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, 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
incorporation or organization) Identification Number)
3750 Monroe Avenue, Pittsford, NY 14534
(Address of principal executive offices)
(716) 381-6000
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act
NONE N/A
(Title of Each Class) (Name of each exchange
on which registered)
Common Stock, $.10 Par Value
(Securities registered pursuant to Section 12(g) of the Act)
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any Amendment to this Form 10-K. ___
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 of 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES x NO
____ ____
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of January 30, 1998 was $41,436,349.
The number of shares of Common Stock, $.10 par value, outstanding on
January 30, 1998 was 7,549,703.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
PART I - None
PART II - None
PART III - Item 10 Pages 3-5 of the Companys Proxy
Statement for the Annual Meeting of
Shareholders to be held May 14, 1998.
under Election of Directors and
Compliance With Section 16 (a).
Item 11 Pages 21-26 of the Companys Proxy
Statement for the Annual Meeting of
Shareholders to be held May 14, 1998.
under Executive Compensation.
Item 12 The table contained on pages 2-3
and the information under Election
of Directors on page 4 of the
Companys Proxy Statement for the
Annual Meeting of Shareholders to
be held May 14, 1998.
<PAGE>
PART I
Item 1 Business
MOSCOM was incorporated in New York in January 1983 and reincorporated
in Delaware in 1984.
MOSCOM Corporation produces telecommunications management systems and
cost control systems for corporations and other users of private branch
exchange (PBX) systems plus billing and customer care systems for providers
of network services in the global market.
MOSCOMs historical core business has been based on sales of
telemanagement systems and software packages including telephone call
accounting and fraud detection products. Moscom is one of the worlds
leading producers of call accounting systems and has sold more than 80,000
of these, and related products, to customers in more than 70 countries.
MOSCOMs call accounting systems are sold through leading manufacturers and
resellers of telephone systems including Ameritech, Lucent Technologies,
Philips, Siemens and Sprint-United Telecom.
MOSCOMS VeraBill software is a network billing and customer care
system used by small to mid-range telephone and wireless network operators
to manage customer accounts, generate bills, track payments and support
customer service operations. MOSCOM has targeted start-up service
providers and more established telephone companies deploying new network
services as potential purchasers of VeraBill systems. VeraBill system
sizes range from 5,000 to more than half a million subscriber lines.
Growth in this market has resulted from the deregulation and liberalization
of monopoly telephone markets throughout the world including the U.S.
Telecommunications Deregulation Act of 1996. Growth in his market has also
been stimulated by the introduction of many new wireless network services
including digital cellular and personal communications service (PCS) now
being deployed widely around the world. The VeraBill product is marketed
worldwide by wireline and wireless network equipment manufacturers
including Alcatel and Nokia Telecommunications.
MOSCOMs products are designed for the global market. During the past
year, 25% of MOSCOMs revenues were derived outside the United States, from
customers in more than 50 countries.
MOSCOMs headquarters, operations, engineering and support staff is
located in a 61,000 square foot leased facility located in Pittsford, New
York. Approximately 25 field sales and support personnel are located in
cities with high concentrations of MOSCOMs products.
Telemanagement Systems
MOSCOM is among the worlds leading producers of telemanagement
products which are used by organizations to optimize the usage of their
<PAGE>
telecommunications services and equipment, and to control telephone
expenses. Telemanagement products include call accounting systems,
telephone fraud detection products and facilities management systems.
Call Accounting
MOSCOMs initial telemanagement product lines were call accounting
systems which connect to a business telephone system (or PBX) to collect,
store, and process information on every outside telephone call made.
Call accounting systems give businesses easy access to complete
information on telephone usage including the dialed number, calling
extension, call duration, time of day, destination, trunk line and cost of
each call. All of MOSCOMs call accounting products provide this
fundamental information, in graphical summary and detailed report formats,
without monitoring actual phone conversations.
The primary appeal of call accounting systems is that they save money
on telephone and network equipment bills. Telephone bills, which typically
represent the third largest business expense after payroll and facilities,
can be reduced by 10% - 30% through heightened awareness and management.
As a result, the cost of a call accounting system can generally be
recovered in less than one year through direct expense reduction.
Call accounting systems are purchased and used for many other valuable
reasons as well, including:
* Traffic analysis to determine an optimal number of trunks and best
long distance carrier configuration.
* Allocating telephone expense to specific cost centers or clients based
on actual use.
* Producing revenues by reselling phone services to clients or hotel
guests.
* Detecting fraudulent use of the phone system by hackers and
unauthorized use of company phones for personal calls or 900 numbers.
* Evaluating employee productivity.
MOSCOMs premier call accounting product is the Emerald CAS for Windows
software. Emerald CAS for Windows comes in affordable model sizes ranging
from 25 to 20,000 telephone extensions. A significant feature of Emerald
CAS for Windows not found in predecessor products is the ability to collect
and process data from up to 100 different remote telephone switches (PBXs)
from one central location. MOSCOMs economical Pollable Storage Unit (PSU)
collects data from the remote PBXs and stores it until polled by a central
Emerald CAS for Windows system. Private label versions of Emerald CAS for
Windows are sold by Lucent Technologies, Siemens and Philips. Emerald CAS
for Windows is designed to be an international product. It supports
worldwide call rating, all world currencies, date schemes and privacy
practices. Most importantly, Emerald CAS for Windows is available in
English, German, Spanish, Italian, Russian and Czech.
<PAGE>
MOSCOM also produces call accounting software products based on the
UNIX operating system. These products are marketed very successfully by
Lucent Technologies as an integrated solution with Lucent Technologies
smaller telephone systems and application processors.
As a complement to a pure software solution MOSCOM also offers a
proprietary platform for call management. The Abacus call management
system is an economical, self-contained unit about the size of a laptop
computer which includes a full keyboard and large LCD screen. It offers
full call accounting functionality for small to mid-sized customers with up
to 400 extensions. Abacus is designed to appeal to dealers of smaller,
simpler telephone systems and small company office managers due to its easy
plug and play installation, plus its simple one key command interface and
intuitive screen instructions. Abacus is also pollable by Emerald CAS for
Windows to enable use by multi-site organizations. The Abacus product is
sold through Siemens in Argentina and by Lucent Technologies in the United
States.
PBX fraud detection systems address a problem that is estimated to
exceed $1 billion annually - the theft of telephone service through PBX
hacking. PBX owners use call accounting systems to spot potential fraud
and take corrective measures to minimize the loss. MOSCOM offers an
optional HackerTracker module with the Emerald CAS for Windows system to
automate the detection of fraud 24 hours per day and instantly send out
alarms by printed report, audio signal, pager or fax to initiate preventive
measures. The Abacus call management system also provides fraud detection
and notification features to users.
The market for telemanagement products is a highly fragmented one
supplied primarily by small firms selling directly to end users. What sets
MOSCOM apart and enables MOSCOM to maintain a leading worldwide market
share is our distribution relationships with some of the largest sales and
support organizations in the industry. The strength, breadth and quality
of MOSCOMs distribution network is unsurpassed, including Lucent
Technologies, Ameritech, and Sprint-United in the United States, and
Siemens, Philips, and Lucent Technologies in international markets.
A typical range of end user prices for MOSCOMs call accounting and
fraud detection systems is from $2,000 to $40,000 per system.
TMS For Windows
TMS for Windows is a client/server based enterprise management system
that automates cost control and service operations in large corporate voice
and multimedia network environments. TMS for Windows goes beyond call
accounting with fully integrated modules for service and maintenance
management, network equipment tracking, as well as local and long distance
call management. TMS for Windows runs on highly scalable single or multi-
processor Windows NT computer platforms, the de facto standard for
client/server computing in information technology departments throughout
the world.
Delivery of TMS for Windows to end user customers began in December of
1997. MOSCOM markets TMS for Windows primarily through manufacturers and
distributors of telecommunications equipment. The first distributor of TMS
for Windows is Lucent Technologies which is now marketing TMS for Windows
as a Lucent product with the Lucent Definity Enterprise Communications
server.
<PAGE>
Target customers for TMS for Windows are mid to large size enterprises
from all industries and include multi-national corporations, government
agencies, and medical and educational institutions. Typical users will
have 2,000 to 50,000 telephone extensions in multiple facilities. End user
prices will typically range from $45,000 to $235,000 per system.
Central Office Telemanagement
MOSCOMs INFO/MDR products capture, at the central office, vital
information in the form of Message Detail Records on every call handled by
that particular central office switch. These raw detail records are then
processed into meaningful formats and distributed to a central telephone
company billing processor or to business subscribers.
Telephone companies use INFO/MDR to enhance the appeal of Centrex and
Virtual Private Network service. With Centrex service, business customers
utilize the telephone companys central office switch to route calls to
individual extensions rather than a PBX. INFO/MDR gives telephone
companies the ability to provide complete, timely and accurate call detail
information to customers, economically and efficiently. Telephone
companies are also using INFO/MDR to provide message accounting for virtual
private networks, another rapidly growing segment of the telecommunications
market. Virtual private networks utilize customized software design to
provide private network functionality over the common carrier public
network.
