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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
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)
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WASHINGTON 91-1273645
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6464 185TH AVENUE N.E
REDMOND, WASHINGTON 98052
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (206) 881-7544
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
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
--- ---
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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the common stock held by nonaffiliates of the
registrant as of March 3, 1997 was $137,639,958 (based on the closing sale price
of $10.375 per share on the Nasdaq National Market on such date).
The number of shares outstanding of the registrant's common stock, $0.01 par
value per share as of March 3, 1997 was 13,266,502.
DOCUMENTS INCORPORATED BY REFERENCE
PART III of this Form 10-K incorporates information by reference from the
registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission within 120 days after the close of the fiscal year.
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MOSAIX, INC.
TABLE OF CONTENTS
PART I
Item One Business
Item Two Properties
Item Three Legal Proceedings
Item Four Submission of Matters to a Vote of Security Holders
PART II
Item Five Market for the Registrant's Common Equity and Related Stockholder
Matters
Item Six Selected Financial Data
Item Seven Management's Discussion and Analysis of Results of Operations and
Financial Condition
Item Eight Financial Statements and Supplementary Data
Item Nine Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
PART III
Item Ten Directors and Executive Officers of the Registrant
Item Eleven Executive Compensation
Item Twelve Security Ownership of Certain Beneficial Owners and Management
Item Thirteen Certain Relationships and Related Transactions
PART IV
Item Fourteen Exhibits, Financial Statement Schedules, and Reports on Form 8-K
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PART I
ITEM ONE
BUSINESS
Mosaix, Inc. (hereinafter referred to as "Mosaix" or the "Company") is a global
provider of enterprise customer management solutions that automate and optimize
an organizations's interactions with customers. Prior to January 1, 1997,
Mosaix was known as Digital Systems International, Inc. ("DSI"). Effective
December 24, 1996, a wholly owned subsidiary of DSI merged with a California
corporation known as ViewStar Corporation ("ViewStar"), and as a result of the
merger ViewStar became a wholly owned subsidiary of DSI. The combined Company's
current operations encompass all former DSI operations, including its wholly
owned United Kingdom subsidiary known as Mosaix Ltd., and ViewStar and its
wholly owned subsidiaries.
Mosaix designs, develops, markets and supports call center systems and
application software designed to help organizations improve the productivity,
quality, effectiveness and profitability of their communications with customers.
Mosaix also offers professional services designed to assist organizations in
integrating their telephone system with computer and data management systems.
The Company's Call Center Applications Group offers sophisticated systems for
processing and managing outbound and blended inbound/outbound telephone
communications. Mosaix enterprise applications allow more customer information
to be captured, quickly routed to the right person, and managed throughout the
life cycle of a customer relationship. Call center applications and integration
services enable the Company to link telephony technologies into a customer
management solution. Mosaix call center products and services are used in a
broad range of industries, including financial services, credit card and
consumer collections, telecommunications and utilities, retail, cable
television, healthcare, fundraising, education and telemarketing. The Company's
ViewStar Enterprise Application Group provides client/server document workflow
software that enables customers to automate and improve document-intensive
business processes across the enterprise. The ViewStar Enterprise Document
Workflow System (the "ViewStar System") is a family of integrated software
modules that provide a complete framework for designing, developing and
deploying enterprise document workflow applications. The ViewStar System is a
client/server application framework designed to rapidly develop and deploy
business critical, process-intensive applications that integrate structured and
unstructured information. ViewStar products are used in a wide variety of
applications, including consumer and mortgage lending, claims processing,
underwriting, trust management, contract management, accounts payable, and
customer service.
Mosaix's strategy is to assist organizations in profitably and effectively
managing the "electronic space" between them and their customers by integrating
advanced telephony and call management technologies with customer data and
business process applications. Using sophisticated call management, and workflow
technologies to provide software based solutions, Mosaix believes that
organizations will be able to expand the functions and capabilities of their
call centers, and to integrate them with back office processes based upon
improving the effectiveness of each contact with a customer increasing total
customer satisfaction and further enhancing the customer relationship.
Headquartered in Redmond, Washington, Mosaix has sales offices in Wilmington,
Delaware; Atlanta, Georgia; Chicago, Illinois; Boston, Massachusetts; Charlotte,
North Carolina; Cleveland, Ohio; Costa Mesa, California; Dallas, Texas; New
York, New York; Vienna, Virginia; and London and Bracknell, England
and has established value-added reseller relationships in North America,
Asia, South America, Africa and Europe. The ViewStar Enterprise Application
Group is headquartered in Alameda, California.
Mosaix, a Washington corporation, was incorporated in 1984.
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INDUSTRY BACKGROUND
Call Centers. Over the past ten years, businesses and other organizations have
increasingly used dedicated centers for processing and managing high volumes of
incoming and outgoing telephone traffic. Call centers have been used extensively
in such fields as credit card and consumer collections, catalog sales,
telemarketing and customer service. In these call centers, activities such as
placing and receiving telephone calls are linked to the computer functions of
database management to capture, store and report on relevant customer
information. As the importance of the call center has increased and as more
functions and capabilities have been combined, a parallel industry has emerged
to create and support the systems, software and services that are designed to
make these call centers efficient, effective and well matched to the broader
corporate mission of the enterprise.
Typically, the call center is the primary "hub" within an organization for
placing or receiving a large volume of customer calls. Customer service
representatives ("CSRs") are the call center's workforce responsible for talking
with customers about subjects including reservations, product information,
account information, and problem resolution. The communication objectives are
as varied as the businesses that employ call centers as part of their marketing
and/or services strategy. Mosaix believes that the call center has become a
strategic business asset as well as the logical point of integration for
customer communications within enterprises. The result is a shift from a call
center-only mission a higher value customer-care mission.
Call centers can range in size from fewer than five CSRs in one location to
thousands of CSRs in multiple locations, networked together via computer and
telecommunications systems. With the significant variability of call center
sizes and call handling objectives, the industry relies on a variety of
suppliers to provide product and service solutions to address their business and
communication needs. Today these product and service solutions include:
- Customer premise telephone call routing and switching systems
("ACDs" and "PBXs")
- Computer telephony integration ("CTI") software (software that
integrates computer (data) and telecommunications equipment
(voice))
- Application software to enhance and facilitate inbound and
outbound customer communications
- Agent coaching and counseling software tools
- Reporting tools to measure and report on agent effectiveness
- Peripheral products (headsets, speakers, video displays)
- Voice mail and interactive voice response ("IVR") systems,
which enable callers to access information in an
organization's computer database via touch-tone dialing
- Computer networking and communications systems, including
e-mail and Internet access systems
- Database/back office information processing systems
Business Process Applications (BPA). The proliferation of relational database
management systems and the growth of client/server computing has fueled
deployment of applications that process and manage structured data. Structured
data, such as financial or inventory data, are typically stored in the rows and
columns of databases. However, these applications and their underlying
technologies are not
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designed to manage the increasing complexity and variety of the information
content and transaction requirements inherent in most business processes.
According to some industry reports, as much as 80% of corporate data is
unstructured; consisting of imaged documents, faxes, electronic documents,
forms, mainframe-generated reports, digitized voice messages, electronic data
interchange (EDI) records, and World Wide Web (Web) documents. For example, loan
officers processing loan applications need access to a variety of structured
data, such as customer and product information, and unstructured data, including
images of applications, credit reports, credit analysis spreadsheets and other
documents. The ability to access, manage and process all relevant information
content, including the seamless integration of structured and unstructured data,
has emerged as a key requirement for business process automation solutions.
Initial efforts to automate document-intensive processes began with electronic
imaging technologies in the late 1980's. These early image-processing products
provided on-line equivalents to paper-based storage and management of business
information. These systems focused primarily on storage and retrieval
applications and were generally only available on dedicated, expensive and
proprietary platforms.
Workflow technology emerged first with the development of rigid and highly
customized BPA software that addressed transaction-based applications focused on
automated routing of document images and related information. Although this
software generated significant benefits both in improved operations efficiency
and cost reductions, implementations were costly, limited in scope and difficult
to change. At the same time, document management emerged as a means for managing
electronic documents and certain other types of unstructured business
information. While these solutions provide significant benefits by allowing an
enterprise access to documents, document management systems do not generally
address the fundamental need to improve business processes. This has resulted
in growing market demand for solutions that combine sophisticated business
process functionality with the ability to seamlessly manage both structured and
unstructured business information.
With the availability of the Internet and intranets, companies have recognized
the opportunity to provide their employees, business partners, and customers
with even greater access to business information. By combining BPA and document
management with Internet and intranet technologies, companies will be able to
significantly broaden access to automated business processes within their
enterprises. This will extend the reach and value of BPA to include
document-based business transactions with their partners and customers beyond
the enterprise. As a result, businesses now seek next-generation business
process automation solutions that include Internet and intranet capabilities.
CALL CENTER SYSTEMS AND APPLICATIONS
Mosaix Call Management Systems are the Company's UNIX-based suite of products
used for the processing and management of outbound and inbound telephone calls.
Integrating directly with an organization's existing telecommunications system
and customer database, the core function of the Mosaix Call Management System is
to process and manage outbound and blended outbound/inbound customer contact
activity within call centers. In managing outbound calling, the Mosaix systems
acquire, review and organize customer data; automatically dial phone numbers
quickly; monitor, interpret and act upon each telephone call's progress; program
redials at the appropriate time and rate; route live voice responses immediately
to an operator; and post and report record updates. The Mosaix 5000 Call
Management System (the "Mosaix 5000"), in addition to performing its normal
outbound call management functions, assists in managing inbound calls.
The Mosaix 5000 was launched in the summer of 1995 and includes Campaign
Director, a graphical interface that provides real-time control over call center
operations. This real-time control allows a supervisor to monitor call center
progress toward established goals and to manage call center resources
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efficiently. Mosaix's Predictive Blend technology, available with the Mosaix
5000, allows inbound call centers the ability to maximize agent productivity.
