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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Annual Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1995
Commission File Number 0-13898
MOSCOM CORPORATION
(Exact Name of Registrant as specified in its Charter)
Delaware 16-1192368
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
3750 Monroe Avenue, Pittsford, NY 14534
(Address of principal executive offices)
(716) 381-6000
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act
NONE N/A
(Title of Each Class) (Name of each exchange
on which registered)
Common Stock, $.10 Par Value
(Securities registered pursuant to Section 12 (g) of the Act)
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any Amendment to this Form 10-K.
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 of 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES [XX] NO [__]
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of January 31, 1996 was $46,703,242.
The number of shares of Common Stock, $.10 par value, outstanding on
January 31, 1996 was 6,818,841.
DOCUMENTS INCORPORATED BY REFERENCE
PART I - None
PART II - None
PART III - Item 10 Pages 3, 4, and 6 of the Companys
Proxy Statement for the Annual
Meeting of Shareholders to be held
May 17, 1996.
Under "Election of Directors" and
"Compliance With Section 16 (a)."
Item 11 Pages 5, 6, and 7 of the Companys
Proxy Statement for the Annual
Meeting of Shareholders to be held
May 17, 1996.
Under "Executive Compensation."
Item 12 The table contained on page 2 and
the information under "Election of
Directors" on pages 3 through 6 of
the Companys Proxy Statement for
the Annual Meeting of Shareholders
to be held May 17, 1996.
PART I
Item 1 Business
MOSCOM was incorporated in New York in January 1983 and reincorporated
in Delaware in 1984. MOSCOM has three wholly-owned subsidiaries, MOSCOM
Limited and Global Billing Services, Ltd., formed under the Laws of England
and MOSCOM GmbH, formed under the Laws of Germany. In 1991 MOSCOM acquired
the assets of Votan Corporation, a leader in voice recognition over
telephone circuits. Votan is now a division of MOSCOM Corporation.
MOSCOM Corporation produces telecommunications management systems,
telephone company billing systems, and voice recognition products for users
and providers of telecommunications services in the global market.
MOSCOMs historical core business has been telemanagement products.
MOSCOMs telemanagement line includes call accounting systems, telephone
fraud detection systems, and telecommunications asset management systems.
MOSCOM is the worlds leading producer of customer premises based call
accounting systems which help control telecommunication expenses. Since
its founding in 1983, MOSCOM has sold over 70,000 of these and related
products in over 60 countries. MOSCOMs call accounting systems are sold
under the brand names of telephone system manufacturers including Lucent
Technologies (the telephone equipment spin-off of AT&T), Siemens and
Philips. They are also sold under the MOSCOM name through leading
resellers of telephone systems, including Ameritech, Nortel Communications,
and Sprint-United.
For the central offices of telephone operating companies, MOSCOM
offers products for management of telecommunications data collected at the
carriers operations center. The patented INFO/MDR system enables
telephone companies to capture comprehensive message detail records (MDR)
carried by the telephone network. The MDR can then be organized into
detailed reports that can be used to enhance special services such as
Centrex. Verabill is a rating, billing and customer service system for
small to mid-sized telephone and cellular companies. Global Billing
Services, Ltd., a subsidiary of MOSCOM, operates a billing and support
service bureau for telephone and cable companies in the United Kingdom.
In the voice processing market, MOSCOM produces voice recognition,
speaker verification, voice mail systems and voice processing applications.
MOSCOMs Votan Division is engaged in the development of advanced voice
recognition technology. This technology enables the use of voice commands
(spoken in person or by telephone) to enter or retrieve data and to control
equipment. MOSCOM has also developed voice verification technology which
is used to verify the identity of the speaker. Both technologies have been
applied by MOSCOM in the development of proprietary voice activated
products and are also licensed to value added resellers.
MOSCOMs products are designed for the global market. During the past
year, 30% of MOSCOMs revenues were derived outside the United States.
MOSCOMs headquarters and manufacturing facility is located in
Pittsford, New York. A software development center is maintained near
Syracuse, New York. The Votan Division is based in Pleasanton, California.
European marketing and support are provided through subsidiaries in England
and Germany. Global Billing Services, Ltd. is based in England.
Telemanagement at the Business Location
MOSCOM is the worlds leading producer of telemanagement products
which are used by organizations to optimize the usage of their
telecommunications services and equipment, and to control telephone
expenses. Telemanagement products include call accounting systems,
telephone fraud detection products and facilities management systems.
MOSCOMs initial telemanagement product lines were call accounting
systems which connect via cable to a business telephone system (or PBX) to
collect, store, and process information on every outside telephone call
made.
Call accounting systems give businesses easy access to complete
information on telephone usage including the dialed number, calling
extension, call duration, time of day, destination, trunk line and cost of
each call. All of MOSCOMs call accounting products provide this
fundamental information, in graphical summary and detailed report formats,
without monitoring actual phone conversations.
The primary appeal of call accounting systems is that they save money.
Telephone bills, which typically represent the third largest business
expense after payroll and rent, can be reduced by 10% - 30% through
heightened awareness and management. As a result, the cost of a call
accounting system can generally be recovered in less than one year through
direct expense reduction.
Call accounting systems are purchased and used for many other valuable
reasons as well, including:
* Traffic analysis to determine an optimal number of trunks and best
long distance carrier configuration.
* Allocating telephone expense to specific cost centers or clients based
on actual use.
* Producing revenues by reselling phone services to clients or hotel
guests.
* Detecting fraudulent use of the phone system by hackers and
unauthorized use of company phones for personal calls or 900 numbers.
* Evaluating employee productivity.
MOSCOMs premier call accounting product is the Emerald CAS for
Windows software. Emerald CAS for Windows comes in affordable model sizes
ranging from 25 to 20,000 telephone extensions. A significant feature of
Emerald CAS for Windows not found in predecessor products is the ability to
collect and process data from up to 100 different remote telephone switches
(PBXs) from one central location. MOSCOMs economical Pollable Storage
Unit (PSU) collects data from the remote PBXs and stores it until polled
by a central Emerald CAS for Windows system. Private label versions of
Emerald CAS for Windows are sold by Lucent Technologies (formerly part of
AT&T), Siemens and Philips. Emerald CAS for Windows is designed to be an
international product. It supports worldwide call rating, all world
currencies, date schemes and privacy practices. Most importantly, Emerald
CAS for Windows is available in English, German, Spanish, Italian,
Portuguese, Russian and Czech.
MOSCOM also produces call accounting software products based on the
UNIX operating system. These products are marketed very successfully by
Lucent Technologies as an integrated solution with Lucent Technologies
telephone systems and applications.
During 1995, MOSCOM filled out its call accounting line with an
exciting new product, the Abacus call management system. Abacus is an
economical, self-contained unit about the size of a laptop computer which
includes a full keyboard and large LCD screen. It offers full call
accounting functionality for small to mid-sized customers with up to 400
extensions. Abacus is designed to appeal to dealers due to its easy plug
and play installation, and to users for its simple one key command
interface and intuitive screen instructions. Abacus is also pollable by
Emerald for Windows to enable use by multi-site organizations. The success
of the Abacus design is evident in the decisions of Siemens, Lucent
Technologies, Nortel and other leading PBX sellers to sell the Abacus
product.
PBX fraud detection systems address a problem that is estimated to
exceed $1 billion annually - the theft of telephone service through PBX
hacking. Alert PBX owners use call accounting systems to spot the fraud
and take corrective measures to minimize the loss. MOSCOM offers an
optional HackerTracker module with the Emerald CAS for Windows system to
automate the detection of fraud 24 hours per day and instantly send out
alarms by printed report, audio signal, pager or fax to initiate preventive
measures. The Abacus call management system also provides fraud detection
and notification features to users.
Facilities management systems extend telemanagement to physical
equipment used in providing telephone service - the switches, telephone
sets, modems, cables, and trunks. By tracking the acquisition, location,
warranty and maintenance history of equipment, users can optimize the use
of these assets and minimize their associated costs. MOSCOM will enter
this growing market in 1996 with a new multi-user, client server Windows 95-
based call and facilities management software product with independent
modules operating from a shared database and common user interface.
MOSCOMs facilities management software will include an integrated call
management module with functionality superior to Emerald CAS for Windows.
The market for telemanagement products is a highly fragmented one
supplied primarily by small firms selling directly to end users. What sets
MOSCOM apart and enables MOSCOM to maintain a leading worldwide market
share is our distribution relationships with some of the largest sales and
support organizations in the industry. The strength, breadth and quality
of MOSCOMs distribution network is unsurpassed, including Lucent
Technologies, Ameritech, Nortel Communications, and Sprint-United in the
United States, and Siemens, Philips, and Lucent Technologies in
international markets.