Telephone companies with multiple INFO/MDR systems installed include
Alltel, Century Telephone, Citizens Utilities, Mercury Communications (in
the UK), Sprint, and Teleport Communications Group. End user prices for
INFO/MDR range from $26,000 to $80,000 per system
Billing Products and Services
Deregulation and the introduction of new wireless services are the
most significant forces affecting the telecommunications industry
worldwide. One affect is to significantly expand demand for products
designed for new entrants to the industry. Another is to drastically
change the requirements of established service providers suddenly facing a
dramatically new environment. MOSCOMs VeraBill family of software
products is designed for this new telecommunications world.
VeraBill is a comprehensive network and operations support system
for telecommunications, paging and internet service providers. Based on
highly scalable Windows NT client/server architecture, VeraBill can be
configured to support operators with as few as 5,000 or as many as 400,000
subscribers. The next scheduled release of VeraBill will support customers
with up to 1 million subscribers. VeraBill supports wireline as well as
cellular, PCS, and other wireless services. VeraBill is an operations
support system for managing billing, receivables, service and work orders,
plus network and customer premises equipment. These functions are fully
integrated with a common database but modular in design to enable customers
to select the functionality required. VeraBills client server architecture
allows users to easily add subscriber capacity as demanded. This is a
particularly attractive feature for emerging service providers with rapid
expansion plans. Since VeraBill is based on Microsofts pervasive Windows
operating system, operator training is very straightforward. Computer
hardware costs are significantly lower than with traditional billing
systems.
<PAGE>
VeraBill is capable of rating and billing telecommunications services
worldwide. Billing formats and schemes can be adjusted quickly by the
network operators to accommodate new marketing plans or to meet competitive
offerings. Event message rating is highly flexible and supports rating
schemes based on dialed number, rating bands or meter pulse algorithms.
VeraBill is also designed to manage multiple dialing plans simultaneously
and provide tariff options specific for individual telephone numbers. This
flexibility affords service providers limitless tools for creating
competitive marketing promotions.
The market for VeraBill is worldwide -- wherever new service providers
are entering the market or existing providers find their billing and
customers care systems inadequate to meet changing market conditions.
Demand for billing systems is growing rapidly as a result of monopoly
markets being opened to competition and by the introduction of new wireless
technologies. To reach this expansive market MOSCOM is forming
distribution and marketing relationships with the leading global providers
of switches and support systems sold to land line and wireless
telecommunications companies. VeraBill is currently marketed worldwide by
two leading switch manufacturers; Alcatel and Nokia Telecommunications.
End user prices for VeraBill Systems range from $150,000 to over $1
Million per system.
Marketing and Sales
MOSCOMs marketing and sales personnel are located at its headquarters
in Pittsford, New York, and in 30 locations throughout the United States
and Europe.
MOSCOMs marketing and distribution strategy is founded on building
mutually beneficial relationships with companies with large, established
distribution networks for telecommunications and computer products. The
nature of the relationships varies depending on the product and market.
For some, MOSCOM develops and manufactures customized products under a
private label while others purchase and resell MOSCOMs standard products.
MOSCOMs marketing strategy is focused upon telephone switch
manufacturers and sellers and providers of telephone services. A partial
listing of companies using or selling MOSCOM products follows:
TELECOMMUNICATIONS EQUIPMENT MANUFACTURERS
Alcatel
Lucent Technologies, Inc.
Nokia Telecommunications
Philips
Siemens
TELEPHONE SERVICE PROVIDERS
Ameritech
Mercury Communications
Sprint
Teleport Communications
Sales to Lucent accounted for 54% of MOSCOMs 1997 revenue.
<PAGE>
New Product Development
MOSCOM is currently pursuing several opportunities to expand its
telemanagement and billing 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, 1997 MOSCOM had a backlog of $1,828,087. Backlog as
of December 31, 1996 was $2,616,812. Backlog is not deemed to be a
material indicator of 1998 revenues.
The Companys policy is to recognize orders only upon receipt of firm
purchase orders.
Competition
The telecommunications management industry is highly competitive and
highly fragmented. The number of domestic suppliers of telemanagement
systems for business users is estimated to exceed 100 companies. The vast
majority of those are regional firms with limited product lines and limited
sales and development resources. Several competitors are established
companies that are able to compete with MOSCOM on a national basis.
There are fewer competitors in the market for billing systems for
telephone service providers. Competition in this market is expected to
increase as the market matures. In addition several existing competitors
are substantially larger than MOSCOM and devote significantly more
resources to this market on a worldwide basis.
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.
<PAGE>
In common with other information industries, the markets into which
the Company sells have recently been characterized by rapid shift toward
the software component of product content and away from the hardware
element. Historically, prices for application software have declined
rapidly in the face of competition. Increased competition for the Companys
software products could adversely affect the Companys volume and profits.
Manufacturing
MOSCOM assembles its products from components purchased from a large
variety of suppliers both domestic and international. Wherever feasible,
the Company secures multiple sources, but in some cases it is not possible.
MOSCOM offers warranty coverage on all products for 90 days or one
year on parts and 90 days on labor. Repair services are offered at the
Pittsford, New York facility and by some of the Companys larger customers.
Employees
As of December 31, 1997, MOSCOM employed 140 full-time personnel.
MOSCOMs employees are not represented by any labor unions.
Item 2 Facilities
The Companys principal administrative office and manufacturing
facility is located in a one-story building in Pittsford, New York. MOSCOM
presently leases approximately 61,000 square feet of the building of which
approximately 5,000 square feet is devoted to manufacturing. The term of
the lease expires on June 30, 2001.
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.
<PAGE>
PART II
Item 5 Market for the Registrants Common Stock and Related
Stockholder Matters
MOSCOM Corporations Common Stock, $.10 par value, is traded on the
NASDAQ National Market System (symbol: MSCM). The following quotations are
furnished by NASDAQ for the periods indicated. The quotations reflect
inter-dealer quotations that do not include retail markups, markdowns or
commissions and may not represent actual transactions.
COMMON STOCK PRICE RANGE
Quarters Ended
March 31 June 30 September 30 December 31
1997 9 1/4 - 5 3/8 6 7/16 - 2 3/4 6 5/8 - 4 1/4 8 - 5 5/8
1996 9 7/8 - 7 1/4 16 3/8 - 7 1/2 17 1/8 - 8 1/4 12 5/8 - 6 5/8
As of December 31, 1997, there were 629 holders of record of the
Companys Common Stock and approximately 3,400 additional beneficial
holders.
The Company paid dividends of $.02 per share during the months of
January and July of each year from 1990 through 1995. The Company paid a
dividend of $.02 per share in January 1996. No dividend was paid in 1997
and no dividend is planned for 1998.
<TABLE>
Item 6 Selected Financial Data (Restated under Statement of Financial
Accounting Standards No. 128)
<CAPTION>
Year Ended December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Sales $12,408,269 $13,380,862 $17,570,381 $14,260,683 $13,455,810
Net Income (Loss) $(5,030,507) $(5,936,096) $881,950 $ (387,743) $(3,854,641)
Net Income (Loss) per
share $(.69) $(.86) $.13 $(.06) $(.59)
Total Assets $11,909,527 $13,604,623 $18,014,394 $16,083,483 $16,535,935
Long term obligations $1,983,348 $1,320,682 $1,126,786 $955,464 $798,703
Weighted average shares
outstanding 7,331,360 6,866,154 6,909,874 6,707,449 6,589,130
Cash Dividends paid per
share $.00 $.02 $.04 $.04 $.04
</TABLE>
<PAGE>
Item 7 Managements Discussion and Analysis of Results of Operations and
Financial Condition
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, as well as other factors discussed
in the Companys filings with Securities and Exchange Commission.
Results of Operations
1997 Compared with 1996
Sales for the year ended December 31, 1997 were $12,408,269, which
represented a decline of 7% from the sales of $13,380,862 for the year
ended December 31, 1996. The Company incurred a net loss of $5,030,507 or
$.69 per share for the year ended December 31, 1997, which compared with a
net loss of $5,936,096 or $.86 per share incurred for the year ended
December 31, 1996.
Despite the decline in sales and the significant operating losses
incurred during the past two years, 1997 was a year defined by a series of
events and actions taken by the Companys management to restructure the
Company and return it to profitability. As a result of these activities,
the Company realized profitable operations during both the third and fourth
quarters of 1997, earning net income of $27,246 and $87,772 respectively,
following six consecutive quarters of losses. In addition, the Companys
balance sheet was strengthened as a result of the positive cash flows
generated by the return of profitable operations.