Predictive Blend predicts the personnel requirements necessary to handle the
constantly changing volume of inbound telephone calls by transferring CSRs
between incoming and outgoing call functions as call volumes change.
In January 1996, Mosaix introduced the Mosaix 3000 Call Management System (the
"Mosaix 3000") and the Mosaix 4000 Call Management System (the "Mosaix 4000"),
both of which are smaller-scale systems designed to assist smaller call centers
and organizations in processing and managing their outbound call requirements.
The Mosaix 4000 is marketed through Mosaix's telesales and direct sales force
and targets the midrange financial services and telemarketing customer. The
Mosaix 3000 is sold by Mosaix's newly developed network of domestic value-added
resellers, who are expected to focus on small and medium-sized telemarketing
service bureaus and internal telemarketing, telesales and teleservicing
departments.
Mosaix launched its first Internet-based product, Campaign Surfer, in October
1996. This product enables users of popular Web browsers to view information
about Mosaix calling campaigns and agent performance. In addition, the Company
recently encouraged third-party application developers to develop customized CSR
applications by releasing the Agent API developer's kit, which helps customers
integrate data from their host and Mosaix systems.
Mosaix's Call Management Systems are used in a broad range of industries,
including financial services, credit card and consumer collections,
telecommunications, utilities, retail, cable television, healthcare,
fundraising, education and telemarketing. Historically, the majority of sales
have been to the financial services and credit industries with emphasis on
collection activity, the telecommunications and utilities industries and major
retail businesses.
APPLICATION SOFTWARE TO IMPROVE TELEPROFESSIONAL EFFECTIVENESS
Mosaix provides software-only products that can reside in both host-based and
client/server environments that integrate with Mosaix Call Management Systems or
call management systems provided by the Company's competitors.
Guide is designed to allow a call center supervisor to control the content and
pace of each customer contact. Call guides (or scripts) for call center
employees historically have been programmed by the vendor or by application
specialists, with any changes requiring system shut down and reprogramming. By
contrast, Guide is designed so that call center supervisors without programming
skills can design and maintain scripts without relying on the vendor or
third-party application specialists. Supervisors can change the scripts as
necessary, even mid-campaign, providing increased flexibility and enabling the
organization to tailor scripts based on agent skill levels and campaign
objectives.
Analyst software produces detailed reports, integrating statistics from various
vendor products, including the ACD/PBX (telephone switch), the IVR system, host
computer, dialer and other applications. It can also integrate other software
programs, such as payroll or executive reporting systems. This product is
designed to assist call center managers in reviewing the performance of multiple
call center systems by integrating and normalizing raw data and generating key
statistics. Analyst also includes features enabling managers to establish goals
for CSRs and extract data which can then be utilized by other software programs
(e.g., an extract of all agent hours for use in the payroll system or an extract
of system performance information to be placed into an executive presentation
document).
Scout, introduced in August 1996, is a Windows NT-based customer interaction
software designed to manage incoming telephone calls. Mosaix is marketing
Scout through its network of value-added resellers to organizations with
smaller call centers and to larger organizations with departments with informal
call
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center needs. Scout is designed to enable CSRs, managers and supervisors to
obtain immediate visual representations of queuing and other information about
incoming calls and, on the basis of such information, to handle or distribute
such calls appropriately (including taking calls out of order, routing callers
directly to CSRs with proper skill sets to handle their requests or directing
less important calls to voicemail). Call center personnel can review relevant
information about the caller or the reason for the call without changing the
caller's position in the queue. Customer information and attributes arrive at
the agent's desktop terminal at the same time as the call.
CLIENT/SERVER SOFTWARE FOR BUSINESS PROCESS APPLICATIONS
The ViewStar System is an enterprise-class, client/server application framework
that is built on Windows NT and utilizes Microsoft's enterprise-computing
architecture. The ViewStar System is designed to automate and improve
document-intensive business processes that require integration of structured and
unstructured data, including imaged documents, faxes, electronic documents,
forms, mainframe-generated reports, digitized voice messages, EDI records and
Web documents.
Process Architect is ViewStar's visual workflow and process modeling application
framework that enables interactive definition, configuration and deployment of
complex business processes. Using Process Architect, business analysts and
application designers can define work content, business rules, workflow maps and
user roles and activities. Process Architect provides a library of predefined
business functions and reusable tasks that can be easily configured to create a
workflow map representing the business process. Through Process Architect's
simulation feature, "what if" analyses of the throughput can be undertaken and
bottlenecks predicted. Process Architect can also be used to dynamically change
the business process and automatically rebuild the workflow application.
Application Designer facilitates rapid application delivery by providing
predefined application frameworks that can be "snapped together" to meet
specific user, application, and job function requirements. Components such as
workflow tasks, user activities and document operations are stored in object
libraries and made available for selection and reuse through a standard
Windows-based graphical interface. In addition, Application Designer provides
preconfigured application templates for the most-requested users roles and job
functions, such as document access and display, workpacket creation and
indexing, document workflow processing, exception case handling and legacy
system integration.
Business Process Interface ("BPI") is a set of Object Link Embedding ("OLE")
automation interfaces that enables the creation of workflow task and user
applications using any OLE 2.0-compliance visual programming environments. BPI
consists of high-level automation objects and a set of OLE customer controls.
Any third-party development tool that supports OLE 2.0, such as Visual Basic,
Visual C++, Delphi and PowerBuilder, can be used with BPI. In addition, BPI's
OLE-based component architecture enables integration with third-party
components, including document and data capture subsystems, 3270 emulation
packages for accessing mainframe data and productivity applications, such as
Microsoft Word or Excel.
ViewStar services include application services, workflow services, document
services, and enterprise information exchange services. Application Services
deliver core functionality for workflow transaction processing, integrated
document and information management, and enterprise information exchanged across
the enterprise. ViewStar Application Services can be consolidated on a single
server or distributed across multiple servers to deliver unmatched scalability
in performance, throughput and storage capacity. Workflow Services execute
workflow transactions, procedures and tasks, including those actively generated
by a workflow and those scheduled to run periodically at predetermined times or
at specific events. These services also handle custom task processing, work
tracking and monitoring, scheduled tasks and document and data import and
export. Document Services provide system-wide access to ViewStar's document
workflow information repository, which manages the structured data
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and documents associated with ViewStar work objects, including document
references and attributes, work-in-progress and historical tracking information,
location and status of all workpackets in the system. All objects and
unstructured data associated with documents, folders and workpackets, including
images, electronic documents and voice objects, are referenced and stored on
standard network file servers. In addition, ViewStar's storage services provide
access to high-capacity devices such as optical disk and juke box libraries.
Enterprise Information Exchange Services enable wide-area, multisite workflow
processing and distribution utilizing either Microsoft's MAPI messaging and
replication services or the Internet. ViewStar Enterprise Information
Exchange Services utilize relational database engineers for centralized resource
management and allow companies to distribute work geographically for local
processing, without sacrificing the tracking, monitoring and coordination
provided by the workflow management application.
PROFESSIONAL SERVICES
Mosaix's call center professional services group provides fee-based business
process consulting and computer/telephony integration (CTI) services. This group
helps clients plan, budget, design and implement new business processes and
technologies with the goal of improving customer management and call center
workflow, with a critical focus on how voice and transaction data are handled
and transported within call centers. Projects often will involve the
implementation of one or more of Mosaix's products, as well as the development
of custom applications to meet unique user requirements. The professional
services group provides such services as business process re-engineering, call
center re-engineering, call center implementation, application development and
systems integration, and technology transfers.
The ViewStar enterprise application professional services and support
organizations work in close cooperation with service partners and independent,
authorized affiliate consultants to provide a wide range of consulting,
educational and ongoing support services to customers enabling rapid and
successful delivery of ViewStar business process applications. This group offers
a core set of services and packaged offerings designed to accelerate the
development and deployment of ViewStar document workflow applications across the
enterprise. This group also utilizes its network of service providers and system
integration partners to provide its customers with a broad range of application
development, systems planning, configuration, and system integration services.
CUSTOMER SUPPORT AND SERVICES
Mosaix believes that customer service and support are an integral part of its
strategy. Service capability, availability and responsiveness play an important
role in marketing and selling its products, particularly as the technological
complexity of the products increases.
Mosaix earns system and software support fees by providing ongoing support for
all of its products. It provides training and support both at its facilities and
at the customer's site. Mosaix offers a full range of product support options,
including telephone support from "normal business hours" to "24 hours a day" and
on-site response from the "next-half-day" to "immediate service (four hours or
less)." Customer support representatives are able to service customer call
center systems on a remote basis from the customer support center in Redmond,
Washington. If needed, customer support representatives will dispatch on-site
support, which is provided by IBM in North America and the United Kingdom.
Customer support for the ViewStar System is provided by customer support
representatives in Alameda, California. Mosaix earns other fees by providing,
upon customer request, certain special services, such as system relocation and
additional training. In addition to the customer support and training facilities
located in its Redmond, Washington headquarters and its Alameda, California
office, the Company operates a customer support and sales center at the
principle office of its subsidiary in the United Kingdom.
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PRODUCT DEVELOPMENT
Mosaix engineers continue to develop new products and new applications of
existing products that will improve the unique enterprise customer management
missions of Mosaix's customers. In recent years, Mosaix increasingly has focused
its development efforts on client/server, Windows NT-based and Internet-enabled
software solutions that address issues and challenges facing call centers and
workflow processes. Mosaix releases new features and enhancements to existing
products, new products and new services on an ongoing basis. Mosaix supplements
its product development efforts by reviewing customer feedback on existing
products and working with customers and potential customers to anticipate future
functionality requirements. Product development efforts are directed at
increasing product functionality, improving product performance, and expanding
product capabilities to shorten the application development and deployment cycle
and further leverage the Microsoft Windows NT platform. Mosaix continues to
identify and prioritize various technologies for potential future product
offerings.
Mosaix has committed and expects to continue to commit substantial resources to
research and development. In 1996, 1995, and 1994, Mosaix recorded research and
development expenses of $14.9 million, $13.1 million and $12.2 million,
respectively, net of capitalized software development costs. During the same
periods, Mosaix capitalized $1.0 million, $2.2 million and $1.6 million,
respectively, of software development costs.
