FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
QUARTERLY REPORT UNDER Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 1997
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 Identification
Incorporation or Organization) Number)
3750 Monroe Avenue, Pittsford, NY 14534
(Address of principal executive offices) (Zip Code)
(716)381-6000
(Registrants telephone number, including area code)
NA
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant(1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities 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 requirement for the past 90 days.
YES XX NO __
Indicate the number of shares outstanding of each of the issuers
classes of common stock, as of June 30, 1997.
Common stock par value $.10 7,415,120 shares
This report consists of 15 pages.
<PAGE>
INDEX
PART I FINANCIAL INFORMATION Page
Item 1 Financial Statements
Consolidated Balance Sheets
June 30, 1997 and December 31, 1996 3-4
Consolidated Statement of Operations
Three and Six Months Ended June 30,
1997 and 1996 5
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7-9
Item 2 Managements Discussion and Analysis of
Financial Condition and Results of
Operations 10-12
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 13-14
<PAGE>
PART I FINANCIAL INFORMATION
MOSCOM CORPORATION
And Subsidiaries
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1997 1996*
__________________________
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents
(Including Short-term Investments
of $934,871 and $1,353,590 respectively) $ 1,464,832 $ 2,025,535
Investments 1,139,110 250,180
Accounts Receivable, trade (net of
allowance for doubtful accounts of
$320,000 and $118,000 respectively) 2,432,107 3,477,384
Inventories 1,392,617 1,887,808
Prepaid Expenses 90,628 69,719
----------- -----------
Total Current Assets 6,519,294 7,710,626
PLANT AND EQUIPMENT 4,908,906 5,655,706
Less Accumulated Depreciation (4,207,970) (4,520,657)
----------- -----------
Plant and Equipment (Net) 700,936 1,135,049
OTHER ASSETS:
License fees and purchased software
(Net of accumulated amortization
of $272,919 and $223,065 respectively) 44,185 93,520
Software Development Costs
(Net of accumulated amortization
of $1,826,040 and $1,531,780
respectively) 2,733,412 3,145,298
Deposits and Other Assets 1,423,514 1,520,130
----------- -----------
Total Other Assets 4,201,111 4,758,948
----------- -----------
TOTAL ASSETS $11,421,341 $13,604,623
=========== ===========
See notes to Consolidated Financial Statements.
*Derived from Audited Financial Statement
<PAGE>
MOSCOM CORPORATION
And Subsidiaries
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1997 1996*
_____________________________
(Unaudited)
LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 1,120,462 $ 1,170,508
Accrued Compensation and Related Taxes 1,045,318 961,155
Other Accrued Expenses 1,563,739 1,452,688
----------- -----------
Total Current Liabilities 3,729,519 3,584,351
Pension Obligation 1,980,258 1,320,682
----------- -----------
5,709,777 4,905,033
STOCKHOLDERS EQUITY
Common Stock, par value $.10
20,000,000 shares authorized;
issued and outstanding, 7,415,120
and 6,934,872 respectively 741,512 693,487
Additional Paid-in Capital 18,053,905 15,785,850
Retained Earnings (12,868,876) (7,723,351)
Cumulative Translation Adjustment (214,977) (56,396)
----------- -----------
5,711,564 8,699,590
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY $11,421,341 $13,604,623
=========== ===========
See notes to Consolidated Financial Statements.
* Derived from Audited Financial Statements
<PAGE>
MOSCOM CORPORATION
and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
June 30 June 30
(Unaudited) (Unaudited)
1997 1996 1997 1996
____________________________________________________
SALES $3,128,863 $3,347,859 $5,899,922 $6,152,139
COSTS AND OPERATING
EXPENSES:
Cost of Sales 1,175,409 904,206 1,988,200 1,858,865
Engineering &
Software Dev 724,347 564,241 1,454,740 1,167,826
Selling, General,
and Admin 2,679,746 2,567,993 5,277,985 5,174,078
Other Non-recurring
Costs 2,377,869 - 2,377,869 -
---------- ---------- ---------- ----------
Total Costs &
Operating Expenses 6,957,371 4,036,440 11,098,794 8,200,769
---------- ---------- ---------- ----------
LOSS FROM OPERATIONS (3,828,508) (688,581) (5,198,872) (2,048,630)
INTEREST INCOME 23,672 38,178 53,347 126,824
---------- ---------- ---------- ----------
LOSS BEFORE
INCOME TAXES (3,804,836) (650,403) (5,145,525) (1,921,806)
INCOME TAXES - - - (84,000)
---------- ---------- ---------- ----------
NET LOSS $(3,804,836) $(650,403) $(5,145,525) $(1,837,806)
============ =========== ============ ============
NET LOSS PER SHARE $(.52) $(.10) $(.71) $(.27)
============ =========== ============ ============
See notes to Consolidated Financial Statements.
