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 September 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 September 30, 1997.
Common stock par value $.10 7,429,122 shares
This report consists of 15 pages.
<PAGE>
INDEX
PART I FINANCIAL INFORMATION Page
Item 1 Financial Statements
Consolidated Balance Sheets
September 30, 1997 and December 31, 1996 3-4
Consolidated Statements of Operations
Three and Nine Months Ended
September 30, 1997 and 1996 5
Consolidated Statements of Cash Flows -
Nine Months Ended September 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
September 30, December 31,
1997 1996*
____________________________
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents
(Including Investments of $630,105
and $1,353,590 respectively) $ 813,190 $ 2,025,535
Investments 1,333,270 250,180
Accounts Receivable, trade (net of
allowance for doubtful accounts of
$290,000 and $118,000 respectively) 2,397,501 3,477,384
Inventories 1,223,545 1,887,808
Prepaid Expenses 62,647 69,719
----------- -----------
Total Current Assets 5,830,153 7,710,626
PLANT AND EQUIPMENT 4,959,378 5,655,706
Less Accumulated Depreciation (4,267,155) (4,520,657)
----------- -----------
Plant and Equipment (Net) 692,223 1,135,049
OTHER ASSETS:
License fees and purchased software
(Net of accumulated amortization
of $281,771 and $223,065 respectively) 36,518 93,520
Software Development Costs
(Net of accumulated amortization of
$841,265 and $1,531,780 respectively) 2,902,047 3,145,298
Deposits and Other Assets 1,435,361 1,520,130
----------- -----------
Total Other Assets 4,373,926 4,758,948
----------- -----------
TOTAL ASSETS $10,896,302 $13,604,623
=========== ===========
See notes to Consolidated Financial Statements.
*Derived from Audited Financial Statement
<PAGE>
MOSCOM CORPORATION
And Subsidiaries
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996*
____________________________
(Unaudited)
LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 685,540 $ 1,170,508
Accrued Compensation and Related Taxes 755,291 961,155
Other Accrued Expenses 1,706,073 1,452,688
----------- -----------
Total Current Liabilities 3,146,904 3,584,351
Pension Obligation 1,973,812 1,320,682
----------- -----------
TOTAL LIABILITIES 5,120,716 4,905,033
STOCKHOLDERS EQUITY
Common Stock, par value $.10
20,000,000 shares authorized;
issued and outstanding, 7,429,122
and 6,934,872 respectively 742,912 693,487
Additional Paid-in Capital 18,105,253 15,785,850
Accumulated Deficit (12,841,630) (7,723,351)
Cumulative Translation Adjustment (230,949) (56,396)
----------- -----------
5,775,586 8,699,590
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY $10,896,302 $13,604,623
=========== ===========
See notes to Consolidated Financial Statements.
* Derived from Audited Financial Statements
<PAGE>
<TABLE>
<CAPTION>
MOSCOM CORPORATION
and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
September 30 September 30
(Unaudited) (Unaudited)
1997 1996 1997 1996
______________________________________________________
<S> <C> <C> <C> <C>
NET SALES $3,204,875 $4,055,118 $9,104,797 $10,207,257
COSTS AND OPERATING EXPENSES:
Cost of Sales 692,319 1,313,685 2,680,519 3,172,550
Engineering & Software Dev 418,625 1,251,126 1,873,365 2,418,952
Selling, General, and Admin 2,079,310 3,099,727 7,357,295 8,273,805
Other Non-recurring Costs - 1,560,407 2,377,869 1,560,407
---------- ----------- ----------- -----------
Total Costs & Operating Expenses 3,190,254 7,224,945 14,289,048 15,425,714
---------- ----------- ----------- -----------
INCOME (LOSS)FROM OPERATIONS 14,621 (3,169,827) (5,184,251) (5,218,457)
INTEREST INCOME 12,625 52,766 65,972 179,590
---------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 27,246 (3,117,061) (5,118,279) (5,038,867)
INCOME TAXES - - - (84,000)
---------- ----------- ----------- -----------
NET INCOME (LOSS) $ 27,246 $(3,117,061) $(5,118,279) $(4,954,867)
========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE $ .00 $(.45) $(.71) $(.72)
===== ===== ===== =====
</TABLE>
See notes to Consolidated Financial Statements.
