10-Q 1 f10q63002.txt FORM 10-Q Page 1 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-QSB ----------- (Mark One) __X__ Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2002 ____ Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period from ______________ to _______________ Commission file number: 1-11686 CYCOMM INTERNATIONAL INC. (Exact name of small business issuer as specified in its charter) Wyoming 54-1779046 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 1420 Springhill Road, Suite 420 McLean, Virginia 22102 (Address of principal executive offices) (703) 903-9548 (Registrant's telephone number, including area code) Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ___ APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes___ No___ APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of August 14, 2002, the Registrant had 79,994,406 shares of Common Stock outstanding. Transitional Small Business Disclosure Format: Yes No X -- ---- Page 2 CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES TABLE OF CONTENTS Page No. PART I - Financial Information Item 1. Financial Statements Consolidated Balance Sheets........................... 3 Consolidated Statements of Operations................. 4 Consolidated Statements of Cash Flows................. 5 Consolidated Statement of Stockholders' Equity........ 6 Notes to Consolidated Financial Statements............ 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation.............................. 14 PART II - Other Information Item 1. Legal Proceedings..................................... 17 Item 2. Changes in Securities................................. 17 Item 3. Default Upon Senior Securities........................ 18 Item 4. Submission of Matters to a Vote of Security Holders... 18 Item 5. Other Information..................................... 18 Item 6. Exhibits and Reports on Form 8-K...................... 18 Signatures ...................................................... 19 Page 3

CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES ~~CONDENSED~~ CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, ~~2001~~2002 AND DECEMBER 31, ~~2000~~2001 June 30, December 31, 2002 2001 ~~2000~~ ASSETS (Unaudited) Current assets: Cash and cash equivalents $~~176~~457,~~641~~351 $~~301~~80,~~110~~804 Accounts receivable, less allowance for doubtful accounts of $~~70,000 and $~~50,000, ~~respectively 343~~205,~~581~~036 ~~522~~510,~~119~~048 Inventories, net of allowance for obsolete inventory of $~~152~~220,000 and $~~127~~201,~~000~~460, respectively 1525,~~300,428~~659 1489,~~607,059~~236 ~~Deposits~~Deferred ~~with~~financing ~~suppliers~~costs 142,777 --- ~~283,449~~ Foreign taxes receivable ~~230~~114,~~207~~932 96141,~~948~~413 Prepaid expenses 441,~~931~~891 7830,~~192~~562 ~~Other current assets 6,265 14,520~~ --------- ----------- Total current assets 21,~~102~~447,~~053~~646 21,~~903~~252,~~397~~063 ~~Fixed assets~~Equipment, net ~~205~~25,~~543~~909 ~~227~~177,~~728~~977 ---------- ---------- Total assets $21,~~307~~473,~~596~~555 $31,~~131~~430,~~125~~040 ========== ========== LIABILITIES AND STOCKHOLDERS' ~~EQUITY~~DEFICIT Current liabilities: Accounts payable - trade $1636,~~037,743~~768 $950,955 Convertible debentures 1,~~396~~052,~~182~~992 ~~Accrued~~--- ~~liabilities~~Discount 1on convertible debentures (961,~~104~~200) --- -------- -------- Convertible debentures,~~918~~ 1net of discount 91,~~296~~792 --- Warranty reserve 600,~~382~~478 ~~Acquisition~~602,479 ~~earn~~Accrued exit cost obligations 700,623 -~~out~~-- ~~obligation~~Other ~~300~~accrued liabilities 398,~~000~~188 ~~300~~644,~~000~~990 Dividends payable on preferred stock 3343,425 2838,466 Current portion of capital lease obligations 98,~~583~~647 89,~~718~~626 Revolving credit facility ~~426~~210,~~912~~438 ~~675~~405,~~520~~701 --------- --------- Total current liabilities 2,~~912~~690,~~581~~359 32,~~705~~652,~~268~~217 Capital lease obligations, less current portion 2311,~~129~~595 2514,~~127~~488 Commitments and contingencies Stockholders' ~~equity~~deficit: Convertible ~~Preferred~~preferred ~~Stock~~stock, $50,000 par value, unlimited authorized shares, 42 ~~and 11~~ shares issued and outstanding at June 30, ~~2001~~2002 and December 31, ~~2000~~2001, respectively ~~207~~105,~~682~~000 ~~560~~105,~~500~~000 Common ~~Stock~~stock, no par value, unlimited authorized shares, 4782,~~070~~205,~~119~~614 and 3456,~~145~~323,~~982~~871 shares issued, and 4377,~~070~~205,~~119~~614 and 3056,~~145~~323,~~982~~871 shares outstanding at June 30, ~~2001~~2002 and December 31, ~~2000~~2001, respectively 6671,~~238~~169,~~598~~457 ~~63,653,477 Notes receivable - stockholders (~~68,~~570) (66~~214,~~714)~~258 Accumulated deficit (6772,~~005~~502,~~824~~856) (6469,~~746~~555,~~533~~923) ----------- ----------- Total stockholders' ~~equity~~deficit (~~628~~1,~~114~~228,399) (~~599~~1,~~270~~236,665) ----------- ----------- Total liabilities and stockholders' deficit $21,~~307~~473,~~596~~555 $31,~~131~~430,~~125~~040 =========== ===========

See accompanying notes to consolidated financial statements Page 4

CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES ~~CONDENSED~~ CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE PERIODS ENDED JUNE 30, ~~2001~~2002 AND JUNE 30, ~~2000~~2001 (UNAUDITED) Three Months Ended Six Months Ended ~~Ended~~ June 30, June 30, June 30, June 30, 2002 2001 ~~2000~~2002 2001 ~~2000 ----- ----- ----- ----~~ Sales $397,691 $576,943 $1969,~~415,746~~624 $1,877,473 ~~$2,712,994~~ Cost of sales 298,760 683,595 ~~866~~769,~~902~~805 1,715,866 ~~1,971,646~~ -------- -------- --------- --------- Gross profit (loss) 98,931 (106,652) ~~548~~199,~~844~~819 161,607 ~~741,348~~ Expenses Selling, general and administrative 742,642 805,761 ~~947~~1,~~453~~625,805 1,951,358 1Exit costs 998,~~766~~874 --- 998,~~185~~874 --- Research and product development 133,397 196,873 ~~180~~377,~~780~~699 440,010 ~~374,642~~ Depreciation and amortization 10,578 18,998 1124,~~856~~866 38,325 ~~32,716~~ --------- --------- --------- --------- 1,885,491 1,021,632 13,~~140~~027,~~089~~244 2,429,693 ~~2,173,543~~ --------- --------- --------- --------- Loss from Operations (1,786,560)(1,128,284) (~~591~~2,~~245~~827,425) (2,268,086) ~~(1,432,195)~~ Other ~~Income~~ (Expense) Income Interest income 307 1,890 ~~10,985~~550 6,345 ~~30,045~~ Interest expense (74,477) (86,428) (94114,~~771~~485) (212,331) Other (~~208,542~~expense) ~~Other~~ income (939) 69,742 ~~4,585~~(614) 219,792 ~~4,585~~ ------- ------- -------- -------- (75,109) (14,796) (79114,~~201~~549) 13,806 ~~(173,912)~~ ------- ------- -------- -------- ~~Loss~~Net ~~from~~loss ~~continuing operations $~~(1,861,669)(1,143,080) $(~~670~~2,~~446~~941,974) $(2,254,280) ~~$(1,606,107)~~ =========== ========== =========== =========== ~~Discontinued~~Beneficial ~~operations:~~return ~~Gain~~ on ~~dissolution~~preferred ofshares ~~discontinued~~--- ~~operation: Cycomm Secure Solutions, Inc.~~ --- ~~1,119,273~~ --- 1(162,~~119,273~~500) ---------- -- ------- ---- ------ ---- ----- ~~Net income (loss) (1,143,080) 448,827 (2,254,280) (486,834) ========== ========= ========== ========= Beneficial return on preferred shares~~ --- --- ~~(162,500) ---~~ Net ~~income (~~loss) attributable to common stockholders $(1,861,669)$(1,143,080) $~~448~~(2,~~827~~ 941,974)$(2,416,780) ~~$(486,834)~~ =========== =~~=======~~ =========== ========= Earnings Per Share: Basic Loss per share from continuing operations $(0.03) ($0.03) ($0.06) ($0.07) Income per share on dissolution of discontinued operation: Cycomm Secure Solutions, Inc. --- $0.04 --- $0.05 Net loss per share attributable to beneficial return on preferred shares --- --- $0.00 --- ------ ----- ------ ------ Net income (loss) per share attributable to common shareholders $(0.03) $0.02 $(0.06) $(0.02) =~~=====~~ ===== ====== ~~======~~Loss ~~Earnings~~ Per Share: ~~Diluted~~ Loss per share ~~from continuing operations~~ $(0.03) ($(0.0203) ($0.0604) ($0.0706) ~~Income per share on dissolution of discontinued operation: Cycomm Secure Solutions, Inc. --- $0.03 --- $0.05~~ Net loss per share attributable to beneficial return on preferred shares --- --- --- $0.00 --- ---- -- ----- ------- ------- Net ~~income (~~loss) per share attributable to common shareholders $(0.03) $(0.0103) $(0.0604) $(0.0206) ======= ======= ======= ======= ~~Shares~~Weighted ~~used~~average innumber ~~computing~~of ~~earnings~~common ~~per~~shares ~~share:~~outstanding ~~Basic 41~~74,~~637~~427,~~890~~322 ~~25,876,013 38,614,315 23,807,869 ========== ========== ========== ========== Diluted~~ 41,~~637~~624,~~890~~962 3368,~~960~~382,~~963~~508 38,~~614~~607,~~315~~815 ~~23,807,869~~ ========== ========== ========== ==========

See accompanying notes to consolidated financial statements. Page 5

CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES ~~CONDENSED~~ CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE PERIODS ENDED JUNE 30, ~~2001~~2002 AND JUNE 30, ~~2000~~2001 (Unaudited) Six Months Ended June 30, June 30, 2002 2001 ~~2000 ----- ----~~ Operating activities Net loss from continuing operations $(2,~~254~~941,~~280~~974) $(12,~~606~~254,~~107~~280) Adjustments to reconcile net loss to net cash provided by operating activities: Non-cash exit costs 813,475 --- Loss on disposal of fixed assets 130,214 --- Amortization of discount on 43,776 --- convertible debentures Depreciation and amortization 3824,~~825~~866 5538,~~120~~325 Change in operating assets and liabilities ~~196,872~~ (1251,~~675,084~~101) 197,372 ---------- ---------- Cash used in operating activities (2,~~018~~180,~~583~~744) (32,~~226~~018,~~071~~583) ---------- ---------- Investing activities Acquisition of fixed assets (133,~~621~~012) (2213,~~235~~621) ------- ------- Cash used in investing activities (133,~~621~~012) (2213,~~235~~621) ------- ------- Financing activities Issuance of common stock 1,~~548~~857,~~995~~500 41,~~140~~548,~~000~~995 Issuance of preferred stock --- 611,500 ~~---~~Borrowings ~~Exercise~~under ofconvertible ~~stock~~debentures ~~options~~901,938 --- ~~74,999~~ Net repayments under revolving credit facility (~~248~~195,~~608~~263) (~~362~~248,~~117~~608) Repayment of obligations under capital leases (43,~~152~~872) (14,~~130~~152) --------- --------- Cash provided by financing activities 2,560,303 1,907,735 ~~3,851,752~~ --------- --------- Increase (~~Decrease~~decrease) ~~increase~~ in cash and cash equivalents during the period 376,547 (124,469) ~~603,446~~ Cash and cash equivalents, beginning of period 80,804 301,110 ~~22,867~~ -------- -------- Cash and cash equivalents, end of period $~~176~~457,~~641~~351 $~~626~~176,~~313~~641 ======== ======== Supplemental cash flow information: Interest paid $~~108~~52,~~088~~238 $ ~~264~~108,~~573~~088 Income taxes paid $ --- $ --- Non-cash investing and financing activities: Conversion of ~~convertible~~preferred ~~debentures~~stock to common stock --- $~~517~~1,~~452~~019,308 ~~Conversion~~Issuance of ~~preferred~~common stock toin ~~common~~settlement ~~stock~~of ~~$1,019,308~~interest due --- $2 52,~~226,098~~500 ~~Conversion~~Issuance of ~~convertible~~common ~~debentures~~stock toin ~~preferred~~settlement ~~stock~~of ~~---~~lawsuit $3100,000~~,000~~ --- Issuance of common stock in ~~settlement~~payment of ~~interest~~legal fees due $ 521,~~500~~000 ---

See accompanying notes to consolidated financial statements Page 6

CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' ~~EQUITY~~DEFICIT FOR THE UNAUDITED PERIOD ENDED JUNE 30, ~~2001~~2002 AND THE YEAR ENDED DECEMBER 31, ~~2000~~2002 ~~Preferred~~Notes ~~Preferred~~PreferredPreferred Common Common Receivable Accumulated Shares Stock Shares Stock Stockholders Deficit Total Balance, December 31, ~~1999~~2000 711 $~~296~~560,~~250~~500 1630,~~807~~145,~~696~~982 $5463,~~315~~653,~~402~~ 477$(6066,~~644~~714)$(64,~~958~~746,533) $(599,270) ==== ======== ========== =========== ======= =========== ======== Net Loss --- --- --- --- --- (4,~~023~~799,~~822~~724) (4,799,724) Issuance of common stock: Sale of common stock --- --- 917,~~400~~752,~~000~~185 52,~~290~~999,~~000~~721 --- --- 2,999,721 Shares issued in ~~settlement~~settle- ment of ~~vendor~~interest ~~obligation~~due --- --- ~~194~~300,~~283~~000 8452,~~012~~500 --- --- 52,500 Shares issued in ~~settlement~~settle- ment of obligation of ~~acquisition~~acquisi- tion earn-out --- --- ~~400~~1,700,000 ~~200~~413,000 --- ~~Conversion of debenture into common stock~~ --- ~~--- 1~~413,~~034,904~~000 ~~517,452 ---~~ Exercise of stock options ~~and warrants~~ --- --- ~~345~~500,~~833~~000 745,~~999~~000 --- --- 5,000 Issuance of preferred stock: ~~Conversion~~Issuance of- ~~debentures into~~ Series EF preferred stock 3013 3611,~~000,000~~500 --- --- --- ~~Issuance~~ - ~~Series F preferred stock 9 353,000~~ --- ~~---~~611,500 ~~---~~ Conversion of preferred stock (3522) (31,~~206~~229,~~250~~500) 15,~~963~~925,~~266~~704 31,~~289~~253,~~112~~060 --- --- 23,560 Beneficial conversion rights on preferred stock --- ~~117~~162,500 --- (~~117~~162,500) --- --- --- Write-off of notes receivable - stockholders and related interest receivable --- --- --- --- 66,714 --- 66,714 Dividends on preferred stock --- --- --- --- --- (779,~~753~~666) (9,666) ---- ------- --------- --------- ------ ------------ ------------ Balance, December 31, ~~2000~~2001 112 $~~560~~105,~~500~~000 3056,~~145~~323,~~982~~871$68,214,258 --- $63(69,~~653~~555,~~477~~923) $(641,~~746~~236,~~533~~665) ==== ======= ========== ========== ====== ===== ======= =========== Page 7 Net Loss --- --- --- --- --- (2,~~254~~941,~~280~~974) (2,941,974) Issuance of common stock: Sale of common stock --- --- 719,~~298~~829,~~739~~111 1,~~548~~858,~~995~~500 --- --- 1,858,500 Shares issued in ~~settlement~~settle- ment of ~~interest~~lawsuit ~~due~~ --- --- ~~300~~1,~~000~~052,632 52100,~~500~~000 --- ~~Issuance~~--- of100,000 ~~preferred~~Shares ~~stock:~~held ~~Issuance~~in -escrow ~~Series~~underlying Fconvertible ~~preferred~~deben- ~~stock~~tures 13--- ~~611~~--- 5,~~500~~000,000 --- --- --- ~~Conversion~~--- ofBeneficial ~~preferred~~conversion ~~stock~~rights ~~(20)~~convertible ~~(876,818)~~deben- 5ture --- --- --- 652,~~325,398~~829 ~~896~~--- --- 652,~~126~~829 ~~Beneficial~~Warrants ~~conversion~~issued ~~rights~~with onconvertible ~~preferred~~deben- ~~stock~~ture --- ~~(87,500)~~--- --- 87343,~~500~~870 --- --- 343,870 Dividends on preferred stock --- --- --- --- --- (24,~~466~~959) (4,959) ---- -------- ---------- ---------- ---- ----------- ---------- Balance, ~~June~~March ~~30,~~31 ~~2001~~2002 42 $~~207~~105,~~682~~000 4382,~~070~~205,~~119~~614$71,169,457 --- $66(72,~~238~~502,~~598~~856) $(671,~~005~~228,~~824~~399) ===== ======== ========== ========== ==== ============ ===========

See accompanying notes to condensed consolidated financial statements. Page 8 CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2002 NOTE 1: GENERAL The financial information presented as of any other date than December 31 has been prepared from the books and records without audit. Financial information as of December 31 has been derived from the audited financial statements of Cycomm International Inc. and its subsidiaries ("Cycomm"), but does not include all the disclosures required by generally accepted accounting principles. In the opinion of management, the accompanying unaudited financial statements contain all adjustments, consisting of only normal recurring adjustments necessary to present fairly Cycomm's financial position as of June 30, 2002, and the results of its operations and cash flows for the periods ended June 30, 2002 and 2001. The results of operations are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. These unaudited consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in Cycomm's Annual Report on Form 10-KSB for the year ended December 31, 2001. Our Annual Report on Form 10-KSB was 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. We incurred a net loss from continuing operations of $4.8 million for the year ended December 31, 2001 and as of that date had a working capital deficit of approximately $1.4 million and an accumulated deficit of $69.6 million. Further, we were not in compliance with the terms of our debt agreements at December 31, 2001. In the three months ended June 30, 2002, we incurred a net loss of approximately $1.9 million, had a working capital deficit of approximately $1.2 million, and an accumulated deficit of $72.5 million. These factors raise substantial doubt about Cycomm's ability to continue as a going concern. Management has taken several steps towards addressing the going concern issue. We hired a new president, who also serves as Cycomm's Chief Operating Officer, to restructure the company and lower our operating costs. We have reduced headcount from 75 employees to 18 employees, eliminating redundant positions, consolidating administrative functions, and combining our manufacturing and repair personnel. Additionally, we closed our Montreal facility. We are exploring further cost savings initiatives, and plan to outsource tasks that can be handled more efficiently by third parties. We have begun to sell to markets outside of the public safety industry, and plan to aggressively pursue the field service, utilities and industrial markets. We are also developing new products to further expand and diversify our current product line. Cycomm intends to fund its operations through working