<PAGE>
MOSCOM CORPORATION
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30
1997 1996
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(5,145,525) $(1,837,806)
----------- -----------
Adjustments to Reconcile Loss to Net Cash
Provided by Operating Activities
Depreciation and Amortization 1,306,002 914,064
Provision for Losses on Accounts Receivable 207,500 12,000
Provision for Inventory Obsolescence 281,411 100,002
Changes in Assets and Liabilities
Short Term Investments (888,930) (237,924)
Accounts Receivable 837,777 931,006
Inventories 213,780 103,136
Prepaid Expenses (20,909) (50,151)
License Fees (1,477) (27,863)
Other Assets 96,616 32,278
Accounts Payable (50,046) (62,545)
Other Long Term Liabilities 659,576 117,498
Other Current Liabilities 36,633 (516,605)
---------- ----------
Net Adjustments 2,677,933 1,314,896
---------- ----------
Net Cash Used by Operating Activities (2,467,592) (522,910)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loss on Disposal of Fixed Assets 301,919 -
Additions to Property and Equipment (52,688) (172,744)
Software Development Costs (658,422) (1,186,822)
---------- ----------
Net Cash Flows from Investing Activities (409,191) (1,359,566)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of Stock 2,289,518 -
Dividends Paid - (136,477)
Exercise of Stock Options and Warrants 103,062 219,715
Stock Retirements (76,500) (7,625)
---------- ----------
Net Cash Flows from Financing Activities 2,316,080 75,613
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (560,703) (1,806,863)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,025,535 2,727,340
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $1,464,832 $ 920,477
========== ==========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) GENERAL
The accompanying unaudited consolidated financial statements include all
adjustments of a normal and recurring nature which are, in the opinion of
Registrants management, necessary to present fairly Registrants financial
position as of June 30, 1997 and the results of its operations and cash
flows for the three and six months ended June 30, 1997 and 1996. All
significant inter-company accounts and transactions have been eliminated.
Certain information and footnote disclosures normally included in the
financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and related notes contained in the Annual Report for
the fiscal year ended December 31, 1996.
Management believes that the procedures followed in preparing these
consolidated financial statements are reasonable under the circumstances,
but the accuracy of the amounts in the financial statements are in some
respect dependent upon facts that will exist, and procedures that will be
accomplished by Registrant later in the fiscal year.
The results of operations for the three and six months ended June 30, 1997
are not necessarily indicative of the results to be expected for a full
years operation.
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.
(2) INVENTORIES
The composition of inventories at June 30, 1997 and December 31, 1996 was
as follows:
June 30, December 31,
1997 1996
-------------------------
Purchased parts and components $ 489,519 $873,918
Work in process 202,419 256,104
Finished goods 700,679 757,786
---------- ----------
$1,392,617 $1,887,808
========== ==========
<PAGE>
(3) PLANT AND EQUIPMENT
The major classifications of plant and equipment at June 30, 1997, and
December 31, 1996 are:
June 30, December 31,
1997 1996
---------------------------
Machinery and equipment $1,461,454 $1,532,876
Computer hardware and software 2,328,325 2,755,519
Furniture and fixtures 860,892 1,040,879
Leasehold improvements 258,235 326,432
---------- ----------
$4,908,906 $5,655,706
========== ==========
(4) EARNINGS PER SHARE
Weighted average shares outstanding for the three and six months ended June
30, 1997 and 1996 do not include common stock equivalents, as their effect
on earnings per share would be antidilutive. In February 1997, Statement
of Financial Accounting Standards No 128(SFAS No. 128), Earnings per Share,
was issued, superseding APB Opinion 15, Earnings per Share (Opinion 15).
This statement specifies the computation, presentation and disclosure
requirements for earnings per share (EPS) for companies with publicly held
common stock or potential common stock. This statement replaces the
reporting of primary EPS with basic EPS and changes the computation of
fully diluted EPS with dilutive EPS which uses its average share price for
the period, rather that the more dilutive greater of the average share
price of end-of-period share price required by Opinion 15. The Company
will be required to adopt SFAS No. 128 on a prospective basis at December
31, 1997. The Company believes the effect of adoption will not be
material.
