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, 1994
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
(Registrant's 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 registrant's 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 [x] NO [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of January 31, 1995 was $54,789,262.
The number of shares of Common Stock, $.10 par value, outstanding on
January 31, 1995 was 6,769,195.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
PART I None
PART II None
PART III Item 10 Pages 3, 4, and 6 of the Company's Proxy
Statement for the Annual Meeting of
Shareholders to be held May 12, 1995.
under "Election of Directors" and "Compliance
With Section 16 (a)."
Item 11 Pages 5, 6, and 7 of the Company's Proxy
Statement for the Annual Meeting of
Shareholders to be held May 12, 1995.
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 Company's Proxy
Statement for the Annual Meeting of
Shareholders to be held May 12, 1995.
<PAGE>
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 is engaged in the design, production, servicing and marketing of
telecommunications management, voice processing and voice recognition
products for users and providers of telecommunications services in the global
market.
Telemanagement at the Business Location
MOSCOM is the leading producer of call accounting products, which are
used by organizations to better control their telecommunications usage and
expense.
Call accounting systems give businesses easy access to complete
information on telephone usage including the calling extension, duration,
time of day, destination, trunk and cost of each call. All of MOSCOM's call
accounting products provide this fundamental information, without monitoring
actual phone conversations, in clear, concise summary and detailed report
formats.
Call accounting systems 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 of telephone
use. As a result, MOSCOM call accounting systems can generally pay for
themselves in less than a year through direct expense reduction.
There are also many other valuable uses for call accounting systems
including:
Determining optimal number of trunks and best long distance facilities.
Allocating telephone expense to specific cost centers or clients based on
actual use.
Generating revenues by reselling phone services to professional firm
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.
MOSCOM's premier call accounting product is the Emerald CAS for Windows
software. Utilizing all the power and user friendly features of Windows,
Emerald CAS for Windows has the capacity to support up to 30,000 telephone
extensions yet, is affordable for businesses with fewer than 25 telephones.
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
telephone switches (PBX's) simultaneously from one central location.
<PAGE>
MOSCOM's economical Pollable Storage Unit collects data from remote PBX's and
stores it until polled by a central Emerald CAS for Windows system. Emerald
CAS for Windows is designed to be a global product and is available in
several languages. Emerald CAS for Windows has been selected for private
branding by leading manufacturers and sellers of PBX's, including AT&T in
the United States and Philips in Germany.
MOSCOM also produces a call accounting software product that is based on
the UNIX operating system. The UNIX operating system offers the advantage of
supporting multiple terminals and users from a single system. MOSCOM's Unix-
based call accounting software is marketed very successfully by AT&T as an
integrated solution with other AT&T products.
Despite the prevalence of PC's, some call accounting users prefer stand-
alone proprietary hardware systems designed specifically for that purpose.
MOSCOM is a leader in this market segment as well. MOSCOM produces private-
labeled call accounting hardware systems for Siemens, marketed in Germany
under the name GCM, and for British Telecom, marketed in the United Kingdom
under the name Q30.
A use for call accounting systems that has received considerable
attention lately is the detection of PBX fraud. Sophisticated telephone
hackers and their customers now generate fraudulent calls estimated to exceed
$1 billion annually. 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 and instantly send out alarms to initiate
preventive measures.
Telephone Company Products
MOSCOM's INFO family of products capture, at the telephone company's
central office, vital information in the form of Message Detail Records(MDR)
on every originating or terminating call passing through that particular
central office. Those raw detail records can then be processed into
meaningful formats and distributed to a central telephone company computer or
to business subscribers.
The first INFO product was the INFO/MDR series which consists of three
distinct components:
1. INFO Monitor connects directly to the central office switch, via the
message detail port or automatic message accounting port, to capture and
store the call records.
2. INFO Collector aggregates at a single location call records from
different INFO Monitors serving as many as 500 central offices. This
aggregated information is then made available to the phone company's billing
system or transferred to a customer's INFO Manager.
<PAGE>
3. INFO Manager is a customer premises system based on MOSCOM's Emerald
CAS for Windows call accounting software. These allow the customer to
download call records from an INFO Collector or INFO Monitor in real time or
at scheduled times, in summary or detailed, statistical or graphical reports.
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 company's central office switch to
route calls to individual extensions. In recent years Centrex service has
grown rapidly and continues to gain market share from PBX's. However,
surveys of Centrex users indicated that the greatest weakness of Centrex is
the unavailability of complete, timely and accurate call detail information.
INFO/MDR gives telephone companies the ability to provide economically and
efficiently the detailed information customers are demanding. 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 the public switched network with
customized software to provide users network control at a very competitive
price.
The call detail records captured by the INFO Monitor can also be used by
telephone companies to generate subscriber bills. One means of doing so is
MOSCOM's INFO Bill, an extension of the INFO family that provides a
comprehensive operations support system for telephone, cellular and cable
television companies. In addition to generating customer bills, INFO Bill
also maintains reports for the general ledger, accounts receivables,
inventory, payroll, service orders, and other critical operating functions.
In essence, INFO Bill automates virtually all the systems needed to run a
telephone or cable television company. MOSCOM's target markets for INFO Bill
are primarily outside the United States where substantial investments are
being made in upgrading telephone companies or creating entirely new
providers of telephone and cable service.
Another INFO family member, INFO Verabill, is a rating and billing
system for telephone and cellular companies with up to 30,000 access lines.
INFO Verabill is a very economical yet robust system that runs on 486 or
Pentium PC's under Windows. It is designed for start-up companies and
requires a relatively minimal investment in training and capital. MOSCOM's
target market for Verabill is the impressive number of new telephone and
cellular companies being created worldwide. In November of 1994, MOSCOM
signed a six-year agreement with Alcatel SEL for worldwide distribution of
Verabill as a private label Alcatel product.