During 1996, MOSCOM is focusing on expanding its call accounting
market share in the United States through Emerald CAS for Windows and the
new Abacus product, reaching new international markets through existing and
new strategic relationships, and launching a new facilities management
system.
TELEPHONE COMPANY PRODUCTS
MOSCOMs expertise at managing telecommunications data at the PBX
location has been a solid foundation for expansion into a much more complex
telecommunications arena--the central office of the telephone company.
Central Office Telemanagement
MOSCOMs INFO family of products capture, at the central office, vital
information in the form of Message Detail Records on every call handled by
that particular central office switch. These raw detail records are then
processed into meaningful formats and distributed to a central telephone
company billing processor or to business subscribers.
The first of such products was MOSCOMs patented INFO/MDR series which
consists of three distinct components:
1. The INFO Monitor connects directly to the central office switch
via the message detail port to capture and store the call records. At the
INFO Monitor site this information can serve as a management and fault
finding tool.
2. INFO Collector aggregates at a single location call records from
different INFO Monitors serving as many as 500 central offices. The
aggregated information is then available to the phone companys billing
system or transferred to a customers INFO Manager.
3. INFO Manager is a customer premises system based on MOSCOMs
Emerald CAS for Windows call accounting system. It allows the customer to
download call records from an INFO Collector or INFO Monitor in real time
or at scheduled times. The customers reports can be summary or detailed,
statistical or graphical and will include a precise calculation of the cost
of each call.
Although MOSCOM envisions a wide variety of valuable applications for
INFO/MDR the first choice of telephone companies has been to use INFO/MDR
to enhance the appeal of Centrex and Virtual Private Network service.
Centrex allows a customer to utilize the telephone companys central office
switch to route calls to individual extensions. In recent years Centrex
service has grown rapidly and continues to gain market share from PBXs.
However, surveys of Centrex users indicated that one of the greatest
weaknesses of Centrex is the unavailability of complete, timely and
accurate call detail information. INFO/MDR gives telephone companies the
ability to provide just the information customers are demanding,
economically and efficiently. Telephone companies are also using INFO/MDR
to provide message accounting for virtual private networks, another rapidly
growing segment of the telecommunications market. Virtual private networks
utilize customized software design to provide private network functionality
over the common carrier public network.
With active competition unfolding in the US local telephone market,
Centrex features, such as call detail reporting, become important service
differenciators. That is evident in the 1996 decision of Teleport, one of
the leading competitive access providers in the US, to make call detail
reports a standard feature of its Centrex service. Teleport uses MOSCOMs
INFO/MDR products to provide this service.
Billing Products and Services
The most significant use of message detail records by a telephone
company is the calculation of service charges and the generation of a bill.
With the opening of telephone service to competition and the introduction
of new wireless services, billing has come to take on an important
marketing function beyond its administrative significance. In a
deregulated environment with competing service providers and technologies,
the ability to target niche market segments and react quickly to market
changes is vital to a telephone companys success. MOSCOMs expertise in
call rating and central office switch output gives MOSCOM a unique vantage
point from which to fill the emerging need for new billing and operations
support capabilities.
MOSCOMs solution for this requirement is the Verabill family of
software for call rating, billing, service order and inventory management.
Windows 95-based Verabill is designed for easy use and rapid modification
to reflect market changes. Verabill Models 1 and 2 provide rating and
billing for traditional telephone, cellular and PCS companies and telephone
service resellers. These models are targeted toward start-up companies
with up to 30,000 subscribers. Later this year, MOSCOM will introduce
Verabill IS, a much more comprehensive billing and operations support
system for service providers with up to 400,000 subscribers. Verabill IS
will be sold primarily through OEM distribution relationships with global
providers of switches, operating software and billing systems. Under the
first such agreement, Verabill IS is being sold worldwide under a six-year
OEM distribution agreement with the French-based multi-national
telecommunications firm, Alcatel.
Global Billing Services, Ltd. ("GBS") is a wholly-owned subsidiary of
MOSCOM in the United Kingdom that offers telephone and cable companies an
outsourcing alternative for billing services. The services offered by GBS
range from simple rating of transaction messages to complete customer care
and customized billing. GBS will appeal to companies that prefer not to
make an investment in licensing software, purchasing hardware and hiring
and training operations and support staffs. GBS allows service providers
to change pricing schemes rapidly and to grow quickly without concern that
their investment in support infrastructure will become obsolete.
The United Kingdom is an ideal market for GBS because the regulatory
environment in that country spawned the first competitive
telecommunications market in the world. That has resulted in market entry
of a sizable number of new service providers and the convergence of
telephone and cable television services. The resultant stiff competition
has mandated a higher degree of service and pricing flexibility by all
market participants. This is a fertile environment for a service bureau
able to provide timely, comprehensive service at a competitive price.
GBS markets its services by means of a direct sales force as well as
through a strategic partnership with Nortel, the largest supplier of
central office switches in the United Kingdom.
Voice Recognition
MOSCOMs Votan Division is a leading developer of speech recognition
and voice verification technology. Speech recognition technology enables a
device to understand a spoken sound as a word or phrase. Voice
verification technology further enables the device to verify the identity
of the speaker of that spoken word or phrase.
Both technologies utilize patented Votan algorithms to create unique
voice prints of the spoken phrase. These are compared to previously
recorded and stored samples or templates. A suitable match to the template
enables understanding of the phrase or verification of the speaker.
MOSCOMs proprietary algorithms, are particularly effective in noisy
environments, whether that noise is the electronic static of a telephone
line or the variable clamor of an airport lobby.
The primary hardware platform for the Votan voice recognition
technology is the Model 2400 series 4-port voice processing board
introduced by MOSCOM in 1994. The Model 2400, available in both telephone
or microphone input models, operates under Microsoft Windows in standard
personal computers. Combined with Votans superior noise immune voice
recognition and verification software, the Model 2400 card is setting
industry standards for accuracy and economy.
MVM for Windows is MOSCOMs voice mail system that is controlled by
voice commands as well as phone key pad tones. MVMs combination of voice
processing and voice recognition technology gives MOSCOM two significant
advantages over traditional voice mail products: (i) it can be entirely
voice controlled and therefore operate without touch tones, and (ii) it
includes voice verification technology to provide superior mail box
security to ensure privacy and to prevent fraud. MOSCOMs target markets
for MVM for Windows are those countries without significant touch tone
usage and proportionately low acceptance of traditional tone-controlled
voice mail products. We believe the availability of a voice controlled
system will make voice mail a sizable industry in those countries, as it
has become in the United States. In North America, MVM for Windows will
appeal to international companies whose overseas employees and customers
may lack local touch tone capability. MVM for Windows is available in
English, Spanish, German and Portuguese. For distribution of MVM for
Windows MOSCOM will target leading sellers of PBX systems starting with
MOSCOMs existing extensive network of call accounting distributors.
The TeleVoice system is a platform for developing interactive
telephone information applications that respond to both phone generated
tones and voice commands. It is a highly flexible system which is easily
adapted to different vertical market industries. Callers to a TeleVoice
application can use spoken words to select recorded product or service
announcements from a menu, transfer to an operator or leave a message.
Siemens markets a customized version of TeleVoice in Germany and Austria
under the name Infovoice. Customized Infovoice systems have been developed
for Siemens customers in a wide variety of vertical markets including
travel agencies, real estate firms, auto dealers, and government transport
agencies.
A vast market in a wide assortment of industries awaits the
application of voice verification to meet commercial security requirements.
The ease with which new users can enroll in the system and its accurate
performance in adverse conditions make MOSCOMs voice verification
technology ideal for this growing market.
Commercial banks, for example, are looking to voice verification to
cut costs by improving teller productivity and by reducing the number of
transactions requiring teller assistance. MOSCOM has conducted field
trials with a bank to use voice verification to identify customers cashing
checks. Voice verification was found to be quicker and more accurate than
a visual check of a signature card and customers preferred voice
verification to computerized fingerprint or signature analysis. Customers
and banks also benefit from home banking. Customers paying bills and
transferring funds from home find the convenience valuable and banks find
their costs reduced. However, the bank must identify the caller to ensure
that only the authorized owner of an account may gain access to it. To be
commercially feasible, this verification must be convenient and must be
accomplished without expensive equipment at every home site. Voice
verification meets both requirements.
