<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition Period from ______ to ______.
Commission file number 0-18511
---------------------
MOSAIX, INC.
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1273645
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
6464 185TH AVE. N.E.
REDMOND, WASHINGTON 98052
(Address of principal executive offices) (Zip Code)
(206) 881-7544
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities 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
--- ---
Common stock, par value $0.01 per share: 13,275,286 shares outstanding as
of March 31, 1997.
Page 1 of 14 sequentially numbered pages.
================================================================================
<PAGE> 2
MOSAIX, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
TABLE OF CONTENTS
---------------------
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION PAGE NO.
--------
<S> <C> <C>
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial Condition 8
PART II: OTHER INFORMATION 11
</TABLE>
Page 2
<PAGE> 3
PART I:
ITEM 1. FINANCIAL STATEMENTS
MOSAIX, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(IN THOUSANDS) MARCH 31, 1997 DEC 31, 1996
- -------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents and short-term investments $44,399 $42,809
Trade accounts receivable, net 29,869 29,566
Inventories 2,206 2,814
Current installments of contracts receivable, net 1,739 1,764
Other current assets 4,329 5,837
------- -------
Total current assets 82,542 82,790
Furniture, equipment and leasehold improvements, net 7,439 7,393
Contracts receivable, less current installments 177 670
Capitalized software costs, net 1,882 1,993
Other assets 1,374 1,422
------- -------
Total assets $93,414 $94,268
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 800 $ 934
Accounts payable 4,813 5,064
Accrued compensation 5,434 6,614
Other accrued expenses 8,375 9,755
Customer deposits and unearned revenue 12,873 13,619
------- -------
Total current liabilities 32,295 35,986
Other long-term liabilities 687 939
------- -------
Total liabilities 32,982 36,925
------- -------
Shareholders' equity 60,432 57,343
------- -------
Total liabilities and shareholders' equity $93,414 $94,268
======= =======
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
Page 3
<PAGE> 4
MOSAIX, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA) THREE MONTHS ENDED MARCH 31,
- --------------------------------------------------------------------------------------------
1997 1996
(UNAUDITED)
<S> <C> <C>
Revenue:
Systems sales $13,164 $ 12,035
Software licenses 5,520 4,539
Service and miscellaneous 11,930 10,423
------- --------
30,614 26,997
------- --------
Cost of Revenues:
Cost of systems 4,694 4,991
Cost of software licenses 601 439
Cost of service and miscellaneous 6,076 4,536
------- --------
11,371 9,966
------- --------
Gross profit 19,243 17,031
------- --------
Operating expenses:
Selling, general and administrative 11,987 10,299
Research and development 3,656 3,549
Write-off of capitalized software costs - 705
Purchase of in-process research and development - 4,307
------- --------
Total operating expenses 15,643 18,860
------- --------
Operating income (loss) 3,600 (1,829)
Other income, net 442 422
------- --------
Earnings (loss) before income taxes 4,042 (1,407)
Income tax expense 1,124 1,006
------- --------
Net earnings (loss) $ 2,918 $ (2,413)
======= ========
Net earnings (loss) per share $ 0.21 $ (0.21)
======= ========
Weighted average common shares and common
equivalent shares outstanding 13,847 11,685
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
Page 4
<PAGE> 5
MOSAIX, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(IN THOUSANDS) THREE MONTHS ENDED MARCH 31,
- ------------------------------------------------------------------------------------------------------
1997 1996
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ 2,918 $ (2,413)
Depreciation and amortization 1,563 2,371
Trade and other accounts receivable 486 5,179
Other assets 2,068 (305)
Accounts payable and accrued liabilities (2,844) (2,000)
Unearned revenue (805) (5,295)
-------- --------
Net cash provided by (used in) operating activities 3,386 (2,463)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of short-term investments (6,897) (7,206)
Proceeds from maturities of short-term investments 7,292 11,887
Purchases of furniture and equipment (1,133) (1,160)
Increase in capitalized software costs (242) (508)
Other (28) 202
-------- --------
Net cash provided by (used in) investing activities (1,008) 3,215
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on borrowings under bank line of credit - (2,000)
Repayment of long-term obligations (299) (360)
Proceeds from issuance of preferred and common stock 55 3,386
-------- --------
Net cash provided by (used in) financing activities (244) 1,026
-------- --------
Effect of exchange rate changes on cash (149) 53
-------- --------
Increase in cash and cash equivalents 1,985 1,831
Cash and cash equivalents, beginning of period 10,984 7,746
-------- --------
Cash and cash equivalents, end of period 12,969 9,577
Short-term investments 31,430 35,470
-------- --------
Cash and cash equivalents and short-term
investments at end of period $ 44,399 $ 45,047
======== ========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
Page 5
<PAGE> 6
MOSAIX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of Mosaix, Inc. and its wholly owned subsidiaries, collectively
referred to as the "Company". The unaudited interim condensed
consolidated financial statements and related notes thereto have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
omitted pursuant to such rules and regulations. The accompanying
condensed consolidated financial statements and related notes thereto
should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company's annual report on
Form 10-K for the year ended December 31, 1996.