(5) OTHER NON-RECURRING COSTS
The Company recorded a second quarter 1997 charge against earnings of
$2,377,869 consisting of the following.
Restructuring Charges $ 618,954
Accelerated Retirement Benefits 509,576
Other Non-Recurring Charges 1,249,339
----------
$2,377,869
==========
The restructuring charges are attributable to the closing of the Companys
European subsidiaries and its Votan division located in California, all of
which had been operating unprofitably. These closings were part of a
restructuring plan developed by the Companys management and approved by its
Board of Directors during May 1997. The plan allows the Company to focus
its attentions and resources on its core businesses and profitable markets,
while at the same time significantly reducing operating expenses. The
charge of $618,954 consists of lease termination charges, the disposal of
certain fixed assets, and severance and accrued compensation payments to
effected employees. In total, employment was reduced by 28 employees as a
result of the restructuring of these subsidiaries.
<PAGE>
The charge of $509,576 for accelerated retirement benefits relate to the
retirement of the Companys former President and CEO, Albert J.
Montevecchio, who submitted a proposal for his retirement to the Board of
Directors on May 21. This charge represents an acceleration of charges
that normally would have been accrued by the Company over the next four
years had Mr. Montevecchio remained with the Company to age 65 as assumed
by his employment agreement with the Company.
The other non-recurring charges of $1,249,339 consist of a variety of items
including $276,712 of costs incurred in connection with the withdrawn Votan
initial public offering, the write-off of accounts receivable of $492,500
associated with US West and certain foreign accounts, the write-off of
capitalized software associated with the Votan voice technologies of
$470,876 and miscellaneous expenses of $9,251.
<PAGE>
Item 2 Managements Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Sales for the three and six month periods ended June 30, 1997 of $3,128,863
and $5,899,922 respectively, represented decreases of 7% and 4% from the
sales of $3,347,859 and $6,152,139 for the same three and six month periods
ended June 30, 1996. Sales of the Companys core call accounting products
for the first six months of 1997 were almost identical to the sales
achieved during the first half of 1996, with sales to Lucent Technologies,
the Companys largest customer, increasing by 9% from the prior years level.
However, 1997 sales to foreign markets decreased by 12% from the sales
level attained during the first six months of 1996 mainly as a result of
lower shipments to Siemens, traditionally the Companys largest foreign
customer.
The prospects for the Companys newest product offerings, Verabill IS and
TMS, continue to improve although they are not yet contributing
significantly to revenues. Several orders for Verabill IS were received in
the second quarter for shipment in the third quarter of the year and the
company is aware of a backlog of proposals outstanding from its
distributors. The TMS product, the Companys newest telemanagement software
product was introduced at a Lucent Technologies users group meeting in
June, and is currently in the certification process at Lucent and beta
tests. The Company anticipates shipments of TMS will commence in the
fourth quarter.
The second quarter of 1997 included a series of events and changes, some of
which had an immediate and negative impact on second quarter results and
some of which will have far reaching and a future positive impact upon the
Companys results.
On May 6, 1997 the Company announced that it was withdrawing its attempted
initial public offering of its subsidiary, Votan Corporation, based upon
indications from the offering underwriter that it could not be successfully
completed.
The Company has taken a charge against second quarter results of $276,712
for expenses incurred in connection with the attempted offering. Upon
withdrawal of the offering the company closed down the operations of Votan
in Pleasanton, California and consolidated the remaining functions into
MOSCOMs operations in Pittsford, New York. As a result of this closing the
Company expects to reduce its annual operating expenses by approximately $2
million per year. The Company is exploring various alternatives including
the sale and licensing of the Votan technology. As a result of the
closing, the Company recorded a second quarter charge of $450,876 for
unamortized capitalized software related to a variety of voice products, as
well as capital asset write-offs and severance charges.
On May 20 the Company announced that it has received notification from US
West, that MOSCOM will not be awarded a contract for a station message
detail record collection and transmission system. In November 1996, US
West had sent MOSCOM a letter of intent, stating that MOSCOM had been
selected as the supplier of choice for this project. US West stated that
the main reason for their decision was their desire to have a UNIX-based
solution, rather that MOSCOMs proposed Windows NT solution. As a result
the Company reversed $292,500 of revenue previously billed to US West
against this project.