The most significant aspect of the Companys restructuring entailed the
closing of the Companys European subsidiaries MOSCOM Gmbh located in
Germany, MOSCOM Ltd and Global Billing Systems Ltd, located in England, and
the closing of the Votan subsidiary located in California, all of which had
been operating unprofitably. This has allowed the Company to focus its
attentions and resources on the remaining core businesses and profitable
markets, while at the same time significantly reducing operating expenses.
While the closing of the subsidiaries led to the decline in Companys sales
for 1997 versus 1996, the reduction in associated operating expenses more
than offset the reduced sales levels and was a major factor in the Companys
profitable operations during the third and fourth quarters of 1997. Also
offsetting the loss of sales generated by the European subsidiaries has
been a significant increase in sales of the Companys core call accounting
products through new Lucent and Siemens sales offices and dealers in South
American, the Middle East and Asia.
During the fourth quarter of 1997, the Company announced that it had
received certification of its new telecommunications management systems
(TMS) by Lucent Technologies. The new TMS product is a secure integrated
network usage management system which goes far beyond MOSCOMs traditional
call accounting products in managing the cost and logistics of large scale
voice and data networks. Designed for enterprise networks encompassing
hundreds of geographical locations with tens of thousands of users, TMS
provides online computerized tracking of all network assets including PBX
equipment, telephones, network hubs, routers and bridges.
<PAGE>
Beta testing of the TMS product was undertaken with a number of
customers during the fourth quarter of 1997, and was subsequently approved
for general release by Lucent in late January of 1998.
Progress on the marketing efforts associated with the VeraBill
product, initially released late in 1996, were also very encouraging.
VeraBill is a comprehensive billing and operations support system for
telecommunications service providers with up to 400,000 subscribers.
During 1997, the Company focused on forming distribution and marketing
relationships with global providers of switches and support systems sold to
land line and wireless telecommunications companies. VeraBill is currently
marketed worldwide by two leading switch manufacturers: Alcatel and Nokia
Telecommunications.
The Companys expectation is that these two network products, TMS and
VeraBill, will be major contributors to sales growth beginning in 1998.
Another significant event occurring in 1997 was the appointment of
David G. Mazzella as MOSCOMs Chief Executive Officer and President. Mr.
Mazzella replaced Albert J. Montevecchio, founder of MOSCOM and its CEO and
President since 1982. Mr. Mazzella has over 16 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. In addition,
John E. Mooney, an outside Director on the Companys Board since 1985, was
appointed to the position of Chairman of the Board, and two new outside
Directors, John E. Gould and William J. Reilly were appointed.
Gross profit margins on sales for the year ended December 31, 1997
were 72%, increasing from a gross profit margin of 70% earned during the
year ended December 31, 1996. The increased margin reflects the continuing
demand for software based products and solutions in the telecommunications
industry, which typically have higher margins than the older, traditional,
standalone, hardware based product offerings.
Gross engineering and development costs for the year ended December
31, 1997 of $3,471,953 were 29% lower than the year ended December 31,
1996, primarily as a result of the closing of the Votan subsidiary. Net
engineering and development expenses after the effects of capitalization,
fell from $3,197,002 for the year ended December 31, 1996 to $2,148,107 for
the year ended December 31, 1997, a decrease of 33%.
The table below presents a comparison of net and gross engineering and
development expenses, amounts capitalized and amortized, and the resulting
impact on the Companys operations attributable to its engineering and
development efforts for the years ended December 31, 1997 and 1996;
<PAGE>
1997 1996
Gross expenditures for engineering
and software development $3,471,953 $4,859,996
Less: Costs Capitalized 1,323,846 1,662,994
---------- ----------
Net expenditures for engineering
and software development $2,148,107 $3,197,002
Plus: Amounts amortized and charged
to cost of sales 1,360,676 $1,756,808
---------- ----------
Total Expense recognized $3,508,783 $4,953,810
========== ==========
During 1997, the major emphasis of the engineering and development
effort was focused on completing the development of TMS and support issues
related to the Companys other network product, VeraBill released in 1996.
During 1998, the Company will be stressing further enhancement and
additional functionality to both of these products, in addition to
upgrading its traditional core call accounting products.
Selling, general and administrative expenses incurred during the year
ended December 31, 1997 were $9,343,880. This represented a decline for
13% from the $10,756,381 of selling general and administrative expenses
incurred for the year ended December 31, 1996. The reduction in spending
is the direct result of the closing of the Companys foreign subsidiaries
and Votan during the second and third quarters of 1997. The savings
realized by the closing of these segments of the business are currently
being re-invested in strengthening the staffs of the Companys marketing,
project management, customer support and training groups. The Company
believes this investment is necessary to properly support our partners
marketing initiatives, particularly for the new network product offerings,
to enhance the prospects of future sales growth and profitability.
During 1997 the Company recorded a non-recurring charge against
earnings of $2,613,359 attributable to the closing of the foreign
subsidiaries, and the impact of accelerated retirement benefits related to
the retirement of the Companys former CEO and President, and expenses
associated with the withdrawal of an initial public offering for the
Companys former Votan subsidiary. For additional details of this charge
against earnings, please refer to Note 11 of the Notes to Financial
Statements section of this document.
Results of Operations
1996 Compared with 1995
Sales of $13,380,862 for the year ended December 31, 1996 were 24%
less than the record sales of $17,570,381 achieved for the year ended
December 31, 1995. The decline in sales resulted from a number of
factors, the most significant being:
<PAGE>
a) A 28% reduction in sales to Lucent Technologies, the Companys largest
customer of call management products due in part to a Lucent inventory
reduction program. Sales to Lucent were particularly affected during
the first half of 1996 by their focus on their carve-out from AT&T.
b) Delays in product enhancements to call management software products sold
primarily through the Companys German subsidiary, MOSCOM GmbH. These
enhancements were ultimately released during the fourth quarter of 1996,
and should help to return 1997 revenues from MOSCOM GmbH to historical
levels.
c) Delays in orders the Company had expected during the fourth quarter of
1996 for VeraBill IS and INFO/MDR. In both cases those orders are
expected to be received during the first and second quarters of 1997.
Both VeraBill and INFO/MDR are expected to contribute significantly to
1997 revenues.
Gross margins for the year ended December 31, 1996 were 70% which was
just slightly less than the gross margin of 71% realized for the year ended
December 31, 1995, and was entirely due to the lower sales volume for 1996.
Gross engineering and development costs for 1996 of $4,859,996 was up
by 49% from the 1995 expense level of $3,267,726. Net engineering and
development costs of $3,197,002 for the year ended December 31, 1996, after
the effects of capitalization were 86% higher than the net engineering and
development costs of $1,716,793 for the year ended December 31, 1995.
The table below presents a comparison of both net and gross
engineering and development expenses, amounts capitalized and amortized,
and the resulting overall impact on the Companys operations for the years
ended December 31, 1996 and 1995.
1996 1995
Gross expenditures for engineering
and software development $4,859,996 $3,267,726
Less: Costs capitalized 1,662,994 1,550,933
---------- ----------
Net engineering & software development
expense $3,197,002 $1,716,793
Plus: Amounts amortized and charged
to cost of sales 1,756,808 1,207,674
---------- ----------
Total expense recognized for the year $4,953,810 $2,924,467
========== ==========
A significant amount of the increased spending relates to
customization, enhancements, and support effort required by the initial
VeraBill IS shipments after product release in July of 1996. It is
expected that these costs will decline during 1997.
<PAGE>
Selling, general and administrative expenses of $10,756,381 for the
year ended December 31, 1996 compared with total costs of $9,915,877 for
the year ended December 31, 1995, an increase of 8%. The increased costs
incurred during 1996 reflected the expansion of the Votan Division of the
Company from a research and development facility to a wholly owned
subsidiary with sales, engineering and marketing capability, including non-
recurring charges for recruitment of the Votan management team, in
anticipation of a late third quarter 1996 initial public offering,
subsequently withdrawn.
During the third quarter of 1996 the Company recorded other expenses
of $1,560,407, consisting of one time charges for the following:
a) Expenses of $724,845 related to the withdrawal of a prior attempted
initial public offering of Votan stock consisting primarily of legal and
accounting fees, printing costs, and financial advisor fees.
b) A writedown of capitalized software and certain purchased software of
$835,562. The charges relate primarily to older software products that
have been or will be replaced by newer products. By taking this charge
the Companys balance sheet will more closely correlate with projected
future revenues, and reduce future amortization expense.
The net loss for the year ended December 31, 1996 was $5,936,096 or
$.86 per share compared with a net profit of $881,950 or $.13 per share for
the year ended December 31, 1995.
Results of Operations
1995 Compared with 1994
MOSCOM Corporation achieved record sales revenues of $17,570,381 for
the year ended December 31, 1995, an increase of 23% over 1994 sales
$14,260,683. All major markets participated in the overall sales growth
with domestic sales increasing 21% and sales to international markets
increasing by 30%, primarily through MOSCOM GmbH the Companys German
subsidiary.