Other exciting uses of voice verification technology being evaluated
by MOSCOM, its partners, end user customers and value added resellers
include security for commercial transactions on the Internet, smart card
security, computer database protection, PBX fraud prevention and physical
access security. No other security technology offers these markets the
convenience, portability, ease and affordability of voice verification.
VoiceBuilder for Windows puts the power of the Model 2400 board within
easy reach of application developers. With VoiceBuilder for Windows and a
one-week programmer training class provided by MOSCOM, value added
resellers can create their own customized speech recognition and voice
verification applications.
Marketing and Sales
MOSCOMs marketing and sales personnel are located at its headquarters
in Pittsford, New York as well as in Chicago, New Jersey, Pleasanton,
California and Virginia.
Marketing and sales personnel of MOSCOMs subsidiary, MOSCOM Ltd.,
located in Slough, England, market MOSCOMs products in the United Kingdom.
Sales personnel employed by MOSCOM GmbH in Munich, Germany, market the
Companys products throughout continental Europe.
MOSCOMs marketing and distribution strategy is founded on building
mutually beneficial relationships with companies with large, established
distribution networks for telecommunications and computer products. The
nature of the relationships varies depending on the product and market.
For some, MOSCOM develops and manufactures customized products under a
private label while others purchase and resell MOSCOMs standard products.
MOSCOMs marketing strategy is focused upon telephone switch
manufacturers and sellers and providers of telephone services. A partial
listing of companies using or selling MOSCOM products follows:
PHONE SYSTEM MANUFACTURERS
Alcatel SEL (Germany)
AT&T (USA)
Northern Telecom (US and UK)
Philips (Germany)
Siemens (Germany)
TELEPHONE SERVICE PROVIDERS
Ameritech (USA)
Sprint (USA)
Teleport Communications (USA)
Sales to AT&T and Siemens AG accounted for 52% and 12% respectively of
MOSCOMs 1995 revenue.
New Product Development
MOSCOM is currently pursuing several opportunities to expand its
telemanagement product lines and to offer products for related markets.
Software development costs meeting recoverability tests are
capitalized under Statement of Financial Accounting Standard No. 86
effective January 1, 1986. The cost of software capitalized is amortized
on a product-by-product basis over its estimated economic life, or the
ratio of current revenues to current and anticipated revenues from such
software, whichever provides the greater amortization. The Company
periodically records adjustments to write down certain capitalized costs to
their net realizable value.
Backlog
At December 31, 1995 MOSCOM had a backlog of $2,589,320. Backlog as
of December 31, 1994 was $1,452,458. Backlog is not deemed to be a
material indicator of 1996 revenues.
The Companys policy is to recognize orders only upon receipt of firm
purchase orders.
Competition
The telecommunications management industry is highly competitive and
highly fragmented. The number of domestic suppliers of telemanagement
systems for business users is estimated to exceed 100 companies. The vast
majority of those are regional firms with limited product lines and limited
sales and development resources. Several competitors are established
companies that are able to compete with MOSCOM on a national basis.
There are fewer competitors in the market for telemanagement systems
for regulated telephone companies. However, competition in this market is
expected to increase as the market matures.
A large number of firms have or are developing voice recognition
technology. Success in this market will depend most heavily in technical
performance but also on the ability to apply technology in useful
applications.
Some competing firms have greater name recognition and more financial,
marketing and technological resources than MOSCOM. Competition in the
industry is based on price, product performance, depth of product line and
customer service. MOSCOM believes its products are priced competitively
based upon their performance and functionality. However, MOSCOM does not
strive to be consistently the lowest priced supplier in its markets.
In common with other information industries, the markets into which
the Company sells have recently been characterized by rapid shift toward
the software component of product content and away from the hardware
element. Historically, prices for application software have declined
rapidly in the face of competition. Increased competition for the
Companys Emerald product or softness in demand for its hardware based
products would, if they were to materialize, adversely affect the Companys
volume and profits.
Manufacturing
MOSCOM assembles its products from components purchased from a large
variety of suppliers both domestic and international. Wherever feasible,
the Company secures multiple sources, but in some cases it is not possible.
MOSCOM offers warranty coverage on all products for 90 days or one
year on parts and 90 days on labor. Repair services are offered at the
Pittsford, New York facility, at the U. K. facility in Slough, England, and
by some of the Companys larger customers.
Employees
As of December 31, 1995, MOSCOM employed 181 full-time personnel,
including 26 based in Europe employed by MOSCOMs subsidiaries.
MOSCOMs employees are not represented by any labor unions.
Item 2 Facilities
The Companys principal administrative office and manufacturing
facility is located in a one-story building in Pittsford, New York. MOSCOM
presently leases approximately 51,430 square feet of the building of which
approximately 5,000 square feet is devoted to manufacturing. The initial
term of the lease expires on June 30, 1998.
The Company also leases approximately 3,000 square feet in Pleasanton,
California which houses the Votan division of MOSCOM acquired in September
1991. That lease expires on July 14, 1998.
The Companys subsidiary in the United Kingdom, MOSCOM Limited,
occupies approximately 4,250 square feet in Slough, England pursuant to a
lease which expires on December 31, 1998.
The Companys subsidiary in Germany, MOSCOM GmbH, leases approximately
4,000 square feet in Ismaning, Germany. This lease expires July 31, 1996.
Item 3 Legal Proceedings
The Company is engaged in litigation with a former employee with
respect to termination of employment. The Company believes this action is
unlikely to have a material impact on the Company.
There are no other material pending legal proceedings against the
Company or to which the Company is a party or of which any of its property
is the subject.
Item 4 Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5 Market for the Registrants Common Stock and Related
Stockholder Matters
MOSCOM Corporations Common Stock, $.10 par value, is traded on the
NASDAQ National Market System (symbol: MSCM). The following quotations
are furnished by NASDAQ for the periods indicated. These quotations
reflect inter-dealer quotations that do not include retail markups,
markdowns or commissions and may not represent actual transactions.
COMMON STOCK PRICE RANGE
Quarters Ended
March 31 June 30 September 30 December 31
1995 11 1/4 - 8 1/8 10 5/8 - 8 1/4 9 1/2 - 6 5/8 8 1/4 - 5 3/4
1994 12 3/8 - 7 5/8 12 - 4 1/8 8 3/4 - 4 1/4 9 1/4 - 7
As of December 31, 1995, there were 820 holders of record of the
Companys Common Stock and approximately 3,900 additional beneficial
holders.
MOSCOM initiated a semi-annual cash dividend during 1990. The Company
has paid dividends of $.02 per share during the months of January and July
of each year since 1990.
Item 6 Selected Financial Data
Year Ended December 31,
1995 1994 1993 1992 1991
Sales $17,570,381 $14,260,683 $13,455,810 $12,616,448 $15,815,233
Net Income (Loss) $ 881,950 $ (387,743) $(3,854,641) $ 70,992 $ 2,015,913
Net Income (Loss) $.13 $(.06) $(.59) $.01 $.30
per share
Total Assets $18,014,394 $16,083,483 $16,535,935 $20,360,770 $20,871,495
Long term $ 1,126,786 $ 955,464 $ 798,703 $ 967,244 $ 668,221
obligations
Weighted average 6,909,874 6,707,449 6,589,130 6,654,080 6,697,433
shares outstanding
Cash Dividends paid $.04 $.04 $.04 $.04 $.04
per share
MOSCOM acquired virtually all of the assets of Auditech Communications
in January, 1991 for $296,770 in cash. Auditech, located in Bothell,
Washington, produced the TDR call accounting system, a stand-alone
proprietary, hardware system for businesses and hotels. All operations of
Auditech were moved to MOSCOMs Pittsford, New York facility in 1991.
MOSCOM acquired all assets and certain liabilities of Votan
Corporation, based in Fremont, California, in September of 1991 for
$323,730 in cash. Votan developed and produced voice recognition
technology. Votan is being operated as a division of MOSCOM with its
principal facility remaining in the San Francisco area. Votan products are
manufactured at MOSCOMs facility in Pittsford, New York.
Item 7: Managements Discussion and Analysis of Results of Operations and
Financial Condition
MOSCOM Corporation achieved record sales revenues of $17,570,381 for
the year ended December 31, 1995, an increase of 23% over 1994 sales of
$14,260,683. All major markets participated in the overall sales growth
with domestic sales increasing 20% and sales to international markets
increasing by 30%, primarily through MOSCOM GmbH, the Companys German
subsidiary.
Sales to the Companys traditional telemanagement markets were
especially strong during 1995, further solidifying our position as the
world leader in that market. OEM sales of Emerald CAS for Windows were
strong through AT&T in the US and Philips in Germany. Late in the year
Siemens also began selling Emerald CAS for Windows in Germany.