<PAGE>
Also during the second quarter the Company announced that it was closing
MOSCOM Ltd and Global Billing Services Inc., subsidiaries located in
England and severely cutting back employment at MOSCOM GMBH, the Companys
German subsidiary with the intention of closing the German office by the
end of September 1997. It is the Companys opinion that it could not
operate its European subsidiaries profitably. The Company will continue to
sell to its European customers, dealers and distributers, but will provide
sales and technical support directly from the United States. The Company
expects a reduction in annual operating expenses from these closings of
approximately $2.2 million per year. The Company recorded a second quarter
charge of $618,954 in restructuring costs consisting of lease termination
charges, capital asset write-offs, and severance charges attributable to
the closing of the European subsidiaries and the Votan division.
On May 21, 1997 the Companys President and CEO Albert J. Montevecchio
submitted a proposal for retirement. Subsequently David G Mazzella was
named MOSCOMs new CEO, replacing Mr. Montevecchio. Mr. Mazzella joined
MOSCOM as its President and Chief Operating Officer in February of 1997.
Mr. Mazzella has over 15 years of senior management experience in the
telecommunications industry. Previously, he was President and CEO of
NPC/Scotgroup, Corporate Vice President of Glenayre Electronics, and
President and CEO of Multitone Electronics Incorporated.
The Company and Mr. Montevecchio have been engaged in negotiations over his
retirement compensation. Proposals outstanding from each party involve
retirement payments to be made to Mr. Montevecchio over a seventeen year
period, structured to accelerate charges that would otherwise have accrued
under an insurance funded executive retirement plan. The acceleration of
charges resulted in a charge against earnings in the second quarter of
$509,576.
Cost of sales percentages of 38% for the three months ended June 30, 1997
and 34% for the six months ended June 30, 1997 compared with cost of sales
percentages of 27% and 30% for the same three and six month periods of
1996. The higher cost of sales were attributable to the non-recurring
inventory write-off associated with the closing of the Votan subsidiary.
Cost of sales percentages are expected to return to historical levels
during the third and fourth quarters of 1997.
Net engineering and software development expenses for both the three and
six month periods of 1997 rose from 1996 levels for the same three and six
month periods despite lower gross spending. This was the result of
significantly lower percentage of engineering and development spending
being capitalized as illustrated by the following table.
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
Gross Expenditures for
Engineering & Software
Development 1,089,511 1,267,175 2,113,162 2,354,648
Less Costs Capitalized (365,164) (702,934) (658,422) (1,186,822)
---------- ---------- ---------- ----------
Net Engineering & S/W
Development Expense $ 724,347 $ 564,241 $1,454,740 $1,167,826
========== ========== ========== ==========
<PAGE>
Selling general and administrative expense for the six months ended June
30, 1997 were $5,277,985, an increase of 2% over expenses incurred of
$5,174,078 for the first six months of 1996. The increase was attributable
to higher selling and administrative costs associated with the Companys
Votan subsidiary.
Given the closing of the Votan and European subsidiaries the Company
expects to realize significant reductions in operating expenses throughout
the second half of 1997.
The Company recorded other non-recurring costs of $2,377,869 during the
second quarter of 1997 related to the effects of restructuring, the Votan
IPO and other events mentioned earlier in this report. These costs are
summarized in Note 5 of the financial statements included with this report.
After the effect of the non-recurring charges the company recorded a loss
of $3,804,836 or $0.52 per share for the quarter ended June 30, 1997. For
the same three months ended June 30, 1996 the Company recorded a loss of
$650,403 or $0.10 per share.
For the six months ended June 30, 1997 the Company incurred a loss of
$5,145,525 or $0.71 per share, versus a loss of $1,837,806 or $0.27 per
share for the first six months of 1996.
Liquidity and Capital Resources
- -------------------------------
The Companys total cash position (cash plus investments) at June 30, 1997
of $2,603,942, compares with total cash positions of $2,275,715 at December
31, 1996 and $4,126,210 at June 30, 1996.
Current Ratios at June 30, 1997, December 31, 1996 and June 30, 1996 were
1.7, 2.2, and 4.4 respectively.
The Company has taken a number of measures over the last six months in
order to secure its short term financing as well as to provide for future
growth.
