,870,778
<EXTRAORDINARY> 0
<CHANGES> 100,000
<NET-INCOME> (9,112,481)
<EPS-BASIC> (.67)
<EPS-DILUTED> (.67)
</TABLE>