With the INFO family, MOSCOM has a uniquely broad array of products to
support telephone cable and wireless companies of all sizes and levels of
sophistication. These service providers have the technology today to vastly
expand the types of information they convey to their subscribers. As
economic and regulatory conditions enable expansion of these services the
value of the INFO family will only be enhanced. As a result, MOSCOM's target
market for the INFO family of products has grown beyond traditional telephone
companies to include alternative providers of local service, cable television
companies expanding into telephony, cellular and PCN service providers and
managers of virtual private networks.
<PAGE>
Global Billing Services, Ltd.
MOSCOM has established Global Billing Services, Ltd. ("GBS") in the
United Kingdom as an alternative means of marketing the INFO Bill software.
Some providers of telephone, cable and virtual private network services
appreciate the flexibility of the INFO Bill system but prefer not to make the
investment in licensing the software, purchasing hardware, and hiring and
training operations and support staffs. GBS offers an outsourcing
alternative that can provide a wide variety of services ranging from simple
rating of transaction messages to complete customer care, billing and
collection services.
MOSCOM chose to start a telecommunications service bureau in the United
Kingdom because the regulatory environment in that country has spawned the
most competitive telecommunications market in the world. That has resulted
in entry into the market 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 an ideal market environment for a
service bureau able to provide timely comprehensive service at a competitive
price. GBS charges for its services are believed to be 30%-50% less than the
costs presently paid by telephone and cable companies in the UK for
comparable services provided by internal support staff for outside service
providers.
GBS will market its services by means of a direct sales force as well as
through strategic partnerships with providers of central office switches in
the United Kingdom.
Voice Processing
Voice processing involves recording, responding to, recognizing, or
other manipulation of the spoken word. This technology is commonly used in
voice mail and interactive voice information systems.
Voice Recognition
The foundation for MOSCOM's voice processing business and what sets
MOSCOM apart from others in the industry is the use of voice recognition
technology. MOSCOM became the beneficiary of many years of advanced research
in voice recognition technology with the acquisition of Votan in September of
1991. Prior to the acquisition, Votan had invested over $14 million in the
development of high performance voice recognition systems. MOSCOM has
continued to invest in improving the base recognition technology but has
focused more on developing an economic hardware platform and key
telecommunications applications.
Votan products use complex algorithms and proprietary microprocessor
design to create distinctly recognizable digital voice prints from the spoken
word. These prints are then stored in the memory of the Votan system. By
comparing these stored voice prints to prints of a new utterance, the system
is able to recognize spoken words or verify the identity of the speaker.
<PAGE>
The hardware platform for the Votan voice recognition technology is the
new Model 2400 series 4-port voice processing card introduced by MOSCOM in
1994. The 2400 card, available in either telephone or microphone input
models, operates under Microsoft Windows in standard 486 or Pentium PC's.
Combined with Votan's superior noise immune voice recognition and
verification software, the 2400 card is setting industry standards for
accuracy and economy.
VoiceBuilder for Windows puts the power of the Model 2400 card within easy
reach of applications developers. With VoiceBuilder for Windows and a one-
week programmer training class provided by MOSCOM, value added resellers can
create their own customized voice recognition applications.
The TeleVoice system is an interactive telephone information system that
responds to both phone generated tone and voice commands. It is a highly
flexible user friendly product easily adapted to different vertical market
industries. Callers to a TeleVoice system can use spoken words to select
recorded messages, transfer to a live attendant or leave a message. North
Americans are quite familiar with similar applications that use Touchtones to
activate the system. However, in much of Europe, Latin America, Asia and
Africa these applications are rare because the majority of callers do not
have tone capability. MOSCOM sees these regions as the best markets for
TeleVoice. Siemens markets a customized version of TeleVoice in Germany and
Austria under the name InfoVoice.
MVM for Windows is a MOSCOM developed voice mail application using the Model
2400 card. The combination of voice processing and voice recognition
technology gives MOSCOM two significant advantages over traditional voice
mail products: (i) it is voice controlled and therefore can operate without
tone, and (ii) includes voice verification technology to provide superior
security. MOSCOM's target markets for MVM for Windows are those countries
without significant touch tone usage and proportionately low acceptance of
traditional voice mail products. We believe the availability of a voice
controlled system will make voice mail as popular in these markets as it has
become in the United States.
Marketing and Sales
MOSCOM's marketing and sales personnel are located at its headquarters
in Pittsford, New York as well as in Chicago, St. Louis, New Jersey,
Pleasanton, California and Virginia.
Marketing and sales personnel of MOSCOM's subsidiary, MOSCOM Ltd.,
located in Slough, England, market MOSCOM's products in the United Kingdom.
Sales personnel employed by MOSCOM GmbH in Munich, Germany, market the
Company's products throughout continental Europe.
MOSCOM's 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
<PAGE>
some, MOSCOM develops and manufactures customized products under a private
label while others purchase and resell MOSCOM's standard products.
MOSCOM's 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)
British Telecom (UK)
Sprint (USA)
Teleport Communications (USA)
Sales to AT&T and Siemens AG accounted for 50% and 14% respectively of
MOSCOM's 1994 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, 1994 MOSCOM had a backlog of $1,452,458. Backlog as of
December 31, 1993 was $1,451,178. Backlog is not deemed to be a material
indicator of 1995 revenues.
The Company's policy is to recognize orders only upon receipt of firm
purchase orders.