On June 4, 1997 the Company entered into a private equity line of credit
agreement (Equity Line) with a single investor (Investor). Under the
Equity Line the Company has the right for a period of two years to sell to
the Investor shares of the Companys Common Stock at a price equal to 88% of
the average bid price of the stock for the subsequent ten trading days.
During the two year period the Company may sell up to $6 million of common
stock to the Investor with no more than $500,000 in any single month. As
an initial draw the Company received $750,000 from the Investor in June
1997.
During the first quarter of 1997, the Company signed an agreement with a
major commercial bank for a secured line of credit agreement for up to
$500,000. There have been no borrowings against this agreement.
<PAGE>
In addition to the subsidiary closings described in the management
discussion and analysis portion of this report, the corporate headquarters
of MOSCOM Corporation also underwent a complete restructuring and
consolidation of functions in order to operate more efficiently. Since
last November employment has been reduced from 205 employees worldwide to
approximately 130 employees as of the date of this report. It is expected
that the aggregate impact of the restructuring and employment reductions
will be a savings of approximately $5 million per year in operating
expenses, and provide for positive cash flows from operations by early
fourth quarter.
Given the effects of restructuring, combined with current cash balances
available and the credit agreements referred to above, the Company believes
that sufficient capital resources are available to meet its financial needs
over the next twelve months
<PAGE>
PART II - OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K
(1) Registrants Consolidated Financial Statements for the three and six
months ended June 30, 1997 and 1996 are set forth in Part I, Item 1 of
this Quarterly Report on Form 10-Q.
(2) Calculation of earnings per share.
<PAGE>
Exhibit A: (2)
MOSCOM CORPORATION
and Subsidiary
Calculations of Earnings Per Share
<TABLE>
Three Months Ended Six Months Ended
June 30 June 30
(Unaudited) (Unaudited)
<CAPTION>
1997 1996 1997 1996
_________________________________________________________
<S> <C> <C> <C> <C>
Basic
- -----
Net Loss $(3,804,836) $(650,403) $(5,145,525) $(1,837,806)
=========== ========= =========== ===========
Weighted Common Shares Outstanding 7,280,931 6,861,335 7,185,016 6,846,293
Dilutive Effect of Stock Options
After Application of Treasury
Stock Method - - - -
----------- --------- ----------- -----------
Weighted Average Shares Outstanding 7,280,931 6,861,335 7,185,016 6,846,293
=========== ========= =========== ===========
Loss Per Common and Common
Equivalent Share $(.52) $(.10) $(.71) $(.27)
=========== ========= =========== ===========
Assuming Full Dilution
- ----------------------
Net Loss $(3,804,836) $(650,403) $(5,145,525) $(1,837,806)
=========== ========= =========== ===========
Weighted Average Shares Outstanding 7,280,931 6,861,335 7,185,016 6,846,293
Additional Dilutive Effect of
Stock Options and Warrants after
Application of Treasury Stock Method - - - -
----------- --------- ----------- -----------
Weighted Average Shares Outstanding 7,280,931 6,861,335 7,185,016 6,846,293
=========== ========= =========== ===========
Loss per Common Share Assuming Full
Dilution $(.52) $(.10) $(.71) $(.27)
=========== ========= =========== ===========
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOSCOM CORPORATION
REGISTRANT
Date: _________________
________________________
David G. Mazzella
President & CEO
Date: __________________
_________________________
Ronald C. Lundy
Treasurer
(Chief Accounting Officer)
<PAGE>
6
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,464,832
<SECURITIES> 1,139,110
<RECEIVABLES> 2,752,107
<ALLOWANCES> 320,000
<INVENTORY> 1,392,617
<CURRENT-ASSETS> 6,519,294
<PP&E> 4,908,906
<DEPRECIATION> 4,207,970
<TOTAL-ASSETS> 11,421,341
<CURRENT-LIABILITIES> 3,729,519
<BONDS> 0
0
0
<COMMON> 741,512
<OTHER-SE> 4,970,052
<TOTAL-LIABILITY-AND-EQUITY> 11,421,341
<SALES> 3,128,863
<TOTAL-REVENUES> 3,128,863
<CGS> 1,175,409
<TOTAL-COSTS> 4,579,502
<OTHER-EXPENSES> 2,377,869
<LOSS-PROVISION> 320,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,804,836)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,804,836)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,804,836)
<EPS-PRIMARY> (.52)
<EPS-DILUTED> (.52)
</TABLE>