capital, borrowings on our secured line of credit, private equity placements and borrowings under convertible debentures. Historically, Cycomm has been able to raise capital through private equity placements and debenture issuances. During 2001, we raised $3,611,211 in private equity placements. In the six months ended June 30, 2002, Cycomm raised $1,857,500 in private equity placements (See Note 6: Capital Stock for further detail) and $901,938 under convertible debentures (See Note 5: Convertible Debentures for further detail). These interim financial statements do not give effect to any adjustments which would be necessary should Cycomm 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 Page 9 reflected in the accompanying consolidated financial statements. In the event that Cycomm is unable to achieve its plans to fund operations, Cycomm will consider further cost reductions and may be required to seek protection under the United States Bankruptcy Code. NOTE 2: RESTRUCTURING In April 2002, Cycomm began to take major steps to reduce costs. Cycomm's organization had been built to support production levels much higher than it had achieved historically. Management made the decision to close Cycomm's Canadian facility, and to transfer all manufacturing operations to its Florida facility. Cycomm is continuing to manufacture its existing product line of rugged, mobile computers. On April 9, 2002, Cycomm reduced its staff from approximately 75 employees to approximately 45 employees. On June 28, 2002, Cycomm further reduced its staff to 18 employees. The terminated personnel included 28 general and administrative employees, 19 research and development employees, 7 production employees, 2 repair and maintenance employees and 1 salesperson. The total value of employee severance packages was $511,737. In the six months ended June 30, 2002, Cycomm paid $166,946 in severance. Cycomm has accrued $344,791 for severance obligations as of June 30, 2002, which is included in accrued exit cost obligations. The severance packages included $111,761 in payroll and vacation benefits that had been previously accrued, therefore severance expense of $399,976 was incurred in the three months ended June 30, 2002 and is included in exit cost expenses. Cycomm agreed to pay employee severance over a period of time, as specified in each individual severance agreement. Subsequent to June 30, 2002, Cycomm has made one scheduled severance payment. As of August 14, 2002, the outstanding employee severance obligation is $287,038. On June 28, 2002, Cycomm closed its Canadian facility. The lease for the Canadian facility does not expire until March 31, 2008. The present value of future lease payments due under the Canadian facility lease is $751,060. Management has estimated the present value of income from subleasing the Canadian facility as approximately $395,228, therefore Cycomm recorded $355,832 at June 30, 2002 as an accrued exit obligation related to the termination of the Canadian facility lease, and recognized this amount as exit costs in the three months ended June 30, 2002. In connection with the closing of the Canadian facility, Cycomm made the decision to abandon certain fixed assets, and accordingly, Cycomm has written off fixed assets with a book value of $130,214. This write-off is included in exit costs in the three months ended June 30, 2002. Management also determined that the closing of the Canadian facility could prevent Cycomm from collecting the full amount of foreign taxes receivable from the Canadian government related to tax credits for research and development. Cycomm has recorded a reserve of $112,852 against foreign taxes receivable, and has recognized this amount as exit costs in the three months ended June 30, 2002. In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144 (FAS 144), "Accounting for the Impairment or Disposal of Long-Lived Assets", which addresses financial accounting and Page 10 reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations", for a disposal of a segment of a business. The Company adopted FAS 144 as of January 1, 2002. This guidance was followed in recognizing the impact of closing the Canadian facility. In June 2002, the FASB issued Statement No. 146 (FAS 146), "Accounting for Costs Associated with Exit or Disposal Activities." FAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs in a Restructuring)." FAS 146 specifies that a liability for a cost associated with an exit or disposal activity is incurred when the definition of a liability in Concepts Statement 6, "Elements of Financial Statements", is met. The provisions of FAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The Company has implemented FAS 146 in June 2002 related to the closure of the Canadian facility. NOTE 3: INVENTORIES The following is a summary of inventories at June 30, 2002 and December 31, 2001:

June 30, December 31, 2002 2001 ~~2000~~ ----- ---- Raw materials $1544,~~071,665~~319 $1645,~~376,206~~286 Work in process and sub-assemblies ~~378~~20,~~841~~068 ~~133~~35,~~106~~966 Finished goods 2181,~~043~~272 ~~224~~9,~~974~~444 Allowance for obsolete inventory (~~152~~220,~~121~~000) (~~127~~201,~~227~~460) --------- --------- $1525,~~300,428~~659 $1489,~~607,059 ========== ==========~~236