<PAGE>
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 Company's Emerald product
or softness in demand for its hardware based products would, if they were to
materialize, adversely affect the Company's 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 Company's larger customers.
Employees
As of December 31, 1994, MOSCOM employed 155 full-time personnel,
including 14 based in Europe employed by MOSCOM's subsidiaries.
MOSCOM's employees are not represented by any labor unions.
<PAGE>
Item 2 Facilities
The Company's 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 14,500 square feet is devoted to manufacturing. The initial
term of the lease expires on June 30, 1998.
The Company also leases approximately 3,750 square feet in Pleasanton,
California which houses the Votan division of MOSCOM acquired in September
1991. That lease expires on December 31, 1996.
The Company's 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 Company's subsidiary in Germany, MOSCOM GmbH, leases approximately
4,000 square feet in Ismaning, Germany. This lease expires July 31, 1995.
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 Registrant's Common Stock and Related
Stockholder Matters
MOSCOM Corporation's 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.
<PAGE>
COMMON STOCK PRICE RANGE
Quarters Ended
March 31 June 30 September 30 December 31
1994 12 3/8 - 7 5/8 12 - 4 1/8 8 3/4 - 4 1/4 9 1/4 - 7
1993 6 5/8 - 4 7 1/4 - 5 1/8 6 7/8 - 5 9 1/4 - 5 1/2
As of December 31, 1994, there were 886 holders of record of the
Company's Common Stock and approximately 3,500 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.
<TABLE>
Item 6 Selected Financial Data
<CAPTION>
Year Ended December 31,
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Sales $14,260,683 $13,455,810 $12,616,448 $15,815,233 $13,787,276
Net Income (Loss) $(387,743) $(3,854,641) $70,992 $2,015,913 $2,782,768
Net Income (Loss)
per share $(.06) $(.59) $.01 $.30 $.41
Total Assets $16,083,483 $16,535,935 $20,360,770 $20,871,495 $18,034,537
Long term
obligations $955,464 $798,703 $967,244 $668,221 $112,366
Weighted average
shares outstanding 6,707,449 6,589,130 6,654,080 6,697,433 6,737,832
Cash Dividends
paid per share .04 .04 .04 .04 .04
</TABLE>
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 MOSCOM's Pittsford, New York facility in 1991.
<PAGE>
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 MOSCOM's facility in
Pittsford, New York.
Item 7: Management's Discussion and Analysis of Results of Operations
and Financial Condition
The Company's 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 Company's 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
Company's sales revenues compared with 21% during 1993. Most of the growth
in international markets stem from the growth of MOSCOM GmbH, the Company's
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 Company's research
and development efforts, including the amounts amortized and charged to cost
of sales, on the Company's 1994 and 1993 operating results.
<PAGE>
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 Company's 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
Company's portfolio reflecting the poor performance of the worldwide bond
markets during 1994.
The Company's 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 8 of the financials presented as part of this document.)
<PAGE>
Results of Operations
1993 Compared with 1992
The Company's 1993 sales of $13,455,810 represented an increase of 7% as
compared with the 1992 sales level of $12,616,448. Fourth quarter sales of
$4,106,536 represented the company's highest quarterly sales level since the
fourth quarter of 1991. Fourth quarter sales were particularly strong for
call accounting software in the United States and also included our first
sale of INFO/MDR outside the United States, to Mercury Communications Ltd. in
the United Kingdom.
For all of 1993 domestic sales increased by 12%, with much of the
increase attributable to newer product offerings such as Emerald CAS for
Windows and INFO/MDR. International sales for 1993 were approximately 6%
lower than levels achieved during 1992, but this was due primarily to $1.0
million dollars of revenue from the Petroleos Mexicanos contract being
recognized in 1992. A large portion of that revenue was replaced by a
continued strong demand for the GCM call accounting product marketed by
Siemens A.G., and the INFO/MDR sale to Mercury Communication Ltd. referenced
above.
While the Company's voice activated information systems did not
contribute to 1993 sales, important product approvals have been received from
the national telephone companies of Germany and Austria, as well as the
Siemens test lab. Interest from the domestic markets continues to grow as
well, and the Company expects significant sales contributions from this new
product segment beginning in the first half of 1994.
The 1993 cost of sales percentage was 37% as compared to a cost of sales
percentage of 34% for 1992. The cause of the increased cost is two-fold.
The first factor was an increase in the amortization of capitalized software
and purchased software costs charged to cost of sales increasing from
$848,000 in 1992 (6.7% of sales) to $1,190,000 in 1993 (8.8% of sales). The
second factor was an increase in amounts charged to shrinkage and
obsolescence provisions (0.2% of sales in 1992, versus 1.7 % of sales in
1993) for slower moving stand-alone products, primarily the AP2000, PL series
and Q30/30E series of products.
Net engineering and software development expenses were $1,522,770 for
the year ended December 31, 1993 as compared to net engineering and
development expenses of $1,220,519 for the year ended December 31, 1992.
Gross spending for 1993, however, declined by 13% from 1992 levels before
applying the effects of capitalized software.
The following chart summarizes both gross and net engineering and
development expenses, including both the amounts capitalized and the amounts
amortized and charged to cost of sales for the year 1993 and 1992.
<PAGE>
1993 1992
Gross expenditures for engineering
and software development $3,081,908 $3,564,318
Less: Costs capitalized $1,559,138 2,343,799
--------- ---------
Net engineering & software
development expense $1,522,770 $1,220,519
Plus: Amounts amortized and charged
to cost of sales 970,083 646,585
--------- ---------
Total expense recognized for the year $2,492,853 $1,867,104
========= =========
The major focus of the 1993 engineering and development efforts was
targeted toward the enhancement and broadening of the Emerald CAS for Windows
and INFO/MDR product lines, as well as a significant investment in the
development of the voice recognition product lines.