MANUFACTURING
Mosaix's manufacturing operations consist of procurement, assembly, testing and
quality control of all parts, components, subassemblies and final assemblies of
its call center products. Components and subassemblies for Mosaix's call center
products are manufactured by third-party vendors to Mosaix's specifications and
from materials provided by Mosaix. Mosaix's suppliers maintain quality control
by subjecting components and subassemblies to rigorous testing, including
in-circuit automated testing. In addition, Mosaix conducts its own testing of
systems and subassemblies using automated test equipment and manual tests.
Beginning in mid-1996, certain of Mosaix's products were manufactured on a
turn-key basis by an independent third-party vendor. By mid-1997, substantially
all manufacturing will be provided by an independent third-party vendor.
SALES AND MARKETING
Mosaix markets its call center products and services through a direct sales
force operating from Mosaix's headquarters in Redmond, Washington and offices in
Wilmington, Delaware; Atlanta, Georgia; Chicago, Illinois; Boston,
Massachusetts; Charlotte, North Carolina; Cleveland, Ohio; Costa Mesa,
California; Dallas, Texas; New York, New York; Vienna, Virginia; and Branknell,
and London, England. Direct sales staff and support
organizations for the ViewStar line of products and
services are located at Mosaix's subsidiary offices in
Alameda, California and in the United Kingdom. Mosaix also has established
value-added reseller relationships in North and South America, Asia, Africa, and
Europe. The Mosaix Call Management Systems and Guide products have been
localized for sale in the Japanese market. The ViewStar System has been
double-byte enabled for distribution into Japan and Korea.
As of the end of 1996, the Company employed 102 people in sales. The Company's
marketing department consisted of 35 individuals.
COMPETITION
The market for Mosaix's products and services is highly competitive. Important
competitive factors include price, performance, diversity of product line,
reliability, delivery capabilities, and customer support and service.
Mosaix's principal competitors in the outbound call processing systems market
include Davox Corporation, EIS International, Inc. and Melita Electronic Labs.
The potential entry into the market of major ACD and PBX suppliers (suppliers of
customer-premised call routing and switching systems) also
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presents a strong competitive threat, as these competitors may elect to purchase
Mosaix's competitors, increasing their market presence and distribution; resell
principal competitors' products; or elect to develop and market their own
predictive dialing application software. In the market for system integration
services in call centers, Mosaix may compete with software providers and system
integrators such as Andersen Consulting, Genesys Labs and Nabnasset Corporation.
As Mosaix expands its offering of call center applications, it may also
encounter increased competition from call center application providers such as
Brock Control Systems, Information Management Associates, Early Cloud (owned by
IBM) and Versatility. As Mosaix expands into the informal or casual call center
market, it also may experience competition from companies such as Active Voice
Corporation, Applied Voice Technology, Inc., and others which provide
network-based applications that have a critical computer telephony integration
component.
ViewStar Enterprise Applications Group products are targeted for document
workflow software solutions, and competitors offer a variety of products and
services to address this market. ViewStar currently encounters direct
competition from a number of public and private companies or divisions thereof,
including Filenet, IBM and Eastman Kodak. In addition, ViewStar may face
competition from new competitors, including client/server applications vendors
such as Oracle, People/Soft and SAP; document management vendors such as
Documentum and PC DOCS Group; and vendors of workflow products such as Action
Technologies and Staffware. Mosaix's customer management application may in the
future encounter competition from a number of customer management focused
software companies including, the Vantive Corporation, Remedy Corporation,
Pegasystems, Inc. and Seibel Systems. Certain of these companies have announced
and others may announce, document workflow capabilities for their existing or
future products.
ViewStar also faces indirect competition from system integrators. ViewStar
relies on a number of system integration firms for implementation and other
services as well as recommendations of its products during the evaluation stage
of the purchasing process. Although ViewStar seeks to maintain close
relationships with these service providers, many of these third parties have
similar, and often more established relationships with ViewStar's principal
competitors. If ViewStar is unable to develop and retain effective, long-term
relationships with these third parties, ViewStar's competitive position would be
materially adversely affected. See "Forward Looking Statements-Risk Factors
Regarding Future Performance-Competition" in Item Seven.
INTERNATIONAL OPERATIONS
Mosaix's sales to customers in international markets outside the United States
comprised approximately 19.0%, 18.9% and 11.6% of total revenue in 1996, 1995,
and 1994, respectively. In most cases, Mosaix markets its products and services
internationally through value-added resellers.
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The following table sets forth certain information relating to Mosaix's foreign
and domestic operations for the years ended December 31, 1996, 1995, and 1994.
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenue-U.S. operations:
United States ................... $ 94,870 $ 75,593 $ 67,230
United States export ............ 12,083 12,289 4,605
Revenue-foreign subsidiaries ........ 10,228 5,366 4,255
-------- -------- --------
$117,181 $ 93,248 $ 76,090
-------- -------- --------
Operating income (loss):
U.S. operations ................. $ 4,235 $ 1,355 $ (8,785)
Foreign subsidiaries ............ 1,867 382 30
Eliminations .................... 130 121 398
-------- -------- --------
$ 6,232 $ 1,858 $ (8,357)
-------- -------- --------
Assets:
U.S. operations ................. $ 88,740 $ 90,597 $ 91,803
Foreign subsidiaries ............ 5,528 2,974 3,993
-------- -------- --------
$ 94,268 $ 93,571 $ 95,796
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</TABLE>
SEASONALITY
Mosaix's quarterly operating results may be subject to seasonal influences. The
Company generally has realized lower revenues in the first quarter of the year
than the immediately preceding quarter. The Company believes that this has been
due primarily to the structure of the sales commission programs and the
concentration by some customers of larger capital purchases in the fourth
quarter of the calendar year to avoid end-of-year budgetary limitation, followed
by lower purchasing activity during the first quarter of the next calendar year.
Further, to the extent that international operations in the future constitute a
higher percentage of total revenues, the Company anticipates it will experience
relatively weaker demand in the quarter ending September 30 due to reduced
customer activity in Europe during the summer months.
SIGNIFICANT CUSTOMERS
No single customer accounted for more than 10% of Mosaix's revenue in 1996,
1995, and 1994.
REGULATORY ENVIRONMENT
Mosaix's call management products are subject to and conform with FCC
regulations under the Communications Act of 1934. Future products developed by
Mosaix also may be required to comply with certain registration and technical
requirements before they can be sold in the United States. As Mosaix expands its
operations in other countries, its products will become subject to regulation by
foreign governments.
While existing industry regulation does not directly regulate the manufacture
and sale of Mosaix's call management products, certain existing laws and
regulation may affect the ability of Mosaix's customers to utilize some of its
product in certain ways. For example, Mosaix's call management systems may not
be used for certain prohibited debt collection and remote telephone solicitation
practices, nor may they be used under certain circumstances to leave or play
artificial or prerecorded messages. These practices are governed by such federal
laws as the Telephone Consumer Protection Act of 1991 and the Telemarketing and
Consumer Fraud and Abuse Prevention Act, which authorize the FCC and Federal
Trade Commission, respectively, to issue additional regulations and administer
such laws. In addition, most states have enacted legislation limiting certain
telephone solicitation practices or restricting use of automatic dialing and
announcement devices.
-9-
<PAGE> 12
Other federal and state legislation that has been proposed from time to time
include bills that would, if enacted, recognize certain privacy rights of
employees at the work site and regulate the ability of employers to monitor job
performance, including monitoring employees' telephone communication or
gathering information regarding such communications. It is possible that such
legislation or other legislation, if enacted, might directly or indirectly
affect how Mosaix's call management systems, or some future variant thereof, can
be used.
Mosaix fully supports legislation designed to promote the responsible use of
auto dialing equipment. Mosaix endeavors to design its products to enable its
customers to comply with the requirements of current and anticipate regulations.
PROPRIETARY RIGHTS
As new products are identified and created, Mosaix has sought, and will continue
to seek, patent protection, where appropriate, for inventions arising out of its
development efforts. Thus, Mosaix sought and obtained, on March 30, 1992, a U.S.
Patent (No. 5,101,425) on its Realtime Monitor, a device enabling real time
monitoring of predictive dialing systems. On November 14, 1995, Mosaix obtained
a U.S. Patent (No. 5,467,391) on its Integrated Intelligent Call Blending
technology, which describes a system and method for sharing a pool of CSRs in a
telephone call servicing operation so that CSRs are utilized effectively. Mosaix
also intends to pursue, where appropriate, patent protection for these
inventions in the international markets where they are offered.
Although Mosaix has not registered its copyrighted software, such software is
protected by copyright and trade secret laws. In addition, Mosaix enters into
confidentiality agreements with certain of its employees, consultants,
distributors, value-added resellers and customers; limits access to and
distribution of its software, documentation and other proprietary information;
and enters into noncompete agreements with certain of its employees.
Despite Mosaix's efforts to protect its proprietary rights, unauthorized parties
may attempt to copy the Mosaix's products or to obtain and use Mosaix's
proprietary information. Policing unauthorized use of Mosaix's products is
difficult, and since Mosaix is unable to determine the extent to which piracy of
its software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect Mosaix's
proprietary rights to as great an extent as the laws of the United States. There
can be no assurance that Mosaix's means of protecting its proprietary rights
will be adequate or that competitors will not independently develop similar
technology.
Mosaix also relies on certain software licensed from third parties, including
software that is integrated with internally developed software and used in the
Company's products to perform key functions. There can be no assurance that such
third parties will remain in business, that they will continue to support their
products or that their products will otherwise continue to be available to
Mosaix on commercially reasonable terms. The loss or inability to maintain any
of these software licenses could materially adversely affect the Company's
business. See "Forward Looking Statements-Risk Factors Regarding Future
Performance-Dependence on Proprietary Rights; Infringement
Claims; Uncertainty of Obtaining Licenses" in Item Seven.