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. NOTE 4: REVOLVING CREDIT FACILITY On February 28, 2002, Cycomm renewed and amended its revolving credit facility to allow the Company to borrow and repay amounts up to a maximum of $1,000,000. As part of the renewal, the interest rate on the revolving credit facility was increased to prime plus 4%. Prior to February 28, 2002, Cycomm was able to borrow and repay amounts up to a maximum of $2,000,000, and was paying an interest rate of prime plus 3%. Cycomm restructured the terms of its revolving credit facility in order to lower the minimum loan balance on which the Company was paying interest. Prior to February 28, 2002, Cycomm was paying interest on a minimum loan balance of $1,050,000. Under the new terms of the revolving credit facility, Cycomm is paying interest on a minimum loan balance of $550,000. Page 11 The credit facility is collateralized by the trade accounts receivable, inventory and other assets of Cycomm Mobile Solutions. The amounts outstanding on the credit facility were $210,438 and $405,701 as of June 30, 2002 and December 31, 2001, respectively. As of June 30, 2002, Cycomm was in compliance with the terms of the credit facility. As of December 31, 2001, Cycomm 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 $5,019. NOTE 5: CONVERTIBLE DEBENTURES On June 17, 2002, Cycomm issued $1,050,000 of 8% convertible debentures due June 17, 2003 which are convertible at the option of the holders into Cycomm common stock at the lesser of 75% of the average of the three lowest closing prices for the 30 days prior to the date of issuance ($0.04), or 75% of the average of the three lowest closing prices for the 30 days prior to the date of conversion. The debentures are fully eligible for conversion as of June 17, 2002. Interest on the debentures can be paid in either cash or common stock, at Cycomm's option. In the event that the debentures have not been fully converted into common stock at the date of maturity, the debentures can be converted into common stock at Cycomm's option. Cycomm issued 5,000,000 shares of common stock to be available upon conversion of the debentures. The shares of common stock are restricted and are being held in escrow by the collateral agent and holder of the convertible debentures. In connection with the issuance of the debentures, Cycomm issued 13,125,000 warrants to purchase common stock at $0.08 per share. The warrants are immediately exercisable for a period of seven years. Cycomm allocated the proceeds from the offering, less issue costs paid to the investor of $53,301, to the warrants and the debentures based on the relative fair value of each instrument. This resulted in $343,870 recorded as a discount on the convertible debentures for the relative fair value of the warrants. The proceeds allocated to the debentures were compared to the fair value of the common stock into which the debentures are convertible in order to determine the intrinsic value of the beneficial conversion feature. The value of the beneficial conversion feature of $652,829 was recorded as an additional discount on the convertible debentures. The total discount was limited to the proceeds raised, less issue costs paid to the investor of $53,301, and will be amortized as interest expense over the term of the debentures. NOTE 6: CAPITAL STOCK Common Stock On January 8, 2002, Cycomm raised capital through a private equity placement of its common stock. Cycomm issued 1,000,000 shares of common stock for cash proceeds of $135,000. On January 11, 2002, Cycomm raised capital through a private equity placement of its common stock. Cycomm issued 1,500,000 shares of common stock for cash proceeds of $150,000. On January 23, 2002, Cycomm raised capital through a private equity placement of its common stock. Cycomm issued 1,500,000 shares of common stock for gross proceeds of $225,000. Cash proceeds, after commissions and issue costs were $150,000. Page 12 On January 31, 2002, Cycomm raised capital through a private equity placement of its common stock. Cycomm issued 1,428,572 shares of common stock for cash proceeds of $200,000. On February 13, 2002, Cycomm raised capital through a private equity placement of its common stock. Cycomm issued 1,500,000 shares of common stock for gross proceeds of $270,000. Cash proceeds, after commissions and issue costs were $195,000. On March 7, 2002, Cycomm raised capital through a private equity placement of its common stock. Cycomm issued 2,750,000 shares of common stock for cash proceeds of $250,000. On March 15, 2002, Cycomm issued 2,500 shares of common stock in payment of legal services totalling $500. On March 15, 2002, Cycomm issued 50,000 shares of common stock upon the exercise of non-employee stock options for proceeds of $500. On March 26, 2002, Cycomm raised capital through a private equity placement of its common stock. Cycomm issued 1,764,706 shares of common stock for cash proceeds of $150,000. On April 3, 2002, Cycomm issued 1,052,632 shares of common stock in settlement of a lawsuit. The shares were issued in full settlement of a $100,000 obligation. On April 26, 2002, Cycomm raised capital through a private equity placement of its common stock. Cycomm issued 2,333,333 shares of common stock for cash proceeds of $175,000. On May 3, 2002, Cycomm raised capital through a private equity placement of its common stock. Cycomm issued 2,000,000 shares of common stock for cash proceeds of $140,000. On May 14, 2002, Cycomm raised capital through a private equity placement of its common stock. Cycomm issued 2,500,000 shares of common stock for cash proceeds of $200,000. On May 22, 2002, Cycomm raised capital through a private equity placement of its common stock. Cycomm issued 1,500,000 shares of common stock for cash proceeds of $112,500. Page 13 NOTE 7: SEGMENT AND RELATED INFORMATION Cycomm has one reporting segment, which sells wireless rugged computing products and peripherals. Prior to June 28, 2002, we operated a manufacturing facility in Montreal, Canada. On June 28, 2002, we closed this facility and transferred inventory and certain fixed assets to our Melbourne, Florida facility. Fixed assets with a book value of $130,214 were not transferred to Florida, and were written off as of June 30, 2002. Geographic region data on sales and the location of identifiable assets is provided in the tables below.