Selling, general, and administrative expenses were $8,183,622 for 1993,
an increase of 12% over the $7,335,617 of expenses during 1992. As cited in
previous 10-Q reports filed in 1993, the increased spending is primarily the
result of additional marketing and selling costs associated with the
introduction of the Emerald CAS for Windows and INFO/MDR product lines,
combined with the expansion of the Company's presence in Germany through
MOSCOM GmbH.
The Company recognized other expenses during the third quarter of 1993
of $3,650,744 consisting of 3 components:
1.The write-off of $1,758,502 of capitalized software associated with the
domestic version of the AP2000 product line. Over the past several years,
MOSCOM has embarked on an aggressive plan to develop four major new product
lines. Market indications for three of those -- Emerald CAS, INFO/MDR, and
voice recognition systems have given us reason to expect significant long-
term successes. The fourth, the AP2000, has not met our expectations due
to development delays and ensuing dramatic changes in the market.
As a result of the steep decline in PC prices since the AP2000 was
conceived, most of the telecom applications intended for AP2000 are now
more economically done on PC's. MOSCOM's success with Emerald CAS for
Windows is a clear example of that. With that in mind, we have
discontinued development of additional AP2000 applications, other than
those related to the GCM product sold to Siemens. Sales of AP2000 call
accounting products will continue. We have also reevaluated all intangible
assets associated with the AP2000 and other stand-alone hardware products
relative to probable future revenues from these products. Given the
investment MOSCOM has made in the AP2000, and our lowered expectations of
future sales, we concluded that the write-off was both appropriate and
necessary.
<PAGE>
2.The write-off of $1,337,242 of goodwill remaining from the 1988 acquisition
of the PL stand-alone call accounting system. The PL product has also
suffered erosion of market from less expensive PC-based products. Our
expectation had been that its replacement by the AP2000 would reverse that
decline. As that no longer is probable, we elected not to continue to
reflect goodwill related to the PL line as an asset of the Company.
The adjustments to capitalized software and goodwill bring two important
results for MOSCOM: (1) Future expenses will more accurately reflect the
actual costs of the products contributing to future sales without the
distortive effect of discontinued products or projects; and (2) MOSCOM's
efforts will be more focused on the three new product lines referred to
above, that have bright prospects.
3.The settlement of a lawsuit which was initiated in December 1991 against
MOSCOM by PEP Modular Computers Inc. Under the settlement, MOSCOM paid PEP
$555,000 during the fourth quarter of 1993.
Interest income earned from investments for 1993 amounted to $278,965,
down slightly from the $311,925 of interest income recognized during 1992.
The decline reflects primarily the effect of lower average balances available
for investment purposes.
MOSCOM's 1993 loss, net of tax recoveries, was $3,854,641, or $.59 per
share. For 1992 MOSCOM realized a net after tax profit of $70,992, or $.01
per share.
<PAGE>
Liquidity and Capital Reserves
The Company's December 31, 1994 balance sheet includes cash and
investments of $4,113,346, which compares with a total cash and investment
position of $4,650,169 at December 31, 1993. The working capital ratio of
6.0 at December 31, 1994 compares with working capital ratios of 5.3 and 6.3
for the years ended December 31, 1993 and 1992 respectively.
Cash outflows for additions of property and equipment of $143,128
declined from levels of $265,267 in 1993 and $258,076 in 1992.
After increases of approximately $680,000 in 1993 and $733,000 in 1992
in anticipation of new product introductions, net inventories were reduced by
approximately $345,000 at December 31, 1994, and are expected to decline
further in 1995.
Accounts receivable increased by approximately $693,000 during 1994 to
$3,473,667 at December 31, 1994. This increase is due to the timing of
shipments, and as such does not indicate any significant unfavorable trend in
payments from the Company's customers.
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 bank's prime rate of interest or the bank's 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 Company's
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, 1994 and 1993. This
agreement originally was to expire on January 31, 1995 but has been extended
to January 31, 1996.
<PAGE>
Item 8 Consolidated Financial Statements and Supplementary Data
Required to be Included Herein as Follows:
Independent Auditors' Report Page 19
Financial Statements:
Consolidated Balance Sheets Pages 20 - 21
Consolidated Statements of Operations Page 22
Consolidated Statements of Stockholders Equity Page 23
Consolidated Statements of Cash Flows Page 24
Notes to Consolidated Financial Statements Pages 25 - 33
Item 9 Disagreements on Accounting and Financial Disclosure
None.