The information furnished reflects, in the opinion of management, all
adjustments, consisting of only normal recurring items, necessary for a
fair presentation of the results for the interim periods presented.
Interim results are not necessarily indicative of results for a full
year.
2. NET EARNINGS (LOSS) PER SHARE
Net earnings (loss) per share is computed using the weighted average
number of common shares outstanding plus dilutive common equivalent
shares outstanding during the period using the treasury stock method.
Common equivalent shares consist of employee stock options, common stock
warrants and convertible preferred stock. The dilutive effect of
convertible preferred stock is calculated on an "as-if-converted" basis.
Fully diluted earnings per share were not materially different from
primary earnings per share.
3. NEW ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share
(Statement 128). This statement establishes standards for the
computation, presentation, and disclosure of earnings per share (EPS),
replacing the presentation of currently required Primary EPS with a
presentation of Basic EPS. It also requires dual presentation of Basic
EPS and Diluted EPS on the face of the income statement for entities
with complex capital structures. Basic EPS, unlike Primary EPS, excludes
all dilution while Diluted EPS, like the current Fully Diluted EPS,
reflects the potential dilution that could occur from the exercise or
conversion of securities into common stock or from other contracts to
issue common stock. Statement 128 is effective for financial statements
for periods ending after December 15, 1997, including interim periods,
and earlier application is not permitted. When adopted, the Company will
be required to restate its EPS data for all prior periods presented. The
Company does not expect the impact of the adoption of this statement to
be material to previously reported EPS amounts.
Page 6
<PAGE> 7
4. RECLASSIFICATIONS
Certain reclassifications have been made to the prior period financial
statements to conform with the current period presentation.
As stated in the Company's annual report on form 10-K, the Company
completed a merger with ViewStar Corporation in December of 1996. This
merger was accounted for as a pooling-of-interest and, as such, all
previous periods have been restated to reflect the operations of the
combined companies; including the three month period ended March 31,
1996 presented herein.
Page 7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
OVERVIEW
For the first quarter of 1997, revenue increased to $30.6 million
compared with $27.0 million reported in the first quarter of 1996. The
Company had first quarter 1997 net earnings of $2.9 million, or $.21 per
share, compared with a net loss of ($2.4) million, or ($.21) per share
in the first quarter of 1996. Excluding one time charges, net income in
the first quarter of 1996 would have been $2.4 million, or $0.19 per
share. The one time charges in 1996 include $4.3 million of purchased
in-process research and development that was expensed and the write-off
of $0.7 million of previously capitalized software development costs,
both related to the February 1996 acquisition of Caleo Software, Inc.
REVENUE
Revenue of $30.6 million for the first quarter of 1997 represents a 13%
increase over revenue of $27.0 million reported in the comparable
quarter of the prior year. Systems sales increased $1.1 million, or 9%,
to $13.2 million in 1997 versus $12.0 million in 1996. Software licenses
revenue increased $1.0 million, or 22%, to $5.5 million in 1997 compared
to $4.5 million in 1996. Software licenses revenue now accounts for 18%
of total revenue up from 17% in the first quarter of 1996. The Company's
objective is to grow software licenses revenue at a faster rate than
overall revenue. Service and miscellaneous revenue increased by $1.5
million, or 14%, to $11.9 million in 1997 from $10.4 million in 1996.
International revenue increased to $7.1 million in the first quarter of
1997 from $4.4 million in the comparable quarter for 1996 due to
increased product sales in the United Kingdom.