During the year the Company made significant progress in the
development of markets for our newer products such as Verabill IS, MVM for
Windows and our Voice Verification applications, all of which are expected
to contribute to 1996 revenues.
For the year ended December 31, 1995 the Company realized a gross
margin percentage of 71%. This compares with gross margin percentages of
65% and 63% for the years ended December 31, 1994 and December 31, 1993
respectively. The improved margins result from a combination of three
separate factors.
1. The continued shift in sales mix toward software based products and
services, and away from hardware based products which are characterized by
higher manufacturing costs.
2. This reduction in hardware based products as a percentage of the sales
mix has also allowed the Company to continue a streamlining of its
manufacturing processes begun late last year, resulting in lower overhead
rates and in turn further lowering unit production costs.
3. A decrease in the amortization of capitalized software as a percentage
of total sales revenue. For 1995 amortization expense equaled 9% of sales
revenue, versus 11% during 1994.
Net engineering and software development expenses for 1995 amounted to
$1,716,793, an increase of 5% over 1994 engineering and development costs
of $1,633,902. Gross expenditures for engineering and development
increased from $3,044,466 for the year ended December 31, 1994 to
$3,267,726 for the year ended December 31, 1995, an increase of 7%.
The following table presents a comparison of both net and gross engineering
and development expenses, amounts capitalized and amortized, and the
resulting impact on the Companys operations for the years ended December
31, 1995 and 1994.
1995 1994
Gross expenditures for engineering and $3,267,726 $3,044,466
software development
Less: Costs capitalized 1,550,933 1,410,564
---------- ----------
Net engineering & software development
expense $1,716,793 $1,633,902
Plus: Amounts amortized and charged to
cost of sales 1,207,674 1,136,733
---------- ----------
Total expense recognized for the year $2,924,467 $2,770,635
========== ==========
A significant portion of the 1995 development efforts was geared
toward two major product offerings, both of which are expected to begin
generating revenues by mid 1996. They are Verabill IS, a comprehensive
billing and service system capable of handling up to 400,000
subscribers, and TMS, a total facilities and call management system.
Selling, general, and administrative expenses for 1995 were $9,915,877
as compared to $8,153,042 for 1994. As a percentage of total sales revenue
generated, 1995 selling, general and administrative expense amounted to 56%
of total sales, down from 57% in 1994, and 61% for 1993. The largest
portion of the increased spending was attributable to the Companys
formation of its wholly owned subsidiary, Global Billing Services, Ltd.
located in the United Kingdom, a provider of services to the telephone,
cable, and virtual private network markets in the UK.
In addition, selling and marketing costs were impacted by expenses
related to new releases of MVM for Windows, the voice activated voice mail
system, and Verabill, our billing and operations software product for small
to mid-sized telephone and cellular companies.
Interest earned on investments increased from $61,378 for the year
ended December 31, 1994 to $277,913 for the year ended December 31, 1995.
The increase was attributable to a combination of higher balances available
for investment due to the positive cash flow provided by operations and the
rebound in the bond market from 1994s poor showing.
The net income realized for 1995 of $881,950 or $.13 per share
represents an improvement of $1,269,693 from the net loss of $387,743 or a
loss of $.06 per share realized for 1994.
Except for the historical information contained herein, the matters
discussed in this report are forward-looking statements which involve risks
and uncertainties, including but not limited to economic, competitive,
governmental and technological factors affecting the Companys operations,
markets, products, services and prices, and other factors discussed in the
Companys filings with the Securities and Exchange Commission.
Results of Operations
1994 Compared with 1993
The Companys 1994 sales of $14,260,683 for the year ended December
31, 1994 represented an increase of 6% over the 1993 sales level of
$13,455,810. The increase in sales reflects a strong showing for the
Companys products in the international market place during 1994, with
export sales increasing by 47% over 1993 levels. During 1994 export sales
accounted for 29% of the Companys sales revenues compared with 21% during
1993. Most of the growth in international markets stems from the growth of
MOSCOM GmbH, The Companys German subsidiary, primarily from the sale of
voice products such as TeleVoice and MVM through Siemens A.G. Late in 1994
MOSCOM GmbH was also responsible for signing a six year agreement with
Alcatel SEL for worldwide sales of our Verabill, TeleVoice, Emerald CAS for
Windows and INFO/MDR products, and a three year agreement with Phillips for
the distribution of the Emerald call accounting product. As a result of
our expanded product offerings and these key new distribution agreements,
the Company expects continued sales growth in international markets during
1995.
1994 was a disappointing year for domestic sales, which declined by 5%
from 1993 levels, largely as a result of inventory reductions undertaken by
AT&T. During 1994 MOSCOM established a sales support organization of ten
people working directly in the largest AT&T branches whose sole focus is to
promote and support AT&T sales of MOSCOM produced products. As a result of
the reduced inventory and the efforts of this dedicated support group we
anticipate AT&T sales to increase in 1995.
The 1994 cost of sales percentage of 35% compared favorably with a
cost of sales percentage of 37% for the year ended December 31, 1993. The
lower cost of sales reflected a significant reduction in manufacturing and
overhead costs resulting from lower warranty costs and a streamlining of
operations. These savings were more than enough to offset a 20% increase
in amortization expense recorded, primarily for capitalized software.
Net engineering and development costs of $1,633,902 increased by 7%
over the $1,522,770 realized during 1993. Gross spending before the
effects of software capitalization, however, declined from $3,081,908
during 1993 to $3,044,466.
The following chart illustrates the net effect of the Companys
research and development efforts, including the amounts amortized and
charged to cost of sales, on the Companys 1994 and 1993 operating results.
1994 1993
Gross expenditures for engineering and
software development $3,044,466 $3,081,908
Less: Costs capitalized $1,410,564 $1,559,138
---------- ----------
Net engineering & software development
expense $1,633,902 $1,522,770
Plus: Amounts amortized and charged to
cost of sales 1,136,733 970,083
---------- ----------
Total expense recognized for the year $2,770,635 $2,492,853
========== ==========
Total selling, general and administrative costs incurred during 1994
of $8,153,042 in total, were slightly lower than the 1993 expense level of
$8,183,622. Selling expenses accounted for approximately 59% of the total
expenditures, up from 50% of the total selling, general and administrative
costs incurred during 1993. The higher selling costs reflect the continued
expansion of MOSCOM GmbH in Germany, as well as a significant strengthening
of the Companys support and training capabilities.
Interest income earned on the investment of surplus capital declined
from $278,965 for 1993, to $61,378 for 1994. The lower interest income
generated results from the combination of lower balances under investment,
and the recording of adjustments required on certain bond funds held in the
Companys portfolio reflecting the poor performance of the worldwide bond
markets during 1994.
The Companys net loss for 1994 was $387,743 or $.06 per share. For
1993 the Company incurred a net loss of $3,854,641 or $.59 per share, a
year impacted by the write-off of intangible assets of approximately
$3,650,000 (see note 10 of the financials presented as part of this
document.)
Liquidity and Capital Resources
Total cash and investments at December 31, 1995 total $5,695,149, an
increase of 38% over the cash and investment position of $4,113,346 at
December 31, 1994. The December 31, 1995 working capital ratio of 4.6
compares with working capital ratios of 6.0 and 5.3 for the years ended
December 31, 1994 and 1993 respectively.
Inventories of $1,646,941 at the end of 1995 were 39% lower than the
inventory level of $2,710,228 at the end of 1994, and 46% lower than the
December 31, 1993 inventory level of $3,054,897, reflecting the long term
shift from hardware to software products.
Additions to capital equipment increased significantly in 1995 to
$719,945 as compared to capital additions of $143,128 and $265,267 during
1994 and 1993 respectively. Approximately $200,000 of the spending was
incurred by the Companys foreign subsidiaries, consisting primarily of
equipment upgrades and facility improvements.
Accrued expenses increased from $469,469 at December 31, 1994 to
$918,653 at December 31, 1995 due to deferred revenues generated from
billings to AT&T for services to be performed during 1996.
The Company continues to maintain an unsecured revolving line of
credit arrangement with a commercial bank for a maximum of $3,000,000 at an
interest rate of the lower of the banks prime rate of interest or the
banks offered rate of interest. The Company must pay a loan commitment
fee of 1/4% per annum of the difference between the maximum amount
available under the line less loans outstanding at the end of each quarter.