<PAGE>
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, 1994 and
1993, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1994. Our audits also
included the financial statement schedule listed in the Index
at Item 14(a). These financial statements and financial
statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule 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 referred
to above present fairly, in all material respects, the
financial position of MOSCOM Corporation and subsidiaries as of
December 31, 1994 and 1993, and the results of their operations
and their cash flows for each of three years in the period
ended December 31, 1994 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/s/
Rochester, New York
February 9, 1995
<PAGE>
<TABLE>
MOSCOM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1993
<CAPTION>
ASSETS 1994 1993
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (includes investments
of $1,775,416 and $1,060,064) $2,152,377 $ 1,293,999
Investments 1,960,969 3,356,170
Accounts receivable, trade (net of allowance for
doubtful accounts of $105,000 and $132,000) 3,473,667 2,781,030
Inventories (Note 2) 2,710,228 3,054,897
Prepaid expenses and other current assets 239,002 381,131
---------- ----------
Total current assets 10,536,243 10,867,227
---------- ----------
PLANT AND EQUIPMENT (Note 3):
Cost 5,221,322 5,078,194
Less accumulated depreciation 4,268,984 3,870,895
---------- ----------
Plant and equipment, net 952,338 1,207,299
---------- ----------
OTHER ASSETS:
License fees and purchased software (net of accumulated
amortization of $569,887 and $506,082) 389,366 520,814
Software development costs (net of accumulated amortization
of $1,427,864 and $953,067) (Notes 4 and 8) 2,895,853 2,622,022
Deposits and other assets (Notes 5 and 9) 1,309,683 1,318,573
---------- ----------
Total other assets 4,594,902 4,461,409
---------- ----------
TOTAL ASSETS $16,083,483 $16,535,935
========== ==========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
MOSCOM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1993
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1993
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 510,145 $ 507,968
Accrued compensation and related taxes 778,684 668,385
Other accrued expenses 469,469 756,322
Dividends payable - 133,616
---------- ----------
Total current liabilities 1,758,298 2,066,291
---------- ----------
PENSION OBLIGATION (Note 5) 955,464 798,703
COMMITMENTS (Note 10) - -
---------- ----------
Total liabilities 2,713,762 2,864,994
---------- ----------
STOCKHOLDERS' EQUITY (Note 6):
Common Stock, par value $.10, 20,000,000 shares
authorized; issued and outstanding, 6,743,875 shares
and 6,680,781 shares 674,388 668,078
Additional paid-in capital 14,945,932 14,811,533
Retained deficit (2,261,852) (1,739,957)
Cumulative translation adjustment 11,253 (68,713)
---------- ----------
Total stockholders' equity 13,369,721 13,670,941
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $16,083,483 $16,535,935
========== ==========
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
MOSCOM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
SALES (Note 7) $14,260,683 $13,455,810 $12,616,448
COSTS AND OPERATING EXPENSES:
Cost of sales (Note 4) 4,936,761 4,985,265 4,264,543
Engineering and software development (Note 4) 1,633,902 1,522,770 1,220,519
Selling, general and administrative 8,153,042 8,183,622 7,335,617
Other expenses (Note 8) - 3,650,744 -
--------- ---------- ----------
Total costs and operating expenses 14,723,705 18,342,401 12,820,679
--------- ---------- ----------
LOSS FROM OPERATIONS (463,022) (4,886,591) (204,231)
INTEREST INCOME 61,378 278,965 311,925
--------- ---------- ----------
(LOSS) INCOME BEFORE INCOME TAXES (401,644) (4,607,626) 107,694
INCOME TAX (BENEFIT) PROVISION (Note 9) (13,901) (752,985) 36,702
--------- ---------- ----------
NET (LOSS) INCOME $ (387,743) $(3,854,641) $ 70,992
========= ========= =========
NET (LOSS) INCOME PER COMMON SHARE $ (.06) $ (.59) $ .01
========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING 6,707,449 6,589,130 6,654,080
========= ========= =========
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
MOSCOM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<CAPTION>
Common Stock Additional Retained Cumulative Total
Par Paid-in Earnings Translation Stockholders'
Shares Value Capital (Deficit) Adjustment Equity
<S> <C> <C> <C> <C> <C> <C>
BALANCE - January 1, 1992 6,450,168 $ 645,017 $14,219,380 $ 2,568,794 $ 17,265 $ 17,450,456
Exercise of stock options 90,045 9,004 181,293 - - 190,297
Foreign currency translation adjustment - - - - (48,592) (48,592)
Dividends declared on common stock
($.04 per share) - - - (259,469) - (259,469)
Net income - - - 70,992 - 70,992
BALANCE - December 31, 1992 6,540,213 654,021 14,400,673 2,380,317 (31,327) 17,403,684
Exercise of stock options and warrants 144,276 14,428 432,689 - - 447,117
Stock retirements (3,708) (371) (21,829) - - (22,200)
Foreign currency translation adjustment - - - - (37,386) (37,386)
Dividends declared on common stock
($.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) (Note 6) - - - (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
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
MOSCOM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $ (387,743) $(3,854,641) $70,992
--------- ----------- ----------
Adjustments to reconcile net (loss) income
to net cash provided (used) by operating activities:
Depreciation and amortization 1,890,977 1,754,964 1,561,222
Decrease (increase) in deferred income tax (6,674) (462,925) 115,396
Other expenses: write-downs of other asse - 3,095,743 -
Provision for bad debts (23,188) 20,254 24,544
Provision for inventory obsolescence 168,550 234,500 30,000
Changes in assets and liabilities:
Investments 1,395,201 2,982,923 (1,244,079)
Accounts receivable (669,449) 185,554 2,259,817
Inventories 176,119 (914,710) (762,512)
Prepaid expenses and other current asset 142,129 (308,665) 1,691
License fees and purchased software (224,707) (256,703) (248,044)
Software development costs (1,410,564) (1,559,138) (2,343,799)
Deposits and other assets 15,564 (513,290) (271,416)
Accounts payable 2,177 (188,281) 17,730
Accrued compensation and related taxes 110,299 22,326 (292,454)
Other accrued expenses (50,126) 496,167 (337,810)
----------- ------------ -----------
Net adjustments 1,516,308 4,588,719 (1,489,714)
----------- ------------ -----------
Net cash provided (used) by operating 1,128,565 734,078 (1,418,722)
----------- ------------ -----------
INVESTING ACTIVITY:
Additions to plant and equipment (143,128) (265,267) (258,076)
----------- ------------ -----------
FINANCING ACTIVITIES:
Exercise of stock options and warrants 140,709 424,917 190,297
Payment of dividends on common stock (267,768) (262,398) (258,091)
Principal payments on long-term debt and
capital leases 0 0 (16,785)
----------- ------------ -----------
Net cash (used) provided by financing (127,059) 162,519 (84,579)
----------- ------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 858,378 631,330 (1,761,377)
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR 1,293,999 662,669 2,424,046
----------- ------------ -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $2,152,377 $ 1,293,999 $ 662,669
=========== ============ ===========
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
MOSCOM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
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 (a company 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 companies in this industry.