Quarters Ended Six Months Ended -------------- ---------------- June 30, June 30, June 30, June 30, 2002 2001 ~~2000~~2002 2001 ~~2000~~ ----- ----- ----- ---- Geographic Region Data Sales United States $ 389,173 $ 557,464 $1929,~~400,574~~236 $1,838,805 ~~$2,348,364~~ Canada 8,518 19,479 1540,~~172~~388 38,668 ~~364~~--------- --------- -------- ---------- $ 397,~~630~~691 $ 576,943 $1969,~~415,746~~624 $1,877,473 ~~$2,712,994~~ ========= ========== ========== ========== Loss from Operations United States $ ~~689~~565,~~060~~667 $ 24689,~~601~~060 $1,~~473~~169,~~713~~078 $1,~~000~~473,~~686~~713 Canada 1,220,893 439,224 ~~566~~1,~~644~~658,347 794,373 ~~431,509~~ ---------- ---------- ---------- ---------- $1,786,560 $1,128,284 $ ~~591~~2,~~245~~827,425 $2,268,086 ~~$1,432,195~~========== ========== ========== ========== Identifiable Assets June 30, December 31, 2002 2001 United States $1,473,555 $ 717,048 Canada --- 712,992 ---------- ---------- $1,473,555 $1,430,040 ========== ==========

NOTE 8: SUBSEQUENT EVENTS On July 1, 2002 Cycomm issued 1,000,000 warrants to purchase Cycomm common stock at $0.01 per share in payment of a consulting agreement, and an additional 1,000,000 warrants to purchase Cycomm common stock at $0.01 per share in payment of another consulting agreement. On July 31, 2002, Cycomm issued 288,344 shares of common stock upon conversion of debentures with principal and accrued interest of $7,569. On August 12, 2002, Cycomm issued 500,448 shares of common stock upon conversion of debentures with principal and accrued interest of $13,162. On August 12, 2002, Cycomm issued 2,000,000 shares of common stock to be held in escrow. These shares were issued in anticipation of a proposed future financing. Page 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation. Results of Continuing Operations Three Months Ended June 30, 2002 and June 30, 2001 Revenues for the three months ended June 30, 2002 were $397,691 as compared to revenues of $576,943 for the prior period. The decrease in revenue was primarily the result of delays related to the restructuring of our company. During the three months ended June 30, 2002, we reduced our headcount from 75 employees to 18 employees and closed our Canadian facility. The transition of the manufacturing operations and physical transfers of materials slowed productivity in the three months ended June 30, 2002. Cost of sales for the three months ended June 30, 2002 was $298,760 as compared to cost of sales of $683,595 for the prior period. Gross margins for the three months ended June 30, 2002 were 25% as compared to gross margins of (18%) in the prior period. The improvement in gross margins is a result of lower overhead costs associated with the reduction in headcount. Operating expenses increased to $1,885,491 for the three months ended June 30, 2002 as compared to $1,021,632 in the prior period. Selling, general and administrative expenses decreased to $742,642 from $805,761 in the three months ended June 30, 2001, primarily as a result of headcount reductions. The restructuring of Cycomm's organization caused Cycomm to incur $998,874 in exit costs in the three months ended June 30, 2002. This amount includes $399,976 related to severance charges for terminated employees, $355,832 related to the termination liability for the lease on Cycomm's Canadian facility, a $130,214 write-off of Canadian fixed assets, and a reserve of $112,852 taken against the value of Cycomm's Canadian foreign taxes receivable. Research and development costs decreased to $133,397 as compared to $196,873 in the prior period. The decrease is the result of headcount reductions in the R&D staff. Depreciation and amortization decreased to $10,578 for the three months ended June 30, 2002 as compared to $18,998 in the prior period. The decrease is a result of certain fixed assets reaching the end of their depreciable lives, and the write-off of Canadian fixed assets with a book value of $130,214 included in exit costs in the three months ended June 30, 2002. Interest expense for the three months ended June 30, 2002 was $74,477 as compared to $86,428 for the prior period. The decrease is a result of lower average debt balances during the six months ended June 30, 2002, and a lower amount of interest being paid to vendors, offset by interest on convertible debentures. On June 17, 2002, Cycomm issued debentures convertible into Cycomm common stock with a principal amount of $1,050,000, bearing interest at 8% and maturing on June 17, 2003. The total interest accrued on the principal of the debentures in the three months ended June 30, 2002 was $2,992. The debentures have a beneficial conversion feature, in which they are convertible at a discount to the market price of Cycomm's common stock. This beneficial conversion feature has a value of $652,829, which is amortized over the life of the debenture and recognized as interest expense. Total interest related to the amortization of the beneficial conversion feature in the three months ended June 30, 2002 was $23,252. Additionally, Cycomm issued 13,125,000 warrants to purchase common stock at $0.08 per share to the debenture holders. The relative fair value of these warrants is $343,870, which is amortized over the life of Page 15 the debenture and recognized as interest expense. Total interest related to the amortization of the relative fair value of the warrants in the three months ended June 30, 2002 was $12,247. The portion of deferred loan costs related to financing fees is amortized over the life of the debentures, and recognized as interest expense. Total interest expense related to the amortization of deferred loan costs was $5,285 in the three months ended June 30, 2002. Net loss increased to $1,861,669, or $0.03 per share, for the three months ended June 30, 2002 from $1,143,080, or $0.03 per share for the three months ended June 30, 2001. The increase in net loss is a result of the factors discussed above. Six Months Ended June 30, 2002 and June 30, 2001 