The line of credit arrangement is subject to certain financial covenants
relating primarily to the Companys current ratio, tangible net worth,
liabilities to tangible net worth and a limit on the amount of dividends
declared or paid each year. The Company has satisfied these financial
covenants as of December 31, 1995 and 1994. This agreement originally was
to expire on January 31, 1996 but has been extended to January 31, 1997.
Item 8 Consolidated Financial Statements and Supplementary Data
Required to be Included Herein as Follows:
Page
INDEPENDENT AUDITORS REPORT 20
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated balance sheets 21 - 22
Consolidated statements of operations 23
Consolidated statements of stockholders equity 24
Consolidated statements of cash flows 25
Notes to consolidated financial statements 26 - 36
Item 9 Disagreements on Accounting and Financial Disclosure
None.
INDEPENDENT AUDITORS REPORT
To the Board of Directors and Stockholders
of MOSCOM Corporation
Pittsford, New York
We have audited the accompanying consolidated balance sheets of MOSCOM
Corporation and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of operations, stockholders equity, and
cash flows for each of the three years in the period ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of MOSCOM Corporation and
subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set
forth therein.
Deloitte & Touche LLP
Rochester, New York
February 7, 1996
MOSCOM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
ASSETS 1995 1994
CURRENT ASSETS:
Cash and cash equivalents (includes
investments of $2,632,286 and $1,775,416) $ 2,727,340 $ 2,152,377
Investments 2,967,809 1,960,969
Accounts receivable, trade (net of
allowance for doubtful accounts of
$71,000 and $105,000) 4,158,378 3,473,667
Inventories (Note 2) 1,646,941 2,710,228
Prepaid expenses and other current assets 132,205 239,002
---------- ----------
Total current assets 11,632,673 10,536,243
---------- ----------
PLANT AND EQUIPMENT (Note 3):
Cost 5,372,451 5,221,322
Less accumulated depreciation 4,174,126 4,268,984
---------- ----------
Plant and equipment, net 1,198,325 952,338
---------- ----------
OTHER ASSETS:
License fees and purchased software
(net of accumulated amortization of
$357,077 and $569,887) 431,148 389,366
Software development costs (net of
accumulated amortization of
$2,417,094 and $1,427,864) (Note 4) 3,239,112 2,895,853
Deposits and other assets (Notes 5 and 8) 1,513,136 1,309,683
--------- ---------
Total other assets 5,183,396 4,594,902
--------- ---------
TOTAL ASSETS
$ 18,014,394 $ 16,083,483
========== ==========
See notes to consolidated financial
statements.
MOSCOM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
LIABILITIES AND STOCKHOLDERS EQUITY 1995 1994
CURRENT LIABILITIES:
Accounts payable $ 615,136 $ 510,145
Accrued compensation and related taxes 1,019,234 778,684
Other accrued expenses 918,653 469,469
---------- ---------
Total current liabilities 2,553,023 1,758,298
PENSION OBLIGATION (Note 5) 1,126,786 955,464
---------- ----------
Total liabilities 3,679,809 2,713,762
---------- ----------
COMMITMENTS (Note 9)
STOCKHOLDERS EQUITY (Note 6):
Common Stock, par value $.10, 20,000,000
shares authorized; issued and outstanding
6,818,654 shares and 6,743,875 shares 681,865 674,388
Additional paid-in capital 15,294,653 14,945,932
Retained deficit (1,650,778) (2,261,852)
Cumulative translation adjustment 8,845 11,253
---------- ----------
Total stockholders equity 14,334,585 13,369,721
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $ 18,014,394 $ 16,083,483
============ ============
MOSCOM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
SALES (Note 7) $ 17,570,381 $ 14,260,683 $ 13,455,810
---------- ---------- ----------
COSTS AND OPERATING EXPENSES:
Cost of sales (Note 4) 5,138,674 4,936,761 4,985,265
Engineering and software
development (Note 4) 1,716,793 1,633,902 1,522,770
Selling, general and
administrative 9,915,877 8,153,042 8,183,622
Other expenses (Note 10) - - 3,650,744
---------- ---------- ----------
Total costs and operating
expenses 16,771,344 14,723,705 18,342,401
---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS 799,037 (463,022) (4,886,591)
INTEREST INCOME 277,913 61,378 278,965
---------- ---------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 1,076,950 (401,644) (4,607,626)
INCOME TAX PROVISION (BENEFIT)
(Note 8) 195,000 (13,901) (752,985)
---------- ----------- -----------
NET INCOME (LOSS) $ 881,950 $ (387,743) $ (3,854,641)
=========== =========== ===========
NET INCOME (LOSS) PER COMMON SHARE $ .13 $ (.06) $ (.59)
=========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 6,909,874 6,707,449 6,589,130
=========== =========== ===========
See notes to consolidated financial
statements.
MOSCOM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Common Stock Additional Retained Cumulative Total
Shares Par Value Paid-in Earnings Translation Stockholders
Capital (Deficit) Adjustment Equity
BALANCE - January 1, 1993 6,540,213 $654,021 $14,400,673 $ 2,380,317 $(31,327) $17,403,684
Exercise of stock options
and warrants 144,276 14,428 432,689 - - 447,117
Stock retirements (3,708) (371) (21,829) - - (22,200)
Foreign currency
translation adjustment - - - - (37,386) (37,386)
Dividends declared on
common stock
($.04 per share) - - (265,633) - - (265,633)
Net loss - - (3,854,641) - - (3,854,641)
--------- ------- ---------- ----------- ------ ----------
BALANCE - December 31, 1993 6,680,781 668,078 14,811,533 (1,739,957) (68,713) 13,670,941
Exercise of stock options
and warrants 88,120 8,812 282,592 - - 291,404
Stock retirements (25,026) (2,502) (148,193) - - (150,695)
Foreign currency
translation adjustment - - - - 79,966 79,966
Dividends declared on
common stock
($.02 per share) - - - (134,152) - (134,152)
Net loss - - - (387,743) - (387,743)
--------- ------- ---------- ----------- ------ ----------
BALANCE - December 31, 1994 6,743,875 674,388 14,945,932 (2,261,852) 11,253 13,369,721
Exercise of stock options
and warrants 86,779 8,677 435,741 - - 444,418
Stock retirements (12,000) (1,200) (87,020) - - (88,220)
Foreign currency
translation adjustment - - - - (2,408) (2,408)
Dividends declared on
common stock
($.04 per share) - - - (270,876) - (270,876)
Net income - - - 881,950 - 881,950
--------- -------- ----------- ------------- -------- -----------
BALANCE - December 31, 1995 6,818,654 $681,865 $15,294,653 $ (1,650,778) $ 8,845 $14,334,585
========= ======== =========== ============= ======== ===========
See notes to consolidated
financial statements.
MOSCOM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
OPERATING ACTIVITIES:
Net income (loss) $ 881,950 $ (387,743) $(3,854,641)
------- --------- ----------
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 1,947,941 1,890,977 1,754,964
Decrease (increase) in deferred income taxes 48,936 (6,674) (462,925)
Other expenses: write-downs of other assets - - 3,095,743
Provision for bad debts (3,811) (23,188) 20,254
Provision for inventory obsolescence 185,250 168,550 234,500
Changes in assets and liabilities:
Investments (1,006,840) 1,395,201 2,982,923
Accounts receivable (680,900) (669,449) 185,554
Inventories 878,037 176,119 (914,710)
Prepaid expenses and other current assets 106,797 142,129 (308,665)
License fees and purchased software (308,091) (224,707) (256,703)
Software development costs (1,550,933) (1,410,564) (1,559,138)
Deposits and other assets (252,389) 15,564 (513,290)
Accounts payable 104,991 2,177 (188,281)
Accrued compensation and related taxes 240,550 110,299 22,326
Other accrued expenses 618,098 (50,126) 496,167
--------- --------- ---------
Net adjustments 327,636 1,516,308 4,588,719
--------- --------- ---------
Net cash provided by
operating activities 1,209,586 1,128,565 734,078
--------- --------- ---------
INVESTING ACTIVITY:
Additions to plant and equipment (719,945) (143,128) (265,267)
--------- --------- ---------
FINANCING ACTIVITIES:
Exercise of stock options and warrants 356,198 140,709 424,917
Payment of dividends on common stock (270,876) (267,768) (262,398)
--------- --------- ---------
Net cash provided (used) by
financing activities 85,322 (127,059) 162,519
------ --------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 574,963 858,378 631,330
CASH AND CASH EQUIVALENTS, BEG. OF YEAR 2,152,377 1,293,999 662,669
--------- --------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR $2,727,340 $2,152,377 $ 1,293,999
========= ========= =========
See notes to consolidated financial
statements.