Investments - The Company's 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.
As of December 31, 1994, the unrealized holding loss for the
investments was approximately $60,000. As of December 31, 1993,
the fair value of the investments approximated cost.
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 ($3,736,385 and $4,416,234 as of
December 31, 1994 and 1993, respectively) with quality financial
institutions and, by policy, limits the amount of credit
exposure to any one financial institution.
The Company's customers are not concentrated in any specific
geographic region, but are concentrated in the
telecommunications industry. As of December 31, 1994 and 1993,
one specific customer in this industry accounted for
approximately $1,399,000 and $1,528,000, 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.
<PAGE>
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. The
Company periodically records adjustments to write down certain
capitalized costs to their net realizable value (see Note 8).
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 (loss) income 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.
The consolidated statements of cash flows for 1993 and 1992 have
been restated to include the change in investments, which are
classified as trading securities under Statement of Financial
Accounting Standards No. 115, in cash provided (used) by
operating activities.
2. INVENTORIES
The major classifications of inventories as of December 31, 1994
and 1993 are:
1994 1993
Purchased parts and components $2,030,800 $2,351,491
Work in process 529,933 518,233
Finished Goods 149,495 185,173
---------- ----------
$2,710,228 $3,054,897
========== ==========
<PAGE>
3. PLANT AND EQUIPMENT
The major classifications of plant and equipment as of December
31, 1994 and 1993 are:
1994 1993
Machinery and equipment $1,875,572 $1,955,247
Computer hardware and software 2,113,911 1,902,669
Furniture and fixtures 899,164 894,250
Demonstration Equipment 86,234 84,036
Leasehold improvements 246,441 241,992
---------- ----------
$5,221,322 $5,078,194
========== ==========
Depreciation expense was approximately $398,000, $437,000 and
$384,000 for the years ended December 31, 1994, 1993 and 1992,
respectively.
4. ENGINEERING AND SOFTWARE DEVELOPMENT EXPENDITURES
Engineering and software development expenditures incurred
during the years ended December 31, 1994, 1993 and 1992 were
recorded as follows:
1994 1993 1992
Engineering and software development
expense included in the consolidated
statements of operations $1,633,902 $1,522,770 $1,220,519
Amounts capitalized and included in
the consolidated balance sheets 1,410,564 1,559,138 2,343,799
---------- ---------- ----------
Total expenditures for engineering
and software development $3,044,466 $3,081,908 $3,564,318
========== ========== ==========
Additionally, the Company recorded amortization of capitalized
software development costs of approximately $1,137,000, $970,000
and $647,000 for the years ended December 31, 1994, 1993 and
1992, 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 Company's
contributions to the plan are discretionary. No contributions
were made in 1994 and 1993 and $28,000 was contributed in 1992.
<PAGE>
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, 1994, 1993 and
1992 consists of the following:
1994 1993 1992
Service cost $ 100,852 $ 66,798 $ 49,890
Interest cost 55,909 43,912 35,591
Net amortization and deferral 36,965 29,154 26,550
--------- --------- ---------
Pension expense $ 193,726 $ 139,864 $ 112,031
========= ========= =========
A reconciliation of the pension plan's funded status with
amounts recognized in the Company's balance sheets follows:
1994 1993
Actuarial present value of accumulated
benefit obligation $ 955,464 $ 798,703
--------- ---------
Actuarial present value of projected
benefit obligation $ 955,464 $ 798,703
Plan assets - -
--------- ---------
Projected benefit obligation in excess
of plan assets 955,464 798,703
Prior service cost not yet recognized in
net periodic pension cost (482,738) (519,703)
Additional minimum liability 482,738 519,703
--------- ---------
Accrued pension expense $ 955,464 $ 798,703
========= =========
Included in the deposits and other assets caption in the
consolidated balance sheets as of December 31, 1994 and 1993 is
an intangible asset of $482,738 and $519,703, respectively,
related to the minimum liability adjustment for the unfunded
accumulated benefit obligation.
The following assumptions were used in determining the actuarial
present value of the projected benefit obligation as of December
31, 1994 and 1993.
Discount rate 7% 7%
Rate of increase in future
compensation levels 3% 3%
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 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 and
MOSCOM GmbH have a seven year term.
<PAGE>
A summary of stock option transactions for the years ended
December 31, 1994, 1993 and 1992 is shown below:
1994 1993 1992
Shares under option, beginning of year 380,780 517,111 513,801
Options granted 42,020 20,160 120,440
Options exercised at prices ranging from
$.66 to $5.00 (45,163) (129,241) (90,045)
Options terminated (36,022) (27,250) (27,085)
-------- -------- --------
Shares under option, end of year 341,615 380,780 517,111
======== ======== ========
Shares exercisable 254,459 232,402 298,778
======== ======== ========
Exercise price of shares exercisable $1.33-5.00 $1.33-5.00 $.66-4.75
========== ========== =========
A summary of warrant transactions for the years ended December
31, 1994, 1993 and 1992 is shown below:
1994 1993 1992
Warrants outstanding, beginning of year 138,383 182,216 159,770
Warrants granted 7,223 16,202 22,446
Warrants exercised (42,957) (15,035) -
Warrants expired - (45,000) -
-------- -------- --------
Warrants outstanding, end of year 102,649 138,383 182,216
======== ======== ========
Exercise price of shares exercisable $2.31-10.25 $1.75-7.75 $1.50-7.75
========== ========== =========
On January 12, 1995, the Company's Board of Directors declared a
cash dividend of $.02 per share payable on January 30, 1995.