<PAGE>
MOSCOM CORPORATION
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30
1997 1996
___________________________
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(5,118,279) $(4,954,867)
----------- -----------
Adjustments to Reconcile Net Loss to Net Cash
Provided by Operating Activities
Depreciation and Amortization 1,525,285 2,254,841
Provision for Losses on Accounts Receivable 211,250 18,000
Provision for Inventory Obsolescence 306,412 225,003
Changes in Assets and Liabilities
Short Term Investments (1,083,090) 1,049,032
Accounts Receivable 868,633 242,205
Inventories 357,851 (321,545)
Prepaid Expenses 7,072 (3,064)
License Fees (1,858) (32,809)
Other Assets 84,769 31,218
Accounts Payable (484,968) 613,646
Other Long Term Liabilities 653,130 176,247
Other Current Liabilities (127,032) 253,164
----------- -----------
Net Adjustments 2,317,454 4,505,938
----------- -----------
Net Cash Used by
Operating Activities (2,800,825) (448,929)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loss on Disposal of Fixed Assets 301,919 -
Additions to Property and Equipment (103,160) (345,735)
Software Development Costs (979,107) (1,371,724)
----------- -----------
Net Cash Flows from Investing Activities (780,348) (1,717,459)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of Stock 2,278,267 -
Dividends Paid - (136,477)
Exercise of Stock Options and Warrants 167,061 275,771
Stock Retirements (76,500) (7,626)
----------- -----------
Net Cash Flows from Financing Activities 2,368,828 131,668
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,212,345) (2,034,720)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 2,025,535 2,727,340
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 813,190 $ 692,620
=========== ===========
<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 September 30, 1997 and the results of its operations and
cash flows for the three and nine months ended September 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 nine months ended September 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 September 30, 1997 and December 31, 1996
was as follows:
September 30, December 31,
1997 1996
____________________________
Purchased parts and components $ 478,925 $873,918
Work in process 178,925 256,104
Finished goods 565,695 757,786
---------- ----------
$1,223,545 $1,887,808
========== ==========
<PAGE>
(3) PLANT AND EQUIPMENT
The major classifications of plant and equipment at September 30, 1997, and
December 31, 1996 are:
September 30, December 31,
1997 1996
Machinery and equipment $1,462,300 $1,532,876
Computer hardware and software 2,377,951 2,755,519
Furniture and fixtures 860,892 1,040,879
Leasehold improvements 258,235 326,432
---------- ----------
$4,959,378 $5,655,706
========== ==========
(4) EARNINGS PER SHARE
Weighted average shares outstanding for the nine months ended September 30,
1997 and the three and nine months ended September 30, 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 requires the reporting of basic EPS with
diluted EPS. The Company will be required to adopt SFAS No. 128 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 months ended September 30, 1997 were $3,204,875, a 21%
decline from sales of $4,055,118 for the three months ended September 30,
1996. Sales for the nine months ended September 30, 1997 were $9,104,797,
or 11% lower than the $10,207,257 of sales realized for the same nine month
period of 1996. The reduced sales levels are the direct result of planned
reductions in operations, incorporated in a restructuring plan undertaken
by the company during the second quarter of 1997, that focused on
discontinuing unprofitable operations and product lines outside of the
Companys areas of core business strength.
Although revenues declined as expected due to closing of the Companys
European subsidiaries Moscom Ltd and Global Billing Systems in England,
Moscom GMBH in Germany, and Votan Corporation previously based in
California, the resulting reduction in operating expenses more than offset
those revenue losses, resulting in the Companys first operating profit in
seven quarters. While reducing expenses the Company also focused intensive
efforts on their best high margin revenue prospects. The Emerald CAS for
Windows call accounting software continues to sell well through Lucent
Technologies in the United States and through newly tapped Lucent sales
offices and dealers in South America, the Middle East, and Asia. Sales
were also strong through Siemens Argentina and NCR in Chile. Overall sales
of call accounting products in markets other than the US and Europe are up
167% from prior year levels and represented 14% of total sales for the
third quarter of 1997.
Moscoms Verabill customer care and billing system was installed and
accepted in August by Nokia Telecommunications first customer, a
competitive local exchange carrier in Germany. On the basis of that
success, Nokia has begun including Verabill on other proposals to telephone
companies in the deregulating German market. Alcatel has four Verabill
implementations in progress and is expanding its marketing of Verabill. As
previously reported, the Companys new TMS system has been certified for
private label distribution by a major domestic switch vendor. There is
strong initial demand for the product and installations are expected to
begin in the fourth quarter of 1997.
Cost of sales percentages of 22% and 29% for the three and nine month
periods of 1997 compare with cost of sales percentages of 32% and 31% for
the same three and nine month periods of 1996. The improved gross margins
are the result of the combination of a favorable product mix which
contained a heavy concentration of lower cost software based products,
particularly in the third quarter of 1997, and a significant reduction in
amortization expense associated with capitalized software. The reduced
amortization expense primarily results from the second quarter 1997 write-
off of unamortized software associated with a variety of voice recognition
products associated with the Companys now closed Votan subsidiary.