MOSCOM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts
of MOSCOM Corporation and its wholly-owned subsidiaries, MOSCOM Limited
and Global Billing Services Limited (companies incorporated in England)
and Moscom GmbH (a company incorporated in Germany). All significant
intercompany accounts and transactions have been eliminated. The
Company and its subsidiaries design and manufacture computer products,
software and services for the telecommunications industry.
Substantially all sales and accounts receivable are with domestic and
foreign companies in this industry.
Estimates - 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 consolidated financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
The consolidated financial statements include managements best
estimates of the net realizable value of software development costs.
Accordingly, the Company periodically records adjustments to write down
the carrying value of software development costs to their net
realizable value (see Note 10.) The amounts the Company will
ultimately realize could differ materially from the carrying value of
the software development costs.
Investments - The Companys investments are classified as trading
securities since the Company intends to buy and sell the securities in
the near term with the objective of generating profits on short-term
differences in price. Such securities are reported at fair value in
the consolidated financial statements and any unrealized holding gains
and losses are included in earnings. The change in the unrealized
holding loss included in earnings in 1995 totalled $33,000 of income.
Concentrations of credit risk - Financial instruments which potentially
subject the Company to concentration of credit risk consist principally
of investments and accounts receivable. The Company places its
investments ($5,600,095 and $3,736,385 as of December 31, 1995 and
1994, respectively) with quality financial institutions and, by policy,
limits the amount of credit exposure to any one financial institution.
The Companys customers are not concentrated in any specific geographic
region, but are concentrated in the telecommunications industry. As of
December 31, 1995 and 1994, one specific customer in this industry
accounted for approximately $863,264 and $1,399,000, respectively, of
the total accounts receivable balance. The Company performs ongoing
credit evaluations of its customers financial conditions but does not
require collateral to support customer receivables. The Company
establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends
and other information.
Inventories are stated at the lower of cost (first-in, first-out
method) or market. The Company evaluates the net realizable value of
inventory on hand considering deterioration, obsolescence, replacement
costs and other pertinent factors, and records adjustments as
necessary.
Plant and equipment is recorded at cost and depreciated on a straight-
line basis using the following useful lives:
Computer hardware and software 3-5 years
Machinery and equipment 4-7 years
Furniture and fixtures 5-10 years
Leasehold improvements Term of lease
All maintenance and repair costs are charged to operations as incurred.
License fees are being amortized over the periods expected to be
benefited, not exceeding five years.
Software development costs meeting recoverability tests are
capitalized, and amortized on a product-by-product basis over their
economic life, generally three years, or the ratio of current revenues
to current and anticipated revenues from such software, whichever
provides the greater amortization.
Revenue recognition - The Company recognizes revenue from product sales
upon shipment to the customer. Revenues from maintenance and extended
warranty agreements are recognized ratably over the term of the
agreements. The Company also enters into license agreements for
certain of its products. Revenues from such agreements are recognized
based on the terms of the agreements, generally upon the delivery of
the licensed product.
Income taxes are provided on the income earned in the financial
statements. Deferred income taxes are provided to reflect the impact
of "temporary differences" between the amounts of assets and
liabilities for financial reporting purposes and such amounts as
measured by tax laws and regulations. Tax credits are recognized as a
reduction to income taxes in the year the credits are earned.
Net income (loss) per share is based upon the weighted average number
of common shares outstanding during each year assuming exercise of
dilutive outstanding stock options and warrants under the treasury
stock method.
Consolidated statements of cash flows - The Company considers all
highly liquid investments purchased with a maturity of three months or
less to be cash equivalents.
Stock-Based Compensation - In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Standards No. 123,
Accounting for Stock-Based Compensation, which requires adoption by
the Company in 1996. Pursuant to the new standard, companies are
encouraged, but not required, to adopt the fair value method of
accounting for employee stock-based transactions. Under the fair value
method, compensation cost is measured at the grant date based on the
fair value of the award and is recognized over the service period,
which is usually the vesting period. Companies are also permitted to
continue to account for such transactions under Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, but
would be required to disclose in a note to the consolidated financial
statements pro forma net income and earnings per share as if the
Company had applied the new method of accounting. The Company has not
yet determined if it will elect to change to the fair value method, nor
has it determined the effect the new standard will have on net income
and earnings per share should it elect to make such a change. Adoption
of the new standard will have no effect on the Companys cash flows.
2. INVENTORIES
The major classifications of inventories as of December 31, 1995 and
1994 are:
1995 1994
Purchased parts and components $ 1,186,513 $ 2,030,800
Work in process 324,980 529,933
Finished goods 135,448 149,495
--------- ---------
$ 1,646,941 $ 2,710,228
========= =========
3. PLANT AND EQUIPMENT
The major classifications of plant and equipment as of December 31,
1995 and 1994 are:
1995 1994
Machinery and equipment $ 1,551,899 $ 1,961,806
Computer hardware and software 2,497,945 2,113,911
Furniture and fixtures 1,008,926 899,164
Leasehold improvements 313,681 246,441
--------- ---------
$ 5,372,451 $ 5,221,322
========= =========
Depreciation expense was approximately $474,000, $398,000 and $437,000
for the years ended December 31, 1995, 1994 and 1993, respectively.
4. ENGINEERING AND SOFTWARE DEVELOPMENT EXPENDITURES
Engineering and software development expenditures incurred during the
years ended December 31, 1995, 1994 and 1993 were recorded as follows:
1995 1994 1993
Engineering and software
development expense included
in the consolidated
statements of operations $ 1,716,793 $ 1,633,902 $ 1,522,770
Amounts capitalized and included
in the consolidated balance
sheets 1,550,933 1,410,564 1,559,138
--------- --------- ---------
Total expenditures for
engineering and software
development $ 3,267,726 $ 3,044,466 $ 3,081,908
========= ========= =========
Additionally, the Company recorded amortization of capitalized software
development costs of approximately $1,208,000, $1,137,000 and $970,000
for the years ended December 31, 1995, 1994 and 1993, respectively.
Such amortization is included in cost of sales in the consolidated
statements of operations.
5. BENEFIT PLANS
The Company sponsors an employee incentive savings plan under section
401(K) for all eligible employees. The Companys contributions to the
plan are discretionary and totalled $10,000 in 1995. There were no
contributions in 1994 and 1993.
The Company also sponsors an unfunded Supplemental Executive Retirement
Program, which is a nonqualified plan that provides certain key
employees defined pension benefits. Periodic pension expense for the
years ended December 31, 1995, 1994 and 1993 consists of the following:
1995 1994 1993
Service cost $ 104,439 $ 100,852 $ 66,798
Interest cost 66,882 55,909 43,912
Net amortization and deferral 36,965 36,965 29,154
------- ------- -------
Pension expense $ 208,286 $ 193,726 $ 139,864
A reconciliation of the pension plans funded status with amounts
recognized in the Companys balance sheets follows:
1995 1994
Actuarial present value of accumulated
benefit obligation $ 1,126,786 $ 955,464
=========== =========
Actuarial present value of projected benefit
obligation $ 1,126,786 $ 955,464
Plan assets - -
---------- -------
Projected benefit obligation in excess of
plan assets 1,126,786 955,464
Prior service cost not yet recognized in
net periodic pension cost (445,773) (482,738)
Additional minimum liability 445,773 482,738
--------- -------
Accrued pension expense 1,126,786 955,464
=========== =========
Included in the deposits and other assets caption in the consolidated
balance sheets as of December 31, 1995 and 1994 is an intangible asset
of $445,773 and $482,738, respectively, related to the minimum
liability adjustment for the unfunded accumulated benefit obligation.
The discount rate and rate of increase in future compensation levels
used in determining the actuarial present value of the projected
benefit obligation as of December 31, 1995 and 1994 were 7% and 3%,
respectively.
6. STOCKHOLDERS EQUITY
The Company has reserved 650,000 shares of its Common Stock for
issuance under its 1993 Stock Option Plan, the successor Plan to the
1983 Stock Option Plan. The Plan provides for options which may be
issued as nonqualified or qualified incentive stock options. All
options granted to date are exercisable no sooner than 25% per year
beginning one year from the date of grant. All options granted to
employees of MOSCOM Corporation have a ten year term and all options
granted to employees of MOSCOM Limited, Global Billing Services, Ltd.
and MOSCOM GmbH have a seven year term.