EMPLOYEES
As of December 31, 1996, Mosaix employed approximately 625 persons (not
including independent contractors and temporary employees) on a full-time basis.
None of Mosaix's employees are covered by collective bargaining agreements, nor
has it ever experienced a work stoppage. Mosaix considers its employee relations
to be good.
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<PAGE> 13
ITEM TWO
PROPERTIES
Mosaix's corporate offices are located in the Seattle, Washington area in an
84,000 square-foot leased office facility at 6464 185th Avenue N.E., Redmond,
Washington 98052. The corporate offices include sales and marketing, service,
engineering, finance, administrative, manufacturing and international functions.
The lease expires March 31, 1999, with an option to extend.
The Company also leases offices which occupy approximately 55,000 square feet in
Alameda, California, under a lease which expires in May 1999. Mosaix also leases
an 11,000-square-foot sales facility, a portion of which is subleased, in
Wilmington, Delaware under a lease expiring May 31, 1997. Mosaix also leases
domestic sales offices in Atlanta, Boston, Charlotte, Chicago, Cleveland, Costa
Mesa, Dallas, Houston, New York and Vienna, Virginia and foreign sales offices
in London and Bracknell, United Kingdom. The Company's sales
and service operations in the United Kingdom occupies approximately 3,000 square
feet of space near London under a long-term lease. Mosaix believes that its
facilities are suitable and adequate for its current needs.
ITEM THREE
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 FOUR
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of Shareholders of the Company was held on December 20, 1996.
The following two matters were presented to the shareholders for a vote:
1. A proposal to approve the issuance of shares of the Company's common stock,
par value $.01 per share, of the Company's common shares to the shareholders of
ViewStar Corporation in connection with an Agreement and Plan of Merger, dated
as of October 14, 1996 (the "Merger Agreement") among ViewStar, the Company and
Vision Merger Corporation, a Washington corporation and a wholly owned
subsidiary of the Company.
<TABLE>
<CAPTION>
The shareholder vote was: Votes
---------
<S> <C>
For 5,234,168
Against 128,548
Abstain 34,271
</TABLE>
2. To consider and vote upon the adoption of the Company's 1996 Stock Incentive
Plan.
<TABLE>
<CAPTION>
The shareholder vote was: Votes
---------
<S> <C>
For 3,866,222
Against 1,468,695
Abstain 62,070
</TABLE>
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<PAGE> 14
PART II
ITEM FIVE
MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Mosaix common stock, $0.01 par value per share, is traded over the counter under
the symbol "MOSX" (prior to January 1, 1997 "DGTL") and is an authorized
security for quotation on the National Association of Securities Dealers, Inc.
Automated Quotations National Market ("Nasdaq/NM").
The market prices of a share of Mosaix common stock are set forth below. The
prices reflect the high and low trading prices for each quarter as reported by
Nasdaq/NM. Over-the-counter market quotations reflect interdealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1996:
4th Quarter ....................................... $23.000 $10.000
3rd Quarter ....................................... $18.375 $12.000
2nd Quarter ....................................... $24.000 $13.500
1st Quarter ....................................... $16.750 $10.500
1995:
4th Quarter ....................................... $13.875 $ 7.875
3rd Quarter ....................................... $11.750 $ 8.375
2nd Quarter ....................................... $ 9.500 $ 6.250
1st Quarter ....................................... $11.875 $ 6.000
</TABLE>
There were approximately 5,364 shareholders of the Company's common stock as of
March 3, 1997. This includes approximately 4,700 street-name holders and 664
registered certificate holders.
No cash dividends were declared or paid by Mosaix during any of the periods
presented. Mosaix presently does not intend to pay any cash dividends in the
foreseeable future.
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<PAGE> 15
ITEM SIX
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(In thousands, except per share amounts) 1996 1995 1994 1993 1992
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $117,181 $ 93,248 $ 76,090 $ 69,237 $79,793
Operating income (loss) 6,232 1,858 (8,357) (7,349) 8,305
Net earnings (loss) 3,618 (563) (6,482) (9,081) 5,241
Net earnings (loss) per share 0.27 (0.06) (0.65) (0.94) 0.53
Weighted average common shares
and common equivalent shares
outstanding 13,487 9,846 9,998 9,681 9,914
Working capital $ 46,804 $ 37,624 $ 38,738 $ 38,555 $42,222
Total assets 94,268 93,571 95,796 86,156 87,856
Long-term obligations 575 1,085 1,123 1,924 7,845
Shareholders' equity 57,343 48,683 52,799 55,360 58,099
</TABLE>
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<PAGE> 16
ITEM SEVEN
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
The following table sets forth for the years ended December 31, 1996, 1995 and
1994 certain operating data expressed as a percentage of revenue.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Revenue:
System sales........................................ 45.6% 46.3% 48.2%
Software licenses................................... 17.6 16.0 14.4
Service and miscellaneous........................... 36.8 37.7 37.4
----- ----- -----
100.0 100.0 100.0
Cost of revenue:
System sales........................................ 35.2 40.8 38.4
Software licenses................................... 6.6 4.1 6.8
Service and miscellaneous........................... 50.0 48.9 55.9
----- ----- -----
35.6 38.0 40.4
Gross profit:
System sales........................................ 64.8 59.2 61.6
Software licenses................................... 93.4 95.9 93.2
Service and miscellaneous........................... 50.0 51.1 44.1
----- ----- -----
64.4 62.0 59.6
Operating expenses:
Selling, general and administrative................. 38.7 44.2 54.5
Research and development............................ 12.7 14.0 16.0
Write-off of capitalized
software costs................................. 0.6 -- --
Purchase of in-process research and development..... 3.7 -- --
Merger related...................................... 3.3 0.5 --
Other non-recurring................................. -- 1.3 0.1
----- ----- -----
Total operating expenses................................. 59.0 60.0 70.6
----- ----- -----
Operating income (loss).................................. 5.4 2.0 (11.0)
Other income, net................................... 1.4 1.9 5.9
----- ----- -----
Earnings (loss) before income taxes............. 6.8 3.9 (5.1)
Income tax expense....................................... 3.7 4.5 3.4
----- ----- -----
Net earnings (loss)............................. 3.1% (0.6)% (8.5)%
===== ===== =====
</TABLE>
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<PAGE> 17
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995
For the year ended December 31, 1996, Mosaix reported net earnings of $3.6
million, or $0.27 per share, compared to the ($0.6) million net loss or ($0.06)
per share net loss reported in 1995. Excluding one-time charges, operating
income for 1996 was $15.1 million versus $3.6 million for 1995. Net earnings for
the year excluding one-time charges increased to $12.3 million or $0.91 per
share for 1996, compared to $1.2 million or $0.09 per share for 1995. These
one-time charges include: ( a ) the write-off of $4.3 million of acquired
in-process research and development costs and $0.7 million of previously
capitalized software development costs related to the February 1996 acquisition
of Caleo; ( b ) $3.9 million related to the merger with ViewStar incurred during
the fourth quarter of 1996; and ( c ) $1.7 million for 1995 merger-related and
other non-recurring charges for ViewStar. The increase in net earnings of $11.1
million for 1996, which excludes the one time charges, relates to the increased
acceptance of Mosaix products and services in the marketplace, and to the large
operating losses incurred by ViewStar during the first half of 1995.
Revenue. Revenue of $117.2 million for the year ended December 31, 1996
represented a 25.7% increase over revenue of $93.2 million reported in 1995.
System sales increased $10.2 million or 23.6% to $53.4 million in 1996 from
$43.2 million in 1995. Software licenses revenue, increased by 38.2% to $20.7
million for the year ended December 31, 1996 from $14.9 million in 1995. Service
and miscellaneous revenue increased by $8.0 million or 22.8% to $43.1 million
for 1996 from $35.1 million as a result of increased professional service and
customer support revenue. Professional services revenues increased by $5.4
million to $14.3 million representing a 61% increase of 1995 revenue of $8.9
million. International revenue increased to $22.3 million in 1996 from $17.7
million in 1995, due to first time sales in Mexico, South America, and South
Africa combined with increased sales in the United Kingdom and Japan. The
overall revenue increase was influenced by continuing acceptance of the Mosaix
products. Currently, backlog is not significant in relation to Mosaix's revenue
and may not be indicative of future performance.
Gross Margin. Gross margin improved to 64.4% for the year ended December 31,
1996 from 62.0% for the year ended December 31, 1995. System sales gross
margins, which increased to 64.8% in 1996 as compared to 59.2% in 1995 were
influenced in part by the increase in sales volume as well as product mix,
overhead coverage, and software amortization expense. System sales gross margin
in 1995 included accelerated software amortization expense resulting from the
replacement of earlier versions of the Company's software with the Mosaix 5000
Call Management Systems. During 1996, Mosaix expensed $1.4 million related to
software amortization, compared to $2.8 million in 1995. During 1996, Mosaix
sold a greater proportion of large scale, complex telemarketing and financial
services application products in the Mosaix 5000 Call Management Systems, which
contributed to the increase in systems sales gross margins. Gross margin on
software licenses decreased slightly to 93.4% in 1996 from 95.9% in 1995,
primarily due to a referral fee paid to a partner on a license transaction. The
decrease was partially offset by a percentage decrease in royalty payments to
third-party software vendors. Gross margin on service and miscellaneous revenue
for the year ended December 31, 1996 was 50.0% compared to 51.1% in the prior
year, due to a higher mix of lower-margin professional service revenues and
lower customer support margins, due to higher cost of support primarily related
to additional burden of customer support professionals.
Selling, General and Administrative. For the year ended December 31, 1996,
selling, general and administrative expenses were $45.4 million, or 38.7% of
revenue, compared to $41.2 million, or 44.2% of revenue in the prior year. While
selling, general and administrative expenses decreased as a percentage of
revenue, the increase in spending was due to the expansion of marketing
activities and increased travel, advertising and personnel costs.