7. SALES INFORMATION
Sales to two customers were approximately $7,180,000 and
$2,058,000, or 50% and 14% of the Company's total sales in 1994.
Sales to these two customers were approximately $7,490,000 and
$1,468,000 or 56% and 11% of the Company's total sales in 1993
and $6,296,000 and $1,376,000 or 50% and 11% of the Company's
total sales in 1992.
Export sales to unaffiliated customers in Europe were
approximately $3,843,000, $2,673,000 and $2,084,000 in 1994,
1993 and 1992, respectively. Additionally, the Company
recognized revenues under a long-term contract to a single
customer in Mexico of $1,048,000 in 1992 comprising 8% of total
sales.
<PAGE>
8. 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
Company's 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 Company's 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.
9. INCOME TAXES
The components of the (loss) income before income taxes for the
years ended December 31, 1994, 1993 and 1992 is presented below:
1994 1993 1992
Domestic (loss) income $ 73,191 $(4,113,097) $ 322,240
Foreign loss (474,835) (494,529) (214,546)
-------- ---------- --------
$(401,644) $(4,607,626) $ 107,694
======== ========== ========
<PAGE>
The income tax (benefit) provision includes the following:
1994 1993 1992
Current income tax payable
(refundable):
Federal $ (9,876) $ (156,169) $ (80,183)
State 1,550 1,489 1,489
Foreign 1,099 (2,985) -
---------- ----------- ----------
(7,227) (157,665) (78,694)
---------- ----------- ----------
Deferred income tax:
Federal (18,156) (870,968) 119,038
State (210,127) 10,663 (3,642)
Foreign (215,427) (218,472) -
Increase in valuation allowance 437,036 483,457 -
---------- ----------- ----------
(6,674) (595,320) 115,396
---------- ----------- ----------
$ (13,901) $ (752,985) $ 36,702
========== =========== ==========
The income tax (benefit) provision differs from those computed
using the statutory federal tax rate of 34%, due to the
following:
1994 1993 1992
Tax at statutory federal rate $ (136,559) $(1,566,661) $ 36,616
Differences between foreign
and U.S. tax rates (51,791) (50,332) 72,946
State taxes, net of federal
tax benefit (209,104) 8,020 (1,421)
Amortization of excess purchase
price over net assets acquired - 497,963 86,602
Tax-exempt interest income - (35,829) (95,331)
Utilization of tax credits (65,000) - (79,675)
Increase in valuation allowance 437,036 483,457 -
Other 11,507 (89,603) 16,965
----------- ------------ ----------
$ (13,901) $ (752,985) $ 36,702
=========== ============ ==========
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:
1994 1993
Domestic Foreign Domestic Foreign
General business credits $ 837,253 $ - $ 691,664 $ -
Net operating losses 470,918 502,229 427,828 291,757
Deferred compensation 389,816 - 274,536 -
Alternative minimum tax
credits 205,431 - 212,929 -
Inventory 143,881 - 90,195 -
Accounts receivable 38,867 - 32,441 -
Capitalized software (1,071,923) - (891,487) -
Fixed assets (67,549) 6,655 (72,859) 5,156
Other 3,969 13,163 (42,867) 9,707
----------- ----------- ----------- -----------
950,663 522,047 722,380 306,620
Valuation allowance (811,594) (522,047) (589,985) (306,620)
----------- ----------- ----------- -----------
Deferred asset (liability) $ 139,069 $ - $ 132,395 $ -
========== =========== =========== ===========
<PAGE>
The deferred asset as of December 31, 1994 and 1993 is included
in the deposits and other assets caption in the consolidated
balance sheet.
The Company has $1,014,850 of federal net operating loss
carryforwards available as of December 31, 1994, of which
approximately $100,000 may be utilized annually. The
carryforwards expire in varying amounts in 1998 through 2001.
The 1994 regular federal tax net operating loss remaining to be
carried forward is $68,000 which expires in the year 2008. The
valuation allowance has increased by $437,036 during the year
ended December 31, 1994, primarily due to operating loss and tax
credit carryforwards that, in the opinion of management, may not
be realized within the carryforward period.
As of December 31, 1994, the Company has $13,000 of net
operating loss carryforwards available to offset future earnings
of Moscom Limited and net operating loss carryforwards of
$1,230,000 to offset future earnings of Moscom GmbH.
The Company's tax credit carryforwards as of December 31, 1994
are as follows:
Description Amount Expiration Dates
General business credits $ 756,829 1998 - 2009
New York State investment tax credits 121,854 1996 - 2004
Alternative minimum tax credits 205,431 No expiration date
---------
$ 1,084,114
Cash paid (received) for income taxes during the years ended
December 31, 1994, 1993 and 1992 totalled $(231,885), $(10,731)
and $9,747, respectively.
10.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 $773,000, $573,000, and $583,000 for the years ended
December 31, 1994, 1993 and 1992, respectively.
Minimum lease payments as of December 31, 1994 under operating
leases are as follows:
Year Ending December 31,
1995 $ 512,000
1996 508,000
1997 467,000
1998 313,000
-----------
Total minimum lease payments $ 1,800,000
===========
<PAGE>
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 bank's prime
rate of interest or the bank's 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 Company's 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, 1994 and
1993. This agreement originally was to expire on January 31,
1995 but has been extended to January 31, 1996.