A summary of stock option and warrant transactions for the years ended
December 31, 1995, 1994 and 1993 is shown below:
1995 1994 1993
Options
Shares under option, beginning of
year 341,615 380,780 517,111
Options granted 100,930 42,020 20,160
Options exercised at prices
ranging from $.66 to $5.00 (71,177) (45,163) (129,241)
Options terminated (59,028) (36,022) (27,250)
-------- -------- --------
Shares under option, end of year 312,340 341,615 380,780
======= ======= =======
Shares exercisable 210,779 254,459 232,402
======= ======= =======
Exercise price of shares
exercisable $1.50-10.00 $1.33-5.00 $1.33-5.00
========== ========= =========
Warrants
Warrants outstanding, beginning of
year 102,649 138,383 182,216
Warrants granted 1,181 7,223 16,202
Warrants exercised (15,602) (42,957) (15,035)
Warrants expired - - (45,000)
-------- ------- -------
Warrants Outstanding, end of year 88,228 102,649 138,383
======== ======= =======
Exercise price of warrants outstanding $4.06-10.25 $2.31-10.25 $1.75-7.75
========== ========== =========
On January 2, 1996, the Companys Board of Directors declared a cash
dividend of $.02 per share payable on January 29, 1996.
7. SALES INFORMATION
Sales to two customers were approximately $9,184,000 and $2,135,000, or
52% and 12% of the Companys total sales in 1995.
Sales to these two customers were approximately $7,180,000 and
$2,058,000 or 50% and 14% of the Companys total sales in 1994 and
$7,490,000 and $1,468,000 or 56% and 11% of the Companys total sales
in 1993.
Export sales to unaffiliated customers in Europe were approximately
$5,085,000, $3,843,000 and $2,673,000 in 1995, 1994 and 1993,
respectively.
8. INCOME TAXES
The components of the income (loss) before income taxes for the years
ended December 31, 1995, 1994 and 1993 is presented below:
1995 1994 1993
Domestic (loss) income $1,497,163 $73,191 $(4,113,097)
Foreign loss (420,213) (474,835) (494,529)
--------- -------- -----------
$1,076,950 $(401,644) $(4,607,626)
========= ========= ===========
The income tax provision (benefit) includes the following:
1995 1994 1993
Current income tax payable
(refundable):
Federal $128,964 $(9,876) $(156,169)
State 17,100 1,550 1,489
Foreign - 1,099 (2,985)
------- ------ -------
146,064 (7,227) (157,665)
======= ======= =========
Deferred income tax:
Federal 275,838 (18,156) (870,968)
State 58,684 (210,127) 10,663
Foreign (141,557) (215,427) (218,472)
(Decrease) increase in
valuation allowance (144,029) 437,036 483,457
--------- ------- -------
48,936 (6,674) (595,320)
-------- -------- ---------
$195,000 $(13,901) $(752,985)
======= ======== =========
The income tax (benefit) provision differs from those computed using
the statutory federal tax rate of 34%, due to the following:
1995 1994 1993
Tax at statutory federal rate $ 366,163 $(136,559) $(1,566,661)
Differences between foreign and
U.S. tax rates (6,497) (51,781) (50,332)
State taxes, net of federal tax
benefit 69,970 (209,104) 8,020
Utilization of tax credits (108,084) (65,000) -
(Decrease) increase in
valuation allowance (144,029) 437,036 483,457
Other 17,477 11,507 (89,603)
Amortization of excess purchase
price over net assets acquired - - 497,963
Tax-exempt interest income - - (35,829)
------- -------- ---------
$ 195,000 $ (13,901) $ (752,985)
========= ========= ===========
The deferred income tax asset (liability) recorded in the consolidated
balance sheets results from differences between financial statement and
tax reporting of income and deductions. A summary of the composition
of the deferred income tax asset (liability) follows:
1995 1994
Domestic Foreign Domestic Foreign
General business credits $743,352 - $837,253 -
Net operating losses 288,752 663,836 470,918 502,229
Deferred compensation 495,758 - 389,816 -
Alternative minimum tax
credits 203,421 - 205,431 -
Inventory 112,364 - 143,881 -
Accounts receivable 26,339 - 38,867 -
Capitalized software (1,201,562) - (1,071,923) -
Fixed assets (52,283) 177 (67,549) 6,655
Other - (409) 3,969 13,163
--------- -------- -------- --------
616,141 663,604 950,663 522,047
Valuation allowance (526,008) (663,604) (811,594) (522,047)
--------- -------- --------- ---------
Deferred asset
(liability) $ 90,133 $ - $139,069 $ -
=========== ======== ======== =========
The deferred asset as of December 31, 1995 and 1994 is included in the
deposits and other assets caption in the consolidated balance sheet.
The Company has $782,000 of federal net operating loss carryforwards
available as of December 31, 1995, of which approximately $100,000 may
be utilized annually. The carryforwards expire in varying amounts in
1998 through 2001. The valuation allowance has decreased by $144,029
during the year ended December 31, 1995, primarily due to operating
loss and tax credit carryforwards being used in the current year.
As of December 31, 1995, the Company has $82,000 of net operating loss
carryforwards available to offset future earnings of Moscom Limited,
$1,247,000 of net operating loss carryforwards to offset future
earnings of Moscom GmbH and $286,000 of net operating loss
carryforwards to offset future earnings of Global Billing Services
Limited.
The Companys tax credit carryforwards as of December 31, 1995 are as
follows:
Description Amount Expiration Dates
General business credits $ 671,031 1999 - 2009
New York State investment tax credits 109,578 1997 - 2004
Alternative minimum tax credits 203,421 No expiration date
---------
$ 984,030
=========
Cash paid (received) for income taxes during the years ended December
31, 1995, 1994 and 1993 totalled $61,922, $(231,885) and $(10,731),
respectively.
9. COMMITMENTS
Operating Lease Obligations - The Company and its subsidiary lease
their current manufacturing and office facilities and certain equipment
under operating leases which expire at various dates through 1998. The
facility leases provide for extension privileges. Rent expense under
all operating leases (exclusive of real estate taxes and other expenses
payable under the leases) was $635,000, $773,000, and $573,000 for the
years ended December 31, 1995, 1994 and 1993, respectively.
Minimum lease payments as of December 31, 1995 under operating leases
are as follows:
Year Ending December 31,
1996 $ 593,000
1997 506,000
1998 330,000
---------
Total minimum lease payments $ 1,429,000
=========
Line of Credit - The Company has an unsecured revolving line of credit
arrangement with a commercial bank for a maximum of $3,000,000 at an
interest rate of the lower of the banks prime rate of interest or the
banks offered rate of interest. The Company must pay a loan
commitment fee of 1/4% per annum of the difference between the maximum
amount available under the line less loans outstanding at the end of
each quarter. The line of credit arrangement is subject to certain
financial covenants relating primarily to the Companys current ratio,
tangible net worth, liabilities to tangible net worth and a limit on
the amount of dividends declared or paid each year. The Company has
satisfied these financial covenants as of December 31, 1995 and 1994.
This agreement expires on January 31, 1997.
10.OTHER EXPENSES
During the third quarter of 1993, other expenses of $3,650,744, were
charged to operations which consisted of the following:
Write-down of capitalized software development
costs to net realizable value $ 1,758,502
Write-down of excess purchase price over net
assets acquired 1,337,242
Settlement of litigation claim 555,000
---------
$ 3,650,744
=========
In the opinion of management, a market decline occurred and was
expected to continue in the future relative to certain of the Companys
software development projects. As a result, the Company wrote-down the
related capitalized software development costs to net realizable value.
Additionally, in the opinion of management, the future economic benefit
of the excess purchase price over net assets acquired (goodwill)
related to their Control Key division diminished due, in part, to
current market conditions and the Companys sales forecasts. As a
result, the Company wrote-down the remaining goodwill value, which was
originally being amortized over ten years.
The Company settled a lawsuit relative to a contract dispute over a
specific product previously purchased by the Company.
PART III
Item 10 Directors and Executive Officers of the Registrant
Information relating to directors of the Company is incorporated
herein by reference to page 3, 4 and 6 of the Companys Proxy Statement for
the Annual Meeting of Shareholders to be held May 17, 1996 {see "Election
of Directors" and "Compliance With Section 16 (a)".}
The following lists the names and ages of all executive officers of
the Company, all persons chosen to become executive officers, all positions
and offices with the Company held by such persons, and the business
experience during the past five years of such persons. All officers were
elected or re-elected to their present positions for terms ending on May
17, 1996 and until their respective successors are elected and qualified.