Sales to the Companys traditional telemanagement markets were
especially strong during 1995, further solidifying our position as the
world leader in that market. OEM sales of Emerald CAS for Windows were
strong through AT&T in the US and Philips in Germany. Late in the year
Siemens also began selling Emerald CAS for Windows in Germany.
During the year the Company made significant progress in the
development of markets for our newer products such as Verabill IS, MVM for
Windows and our Voice Verification applications, all of which are expected
to contribute to 1996 revenues.
For the year ended December 31, 1995 the Company realized a gross
margin percentage of 71%. This compares with gross margin percentages of
65% and 63% for the years ended December 31, 1994 and December 31, 1993
respectively. The improved margins result from a combination of three
separate factors.
<PAGE>
1. The continued shift in sales mix toward software based products and
services, and away from hardware based products which are characterized
by higher manufacturing costs.
2. This reduction in hardware based products as a percentage of the sales
mix has also allowed the Company to continue a streamlining of its
manufacturing processes begun late last year, resulting in lower
overhead rates and in turn further lowering unit production costs.
3. A decrease in the amortization of capitalized software as a percentage
of total sales revenue. For 1995 amortization expense equaled 9% of
sales revenue, versus 11% during 1994.
Net engineering and software development expenses for 1995 amounted to
$1,716,793, an increase of 5% over 1994 engineering and development costs
of $1,633,902. Gross expenditures for engineering and development
increased from $3,044,466 for the year ended December 31, 1994 to
$3,267,726 for the year ended December 31, 1995, an increase of 7%.
The following table presents a comparison of both net and gross
engineering and development expenses, amounts capitalized and amortized,
and the resulting impact on the Companys operations for the years ended
December 31, 1995 and 1994.
1995 1994
Gross expenditures for engineering and
software development $3,267,726 $3,044,466
Less: Costs capitalized 1,550,933 1,410,564
---------- ----------
Net engineering & software development
expense $1,716,793 $1,633,902
Plus: Amounts amortized and charged to
cost of sales 1,207,674 1,136,733
---------- ----------
Total expense recognized for the year $2,924,467 $2,770,635
========== ==========
A significant portion of the 1995 development efforts were geared
toward two major product offerings, both of which are expected to begin
generating revenues by mid 1996. They are Verabill IS, a comprehensive
billing and service system capable of handling up to 400,000
subscribers, and TMS, a total facilities and call management system.
Selling, general, and administrative expenses for 1995 were $9,915,877
as compared to $8,153,042 for 1994. As a percentage of total sales revenue
generated, 1995 selling, general and administrative expense amounted to 56%
of total sales, down from 57% in 1994, and 61% for 1993. The largest
portion of the increased spending was attributable to the Companys
formation of its wholly owned subsidiary, Global Billing Services, Ltd.
located in the United Kingdom, a provider of services to the telephone,
cable, and virtual private network markets in the UK.
<PAGE>
In addition, selling and marketing costs were impacted by expenses
related to new releases of MVM for Windows, the voice activated voice mail
system, and Verabill, our billing and operations software product for small
to mid-sized telephone and cellular companies.
Interest earned on investments increased from $61,378 for the year
ended December 31, 1994 to $277,913 for the year ended December 31, 1995.
The increase was attributable to a combination of higher balances available
for investment due to the positive cash flow provided by operations and the
rebound in the bond market from 1994s poor showing.
The net income realized for 1995 of $881,950 or $.13 per share
represents an improvement of $1,269,693 from the net loss of $387,743 or a
loss of $.06 per share realized for 1994.
Liquidity and Capital Resources
As of December 31, 1997, the Company had a total cash position (cash
plus investments) of $3,462,725. This compared with a total cash position
of $2,275,715 as of December 31, 1996. The current ratio of 1.98 at
December 31, 1997 compared with a current ratio of 2.15 at the end of 1996.
Inventories were reduced from $1,887,808 at December 31, 1996 to
$1,164,797 as of December 31, 1997, a reduction of 38%. The reduced
inventory levels are the result of the continued shift in market preference
toward software based products in contrast to hardware based products,
which require a heavier investment in printed circuit board technology and
components. The Company expects inventories to decrease further in 1998.
Accounts receivable of $1,724,047 at December 31, 1997 were
significantly reduced from the accounts receivable at December 31, 1996 of
$3,477,384. The reduction is the result of intense collection efforts
undertaken during 1997, combined with a reduced level of foreign
receivables which typically take longer to collect.
Spending on capital equipment during 1997 was $437,533, which compared
with $450,971 of capital expenditures incurred in 1996. The majority of
1997 capital spending was for computer hardware and software to upgrade the
capabilities of the Companys Engineering and Development capabilities, as
well as strengthening the resources of its customer support sales and
marketing groups.
As of December 31, 1997, the Company has $3,108,468 of capitalized
software costs, which was slightly less than the $3,145,298 of capitalized
software costs as of December 31, 1996. The capitalized software
represents remaining unamortized development costs primarily related to the
Companys new network product offerings, VeraBill and TMS. These costs will
be amortized over periods ranging from three to five years as a component
of cost of sales.
<PAGE>
Accounts payable and accrued compensation costs decreased from
$2,131,663 at December 31, 1996 to $1,094,831 at December 31, 1997, as a
result of the reduction of employment and operating expenses associated
with the former subsidiaries.
Other accrued liabilities increased from $1,452,688 at December 31,
1996 to $2,129,196 at December 31, 1997. The largest component of this
liability represents deferred revenue generated from billings to customers
for support, training, installation and turnkey services to be provided
during 1998. As of December 31, 1997 and December 31, 1996, this liability
for deferred revenue amounted to $1,577,564 and $1,078,045, respectively.
During 1997, the Company entered into a private equity line of credit
agreement with a single institutional investor. Under the equity line for
a period of two years, the Company has the right 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. During
1997, the Company sold 501,934 shares of common stock to this investor
realizing net proceeds of $2,480,017. The agreement expires June 2, 1999.
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 a result of the Companys restructuring plan undertaken during the
second quarter of 1997 resulting in the operating profits and positive cash
flows experienced during the third and fourth quarters of 1997, the absence
of debt, and the credit arrangements referred to above, the Company
believes that it has sufficient resources to meet its financial needs and
support expected growth over the next twelve months.
The Company has evaluated its information technology infrastructure to
ensure that computer systems and software will recognize and process the
year 2000 and beyond with no effect on customers or disruptions to business
operations. The Company does not expect the cost of modifying its
information technology infrastructure for Year 2000 compliance to be
material to its financial condition or results of operations. The Company
does not anticipate any material disruption in its operations as a result
of any failure by the Company to be in compliance.
<PAGE>
Item 8 Consolidated Financial Statements and Supplementary Data
Required to be Included Herein as Follows:
Page
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 20
INDEPENDENT AUDITORS REPORT 21
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated balance sheets 22 - 23
Consolidated statements of operations 24
Consolidated statements of stockholders equity 25
Consolidated statements of cash flows 26
Notes to consolidated financial statements 27 - 37
Item 9 Disagreements on Accounting and Financial Disclosure
None
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
MOSCOM Corporation:
We have audited the accompanying consolidated balance
sheets of MOSCOM Corporation and subsidiaries as of
December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders equity and cash
flows for the years then ended. These financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also
includes assessing the accounting principles used and
significant estimates made by management, as well as
evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects,
the financial position of MOSCOM Corporation and
subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for the
years then ended in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Rochester, New York
February 4, 1998
<PAGE>
INDEPENDENT AUDITORS REPORT
To the Board of Directors and Stockholders
Of MOSCOM Corporation
Pittsford, New York
We have audited the accompanying consolidated balance sheet of MOSCOM
Corporation and subsidiaries as of December 31, 1995, and the related
consolidated statements of operations, stockholders equity, and
cash flows for the year ended December 31, 1995. Our audit also
included the consolidated financial statement schedule listed in the
Index at Item 14(a) for the year ended December 31, 1995. These
financial statements and the financial statement schedule are the
responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements and financial
statement schedule based on our audit.
We conducted our audit 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 audit provides 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,
1995, and the results of their operations and their cash flows for
the year ended December 31, 1995 in conformity with generally
accepted accounting principles. Also, in our opinion, such financial
statement schedule for the year ended December 31, 1995, when
considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly in all material respects the
information set forth therein.