GROSS MARGIN
Total gross margin remained constant at approximately 63% of revenue in
the first quarter of 1997 as compared to the same period in the prior
year. Systems gross margin, however, increased to 64% in the first
quarter of 1997 compared to 59% in the comparable period of the prior
year. Systems gross margin increased as a result of product design
changes and purchasing practices that combined to lower costs as well as
a decrease in software amortization. Software amortization expense was
approximately $0.3 million versus $0.5 million for the comparable
quarter a year ago. Software licenses gross margins declined slightly to
89% from 90% a year ago. Service and miscellaneous gross margin declined
to 49% compared to 56% in the comparable period of the prior year,
primarily due to a decrease in consulting margins on certain projects
and increased customer support staffing which began in the second
quarter of 1996 as part of the Company's plan to improve customer
service levels. The Company intends to continue to invest in improving
customer service as management believes superior customer service is one
of the key differentiators in vendor preference.
During the first quarter of 1997, the Company completed the outsourcing
of all manufacturing activities. The Company now uses a third party
vendor for assembly of systems. The Company will continue to maintain an
inventory of certain components and finished good.
Page 8
<PAGE> 9
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $12.0 million or 39%
of revenue in the first quarter of 1997, compared to $10.3 million or
38% of revenue in the comparable period of the prior year. The increase
in expense is primarily due to growth in the sales force and increased
marketing costs.
RESEARCH AND DEVELOPMENT
Research and development expense, net of amounts capitalized as software
development costs, was $3.7 million or 12% of revenue in the first
quarter of 1997, compared to $3.5 million or 13% of revenue in the
comparable quarter of the prior year. Software costs capitalized as a
percent of spending were 5% or $0.2 million in the first quarter of 1997
compared to 10% or $0.4 million in the first quarter of 1996.
Capitalized software costs continue to decrease, and as of March 31,
1997, were reduced to $1.9 million compared to $2.7 million at March 31,
1996.
The Company remains committed to the ongoing development of new products
and improvements to existing products as a key source of future revenue.
The Company expects to invest approximately 12-14% of revenue in new
product development.
ONE TIME CHARGES
In February 1996, the Company acquired Caleo Software, Inc. and expensed
$4.3 million of in-process research and development costs associated
with the acquisition. In addition, the Company wrote-off $0.7 million of
previously capitalized software costs in the first quarter of 1996 due
to rapidly changing technology.
OTHER INCOME, NET
Other income, net is comprised primarily of interest income and remained
at $0.4 million in the first quarter of 1997 compared with the same
period of the prior year.
INCOME TAXES
The effective tax rate for the first quarter of 1997 was 28% compared to
the statutory rate of 34%. The lower rate is due mainly to the combined
Company's use of ViewStar net operating loss carryforwards to reduce
taxable income. The utilization of net operating loss carryforwards and
excess credit carryforwards are restricted by the Internal Revenue Code.
The Company therefore, is limited each quarter in the amount of net
operating loss carryfowards that may be utilized. The tax expense in the
first quarter of 1996 increased the loss before income taxes due to the
lack of deductibility for tax purposes of the software cost write-offs
and the purchase of research and development write-off.
FINANCIAL CONDITION
LIQUIDITY & CAPITAL RESOURCES
The Company's combined cash and cash equivalents and short-term
investments were $44.4 million at March 31, 1997 versus $42.8 million at
December 31, 1996. The short-term investment portfolio is invested in
municipal securities, corporate notes and bonds, and
Page 9
<PAGE> 10
commercial paper, and is diversified among security types and issuers.
The portfolio does not include any derivative products. At March 31,
1997, the Company's working capital was $50.2 million compared to $46.8
million at December 31, 1996.
During the first quarter of 1997, the Company generated $3.4 million in
cash from operations compared to a $2.5 million use of cash in the
comparable quarter of 1996. The use of cash from operating activities in
the first quarter of 1996 was due primarily to the purchase of Caleo
Software, Inc. for $4.8 million in February 1996, as well as a decrease
in customer deposits.
In addition to its cash and short term investment balances, the Company
has available a $10 million domestic line of credit to meet cash flow
needs. Management believes that existing cash and short-term investments
and cash flow from operations, together with its available credit line,
will continue to be sufficient to meet ongoing operating requirements as
well as the Company's planned future investments in capital additions
and research and development activities. In connection with research and
development and market expansion, cash may be used to acquire technology
or to fund strategic ventures.
The Company does not currently hedge against changes in foreign currency
exchange rates. The majority of the Company's sales are denominated in
US dollars with customers assuming foreign currency exchange rate risks.
The Company's United Kingdom subsidiaries' sales are denominated in
British Pounds. As of March 31, 1997 outstanding receivables at the UK
subsidiaries totaled $4.7 million dollars or 16% of total accounts
receivable. Management believes the Company is not subject to material
foreign currency exchange rate risks at this time.