-15-
<PAGE> 18
Research and Development. For the year ended December 31, 1996, research and
development expenses, net of amounts capitalized, were $14.9 million, or 12.7%
of revenue, compared to $13.1 million, or 14.0% of revenue, in 1995. Gross
research and development spending increased to $15.9 million from $15.3 million
primarily due to increases in engineering staff and outside contractors.
Software costs capitalized as a percentage of research and development spending
were 6.3% ($1.0 million) in 1996 and 14.4% ($2.2 million) in 1995. Capitalized
software continues to decrease, and as of December 31, 1996, has been reduced to
$2.0 million versus $2.9 million as of December 31, 1995.
Mosaix remains committed to the ongoing development and/or acquisition of new
products and improvements to existing products as a key source of future
revenue. Mosaix expects to invest approximately 12-14% of revenue in new product
development.
Other Income, Net. Other income, net is comprised primarily of interest income
and expense and remained constant at $1.7 million for the years ended December
31, 1996 and 1995.
Income Taxes. Mosaix's income tax expense was $4.3 million and $4.2 million for
the years ended December 31, 1996 and 1995, respectively. The unusually high
effective tax rates are primarily the result of non-deductible merger related
expenses and purchased in-process research and development costs. The effective
tax rates are also impacted by the merger with ViewStar whereby operating losses
generated by ViewStar provided no income tax benefit to the consolidated
organization.
YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994
Revenue. Revenue for the year ended December 31, 1995 was $93.2 million and
represents an increase of 22.5% over revenue of $76.1 million in 1994. System
sales increased by $6.5 million or 17.7% to $43.2 million in 1995 from $36.7
million in 1994. The improvement in system sales resulted from an increased
acceptance of the Mosaix series of products. Software license revenue increased
36.1% to $14.9 million in 1995 from $11.0 million in 1994, primarily due to an
increased demand for the ViewStar System in the second half of the year. Service
and miscellaneous revenue increased $6.7 million or 23.5% to $35.1 million in
1995 from $28.4 million in 1994. This increase was due to an increase in
professional services revenue for both systems integration and facilities
management projects, as well as a higher volume of systems support and "right to
use" fees. International sales increased by $8.8 million or 99.3% compared to
1994, primarily due to increased sales in Asia and Canada.
Mosaix's backlog at December 31, 1995 was $6.5 million compared to $20.6 million
at December 31, 1994. A substantial part of the December 31, 1994 backlog was
related to enhanced newly developed products in the Mosaix family which were
installed and accepted throughout 1995. The backlog decreased during 1995 due to
improved internal process which decreased the time between a customer's decision
to purchase a system and the implementation of that system and the acceptance of
many previously installed systems. Currently, backlog is not significant in
relation to Mosaix's revenue.
Gross Margin. Gross margin improved to 62.0% in 1995 from 59.6% in 1994. System
sales gross margin declined to 59.2% in 1995 from 61.6% in 1994 due to the lower
volume of upgrades and increased software amortization. System sales gross
margins are influenced by a variety of factors, including product volume and
mix, overhead coverage, and software amortization expense. During 1995, software
amortization expense totaled $2.8 million, an increase of $0.8 million over
1994. Software licenses gross margins increased to 95.9% in 1995 from 93.2% in
1994, resulting primarily from reductions in third-party software vendor
royalties on the new version of the ViewStar System. Service and miscellaneous
gross margin improved to 51.1% in 1995 compared to 44.1% in 1994. Lower 1994
service gross margin was due to start-up costs of the Professional Services
Group and higher fixed costs of providing customer service and support.
Selling, General and Administrative. Mosaix's selling, general and
administrative expenses slightly decreased to $41.2 million in 1995 from $41.5
in 1994. As a percentage of revenue, selling, general and
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<PAGE> 19
administrative expenses decreased to 44.2% in 1995 from 54.5% in 1994, due to
higher revenue without a corresponding increase in personnel costs.
Research and Development. Research and development expenses, net of software
capitalization, were $13.1 million, or 14.0% of revenue, in 1995 compared to
$12.2 million, or 16.0% of revenue, in 1994. Gross research and development
spending increased by $1.5 million to $15.3 million in 1995 from $13.8 million
in 1994. In 1995, Mosaix capitalized 14.4% of gross research and development
spending or $2.2 million compared to 11.6% or $1.6 million in 1994. The spending
increase was due to an expansion in Mosaix's applications software development
efforts.
Other Income, Net. Other income, net was $1.7 million in 1995 compared to $4.4
million in 1994. Other income, net for 1994 includes pretax non-operating income
of $3.3 million, net of legal expenses ($2.1 million after-tax), associated with
the settlement of a lawsuit. Interest income, net increased 73.0% to $1.4
million in 1995 from $0.8 million in 1994 due to higher invested cash balances
and an improved rate of return.
Income Taxes. Mosaix's effective tax rate was 115.7% in 1995 compared to 65.8%
in 1994. The 1994 tax rate benefited from the utilization of Mosaix's foreign
subsidiary's net operating loss carryforward offsetting the subsidiary's 1994
taxable earnings. The effective income tax rates are also impacted by the merger
with ViewStar whereby operating losses generated by ViewStar provided no income
tax benefit to the consolidated organization.
LIQUIDITY AND CAPITAL RESOURCES
Mosaix's combined cash and cash equivalents and short-term investments were
$42.8 million, $41.6 million and $45.1 million at December 31, 1996, 1995 and
1994, respectively. The short-term investment portfolio is invested in municipal
securities, corporate notes and bonds, and is diversified among security types
and issuers. It does not include any derivative products. At December 31, 1996,
Mosaix's working capital was $46.8 million compared to $37.6 million at December
31, 1995. During 1996, Mosaix generated $4.9 million from operations compared to
$6.2 million and $20.1 million generated in 1995 and 1994, respectively. The
decrease in cash generated from operating activities in 1996 was due primarily
to the purchase of Caleo for $4.8 million in cash during February 1996, as well
as a decrease in customer deposits and an increase in accounts receivable. Of
the $4.8 million Caleo purchase price, $4.3 million was charged to operations as
acquired in-process research and development costs. The decrease in cash flow
from operations in 1995 compared to 1994 was primarily related to a substantial
increase in receivables, due in part to annual service billings at year-end, as
well as a reduction in customer deposits. The reduced amount of customer
deposits was due to process improvements no longer requiring customer deposits
before orders are processed.
Mosaix invested $3.5 million to purchase furniture and equipment in 1996
compared to $2.8 million in each of the two prior years. The increase between
1996 and 1995 is primarily due to the investment in internal customer management
hardware and software systems. Mosaix made repayments on long-term obligations
of $1.3 million in 1996 compared to $2.2 million in 1995 and $4.0 million in
1994.
In 1995, the Mosaix Board of Directors authorized a program to repurchase up to
1.6 million Mosaix Common Shares. Approximately 0.7 million shares were
repurchased at a cost of approximately $5.5 million. The repurchase plan was
discontinued on October 2, 1996, due to pooling-of-interests rules relating to
the merger.
In addition to its cash and short-term investment balances, Mosaix 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 Mosaix's investment
in capital assets
-17-
<PAGE> 20
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.
FORWARD LOOKING STATEMENTS - RISK FACTORS REGARDING FUTURE PERFORMANCE
Certain statements in this Annual Report on Form 10-K contain "forward-looking"
information (as defined in the Private Securities Litigation Reform Act of 1995)
that involves risks and uncertainties. Actual future results may differ
materially depending on a variety of factors, including, without limitation, the
following:
Uncertainties Relating to Integration of Operations. The integration of
ViewStar's operations has required and will continue to require the dedication
of management resources, which will temporarily distract attention from the
Company's day-to-day business. The geographical separation of ViewStar's
operations may hinder efforts to integrate operations. There can be no assurance
that such integration will be completed without significant disruption of the
Company's business. The Company intends to operate ViewStar as a separate
business unit. Although some administrative and management functions eventually
may be combined, operating efficiencies resulting from the merger of ViewStar
may be limited or difficult to achieve. In addition, although the Company
believes that ViewStar's complementary technologies, distribution channels and
shared market vision may enhance the sales performance of the Company, there can
be no assurance that any synergy will be realized from the combination. ViewStar
incurred net losses in each year through 1995, including net losses of $8.0
million in 1995 and $11.3 million in 1994. As of September 30, 1996, ViewStar
had an accumulated deficit of $31.5 million. Although ViewStar operated
profitably in 1996, there can be no assurance that the Company's ViewStar unit
will operate profitably in the future. A failure of such unit to operate
profitably would materially adversely affect the Company's business.
Uncertainty of Future Operating Results; Fluctuations in Operating Results;
Seasonality. The Company's system sales and software license revenues are
difficult to forecast because sales cycles are relatively long and quarterly
revenues depend on a relatively few large contracts that are subject to changes
in customer budgets and general economic conditions. Furthermore, because the
Company's products generally are shipped as orders are received, revenues in any
quarter are substantially dependent on orders booked and shipped in that
quarter. The Company's operating results have fluctuated in the past and are
likely to do so in the future, particularly on a quarterly basis. In addition,
changes in levels of the Company's consulting activity and seasonality in its
consulting revenues have resulted in variability of service revenues from
quarter to quarter. Historically, the Company often has recognized a substantial
portion of its revenues in the last month of the quarter, with these revenues
frequently concentrated in the last week of the quarter. In addition, the
Company generally has realized lower revenues from system sales and software
license fees in the first quarter of the year than in the immediately preceding
quarter. Mosaix believes that this has been due primarily to the structure of
its sales commission programs and the concentration by some customers of larger
capital purchases in the fourth quarter of the calendar year to avoid
end-of-year budgetary limitations, followed by lower purchasing activity during
the first quarter of the next calendar year. Further, to the extent that
international operations in the future constitute a higher percentage of total
revenues, the Company anticipates that it ordinarily will experience relatively
weaker demand in the quarter ending September 30 due to reduced customer
activity in Europe during the summer months. As a result of these and other
factors, revenues for any quarter are difficult to forecast and are subject to
significant variation. Moreover, results of operations for any particular period
are not necessarily indicative of future performance. In particular, the Company
does not believe that the revenue growth rate ViewStar achieved in the first
half of 1996 compared to the first half of 1995 is sustainable. Due to all of
the foregoing factors, it is likely that in some future quarter the Company's
operating results will be below the expectations of market analysts and
investors.