Deloitte & Touche LLP
Rochester, New York
February 7, 1996
<PAGE>
MOSCOM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS 1997 1996
CURRENT ASSETS:
Cash and cash equivalents (includes
investments of $757,076 and $1,353,590) $ 1,106,944 $ 2,025,535
Investments 2,355,781 250,180
Accounts receivable, trade (net of allowance
for doubtful accounts of $75,000 and $118,000) 1,724,047 3,477,384
Inventories 1,164,797 1,887,808
Prepaid expenses and other current assets 30,582 69,719
----------- -----------
Total current assets 6,382,151 7,710,626
PROPERTY AND EQUIPMENT:
Cost 5,293,751 5,655,706
Less accumulated depreciation 4,334,164 4,520,657
----------- -----------
Property and equipment, net 959,587 1,135,049
OTHER ASSETS:
Purchased software (net of accumulated
amortization of $62,876 and $223,065) 28,612 93,520
Software development costs (net of accumulated
amortization of $767,537 and $1,531,780) 3,108,468 3,145,298
Pension assets 1,158,092 1,142,403
Deposits and other assets 272,617 377,727
----------- -----------
Total other assets 4,567,789 4,758,948
TOTAL ASSETS $11,909,527 $13,604,623
=========== ===========
The accompanying notes to the consolidated financial statements are an integral
part of these balance sheets.
<PAGE>
MOSCOM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
LIABILITIES AND STOCKHOLDERS EQUITY 1997 1996
CURRENT LIABILITIES:
Accounts payable $ 746,229 $ 1,170,508
Accrued compensation and related taxes 348,602 961,155
Deferred revenue 1,703,803 1,209,070
Restructuring accrual 246,466 -
Other accrued liabilities 178,927 243,618
----------- -----------
Total current liabilities 3,224,027 3,584,351
PENSION OBLIGATION 1,983,348 1,320,682
Total liabilities 5,207,375 4,905,033
COMMITMENTS (Note 9)
STOCKHOLDERS EQUITY:
Common Stock, par value, $.10; shares
authorized, 20,000,000; issued and
outstanding, 7,549,703 shares and
6,934,872 shares 754,970 693,487
Additional paid-in capital 18,701,040 15,785,850
Accumulated deficit (12,753,858) (7,723,351)
Cumulative translation adjustment - (56,396)
----------- -----------
Total stockholders equity 6,702,152 8,699,590
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $11,909,527 $13,604,623
=========== ===========
The accompanying notes to the consolidated financial statements are an integral
part of these balance sheets.
<PAGE>
<TABLE>
MOSCOM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
NET SALES $12,408,269 $13,380,862 $17,570,381
----------- ----------- -----------
COSTS AND OPERATING EXPENSES:
Cost of sales 3,431,342 4,017,224 5,138,674
Engineering and software development 2,148,107 3,197,002 1,716,793
Selling, general and administrative 9,343,880 10,756,381 9,915,877
Other expenses 2,613,359 1,560,407 -
----------- ----------- -----------
Total costs and operating expenses 17,536,688 19,531,014 16,771,344
----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (5,128,419) (6,150,152) 799,037
INTEREST INCOME 97,912 214,056 277,913
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (5,030,507) (5,936,096) 1,076,950
INCOME TAX PROVISION - - 195,000
----------- ----------- -----------
NET INCOME (LOSS) $(5,030,507) $(5,936,096) $ 881,950
=========== =========== ===========
NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE
Basic $ (.69) $ (.86) $ .13
=========== =========== ===========
Diluted $ (.69) $ (.86) $ .13
=========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 7,331,360 6,866,154 6,909,874
=========== =========== ===========
</TABLE>
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
<PAGE>
<TABLE>
MOSCOM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<CAPTION>
Common Stock Additional Accumulated Cumulative Total
Shares Par Value Paid-in (Deficit) Translation Stockholders
Capital Adjustment Equity
<S> <C> <C> <C> <C> <C> <C>
BALANCE - December 31, 1994 6,743,875 $674,388 $14,945,932 $ (2,261,852) $ 11,253 $13,369,721
--------- -------- ----------- ------------ -------- -----------
Exercise of stock options
and warrants 86,779 8,677 435,741 - - 444,418
Stock retirements (12,000) (1,200) (87,020) - - (88,220)
Foreign currency translation
adjustment - - - - (2,408) (2,408)
Dividends declared on common stock
($.04 per share) - - - (270,876) - (270,876)
Net income - - - 881,950 - 881,950
--------- -------- ----------- ------------ -------- -----------
BALANCE - December 31, 1995 6,818,654 681,865 15,294,653 (1,650,778) 8,845 14,334,585
========= ======== =========== ============ ======== ===========
Exercise of stock options
and warrants 118,471 11,847 509,347 - - 521,194
Stock retirements (2,253) (225) (18,150) - - (18,375)
Foreign currency translation
adjustment - - - - (65,241) (65,241)
Dividends declared on common stock
($.02 per share) - - - (136,477) - (136,477)
Net loss - - - (5,936,096) - (5,936,096)
--------- -------- ----------- ------------ -------- -----------
BALANCE - December 31, 1996 6,934,872 693,487 15,785,850 (7,723,351) (56,396) 8,699,590
========= ======== =========== ============ ======== ===========
Sale of Stock 501,934 50,193 2,429,824 - - 2,480,017
Exercise of stock options
and warrants 126,750 12,675 571,729 - - 584,404
Stock retirements (13,853) (1,385) (86,363) - - (87,748)
Foreign currency translation
adjustment - - - - 56,396 56,396
Net loss - - - (5,030,507) - (5,030,507)
--------- -------- ----------- ------------ -------- -----------
BALANCE - December 31, 1997 7,549,703 $754,970 $18,701,040 $(12,753,858) $ - $ 6,702,152
========= ======== =========== ============ ======== ===========
</TABLE>
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
<PAGE>
<TABLE>
MOSCOM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(5,030,507) $(5,936,096) $ 881,950
Adjustments to reconcile net income ----------- ----------- ----------
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,738,518 2,657,205 1,947,941
Deferred income taxes - 90,133 48,936
Provision for bad debts 135,369 18,000 (3,811)
Provision for inventory obsolescence 166,334 168,337 185,250
Loss on disposal of fixed assets 301,919 - -
Changes in assets and liabilities:
Investments (2,105,601) 2,717,629 (1,006,840)
Accounts receivable 1,617,968 662,994 (680,900)
Inventories 556,677 (409,204) 878,037
Prepaid expenses and other current assets 39,137 62,486 106,797
License fees and purchased software (1,858) (48,522) (308,091)
Deposits and other assets 89,421 (6,994) (252,389)
Accounts payable (424,279) 555,372 104,991
Accrued compensation and related taxes (612,553) (58,079) 240,550
Restructuring accrual 246,466 - -
Other accrued liabilities 486,438 572,557 618,098
Long term liabilities 662,666 - -
----------- ----------- -----------
Net adjustments 2,896,622 6,981,914 1,878,569
----------- ----------- -----------
Net cash provided (used) by operating activities (2,133,885) 1,045,818 2,760,519
----------- ----------- -----------
INVESTING ACTIVITY:
Additions to property and equipment (437,533) (450,971) (719,945)
Software development costs (1,323,846) (1,662,994) (1,550,933)
----------- ----------- -----------
Net cash used in investing activities (1,761,379) (2,113,965) (2,270,878)
----------- ----------- -----------
FINANCING ACTIVITIES:
Proceeds from sale of stock 2,480,017 - -
Exercise of stock options and warrants 496,656 502,819 356,198
Payment of dividends on common stock - (136,477) (270,876)
----------- ----------- -----------
Net cash provided by financing activities 2,976,673 366,342 85,322
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (918,591) (701,805) 574,963
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,025,535 2,727,340 2,152,377
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,106,944 $ 2,025,535 $ 2,727,340
=========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
<PAGE>
MOSCOM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts
of MOSCOM Corporation (the Company) and its wholly-owned subsidiaries,
Votan Corporation, MOSCOM Limited and Global Billing Services Limited
(companies incorporated in England) and Moscom GmbH (a company
incorporated in Germany). During 1997 the Company closed these
subsidiaries as discussed in Note 11. All significant intercompany
accounts and transactions have been eliminated. The Company designs
and manufactures telecommunication management systems and telephone
company billing systems for users and providers of telecommunication
services in the global market.
Estimates - The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
The consolidated financial statements include managements best
estimates of the net realizable value of software development costs.
Accordingly, the Company periodically records adjustments to write down
the carrying value of software development costs to their net
realizable value. The amounts the Company will ultimately realize
could differ materially from the carrying value of the software
development costs. (see Note 11).
Fair value of financial instruments - Statement of Financial Accounting
Standards (SFAS) No. 107 Disclosures about Fair Value of Financial
Instruments, requires disclosures of the fair value of certain
financial instruments. The carrying amount of cash and cash
equivalents, investments, accounts receivable and accounts payable
reflect fair value due to their short-term nature.
Cash and cash equivalents - The Company considers all highly liquid
investments purchased with a maturity of three months or less to be
cash equivalents.