Revenues for the six months ended June 30, 2002 were $969,624 as compared to revenues of $1,877,473 for the prior period. The decrease in sales was a primarily the result of the loss of a major customer which accounted for 40% of Cycomm's sales in the six months ended June 30, 2001. Revenue was also affected by delays caused by the restructuring of our company. During the six months ended June 30, 2002, we reduced our headcount from 75 employees to 18 employees and closed our Canadian facility. The transition of the manufacturing operations and physical transfers of materials slowed productivity in the three months ended June 30, 2002. Cost of sales for the six months ended June 30, 2002 was $769,805 as compared to cost of sales of $1,715,866 for the prior period. Gross margins for the six months ended June 30, 2002 were 21% as compared to gross margins of 9% in the prior period. The improvement in gross margins is a result of lower overhead costs associated with the reduction in headcount. Operating expenses increased to $3,027,244 for the six months ended June 30, 2002 as compared to $2,429,693 in the prior period. Selling, general and administrative expenses decreased to $1,625,805 from $1,951,358 in the six months ended June 30, 2001. The decrease is primarily the result of costs related to Cycomm's restructuring efforts. The restructuring of Cycomm's organization caused Cycomm to incur $998,874 in exit costs in the six months ended June 30, 2002. This amount includes $399,976 related to severance charges for terminated employees, $355,832 related to the termination liability for the lease on Cycomm's Canadian facility, a $130,214 write-off of Canadian fixed assets, and a reserve of $112,852 taken against the value of Cycomm's Canadian foreign taxes receivable. Research and development costs decreased to $377,699 as compared to $440,010 in the prior period. The decrease is the result of headcount reductions in the R&D staff. Depreciation and amortization decreased to $24,866 for the six months ended June 30, 2002 as compared to $38,325 in the prior period. The decrease is a result of certain fixed assets reaching the end of their depreciable lives, and the write-off of Canadian fixed assets with a book value of $130,214 included in exit costs in the six months ended June 30, 2002. Interest expense for the three months ended June 30, 2002 was $114,485 as compared to $212,331 for the prior period. The decrease is a result of lower average debt balances during the six months ended June 30, 2002, and a lower amount of interest being paid to vendors, offset by interest on convertible debentures. On June 17, 2002, Cycomm issued debentures convertible into Cycomm common stock with a principal amount of $1,050,000, bearing interest at 8% and maturing on June 17, 2003. The total interest accrued on the principal of the debentures in the six months ended June 30, 2002 was $2,992. The debentures have Page 16 a beneficial conversion feature, in which they are convertible at a discount to the market price of Cycomm's common stock. This beneficial conversion feature has a value of $652,829, which is amortized over the life of the debenture and recognized as interest expense. Total interest related to the amortization of the beneficial conversion feature in the six months ended June 30, 2002 was $23,252. Additionally, Cycomm issued 13,125,000 warrants to purchase common stock at $0.08 per share to the debenture holders. The relative fair value of these warrants is $343,870, which is amortized over the life of the debenture and recognized as interest expense. Total interest related to the amortization of the relative fair value of the warrants in the six months ended June 30, 2002 was $12,247. The portion of deferred loan costs related to financing fees is amortized over the life of the debentures, and recognized as interest expense. Total interest expense related to the amortization of deferred loan costs was $5,285 in the six months ended June 30, 2002. Net loss increased to $2,941,974, or $0.04 per share, for the six months ended June 30, 2002 from $2,254,280, or $0.06 per share for the six months ended June 30, 2001. The increase in net loss is a result of the factors discussed above. Liquidity and Capital Resources Cycomm has satisfied working capital requirements through cash on hand, available lines of credit and various equity related financings. At June 30, 2002, Cycomm had cash and cash equivalents of $457,351. In the six months ended June 30, 2002, cash used in operations amounted to $2,941,974, largely due to Cycomm's net loss of $2,180,744. Accounts receivable decreased by $305,012, but this was offset by an increase in inventory of $36,423, an increase in foreign taxes receivable of $86,371, and a decrease in accounts payable of $314,187. Cash used in investing activities during the six months ended June 30, 2002 totaled $3,012. Cash provided by financing activities was $2,560,303 for the six months ended June 30, 2002. Cycomm completed 11 private placements of common stock for net proceeds of $1,857,500, borrowed funds under convertible debentures totaling $901,938 and decreased the amounts drawn on its bank credit lines in an amount of $195,263 during the six months ended June 30, 2002. Cycomm's net working deficit at June 30, 2002 was ($1,242,713) as compared to ($1,400,154) at December 31, 2001. In the six months ended June 30, 2002, Cycomm's current assets increased by $195,583, and current liabilities decreased by $38,142. Accounts receivable decreased as a result of improved collections and lower sales volumes. Inventories increased in preparation for deliveries to customers in the third quarter of 2002. Accounts payable decreased as Cycomm paid down vendor obligations. The balance of Cycomm's revolving credit facility, which is collateralized by accounts receivable, decreased as a result of the decreases in accounts receivable. Cycomm's auditors modified their report on Cycomm's 2001 Annual Report on Form 10-KSB to include an