FORWARD LOOKING STATEMENTS-RISK FACTORS REGARDING FUTURE PERFORMANCE
Certain statements in this Form 10-Q contain "forward-looking"
information (as defined in the Private Securities Litigation Reform Act
of 1995) that involve risks and uncertainties, which may cause the
actual results, performance or achievements of the Company or industry
results to be significantly different from any future results,
performance or achievement expressed or implied by such forward-looking
information. Such risks and uncertainties include among other things:
uncertainties relating to integration of operations, uncertainty of
future operating results, fluctuations in operating results,
seasonality, lengthy sales and implementation cycle, complex service
requirements, competition, technological change and new products,
limited source of supply, dependence on Windows NT and other core
Microsoft technologies, lack of product revenue diversification,
international sales, dependence on proprietary rights, infringement
claims, uncertainty of obtaining licenses, risk of product defects, and
governmental regulation. Reference is made to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996 filed with the
SEC on March 12, 1997 for a more detailed description of such risks and
uncertainties.
Page 10
<PAGE> 11
PART II: OTHER INFORMATION
Item 1 LEGAL PROCEEDINGS.
Mosaix is subject to various legal proceedings that arise in the
ordinary course of its business. While the outcome of these
proceedings cannot be predicted with certainty, the Company
believes that none of such proceedings, individually or in the
aggregate will have a material adverse effect on the Company's
business or financial condition.
Item 2 CHANGES IN SECURITIES
None
Item 3 DEFAULTS UPON SENIOR SECURITIES
None
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following three items were submitted to the shareholders
during the annual meeting of shareholders held April 22, 1997.
The following nominees for election as Directors were elected:
<TABLE>
<CAPTION>
NOMINEE FOR WITHHELD
<S> <C> <C>
H. Robert Gill 10,519,221 50,513
Umang Gupta 10,521,146 48,588
Kamran Kheirlolmoom 10,519,570 50,164
</TABLE>
The proposal to approve the amendment to the 1991 Employee Stock
Purchase Plan allowing participation by employees of foreign
owned subsidiaries:
For 10,358,440
Against 49,112
Abstain 63,083
The proposal to ratify KPMG Peat Marwick LLP as independent
auditors for the Company received the following votes:
For 10,537,254
Against 5,834
Abstain 26,646
Item 5 OTHER INFORMATION
None
Page 11
<PAGE> 12
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11. Computation of Earnings Per Share
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K.
On January 3, 1997 the Company filed a Form 8-K
announcing the completion of the merger between Digital
Systems International, Inc. and ViewStar Corporation.
The merger was completed on December 24, 1996. The 8-K
also referred to Digital Systems International, Inc.
name change to Mosaix, Inc. effective January 1, 1997.
Page 12
<PAGE> 13
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOSAIX, INC.
(Registrant)
DATE: May 13, 1997 BY: /s/John J Flavio
----------------------------------
John J. Flavio
Chief Financial Officer
(Principal Financial Officer)
Page 13
<PAGE> 14
EXHIBIT INDEX
Exhibits
- --------
11. Computation of Earnings Per Share
27. Financial Data Schedule
<PAGE> 1
MOSAIX, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
EXHIBIT 11: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996
- -------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
Weighted average number of common shares outstanding 13,256 11,685
Dilutive common equivalent shares from outstanding
stock options using the treasury stock method 591 -
---------------------------
Weighted average common shares and common
share equivalents outstanding 13,847 11,685
===========================
Net earnings (loss) $ 2,918 $ (2,413)
===========================
Net earnings (loss) per share $ 0.21 $ (0.21)
===========================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 12,970
<SECURITIES> 31,429
<RECEIVABLES> 31,547
<ALLOWANCES> 1,678
<INVENTORY> 2,206
<CURRENT-ASSETS> 82,542
<PP&E> 28,465
<DEPRECIATION> 21,022
<TOTAL-ASSETS> 93,414
<CURRENT-LIABILITIES> 32,293
<BONDS> 0
0
0
<COMMON> 133
<OTHER-SE> 60,299
<TOTAL-LIABILITY-AND-EQUITY> 93,414
<SALES> 18,684
<TOTAL-REVENUES> 30,614
<CGS> 5,295
<TOTAL-COSTS> 11,371
<OTHER-EXPENSES> 15,643
<LOSS-PROVISION> 85
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,042
<INCOME-TAX> 1,124
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,918
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0
</TABLE>