Investments - The Company carries its investments in accordance with
SFAS No. 115, Investments in Certain Debt and Equity Securities. As of
December 31, 1997, the Company has deemed its portfolio to consist of
available for sale securities. As of December 31, 1996 the Company
deemed its portfolio to consist of trading securities. At December 31,
1997 and 1996 the carrying value of investments approximated market.
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 ($3,112,857 and $1,603,770 as of December 31, 1997 and
1996, respectively) with quality financial institutions and, by policy,
limits the amount of credit exposure to any one financial institution.
<PAGE>
The Companys customers are not concentrated in any specific geographic
region, but are concentrated in the telecommunications industry. As of
December 31, 1997 and 1996, one customer in this industry accounted
for approximately $716,504 and $1,098,905 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) 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.
Property 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.
Long-lived assets and intangibles - In January 1996, the Company
adopted SFAS No. 121 Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of. SFAS No. 121 requires
that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable on an
undiscounted cash flow basis. The statement also requires that long-
lived assets and certain identifiable intangibles to be disposed of be
reported at the lower of carrying amount or fair values less cost to
sell. The adoption of SFAS No. 121 did not have a material effect on
the financial statements. In 1997 the Company wrote off certain
amounts of capitalized software as discussed in Note 11.
Software development costs meeting recoverability tests are
capitalized, and amortized on a product-by-product basis over their
economic life, ranging from three to five years, or the ratio of
current revenues to current and anticipated revenues from such
software, whichever provides the greater amortization.
Revenue recognition - The Company recognizes revenue from product sales
upon shipment to the customer. Revenues from maintenance and extended
warranty agreements are recognized ratably over the term of the
agreements. The Company also enters into license agreements for
certain of its software products. These revenues are recognized in
accordance with the provisions of Statement of Position (SOP) No. 97-2,
Software Revenue Recognition.
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.
<PAGE>
Net income (or loss) per common share is computed in accordance with
the provisions of SFAS No. 128, Earnings Per Share. SFAS No. 128
replaces primary Earnings Per Share (EPS) with basic EPS. Basic EPS is
computed by dividing reported earnings available to common stockholders
by weighted average shares outstanding. No dilution for common share
equivalents is included. Diluted EPS is computed on a similar basis to
the previously calculated fully diluted EPS. The Company was required
to adopt SFAS No. 128 retroactively for periods ending after December
15, 1997.
Reclassifications - Certain prior year balances have been reclassified
to conform with current year presentation.
Stock-Based Compensation - In October 1995, SFAS No. 123. Accounting
for Stock-Based Compensation was issued which sets forth a fair value
method of recognizing stock-based compensation expense. As permitted
by SFAS No. 123, the Company intends to continue to measure
compensation for such plans using the intrinsic value based method of
accounting prescribed by Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees and will disclose the
additional information relative to issued stock options and pro forma
net income and earnings per share, as if the options granted were
expensed at their estimated fair value at the time of grant.
2. INVENTORIES
The major classifications of inventories as of December 31, 1997 and
1996 are:
1997 1996
Purchased parts and components $ 454,617 $ 873,918
Work in process 120,566 256,104
Finished goods 589,614 757,786
---------- ----------
$1,164,797 $1,887,808
========== ==========
3. PROPERTY AND EQUIPMENT
The major classifications of property and equipment as of December 31,
1997 and 1996 are:
1997 1996
Machinery and equipment $1,460,479 $1,532,876
Computer hardware and software 2,627,442 2,755,519
Furniture and fixtures 914,085 1,040,879
Leasehold improvements 291,745 326,432
---------- ----------
$5,293,751 $5,655,706
Depreciation expense was approximately $311,000, $471,000 and $474,000
for the years ended December 31, 1997, 1996 and 1995, respectively.
<PAGE>
4. ENGINEERING AND SOFTWARE DEVELOPMENT EXPENDITURES
Engineering and software development expenditures incurred during the
years ended December 31, 1997, 1996 and 1995 were recorded as follows:
1997 1996 1995
Engineering and software
development expense included
in the consolidated
statements of operations $2,148,107 $3,197,002 $1,716,793
Amounts capitalized and
included in the
consolidated balance sheets 1,323,846 1,662,994 1,550,933
---------- ---------- ----------
Total expenditures for
engineering and software
development $3,471,953 $4,859,996 $3,267,726
========== ========== ==========
Additionally, the Company recorded amortization of capitalized software
development costs of approximately $1,361,000, $1,757,000, and
$1,208,000 for the years ended December 31, 1997, 1996 and 1995,
respectively. Such amortization is included in cost of sales in the
consolidated statements of operations.
5. BENEFIT PLANS
The Company sponsors an employee incentive savings plan under section
401(K) for all eligible employees. The Companys contributions to the
plan are discretionary and totaled $10,000 in 1995. There were no
contributions in 1997 or 1996.
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, 1997, 1996 and 1995 consists of the following:
1997 1996 1995
Service cost $123,231 $115,021 $104,439
Interest cost 92,448 78,875 66,882
Net amortization and deferral 36,965 36,965 36,965
-------- -------- --------
Pension expense $252,644 $230,861 $208,286
======== ======== ========
<PAGE>
A reconciliation of the pension plans funded status with amounts
recognized in the Companys balance sheets follows:
1997 1996
Actuarial present value of accumulated
benefit obligation $1,983,348 $1,320,682
========== ==========
Actuarial present value of projected benefit
obligation $1,983,348 $1,320,682
Plan assets - -
---------- ----------
Projected benefit obligation in excess of
plan assets 1,983,348 1,320,682
Prior service cost not yet recognized in
net periodic pension cost (371,793) (408,088)
Additional minimum liability 371,793 408,088
---------- ----------
Accrued pension expense $1,983,348 $1,320,682
========== ==========
Included in the pension asset caption in the consolidated balance
sheets as of December 31, 1997 and 1996 is an intangible asset of
$371,793 and $408,088, respectively, related to the minimum liability
adjustment for the unfunded accumulated benefit obligation.
The discount rate and rate of increase in future compensation levels
used in determining the actuarial present value of the projected
benefit obligation were 7% and 3% respectively.
The Company maintains life insurance covering the lives of certain key
employees covered under its Supplemental Executive Retirement Program
with the Company named as beneficiary. The Company intends to use
death benefits as well as loans against the accumulating cash surrender
value of the policies to fund the pension obligation.
6. STOCKHOLDERS EQUITY
During 1997, the Company entered into a private equity line of credit
agreement with a single institutional investor. Under the equity line
for a period of two years, the Company has the right 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. During 1997, the Company sold 501,934 shares of common stock to
this investor realizing net proceeds of $2,480,017. The agreement
expires June 2, 1999.
<PAGE>
On December 15, 1997, the Companys Board of Directors approved a proposal
to amend the Companys certificate of incorporation to increase the
authorized common shares from 20 million to 59 million with a par value of
$.10 per share. The Board also approved the authorization of 1 million
shares of preferred stock with a par value of $.10 per share. On December
15, 1997, the Board of Directors also resolved, subject to stockholder
approval, that the Corporations name be changed to Veramark Technologies,
Inc. These actions are subject to shareholder approval at the Companys
Annual Meeting of Shareholders to be held May 14, 1998.
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 Companys Board of Directors approved a 1998 Stock Option
Plan on December 15, 1997 covering up to 2,500,000 shares of common stock
and on that date granted options to purchase 755,000 shares, subject to
shareholder approval. Both plans provide for options which may be issued
as nonqualified or qualified incentive stock options. All options granted
are exercisable in increments of 20 - 25% per year beginning one year from
the date of grant. All options granted to employees of MOSCOM Corporation
have a ten year term.
The Company accounts for its stock-based compensation plans under APB
Opinion No. 25. Accordingly, compensation expense has been recognized only
to the extent the exercise price was below the fair market value at the
time of the grant. Had compensation cost for the Companys stock-based
compensation plans been determined based on the fair value at the grant
dates for awards consistent with the method of SFAS No. 123, the Companys
net income (loss) per share presented on a diluted basis (as basic EPS
would equal diluted EPS) would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C> <C>
Net income (loss) As reported $(5,030,507) $(5,936,096) $881,950
Pro forma $(5,438,726) $(6,138,533) $817,948
Net income (loss) per common share As reported $ (.69) $ (.86) $ .13
Pro forma $ (.74) $ (.89) $ .12
</TABLE>
Compensation expense recognized in the statement of operations for the
year ended December 31, 1997, 1996 and 1995 was approximately $0,
$38,052, and $45,487 respectively, for options issued at an exercised
price below fair market values at the time of the grant. The SFAS No.
123 method of accounting has not been applied to options granted prior
to January 1, 1995, so the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
For purposes of the disclosure above, the fair value of each option
grant is estimated on the date of the grant using the Black-Scholes
option-pricing model with the following weighed-average assumptions
used for grants in 1997, 1996, and 1995.