-18-
<PAGE> 21
Lengthy Sales and Implementation Cycle; Complex Service Requirements. The
purchase or license of the Company's products is usually a significant decision
by prospective customers, requiring the Company to engage in a lengthy sales
cycle, typically between six and twelve months, without any assurance that new
accounts will result. Moreover, the cost to the customer of the Company's
products typically is only a portion of the cost of implementing a large-scale
call processing or document workflow system. For these and other reasons, the
sales cycle is subject to a number of significant delays over which the Company
has little or no control. Successful implementation of the Company's products
also often requires lengthy and complex implementation and integration services,
which services may be provided by the Company or by third-party service
providers. The Company's future operating results will depend upon its ability
to coordinate these complex service resources and ensure successful
implementation of its products, while limiting costs.
Competition. The markets for Mosaix's products are highly competitive. Important
competitive factors include price, performance, diversity of product line,
reliability, delivery capabilities, customer support and service. Some of the
Company's competitors have significantly greater financial, technical,
manufacturing, marketing and other resources. Competitors may develop products
and technologies that are less expensive or technologically superior to the
Company's products.
The Company's competitors in the document workflow market offer a variety of
products and services. The Company currently encounters direct competition from
a number of public and private companies or divisions thereof, including FileNet
Corporation, International Business Machines Corporation ("IBM") and Eastman
Kodak. In addition, Mosaix may face competition from new competitors
including client/server application vendors such as Oracle, PeopleSoft and SAP;
document management vendors such as Documentum and PC DOCS Group; and vendors of
workflow products such as Action Technologies and Staffware. Certain of these
companies have announced, and others may announce, document workflow
capabilities for their existing or future products. Many of these companies have
longer operating histories, significantly greater financial, marketing, service,
support, technical and other resources and name recognition, and a larger
installed customer base than the Company. As a result, such competitors may be
able to respond more quickly to new or emerging technologies and changes in
customer requirements or to devote greater resources to the development,
promotion and sale of their products. It is also possible that new competitors
or alliances among competitors may emerge and rapidly acquire significant market
share. In addition, the Company expects competition to increase as a result of
software industry consolidation, resulting in possible price reductions, reduced
gross margins and loss of market share. There can be no assurance that Mosaix
will be able to compete successfully against current and future competitors or
that competitive pressures will not materially and adversely affect the
Company's business, results of operations and financial condition.
With respect to its document workflow products, the Company relies on a number
of system integration firms for implementation of such products, as well as
recommendations of such products during the evaluation stage of the purchasing
process. Although Mosaix seeks to maintain close relationships with these
service providers, many of these third parties have similar, and often more
established, relationships with the Company's principal competitors. If the
Company is unable to develop and retain effective, long-term relationships with
these third parties, its competitive position would be materially adversely
affected. Further, there can be no assurance that these third parties, many of
which have significantly greater financial, marketing, service, support,
technical and other resources than the Company, will not market software
products in competition with the Company's products in the future.
The Company's principal competitors in the outbound call processing systems
market include Davox Corporation, EIS International, Inc. and Melita Electronic
Labs. The potential entry into the market of major telecommunications equipment
manufacturers also presents a strong competitive threat, as these competitors
may elect to purchase the Company's competitors, thereby increasing their market
presence and distribution; resell principal competitors' products; or elect to
develop and market their own
-19-
<PAGE> 22
predictive dialing application software. In the market for system integration
services in call centers, the Company may compete with software providers and
system integrators such as Andersen Consulting, Genesys Labs and Nabnasset
Corporation. As Mosaix expands its offering of call center applications, it also
may encounter increased competition from call center application providers such
as Brock Control Systems, Information Management Associates, Early Cloud (owned
by IBM) and Versatility. As Mosaix expands into the informal or casual call
center market, it may also experience competition from companies such as Active
Voice Corporation, Applied Voice Technology, Inc. and others which provide
network-based applications that have a critical computer telephony integration
component. Many of the Company's current or potential competitors in this market
have greater financial, technical and marketing resources. As the call
processing market matures and new and existing companies compete for the same
customers, price competition is likely to intensify, which could adversely
affect the operating results of the Company.
Technological Change and New Products. The document management and workflow
software market and the call management market are characterized by rapid
technological change and frequent product introductions and improvements.
Accordingly, the success of Mosaix will depend to a great extent upon its
ability to develop product enhancements and new products that keep pace with
continuing changes in technology and customer preferences while remaining price
competitive.
Mosaix has incurred, and expects to continue to incur, substantial expenses
associated with the introduction and promotion of new products. There can be no
assurance that the expenses incurred will not exceed development budgets, that
Mosaix will introduce products in a timely fashion, if at all, or that such
products will achieve market acceptance and generate sales sufficient to offset
development costs. In addition, the success of the Company's products which are
designed for use on the Internet or intranets will depend upon the acceptance of
the Internet, intranets and World Wide Web technologies, as well as the
products' compatibility with such technologies.
Limited Source of Supply. The Company purchases a principal telephone call
switching component for its Mosaix line of products from a sole-source vendor.
If this component becomes unavailable from such supplier, the establishment of
an alternate source could not be accomplished quickly and would require
investment of resources, which would delay the Company's manufacture of its
Mosaix products. Any such delay could materially adversely affect the operating
results of the combined company.
Dependence on Windows NT and Other Core Microsoft Technologies. The success of
many of the Company's products and potential products depends upon the continued
acceptance and use in critical business applications of Microsoft's Windows NT
platform and other core Microsoft technologies, such as the Windows NT Server,
the Microsoft SQL Server database and related Back Office software on which such
products are, or will be, based. If the Windows NT platform market fails to
grow, grows more slowly than anticipated or becomes obsolete, the Company's
business, results of operations and financial condition would be materially
adversely affected.
Lack of Product Revenue Diversification. While the Company has developed new
software products and services and has established a new indirect channel of
distribution, it expects that its Mosaix line of products and the ViewStar
System will continue to account for a significant amount of the Company's
revenues in the future. A decline in demand for those products as a result of
competition, technological change or other factors would have a material adverse
effect on the Company's results of operations.
International Sales. Mosaix sells products to customers in international
markets, with such sales accounting for approximately 19% of the Company's total
sales in 1996, and accordingly is subject to the normal risks of international
sales, such as currency fluctuations, longer payment cycles, greater
difficulties in accounts receivable collections and compliance with export laws
and a wide variety of foreign laws. Any difficulties with respect to foreign
export or other laws would have a material
-20-
<PAGE> 23
adverse effect on the Company's international sales. Because the Company
invoices certain of its foreign sales in local currency and does not hedge these
transactions, fluctuations in exchange rates could materially adversely affect
the Company's revenues and costs and could create significant foreign currency
losses.
Dependence on Proprietary Rights; Infringement Claims; Uncertainty of Obtaining
Licenses. Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy the Company's products or to obtain and
use the Company's proprietary information. Policing unauthorized use of the
Company's products is difficult, and since Mosaix is unable to determine the
extent to which piracy of its software products exists, software piracy can be
expected to be a persistent problem. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights to as great an extent
as the laws of the United States. There can be no assurance that the Company's
means of protecting its proprietary rights will be adequate or that its
competitors will not independently develop similar technology.
The Company has received communications from time to time asserting that its
products infringe the proprietary rights of third parties or seeking
indemnification against such infringement. Although the Company believes that
none of its products infringe the proprietary rights of third parties, there
can be no assurance that third parties will not claim infringement with
respect to current or future products. The Company expects that software
product developers will increasingly be subject to infringement claims as
the number of products and competitors grows and the functionality of products
in different markets overlaps. Any such claims, with or without merit, could
be time-consuming, result in costly litigation, adversely affect revenues,
cause product shipment delays or require the Company to enter into royalty
or licensing agreements. Such royalty or licensing agreements, if required,
may not be available on terms acceptable to the Company, if at all, which
could have a material adverse effect on the Company's business, results of
operations and financial condition.
Mosaix also relies on certain software licensed from third parties, including
software that is integrated with internally developed software and used in the
Company's products to perform key functions. There can be no assurance that such
third parties will remain in business, that they will continue to support their
products or that their products will otherwise continue to be available to the
Company on commercially reasonable terms. The loss or inability to maintain any
of these software licenses could materially adversely affect the Company's
business.
Risk of Product Defects. Software and other products as internally complex as
those offered by the Company frequently contain errors or defects, especially
when first introduced or when new versions are released. Although Mosaix
conducts extensive product testing during product development, it has
experienced delays in the commercial release of products pending the correction
of software problems and, in some cases, has provided product enhancements to
correct errors or defects in released products. The Company could, in the
future, lose revenues as a result of software errors or other product defects.
The Company's products and future products are intended for use in applications
that are critical to a customer's business. As a result, Mosaix expects that its
customers and potential customers have a greater sensitivity to product defects
than the market for software products generally.
Governmental Regulation. While existing industry legislation does not directly
regulate the manufacture and sale of Mosaix's call management products, certain
existing legislation may affect the ability of Mosaix's customers to utilize
some of its products in certain ways. For example, Mosaix's call management
systems may not be used for certain prohibited debt collection and remote
telephone solicitation practices, nor may they be used under certain
circumstances to leave or play artificial or prerecorded messages. These
practices are governed by such federal laws as the Telephone Consumer Protection
Act of 1991 and the Telemarketing and Consumer Fraud and Abuse Prevention Act,
which authorize the FCC and Federal Trade Commission, respectively, to issue
additional regulations and
-21-
<PAGE> 24
administer such laws. In addition, most states have enacted legislation limiting
certain telephone solicitation practices or restricting use of automatic dialing
and announcement devices. Other federal and state legislation that has been
proposed from time to time include bills that would, if enacted, recognize
certain privacy rights of employees at the work site and regulate the ability of
employers to monitor job performance, including monitoring employees' telephone
communication or gathering information regarding such communications. It is
possible that such legislation or other legislation, if enacted, might directly
or indirectly affect how Mosaix's call management systems, or some feature
thereof, can be used. Mosaix fully supports legislation designed to promote the
responsible use of auto dialing equipment. Mosaix endeavors to design its
products to enable its customers to comply with the requirements of current and
anticipated regulations.