<PAGE>
As depicted in the following table, engineering and software development
costs for the three and nine month periods of 1997 were significantly below
the expense levels realized for the same three and nine month periods of
1996 on both a gross expense and net of capitalization basis. For the
three months ended September 30, 1997 versus 1996 the reduction in net
engineering and development expense reduction was 67%, and for the nine
months ended September 30, 1997 versus 1996 the reduction in net expense
was 23%.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
_______________________ ________________________
<S> <C> <C> <C> <C>
Gross Expenditures for Engineering
& Software Development $ 739,310 $1,436,028 $2,852,472 $3,790,676
Less Costs Capitalized (320,685) (184,902) (979,107) (1,371,724)
--------- ---------- ---------- ----------
Net Engineering & S/W Development
Expense $ 418,625 $1,251,126 $1,873,365 $2,418,952
========= ========== ========== ==========
</TABLE>
Selling, general, and administrative expenses for the quarter ended
September 30, 1997 were $2,079,310, representing a reduction of 33% from
the third quarter 1996 expense level of $3,099,727. The reduced expense
level is attributable to the closing of the Companys subsidiaries in
England, Germany, and California.
Selling general and administrative expenses for the nine months ended
September 30, 1997 were $7,357,295 versus $8,273,805 for the first nine
months of 1996, representing a decrease of 11%. The Company plans to
increase spending for selling, general, and administrative expenses during
the fourth quarter and beyond in order to strengthen implementation and
support capabilities to meet anticipated demand for the Companys network
products, particularly with regard to the initial shipment and installation
of the TMS product, scheduled for the fourth quarter of 1997.
As a result of eliminating unprofitable operations and products the Company
realized a profit of $27,246 for the quarter ended September 30, 1997.
This profit contrasts with a loss of $3,117,061 for the same quarter of
1996.
Liquidity and Capital Resources
The Companys total cash position (cash plus investments) at September 30
was $2,146,460. This compared with a cash and investment position of
$2,275,715 at December 31, 1996. The Company began generating positive
cash flows from operations mid-way through the third quarter of 1997 and
expects that trend to continue through the end of 1997.
<PAGE>
Current ratios at September 30, 1997, December 31, 1996 and September 30,
1996 were 1.9, 2.2, and 2.4 respectively.
The Company has taken a number of measures over the last nine months in
order to secure its short term financing as well as to provide for future
growth.
As reported in the Second Quarter 10-Q Report, the Company has 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 form the Investor in June 1997. Subsequent to the date of this
report the Company utilized an additional $200,000 against this Equity
Line.
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.
As indicated by the Companys profitable results for the third quarter of
1997 the restructuring of the Company discussed in the Second Quarter 10-Q
Report has yielded the expected results. That success along with the
current cash position and credit arrangement referred to above leads the to
Company believe that sufficient resources exist to meet its financial needs
and growth 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 nine
months ended September 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>
<TABLE>
Exhibit A: (2)
MOSCOM CORPORATION
and Subsidiary
Calculations of Earnings Per Share
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
(Unaudited) (Unaudited)
1997 1996 1997 1996
____________________________________________________________
<S> <C> <C> <C> <C>
Basic
Net Income (Loss) $ 27,246 $(3,117,061) $(5,118,279) $(4,954,867)
=========== =========== =========== ===========
Weighted Common Shares Outstanding 7,423,011 6,873,584 7,264,348 6,855,383
Dilutive Effect of Stock Options
After Application of Treasury
Stock Method 156,200 - - -
----------- ----------- ----------- -----------
Weighted Average Shares Outstanding 7,579,211 6,873,584 7,264,348 6,855,383
=========== =========== =========== ===========
Income (Loss) Per Common and Common
Equivalent Share $ .00 $(.45) $(.71) $(.72)
=========== =========== =========== ===========
Assuming Full Dilution
Net Income (Loss) $ 27,246 $(3,117,061) $(5,118,279) $(4,954,867)
=========== =========== =========== ===========
Weighted Average Shares Outstanding 7,579,211 6,873,584 7,264,348 6,855,383
Additional Dilutive Effect of
Stock Options and Warrants after
Application of Treasury Stock Method - - - -
----------- ----------- ----------- -----------
Weighted Average Shares Outstanding 7,579,211 6,873,584 7,264,348 6,855,383
=========== =========== =========== ===========
Income (Loss) per Common Share
Assuming Full Dilution $ .00 $(.45) $(.71) $(.72)
=========== =========== =========== ===========
</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>
2
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 813,190
<SECURITIES> 1,333,270
<RECEIVABLES> 2,687,501
<ALLOWANCES> 290,000
<INVENTORY> 1,223,545
<CURRENT-ASSETS> 5,830,153
<PP&E> 4,959,378
<DEPRECIATION> 4,267,155
<TOTAL-ASSETS> 10,896,302
<CURRENT-LIABILITIES> 3,146,904
<BONDS> 0
0
0
<COMMON> 742,912
<OTHER-SE> 5,032,674
<TOTAL-LIABILITY-AND-EQUITY> 10,896,302
<SALES> 3,204,875
<TOTAL-REVENUES> 3,204,875
<CGS> 692,319
<TOTAL-COSTS> 3,190,254
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 290,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 27,246
<INCOME-TAX> 0
<INCOME-CONTINUING> 27,246
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,246
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
</TABLE>