1997 1996 1995
Dividend yield .00% .01% .01%
Expected volatility 58.86% 51.49% 51.81%
Risk-free interest rate 6.79% 6.71% 6.88%
Expected life 7 years 8 years 8 years
<PAGE>
A summary of stock option and warrant transactions for the years ended
December 31, 1997, 1996 and 1995 is shown below:
<TABLE>
<CAPTION>
1997 1996 1995
Options SHARES WEIGHTED SHARES WEIGHTED SHARES WEIGHTED
AVERAGE AVERAGE AVERAGE
PRICE PRICE PRICE
<S> <C> <C> <C> <C> <C> <C>
Shares under option, beginning of year 231,489 $5.53 312,340 $4.59 341,615 $3.81
Options granted 797,246 3.00 57,410 8.22 100,930 7.41
Options exercised (68,128) 3.64 (106,175) 3.62 (71,177) 2.93
Options terminated (304,861) 6.06 (32,086) 7.55 (59,028) 6.91
-------- ----- ------- ----- ------- -----
Shares under option, end of year 655,746 2.40 231,489 5.53 312,340 4.59
======== ===== ======= ===== ======= =====
Shares exercisable 46,292 $3.01 134,959 $3.88 210,779 $3.43
======== ===== ======= ===== ======= =====
Weighted average fair value of
options granted $3.53 $7.69 $6.03
======== ======= =======
Warrants
Warrants outstanding, beginning of year 92,799 $6.21 88,228 $5.58 102,649 $5.35
Warrants granted 165,412 6.49 17,999 8.14 1,181 6.88
Warrants exercised (58,622) 4.69 (12,296) 4.67 (15,602) 4.17
Warrants expired (4,819) 6.80 (1,132) 4.75 - -
-------- ----- ------- ----- ------- -----
Warrants outstanding, end of year 194,770 7.12 92,799 $6.21 88,228 $5.58
======== ======= =======
</TABLE>
7. SALES INFORMATION
Sales to one customer were approximately $6,748,000 or 54% of the
Companys total sales in 1997. Sales to two customers were
approximately $6,669,000 and $1,943,000, or 50% and 15% of the Companys
total sales in 1996. Sales to these two customers were approximately
$9,184,000 and $2,135,000 or 52% and 12% of the Companys total sales in
1995.
Export sales to unaffiliated customers, primarily in Europe and South
America were approximately $3,138,000, $4,031,200 and $5,085,000 in
1997, 1996 and 1995, respectively.
<PAGE>
8. INCOME TAXES
The components of the income (loss) before income taxes for the years
ended December 31, 1997, 1996 and 1995 is presented below:
1997 1996 1995
Domestic (loss) income $(4,214,949) $(4,467,551) $1,497,163
Foreign loss (815,558) (1,468,545) (420,213)
----------- ----------- ----------
$(5,030,507) $(5,936,096) $1,076,950
=========== =========== ==========
The income tax provision (benefit) includes the following:
1997 1996 1995
Current income tax payable
(refundable):
Federal - $ (92,369) $ 128,964
State 2,225 2,236 17,100
Foreign - - -
----------- ----------- ----------
2,225 (90,133) 146,064
----------- ----------- ----------
Deferred income tax:
Federal (1,483,659) (1,515,585) 275,838
State (97,872) (205,975) 58,684
Foreign - (499,305) (141,557)
Increase (decrease) in
valuation allowance 1,579,306 2,310,998 (144,029)
----------- ----------- ----------
(2,225) 90,133 48,936
----------- ----------- ----------
$ - $ - $ 195,000
=========== =========== ==========
The income tax (benefit) provision differs from those computed using
the statutory federal tax rate of 34%, due to the following:
1997 1996 1995
Tax at statutory federal rate $(1,710,372) $(2,018,273) $ 366,163
Differences between foreign
and U.S. tax rates - - (6,497)
Foreign losses not benefited 302,572 - -
State taxes, net of federal
tax benefit (115,471) (136,258) 69,970
Utilization of tax credits - - (108,084)
(Decrease) increase in
valuation allowance 1,579,306 2,310,998 (144,029)
Exercise of non-qualified
stock options (50,685) (146,081) -
Other (5,350) (10,386) 17,477
----------- ----------- ----------
$ - $ - $ 195,000
=========== =========== ==========
<PAGE>
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:
<TABLE>
<CAPTION>
1997 1996
Domestic Foreign Domestic Foreign
<S> <C> <C> <C> <C>
General business credits $ 912,276 $ - $ 846,267 $ -
Net operating losses 2,884,242 - 1,671,095 1,162,909
Deferred compensation 462,324 - 580,096 -
Alternative minimum tax credits 244,034 - 244,034 -
Inventory 236,476 - 147,544 -
Accounts receivable 27,822 - 43,789 -
Capitalized software (1,153,099) - (1,166,761) -
Fixed assets (62,924) - (43,971) -
Restructuring 327,210 - - -
Other 38,646 - 15,608 -
----------- ------- ----------- -----------
3,917,007 - 2,337,701 1,162,909
Valuation allowance (3,917,007) - (2,337,701) (1,162,909)
----------- ------- ----------- -----------
Deferred asset (liability) $ - $ - $ - $ -
=========== ======= =========== ===========
</TABLE>
The Company has $ 7,774,000 of federal net operating loss carryforwards
available as of December 31, 1997, of that total, $782,000 is limited to a
utilization of approximately $100,000 annually. The carryforwards expire in
varying amounts in 1998 through 2012. The valuation allowance has increased
by $1,579,306 during the year ended December 31, 1997.
As of December 31, 1996, the Company had approximately $500,000 of net
operating loss carryforwards available to offset future earnings of
Moscom Limited, approximately $1,330,000 of net operating loss
carryforwards to offset future earnings of Moscom GmbH and
approximately $775,000 of net operating loss carryforwards to offset
future earnings of Global Billing Services Limited. These subsidiaries
were closed in 1997.
The Companys tax credit carryforwards as of December 31, 1997 are as
follows:
Description Amount Expiration Dates
General business credits 802,649 1999 - 2011
New York State investment tax credits 109,627 1998 - 2005
Alternative minimum tax credits 244,034 No expiration date
Cash paid (received) for income taxes during the years ended
December 31, 1997, 1996 and 1995 totaled $-0-, $45,000 and $61,922,
respectively.
<PAGE>
9. COMMITMENTS
Operating Lease Obligations - The Company leases current manufacturing
and office facilities and certain equipment under operating leases
which expire at various dates through 2001. 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 $707,000, $734,000, and $635,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
Minimum lease payments as of December 31, 1997 under operating leases
are as follows:
Year Ending December 31,
1998 $ 375,115
1999 383,739
2000 383,739
2001 191,869
----------
Total minimum lease payments $1,334,462
==========
Legal Matters - The Company is subject to litigation from time to time
in the ordinary course of business. Although the amount of any
liability with respect to such litigation cannot be determined, in the
opinion of management, such liability will not have a material adverse
effect on the Companys financial condition or results of operations.
10. LINE OF CREDIT
The Company maintains a secured line of credit agreement with a major
commercial bank for up to $500,000, all of which is available as of
December 31, 1997. There have been no borrowings under this agreement.
11. OTHER EXPENSES
The Company recorded a 1997 charge against earnings of $2,613,359
consisting of the following:
Restructuring Charges $ 854,444
Accelerated Retirement Benefits 509,576
Other Non-Recurring Charges 1,249,339
----------
$2,613,359
==========
<PAGE>
The restructuring charges were attributable to the closing of the Companys
European subsidiaries and its Votan subsidiary 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 allowed 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 $854,444 consists of lease termination charges, currency
translation losses, 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. This restructuring met the criteria set forth in Emerging
Issues Task Force Issue (EITF) 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit and Activity
(Including Certain Costs Incurred in a Restructuring).
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 accounts receivable of $492,500, the
write-off of capitalized software associated with the Votan voice
technologies of $470,876 and miscellaneous expenses of $9,251.
12. STOCKHOLDERS RIGHTS PLAN
In December 1997, the Company adopted a stockholder rights plan. The plan
is intended to protect shareholders from unfair or coercive takeover
practices. In accordance with the plan, the Board of Directors declared a
dividend distribution of one common stock purchase right for each share of
common stock payable January 9, 1998 to holders of record of common stock
issued and outstanding at the close of business on that date. Upon the
occurrence of certain trigger events that may be related to an unfriendly
attempt to purchase a controlling interest in the Company, the Board of
Directors may permit each rights holder to purchase from the Company shares
of common stock for one-half market value. The rights will not be
detachable or exercisable until certain events occur. The Board of
Directors may elect to terminate the rights at any time.