<PAGE>
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 Company's Proxy Statement for the
Annual Meeting of Shareholders to be held May 12, 1995 {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 in May 12, 1995 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. 58 Chairman of the
Montevecchio Board,
President, C.E.O.,
Director
Robert L. Boxer 41 Vice President,
Secretary
Corporate Counsel
James H. Herbert 58 Vice President,
Corporate Marketing
James W. Karr 51 Vice President,
International Sales
John P. King 57 Vice President
Customer Support and
Quality Assurance
Ronald C. Lundy 43 Treasurer
Richard C. Vail 64 Vice President,
General Manager,
Votan
Victor de Jong 49 Director
John E. Mooney 50 Director
Harvey E. Rhody 55 Director
Fred E. Strauss 67 Director
<PAGE>
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 H. Herbert has been Vice President-Corporate Marketing since
September, 1990. He was co-founder and Executive Vice President of Phoenix
Telecom, Inc. from November 1985 until joining MOSCOM. Phoenix Telecom
develops and markets application software products for the telephone
industry. Prior to founding Phoenix, he held sales and marketing management
positions with Sykes Datatronics, Inc., Northern Telecom, Inc., Mid-Continent
Telephone Corporation and Ohio Bell.
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.
John P. King has been Vice President of Corporate Quality Assurance
since August 31, 1992. He was President and CEO of Computer Consoles, Inc.
from 1990 through 1992 and COO from 1989 to 1990. Prior to that held various
management positions with Northern Telecom from 1962 to 1989.
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.
<PAGE>
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. He
has 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 Chairman of the Board of Nazareth College Board of Trustees, an
institution of higher learning; Chairman of the Boards of Park Ridge
Hospital, Inc. and 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.
<PAGE>
Item 11 Executive Compensation
Information relating to executive compensation is incorporated by
reference on pages 5, 6 and 7 of the Company's Proxy Statement for the Annual
Meeting of Shareholders to be held May 12 1995. (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 Company's Proxy Statement for the
Annual Meeting of shareholders to be held May 12, 1995.
Item 13 Certain Relationships and Related Transactions
None.
<PAGE>
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 form 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 Company's wholly owned subsidiaries would
constitute a significant subsidiary as of December 31, 1994.
<PAGE>
MOSCOM CORPORATION AND SUBSIDIARIES
Schedule VIII - Valuation and Qualifying Accounts
Years Ended December 31, 1994, 1993, and 1992
Column A Column B Column C Column D Column E
Allowance for Balance At Charged To Accounts Balance
Doubtful Accounts Beginning Costs And Written Off At End of
Of Year Expenses (Recovered) Year
1994 $132,000 $(23,188) ($ 3,812) $105,000
1993 122,000 20,254 10,254 132,000
1992 105,000 24,544 7,544 122,000
Provision for Balance At Charged to Inventory Balance
Inventory Shrinkage Beginning Cost of Written At End
& Obsolescence of Year Sales Off of Year
1994 $208,291 173,499 34,316 347,474
1993 183,884 234,500 210,093 208,291
1992 296,483 30,000 142,599 183,884
<PAGE>
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: 03/28/95
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 Board, March 28, 1995
Albert J. Montevecchio President, C.E.O. and
Director
_____________________________ Director March 28, 1995
Victor de Jong
_____________________________ Director March 28, 1995
John E. Mooney
_____________________________ Director March 28, 1995
Harvey E. Rhody
_____________________________
Fred E. Strauss Director March 28, 1995
_____________________________
Ronald C. Lundy Treasurer March 28, 1995
<PAGE>
Exhibit 11.1
MOSCOM CORPORATION
and Subsidiaries
Calculation of Earnings per Share
Twelve Months Ended December 31,
Primary
1994 1993 1992
Net Earnings (Loss) $(387,743) $(3,854,641) $ 70,992
Average common shares outstanding 6,707,449 6,589,130 6,476,645
Dilutive effect of stock options and
warrants after application of
treasury stock method - - 177,435
_________ __________ __________
Weighted average shares outstanding 6,707,449 6,589,130 6,654,080
========= ========== ==========
Earnings (Loss) per common & common
equivalent share $(.06) $(.59) $.01
========= ========== ==========
Assuming Full Dilution
Net Earnings (Loss) $(387,743) $(3,854,641) 70,992
========= ========== ==========
Weighted average shares outstanding 6,707,449 6,589,130 6,654,080
Additional dilutive effect of stock
options & warrants after application
of treasury stock method - - 14,249
_________ __________ __________
Weighted average shares outstanding 6,707,449 6,589,130 6,668,329
========= ========== ==========
Earnings (Loss) per common share
assuming full dilution $(.06) $(.59) $.01
========= ========== ==========
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 2,152,377
<SECURITIES> 1,960,969
<RECEIVABLES> 3,578,667
<ALLOWANCES> 105,000
<INVENTORY> 2,710,228
<CURRENT-ASSETS> 10,536,243
<PP&E> 5,221,322
<DEPRECIATION> 4,268,984
<TOTAL-ASSETS> 16,083,483
<CURRENT-LIABILITIES> 1,758,298
<BONDS> 0
<COMMON> 674,388
0
0
<OTHER-SE> 12,695,333
<TOTAL-LIABILITY-AND-EQUITY> 16,083,483
<SALES> 14,260,683
<TOTAL-REVENUES> 14,260,683
<CGS> 4,936,761
<TOTAL-COSTS> 14,723,705
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 105,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (401,644)
<INCOME-TAX> (13,901)
<INCOME-CONTINUING> (463,022)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (387,743)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>