-22-
<PAGE> 25
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
The Board of Directors and Shareholders
Mosaix, Inc.:
We have audited the accompanying consolidated balance sheets of Mosaix,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 Mosaix, Inc.
and subsidiaries as of December 31, 1996 and 1995 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT MARWICK LLP
Seattle, Washington
January 30, 1997
-23-
<PAGE> 26
MOSAIX, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1996 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Systems sales $ 53,384 $ 43,169 $ 36,669
Software licenses 20,654 14,949 10,980
Service and miscellaneous 43,143 35,130 28,441
-------- -------- --------
117,181 93,248 76,090
-------- -------- --------
Cost of revenue:
System sales 18,813 17,627 14,088
Software licenses 1,364 612 742
Service and miscellaneous 21,588 17,178 15,902
-------- -------- --------
41,765 35,417 30,732
-------- -------- --------
Gross profit 75,416 57,831 45,358
-------- -------- --------
Operating expenses:
Selling, general and administrative 45,355 41,179 41,478
Research and development 14,912 13,054 12,159
Write-off of capitalized software costs 705 -- --
Purchase of in-process research and development 4,307 -- --
Merger related 3,905 500 --
Other non-recurring -- 1,240 78
-------- -------- --------
Total operating expenses 69,184 55,973 53,715
-------- -------- --------
Operating income (loss) 6,232 1,858 (8,357)
Interest income, net 1,665 1,393 805
Litigation settlement -- -- 3,248
Other, net 9 337 394
-------- -------- --------
Other income, net 1,674 1,730 4,447
-------- -------- --------
Earnings (loss) before income taxes 7,906 3,588 (3,910)
Income tax expense 4,288 4,151 2,572
-------- -------- --------
Net earnings (loss) $ 3,618 $ (563) $ (6,482)
======== ======== ========
Net earnings (loss) per share $ 0.27 $ (0.06) $ (0.65)
======== ======== ========
Weighted average common shares and common
equivalent shares outstanding 13,487 9,846 9,998
</TABLE>
See accompanying notes to consolidated financial statements.
-24-
<PAGE> 27
MOSAIX, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $10,984 $ 7,746
Short-term investments 31,825 33,848
Trade accounts receivable, less allowance for doubtful
accounts of $1,593 in 1996 and $1,006 in 1995 29,566 28,687
Inventories 2,814 2,958
Current installments of contracts receivable, net 1,764 2,797
Prepaid expenses and other current assets 4,277 2,019
Deferred income taxes 1,560 1,526
------- -------
Total current assets 82,790 79,581
Furniture, equipment and leasehold improvements, net 7,393 8,001
Contracts receivable, less allowance for doubtful contracts
of $423 in 1996 and $857 in 1995, excluding current installments 670 1,793
Capitalized software costs, net of accumulated amortization
of $3,464 in 1996 and $4,894 in 1995 1,993 2,870
Other assets, net 1,422 1,326
------- -------
Total assets $94,268 $93,571
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
-25-
<PAGE> 28
MOSAIX, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 934 $ 1,132
Accounts payable 5,064 4,897
Accrued compensation 6,614 4,477
Other accrued expenses 9,755 9,096
Subordinated notes payable to shareholders -- 2,000
Customer deposits and unearned revenue 13,619 20,355
-------- --------
Total current liabilities 35,986 41,957
Long-term obligations, excluding current installments 575 1,085
Deferred income taxes -- 1,199
Unearned revenue, less current portion 364 647
-------- --------
Total liabilities 36,925 44,888
Shareholders' equity:
Preferred stock, $.01 par value. Authorized 5,000 shares;
issued and outstanding no shares in 1996 and
1,847 shares in 1995 -- 18
Common stock, $.01 par value. Authorized 25,000 shares;
issued and outstanding 13,237 shares in 1996 and
9,768 shares in 1995 132 98
Additional paid-in-capital 61,841 56,688
Deferred stock option compensation expense -- (31)
Cumulative translation adjustments (201) (334)
Notes receivable from shareholders (590) (299)
Accumulated deficit (3,839) (7,457)
-------- --------
Total shareholders' equity 57,343 48,683
-------- --------
Total liabilities and shareholders' equity $ 94,268 $ 93,571
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
-26-
<PAGE> 29
MOSAIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1996, 1995, 1994
(In thousands)
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
q -------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1993 1,695 $ 17 9,949 $ 100 $ 56,351
Issuance of preferred stock 152 1 -- -- 2,950
Exercise of stock options -- -- 173 2 590
Amortization of deferred compensation expense -- -- -- -- --
Tax benefit realized upon exercise of stock options -- -- -- -- 218
Forfeiture of compensatory stock options -- -- -- -- (112)
Common stock sold pursuant to employee stock
purchase plan -- -- 38 -- 119
Translation adjustment -- -- -- -- --
Net loss for the year ended December 31, 1994 -- -- -- -- --
------------------------------------------------------
BALANCES AT DECEMBER 31, 1994 1,847 18 10,160 102 60,116
Exercise of stock options -- -- 187 2 537
Amortization of deferred compensation expense -- -- -- -- --
Tax benefit realized upon exercise of stock options -- -- -- -- 103
Common stock sold pursuant to employee stock
purchase plan -- -- 29 -- 226
Translation adjustment -- -- -- -- --
Repurchase of common stock -- -- (608) (6) (4,294)
Net loss for the year ended December 31, 1995 -- -- -- -- --
------------------------------------------------------
BALANCES AT DECEMBER 31, 1995 1,847 18 9,768 98 56,688
Issuance of preferred stock 3,293 33 -- -- 3,294
Exercise of stock options -- -- 369 4 1,440
Amortization of deferred compensation expense -- -- -- -- --
Tax benefit realized upon exercise of stock options -- -- -- -- 1,051
Common stock sold pursuant to employee stock
purchase plan -- -- 33 -- 388
Translation adjustment -- -- -- -- --
Restricted stock issued in exchange for note
receivable -- -- 311 3 152
Conversion of preferred stock to common stock (5,140) (51) 2,797 28 23
Exercise of stock warrents -- -- 42 -- 30
Repurchase of common stock -- -- (83) (1) (1,225)
Net earnings for the year ended December 31, 1996 -- -- -- -- --
------------------------------------------------------
BALANCES AT DECEMBER 31, 1996 -- -- 13,237 132 61,841
======================================================
</TABLE>
<TABLE>
<CAPTION>
DEFERRED
NOTES STOCK
RECEIVABLE CUMULATIVE OPTION TOTAL
FROM TRANSLATION COMPENSATION ACCUMULATED SHAREHOLDERS'
SHAREHOLDERS ADJUSTMENT EXPENSE DEFICIT EQUITY
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1993 $ (59) $(319) $(317) $ (412) $ 55,361
Issuance of preferred stock -- -- -- -- 2,951
Exercise of stock options (60) -- -- -- 532
Amortization of deferred compensation expense -- -- 120 -- 120
Tax benefit realized upon exercise of stock options -- -- -- -- 218
Forfeiture of compensatory stock options -- -- 112 -- --
Common stock sold pursuant to employee stock
purchase plan -- -- -- -- 119
Translation adjustment -- (20) -- -- (20)
Net loss for the year ended December 31, 1994 -- -- -- (6,482) (6,482)
---------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1994 (119) (339) (85) (6,894) 52,799
Exercise of stock options (180) -- -- -- 359
Amortization of deferred compensation expense -- -- 54 -- 54
Tax benefit realized upon exercise of stock options -- -- -- -- 103
Common stock sold pursuant to employee stock
purchase plan -- -- -- -- 226
Translation adjustment -- 5 -- -- 5
Repurchase of common stock -- -- -- -- (4,300)
Net loss for the year ended December 31, 1995 -- -- -- (563) (563)
---------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1995 (299) (334) (31) (7,457) 48,683
Issuance of preferred stock -- -- -- -- 3,327
Exercise of stock options (136) -- -- -- 1,308
Amortization of deferred compensation expense -- -- 31 -- 31
Tax benefit realized upon exercise of stock options -- -- -- -- 1,051
Common stock sold pursuant to employee stock
purchase plan -- -- -- -- 388
Translation adjustment -- 133 -- -- 133
Restricted stock issued in exchange for note
receivable (155) -- -- -- --
Conversion of preferred stock to common stock -- -- -- -- --
Exercise of stock warrents -- -- -- -- 30
Repurchase of common stock -- -- -- -- (1,226)
Net earnings for the year ended December 31, 1996 -- -- -- 3,618 3,618
---------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1996 $(590) $(201) $-- $(3,839) $ 57,343
=====================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
-27-
<PAGE> 30
MOSAIX, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(IN THOUSANDS) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ 3,618 $ (563) $ (6,482)
Depreciation and amortization 6,315 7,266 6,183
Trade and other accounts receivable 1,181 (3,174) 7,301
Other assets (2,162) (466) (1,860)
Accounts payable and accrued liabilities 2,977 4,439 5,212
Deferred revenue (7,023) (1,270) 9,784
------------------------------------
Net cash provided by operating activities 4,906 6,232 20,138
------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of short-term investments (40,635) (50,433) --
Proceeds from maturities of short-term investments 42,658 16,585 --
Purchases of furniture and equipment (3,456) (2,781) (2,842)
Proceeds from sale of furniture and equipment -- 388 --
Increase in capitalized software costs (976) (2,157) (1,619)
Other 207 200 294
------------------------------------
Net cash used in investing activities (2,202) (38,198) (4,167)
------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings under bank line of credit -- -- 2,900
Payments of borrowings under bank line of credit -- (1,500) (1,400)
Proceeds from subordinated notes issued to shareholders -- 2,000 --
Repayment of long-term obligations (1,262) (2,151) (3,964)
Common stock repurchased (1,226) (4,299) --
Proceeds from issaunce of preferred
and common stock 2,905 585 3,603
------------------------------------
Net cash provided by (used in) financing activities 417 (5,365) 1,139
------------------------------------
Effect of exchange rate changes on cash 117 12 (31)
------------------------------------
Increase (decrease) in cash and cash equivalents 3,238 (37,319) 17,079
Cash and cash equivalents, beginning of year 7,746 45,065 27,986
Cash and cash equivalents, end of year 10,984 7,746 45,065
Short-term investments 31,825 33,848 --
------------------------------------
Cash and cash equivalents and short-term investments $ 42,809 $ 41,594 $ 45,065
====================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes $ 5,611 $ 3,255 $ 3,952
------------------------------------
Interest $ 290 $ 568 $ 492
------------------------------------
Noncash investing and financing activities:
Equipment transferred from inventory $ 363 $ 238 $ 252
------------------------------------
Tax benefit realized upon exercise of stock options
and warrants $ 1,051 $ 103 $ 218
------------------------------------
Equipment acquired under capital leases $ 554 $ 1,058 $ 1,114
------------------------------------
Issuance of common stock in exchange for notes receivable $ 291 $ 180 $ 60
------------------------------------
Issuance of preferred stock in exchange for subordinated
notes payable and related accrued interest $ 2,148 $ -- $ --
------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
-28-
<PAGE> 31
MOSAIX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
a. Description of Business.