MANAGEMENT
Directors and Executive Officers of the Registrant
The Directors and executive officers of MOSCOM are as follows:
Name Age Position
Albert J. 59 Chairman of the Board,
Montevecchio President, C.E.O., Director
Robert L. Boxer 42 Vice President, Secretary
Corporate Counsel
James W. Karr 52 Vice President,
International Sales
Ronald C. Lundy 44 Treasurer
Richard C. Vail 65 Vice President,
General Manager, Votan
Victor de Jong 50 Director
John E. Mooney 51 Director
Harvey E. Rhody 56 Director
Fred E. Strauss 68 Director
All Directors hold office until the next annual meeting of
stockholders, and until their successors are duly elected and qualified.
Officers are elected annually by the Board of Directors and serve at the
discretion of the Board.
Albert J. Montevecchio is a founder of MOSCOM and has been its
President, Chief Executive Officer and a Director since its incorporation
in January 1983. He became Chairman of the Board in February 1985. Prior
to founding MOSCOM, he was a director and Executive Vice President of Sykes
Datatronics, Inc. with responsibility for marketing and sales, customer
service and new product planning. Prior to that he held senior technical
positions with Xerox Corporation and General Electric Corporation. He
holds degree in Electrical Engineering (BSEE).
Robert L. Boxer became a Vice President of MOSCOM in November 1991.
Prior to that he had been Secretary and Corporate Counsel of MOSCOM since
March 1983. Prior to that he had been Counsel at Sykes Datatronics, Inc.
and an attorney with the firm of Middleton-Wilson.
James W. Karr has been Vice President-International Sales since May 1,
1989. After joining MOSCOM in 1983, he had held various sales management
positions. Prior to that he held sales management positions with Sykes
Datatronics, Inc., Itel Corporation, Honeywell Information Systems, and NCR
Corporation.
Ronald C. Lundy was appointed Treasurer of MOSCOM in July 1993. Since
joining MOSCOM in 1984 he has held a variety of financial management
positions, the most recent having been Corporate Controller since December
of 1992. Prior to that he held various financial positions with Rochester
Instrument Systems from 1974-1983.
Richard C. Vail has been Vice President and General Manager of the
Votan Division since October, 1991. Prior to that he had been Vice
President-Engineering and Operations since March 1987 and prior to that
Director of Operations since October 1984. Mr. Vail held a series of
Senior Management positions with Taylor Instrument Company from 1974
through 1984.
Victor de Jong has been a Director of MOSCOM since May 1984. He is
President of Huntington General Management, Inc., a management consulting
firm and President of Haller Plastics Corp., a plastic injection molding
company and manufacturer of point-of-purchase displays since 1990. Prior
to that, Mr. de Jong was President of Venture Management Associates, an
investment holding company, and its subsidiaries, Golden Metal Products
Corporation and Precise Metal Parts Company, Inc., both engaged in the
fabrication of metal parts. Prior to 1982, Mr. de Jong held various
management positions with McGraw Edison.
John E. Mooney became a Director of MOSCOM in May 1985. He is Chief
Executive Officer of Essex Investment Group and a general partner of Great
Lakes Capital. For the past five years, he has been President of MM&S
Resources, Inc., First Rochester Corporation and First Rochester Capital
Corporation. All of these affiliated companies are engaged in investment
management and financial services.
Harvey E. Rhody has been a Director of MOSCOM since September 1983.
Since March, 1996 he is Interim Director of the Center for Imaging Science
of the Rochester Institute of Technology prior to that he had been
President of RIT Research Corporation since July 1992. Prior to that and
since 1988, he was a Professor of Electrical Engineering and Imaging
Science at the Rochester Institute of Technology and director of
Intelligent Systems Division of RIT Research Corporation.
Fred E. Strauss has been a Director of MOSCOM since September 1983.
In 1990, he retired as Regional President of Manufacturers Hanover Trust
Company in Rochester, New York, a position he held for more than five
years. Mr. Strauss is a member of the Board of Nazareth College Board of
Trustees, an institution of higher learning; member of the Board of Park
Ridge Health Systems, Inc., providers of health care; and Chairman of the
Board of Rochester Community Baseball, Inc., an operator of a minor league
professional baseball team.
Item 11 Executive Compensation
Information relating to executive compensation is incorporated by
reference on pages 5, 6 and 7 of the Companys Proxy Statement for the
Annual Meeting of Shareholders to be held May 17 1996. (See "Executive
Compensation" and "Corporate Governance Information.")
Item 12 Security Ownership of Certain Beneficial Owners and Management
Information relating to the security holdings of more than five
percent holders and directors and officers of the Company is incorporated
herein by reference to pages 3 through 6 of the Companys Proxy Statement
for the Annual Meeting of shareholders to be held May 17, 1996.
Item 13 Certain Relationships and Related Transactions
None.
PART IV
Item 14 Exhibits, Consolidated Financial Statement Schedule and Reports
on Form 8-K
(a) The following document is filed as part of this report:
VIII. Valuation and Qualifying Accounts
Schedules other than those listed above are omitted because they are
not applicable.
Individual financial statements of the subsidiaries of the Company
have been omitted as the Company is primarily an operating company and the
subsidiaries included in the consolidated financial statements filed, in
the aggregate, do not have minority equity interest and/or indebtedness to
any person other than the Company in amounts which together (excepting
indebtedness incurred in the ordinary course of business which is not
overdue and matures within one year from the date of its creation, whether
or not evidenced by securities, and indebtedness of the subsidiary which is
collateralized by the Company by guarantee, pledge, assignment or
otherwise) exceed 5 percent of the total assets as shown by the most recent
year-end statement of consolidated financial position. There are no
unconsolidated subsidiaries or 50% or less owned persons accounted for by
the equity method.
(b) There have been no reports on from 8-K filed during the last quarter
of the period covered by this report.
(c) Exhibits (numbered in accordance with item 601 of regulation S-K)
(11.1) Calculation of earnings per share
(22) Subsidiaries of registrant
(22.1) Neither of the Companys wholly owned subsidiaries would
constitute a significant subsidiary as of December 31, 1995.
MOSCOM CORPORATION AND SUBSIDIARIES
Schedule VIII - Valuation and Qualifying Accounts
Years Ended December 31, 1995, 1994, and 1993
Column A Column B Column C Column D Column E
Allowance for Balance At Charged To Accounts Balance
Doubtful Accounts Beginning Of Costs And Written Off At End of
Year Expenses (Recovered) Year
1995 $105,000 $(3,811) $(30,189) $ 71,000
1994 132,000 (23,188) ( 3,812) 105,000
1993 122,000 20,254 10,254 132,000
Provision for Balance At Charged to Inventory Balance
Inventory Beginning of Cost of Written At End
Shrinkage & Year Sales Off of Year
Obsolescence
1995 $347,474 $185,250 $319,134 $213,590
1994 208,291 173,499 34,316 347,474
1993 183,884 234,500 210,093 208,291
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
MOSCOM CORPORATION
----------------------------------------------
Albert J. Montevecchio, Chairman of the Board
President and CEO
Dated:
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Capacity Date
_______________________ Chairman of the March 27, 1996
Albert J. Montevecchio Board, President, C.E.O.
and Director
_________________________ Director March 27, 1996
Victor de Jong
_________________________ Director March 27, 1996
John E. Mooney
_________________________ Director March 27, 1996
Harvey E. Rhody
_________________________ Director March 27, 1996
Fred E. Strauss
_________________________ Director March 27, 1996
Ronald C. Lundy
Exhibit 11.1
MOSCOM CORPORATION
and Subsidiaries
Calculation of Earnings per Share
Twelve Months Ended December 31,
Primary 1995 1994 1993
Net Earnings (Loss) $881,950 $(387,743) $(3,854,641)
Average common shares outstanding 6,795,559 6,707,449 6,589,130
Dilutive effect of stock options and
warrants after application of 114,315 - -
treasury stock method ---------- --------- ---------
Weighted average shares outstanding 6,909,874 6,707,449 6,589,130
========== ========= =========
Earnings (Loss) per common & common
equivalent share $.13 $(.06) $(.59)
Assuming Full Dilution ========= ========= ==========
Net Earnings (Loss) $881,950 $(387,743) $(3,854,641)
======= ========= ===========
Weighted average shares outstanding 6,909,874 6,707,449 6,589,130
Additional dilutive effect of stock
options & warrants after application
of treasury stock method 11,520 - -
--------- --------- ---------
Weighted average shares outstanding 6,921,394 6,707,449 6,589,130
========= ========= =========
Earnings (Loss) per common share
assuming full dilution $.13 $(.06) $(.59)
========= ========= ==========