<PAGE>
<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 - 5 of the Companys Proxy Statement for the
Annual Meeting of Shareholders to be held May 14, 1998 {see Election of
Directors and Compliance With Section 16 (a).}
The following lists the names and ages of all executive officers of
the Company, all persons chosen to become executive officers, all positions
and offices with the Company held by such persons, and the business
experience during the past five years of such persons. All officers were
elected or re-elected to their present positions for terms ending on May
14, 1998 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
David G. Mazzella 57 President, C.E.O., Director
Robert L. Boxer 44 Vice President, Secretary
General Counsel
James W. Karr 54 Vice President,
Major Market Sales
Ronald C. Lundy 46 Treasurer
Paul T. Babarik 56 Vice President, Sales
John E. Mooney 53 Chairman of the Board,
Director
William J. Reilly 49 Director
John E. Gould 53 Director
Victor de Jong 52 Director
Harvey E. Rhody 58 Director
Fred E. Strauss 70 Director
All Directors hold office until the next annual meeting of
stockholders, and until their successors are duly elected and qualified.
Officers are elected annually by the Board of Directors and serve at the
discretion of the Board.
<PAGE>
David G. Mazzella, Jr. was appointed Chief Executive Officer in June
1997, he previously served as President and Chief Operating Officer of the
Company from February, 1997. From June, 1994 to February, 1997, he was
engaged in management consulting. From February, 1992 to June 1994, he was
the President and CEO of Scotgroup Enterprises, Inc., which was engaged in
the development and sale of telecommunications software equipment and the
sale of paging and cellular telephone services. From 1988 - 1991 Mr.
Mazzella was Vice President of Glenayre Electronics, a manufacturer of
software based telecommunications equipment. He was President and CEO of
Multitone Electronics, Inc., a company engaged in the manufacture, sale
and servicing of telecommunications equipment from 1983 until its acquisition
by Glenayre Electronics in 1988.
Robert L. Boxer became a Vice President of MOSCOM in November 1991.
Prior to that he had been Secretary and Corporate Counsel of MOSCOM since
March 1983. Prior to that he had been Counsel at Sykes Datatronics, Inc.
and an attorney with the firm of Middleton-Wilson.
James W. Karr has been Vice President-Major Market Sales since May 1,
1989. After joining MOSCOM in 1983, he had held various sales management
positions. Prior to that he held sales management positions with Sykes
Datatronics, Inc., Itel Corporation, Honeywell Information Systems, and NCR
Corporation.
Ronald C. Lundy was appointed Treasurer of MOSCOM in July 1993. Since
joining MOSCOM in 1984 he has held a variety of financial management
positions, the most recent having been Corporate Controller since December
of 1992. Prior to that he held various financial positions with Rochester
Instrument Systems from 1974-1983.
Paul T. Babarik was appointed Vice President of Sales in April 1996.
After joining MOSCOM in 1987 as a Regional Sales Manager he held several
sales management positions, the most recent as Director of AT&T sales from
1989 to 1996. Prior to joining MOSCOM Mr. Babarik was employed by AT&T
from 1977 - 1986 in various sales management positions.
John E. Mooney rejoined the Board of Directors and was elected
Chairman of the Board of MOSCOM in June 1997. He had previously been a
director of MOSCOM from May 1985 until his resignation in May 1997. For
the past five years, he has been Chief Executive Officer of Essex
Investment Group, Inc., an investment management and financial services
firm.
William J. Reilly has been a Director of MOSCOM since June 1997. He
is the Executive Vice President and General Manager of International Sales
and Operations for Checkpoint Systems, Inc., a manufacturer and distributor
of systems for electronic article surveillance, electronic access control,
closed circuit television and radio frequency identifications. He has
served in that capacity for more than five years.
John E. Gould has been a Director of MOSCOM since August 1997. For
more than five years Mr. Gould has been a partner in Gould & Wilkie, a
general practice law firm in New York City. Mr. Gould is also Chairman of
the American Geographical Society.
<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.
Harvey E. Rhody has been a Director of MOSCOM since September 1983.
Since March, 1996 he has been interim Director of the Center for Imaging
Science of the Rochester Institute of Technology. Prior to that he had
been President of RIT Research Corporation since July 1992. Prior to that
and since 1988, he was a Professor of Electrical Engineering and Imaging
Science at the Rochester Institute of Technology and Director of
Intelligent Systems Division of RIT Research Corporation.
Fred E. Strauss has been a Director of MOSCOM since September 1983.
In 1990, he retired as Regional President of Manufacturers Hanover Trust
Company in Rochester, New York, a position he held for more than five
years. Mr Strauss is a member of the Board of Nazareth College Board of
Trustees, and institution of higher learning, member of the Board of Park
Ridge Health Systems, Inc., providers of health care; and Chairman of the
Board of Rochester Community Baseball, Inc., an operator of a minor league
professional baseball team.
Item 11 Executive Compensation
Information relating to executive compensation is incorporated by
reference on pages 21-26 of the Companys Proxy Statement for the Annual
Meeting of Shareholders to be held May 14, 1998. (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 2-4 of the Companys Proxy Statement for the
Annual Meeting of Shareholders to be held May 14, 1998.
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:
II. 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) Reports on Form 8-K
1. Registrant filed a form 8-K with the Securities and Exchange Commission
on February 18, 1997 announcing that the Company completed the sale of
281,593 shares of its common stock to the institutional investors for a
total consideration of $1,620,000, before associated expenses.
2. Registrant filed a form 8-K with the Securities and Exchange Commission
on September 8, 1997 announcing that it had reached final agreement with
Albert J. Montevecchio, its founder and former President, CEO and
Chairman of the Board, regarding his retirement compensation.
(c) Exhibits (numbered in accordance with item 601 of regulation S-K)
(11.1) Calculation of earnings per share
(23.1) Consent of Arthur Andersen LLP
(23.2) Consent of Deloitte & Touche LLP
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To the Board of Directors and Stockholders of
MOSCOM Corporation:
We have audited in accordance with generally accepted
auditing standards, the consolidated financial statements
included in MOSCOM Corporations annual report to
shareholders incorporated by reference in this Form 10-K,
and have issued our report thereon dated February 4, 1998.
Our audit was made for the purpose of forming an opinion on
those statements taken as a whole. The schedule listed in
the index is the responsibility of the Companys management
and is presented for purposes of complying with the
Securities and Exchange Commissions rules and are not part
of the basic consolidated financial statements. The
schedule has been subjected to the auditing procedures
applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states in all
material respects the financial data required to be set
forth therein relation to the basic financial statements
take as a whole.
Arthur Andersen LLP
Rochester, New York,
February, 4, 1998
<PAGE>
MOSCOM CORPORATION AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts
Years Ended December 31, 1997, 1996, and 1995
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 Year Expenses (Recovered) Of Year
1997 $118,000 $135,369 $178,369 $ 75,000
1996 $ 71,000 $ 18,000 $ 29,000 $118,000
1995 $105,000 $ (3,811) $(30,189) $ 71,000
<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
_________________________________________
David G. Mazzella, President and CEO
Dated: ______________
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Capacity Date
______________________ Chairman of the Board, Director March 12, 1998
John E. Mooney
______________________ Director March 12, 1998
John E. Gould
______________________ Director March 12, 1998
William J. Reilly
______________________ Director March 12, 1998
Victor de Jong
______________________ Director March 12, 1998
Harvey E. Rhody
______________________ Director March 12, 1998
Fred E. Strauss
_______________________ Treasurer March 12, 1998
Ronald C. Lundy
<PAGE>
Exhibit 11.1
<TABLE>
MOSCOM CORPORATION
and Subsidiaries
Calculation of Earnings per Share
<CAPTION>
Twelve Months Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Basic
Net Earnings (Loss) $(5,030,507) $(5,936,096) $ 881,950
=========== =========== ==========
Average common shares outstanding 7,331,360 6,866,154 6,795,559
Earnings (Loss) per common & common
equivalent share $(.69) $(.86) $.13
=========== =========== ==========
Diluted
Net Earnings (Loss) $(5,030,507) $(5,936,096) $ 881,950
=========== =========== ==========
Weighted average shares outstanding 7,331,360 6,866,154 6,795,559
Additional dilutive effect of stock
options & warrants after application
of treasury stock method - - 114,315
----------- ----------- ----------
Weighted average shares outstanding 7,331,360 6,866,154 6,909,874
=========== =========== ==========
Earnings (Loss) per common share
assuming full dilution $(.69) $(.86) $.13
=========== =========== ==========
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our reports included in this Form 10-K,
into the Companys previously filed Registration Statement
File No. 333-30991.
Arthur Andersen LLP
Rochester, New York
March 27, 1998
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS CONSENT
We consent to the incorporation by reference in
Registration Statement No. 333-30991 of MOSCOM Corporation
on Form S-3 of our report dated February 7, 1996, appearing
in this Annual Report on Form 10-K of MOSCOM Corporation
for the year ended December 31, 1997 and to the reference
to us under the heading Experts in the prospectus, which is
part of the Registration Statement.
DELOITTE & TOUCHE LLP
Rochester, New York
March 27, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
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0
0
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</TABLE>