explanatory paragraph regarding the Company's ability to continue as a going concern. Management has taken several steps towards addressing the going concern issue. We hired a new president, who also serves as Cycomm's Chief Operating Officer, to restructure the company and lower our operating costs. We have reduced headcount from 75 employees to 18 employees, eliminating redundant positions, consolidating administrative functions, and combining our manufacturing and repair personnel. Additionally, we closed our Page 17 Montreal facility. We are exploring further cost savings initiatives, and plan to outsource tasks that can be handled more efficiently by third parties. We have begun to sell to markets outside of the public safety industry, and plan to aggressively pursue the field service, utilities and industrial markets. We are also developing new products to further expand and diversify our current product line. Cycomm intends to fund its operations through working capital, borrowings on our secured line of credit, private equity placements and borrowings under convertible debentures. Historically, Cycomm has been able to raise capital through private equity placements and debenture issuances. During 2001, we raised $3,611,211 in private equity placements. In the six months ended June 30, 2002, Cycomm raised $1,857,500 in private equity placements (See Note 6: Capital Stock for further detail) and $901,938 under convertible debentures (See Note 5: Convertible Debentures for further detail). PART II. OTHER INFORMATION Item 1. Legal Proceedings. On April 5, 2002, Cycomm entered into a settlement agreement with Michael D. Perrine, former president of the Company's Cycomm Mobile Solutions subsidiary. Cycomm had filed a lawsuit against Mr. Perrine alleging breach of contract, unjust enrichment and breach of fiduciary duty. Mr. Perrine filed a lawsuit against Cycomm alleging breach of contract and tortuous interference with existing contract and business relations. Under the terms of the settlement, Cycomm issued 1,052,632 shares of Cycomm common stock with a value of $100,000 to Mr. Perrine, and both parties agreed to dismiss their respective lawsuits. The settlement is reflected in the results of operations for the year ended December 31, 2001. On November 21, 2001, the Telepad Corporation Liquidating Trust (the "Trustee") filed a lawsuit against Cycomm alleging breach of contract, breach of express trust and unjust enrichment. Telepad Corporation ("Telepad") had entered a bid to sell Cycomm products to TRW Systems & Information Technology Group ("TRW") for use in Montgomery County, MD. On March 17, 1999, Telepad filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. On October 8, 1999, Cycomm entered into an agreement with the Trustee which assigned Telepad's bid to Cycomm. In exchange, Cycomm agreed that if the bid was accepted, Cycomm would pay the Trustee 5% of the total value of products sold to TRW. The Telepad bid was never accepted by TRW. Instead, TRW chose to purchase Cycomm's products through a different reseller. Cycomm's maximum exposure in this lawsuit is $115,000. Cycomm intends to defend this case vigorously. Cycomm does not believe that loss of this case is probable, and has not accrued for any potential loss related to this case. Item 2. Changes in Securities. On May 22, 2002 we issued 1,500,000 shares of common stock that are restricted under Regulation D of the Securities Exchange Act of 1934, to New Range Management, for net proceeds of $112,500. Page 18 On June 17, 2002 we issued 5,000,000 shares of common stock that are restricted under Regulation D of the Securities Exchange Act of 1934, to SS Equities. These shares are being held in escrow by SS Equities, as the collateral agent for Cycomm and the holders of Cycomm convertible debentures. On July 31, 2002 we issued 288,344 shares of common stock that are restricted under Regulation D of the Securities Exchange Act of 1934, to Alpha Capital upon the conversion of debentures with principal and accrued interest of $7,569. On August 12, 2002 we issued 500,448 shares of common stock that are restricted under Regulation D of the Securities Exchange Act of 1934, to Stonestreet LP upon the conversion of debentures with principal and accrued interest of $13,162. On August 12, 2002 we issued 2,000,000 shares of common stock that are restricted under Regulation D of the Securities Exchange Act of 1934, to SS Equities. These shares are being held in escrow by SS Equities, as a collateral agent, in anticipation of a proposed financing between Cycomm and a group of investors. Item 3. Default Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: Exhibit 99.1 Officer's Certification (b) Reports on Form 8-K: None Page 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CYCOMM INTERNATIONAL INC. Date: August 19, 2002 /s/ Albert I. Hawk --------------------------------------- Albert I. Hawk Chief Executive Officer Date: August 19, 2002 /s/ Robert M. Hutton ---------------------------------------- Robert M. Hutton Vice President of Finance Page 20 Exhibit 99.1 I, Albert I. Hawk, CEO of Cycomm International Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: (1) the Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2002 (the "Report") fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 19, 2002 /s/ Albert I. Hawk ------------------------------ Albert I. Hawk Chief Executive Officer I, Robert M. Hutton, Principal Accounting Officer of Cycomm International Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: (1) the Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2002 (the "Report") fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 19, 2002 /s/ Robert M. Hutton ------------------------------ Robert M. Hutton Principal Accounting Officer

Identifiable Assets June 30, December 31, 2001 2000 United States $ 861,986 $1,175,833 Canada 1,445,610 1,955,292 =========== ========== $2,307,596 $3,131,125 ========== ==========

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