Mosaix, Inc. (formerly Digital Systems International, Inc.) and subsidiaries
(the Company) designs, manufactures, markets and supports customer management
systems, call center applications software, client/server document workflow
software and services which are sold both domestically and internationally to
businesses that rely heavily on the telephone to communicate with customers and
potential customers. The Company's products enable customers to automate and
improve document intensive business processes across the enterprise. Credit is
extended to customers in the normal course of business.
b. Basis of Presentation.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
c. Cash Equivalents and Short-Term Investments.
All short-term investments with a maturity of three months or less at the date
of purchase are considered to be cash equivalents.
The Company accounts for investments under Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity
Securities. The Company's investment securities are classified as
held-to-maturity and, as such, are carried at amortized cost.
d. Inventories.
Inventories are stated at the lower of cost (first-in, first-out) or market
(replacement cost for raw materials and net realizable value for finished goods,
work-in-process and spare parts).
e. Furniture, Equipment and Leasehold Improvements.
Furniture, equipment and leasehold improvements are stated at cost. Depreciation
of furniture and equipment (including rental systems) is provided on the
straight-line method over the three to five year estimated useful lives of the
assets. Leasehold improvements and assets recorded under capital leases are
amortized over the shorter of the estimated useful lives or the related lease
term. Maintenance and repairs are expensed as incurred. When properties are
retired or otherwise disposed, gains and losses are reflected in the
consolidated statement of operations.
f. Capitalized Software Costs.
Software development costs incurred in conjunction with product development are
charged to research and development expense until technological feasibility has
been established. Once technological feasibility of a software product to be
marketed has been established, development and enhancement costs are capitalized
and reported at the lower of unamortized cost or net realizable value.
Amortization of capitalized software costs begins when the related product is
available for general release to customers and is computed for each product
based on the greater of (a) the ratio of current gross revenue for a product to
the total of current and anticipated future gross revenue for the product or (b)
the straight line method over the estimated life of the product. Amortization
expense related to capitalized software costs amounted to $1,448, $2,823 and
$2,021 for 1996, 1995 and 1994, respectively. These amounts are included in cost
of revenue.
-29-
<PAGE> 32
g. Revenue Recognition.
The Company's revenues are primarily derived from: systems sales, software
licenses, and service and miscellaneous. Systems sales are comprised of revenue
related to systems sold that include both hardware and software. Software
licenses include revenue related to software-only applications that operate on
industry standard hardware available from the Company and other vendors. Service
and miscellaneous activity consists of consulting and customer service related
revenue as well as miscellaneous revenue.
Revenue on system sales is generally recognized when the units are shipped and
the Company has no significant remaining obligations. For system sales requiring
significant customization or for new products, revenue is recognized upon
completion of the customization or customer acceptance. Installation fees
relating to system sales are recognized when the related system is installed.
Revenue from system and software support service is recognized using the
straight-line method over the term of the contract. Revenue from the sale of
software licenses is recognized when (i) a signed contract exists, (ii) delivery
has occurred, (iii) the fee is fixed and collectibility is probable, and (iv)
remaining Company obligations are insignificant. Generally, revenues from the
sale of software licenses through distributors are recognized after contract
signing and shipment, and upon the earlier of sale to the end user or upon
receipt of nonrefundable cash payments from the distributors.
Customer payment terms vary. Amounts billed in advance of satisfying revenue
recognition criteria are classified in "customer deposits and unearned revenue."
Costs incurred prior to satisfying revenue recognition criteria are deferred and
are classified as a component of inventories.
The Company also licenses and sells its systems pursuant to lease agreements
which qualify as sales type leases with an initial term of three years or more.
Revenue from these contracts is recognized when units are shipped, at the
present value of the minimum payments at the beginning of the contract
discounted at the Company's incremental borrowing rate.
h. Research and Development Costs.
Research and development costs are charged to expense as incurred, except as
described in f.
i. Income Taxes.
The Company computes income taxes using the asset and liability method, under
which deferred income taxes are provided for the temporary differences between
the financial reporting basis and the tax basis of the Company's assets and
liabilities. Deferred tax assets and liabilities are measured using currently
enacted tax rates that are expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. A
valuation allowance is established when necessary to reduce deferred tax assets
to the amounts expected to be realized.
j. Product Warranties.
The Company generally provides a 90-day warranty period for all call center
products sold. A charge to the statement of operations is made at the time of
sale for estimated costs of repair or replacement of the products.
k. Net Earnings (Loss) Per Share.
Net earnings (loss) per share is computed using the weighted average number of
common shares plus dilutive common share equivalents outstanding during the
period using the treasury stock method. Common share equivalents 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.
-30-
<PAGE> 33
1. Foreign Currency Translation.
Assets and liabilities of foreign operations are translated into U.S. dollars
using rates of exchange in effect at the end of the year. Income and expense
accounts are translated into U.S. dollars using annual average rates of
exchange. The net gain or loss resulting from translation is shown as a
cumulative translation adjustment in shareholders' equity. Gains and losses from
foreign currency transactions are included in other income, net.
m. Financial Instruments and Concentrations of Credit Risk.
The Company's financial instruments consist of cash and cash equivalents,
short-term investments, trade accounts and contracts receivable, accounts
payable, and long-term obligations. The Company's cash and cash equivalents and
short-term investments are diversified among security types and issuers, and
approximate fair value. The fair value of financial instruments that are
short-term and/or have little or no risk are considered to have a fair value
equal to book value. Assets and liabilities that are included in this category
are, receivables, accounts payable, accrued liabilities and long term
obligations.
Concentrations of credit risk with respect to receivables are limited due to the
diversity in geographic location of customers as well as diversity in
industries. In addition, the Company performs initial and ongoing evaluations of
its customers' financial position, and generally extends credit on open account
without requiring collateral.
n. Stock Based Compensation
Prior to 1996 the Company accounted for its stock option plans in accordance
with the provisions of Accounting Principles Board (APB) Opinion No. 25
Accounting for Stock Issued to Employees, and related interpretations. As such,
compensation expense would be recorded on the date granted only if the market
value of the underlying stock exceeded the option exercise price on the date of
grant. On January 1, 1996, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 123, Accounting for Stock-Based Compensation, which permits
entities to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25 and provide
pro forma net income and proforma earnings per share disclosures for employee
stock option grants made in 1995 and future years as if the fair-value-based
method defined in SFAS No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
o. Use of Estimates.
The preparation of 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 financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
p. Reclassifications.
Certain reclassifications have been made to the prior period financial
statements to conform with the current year presentation.
2. BUSINESS COMBINATIONS
ViewStar Corporation. In December 1996, the Company issued 3,777,078 shares of
$.01 par value common stock in exchange for all of the outstanding common shares
of ViewStar Corporation, a provider of client/server document workflow software.
This business combination has been accounted for as a pooling-of-interests and,
accordingly, the consolidated financial statements for all periods prior to the
combination have been restated to include the accounts and results of operations
of ViewStar.
-31-
<PAGE> 34
The results of operations previously reported by the separate enterprises and
the combined amounts presented in the accompanying consolidated financial
statements are summarized below.
<TABLE>
<CAPTION>
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Revenue:
Company $ 84,956 $ 68,010 $ 53,278
ViewStar 32,225 25,238 22,812
--------- -------- --------
Combined $ 117,181 $ 93,248 $ 76,090
========= ======== ========
Net earnings (loss):
Company $ 4,447 $ 7,393 $ 4,780
ViewStar (829) (7,956) (11,262)
--------- -------- --------
Combined $ 3,618 $ (563) $ (6,482)
========= -------- --------
</TABLE>
A note payable from ViewStar to the Company in the amount of $4,000 has been
eliminated in the consolidated financial statements as of December 31, 1996.
There were no other significant transactions between the Company and ViewStar
prior to the combination.
Caleo Software, Inc. In February 1996, the Company purchased Caleo Software,
Inc. (Caleo), an Atlanta based software company for $4,750 in cash. The business
combination was accounted for using the purchase method whereby the purchase
price was allocated to the underlying net assets based on their relative fair
values. Of the total purchase price $4,307 was charged to operations as the
purchase of in-process research and development. The results of operations of
Caleo were not significant in relation to the Company. At the time of the
combination the Company wrote off $705 of previously capitalized software costs
representing technology replaced by technology acquired with the Caleo purchase.
3. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company's cash and cash equivalents and short-term investments as of
December 31 consist of the following:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Cash and cash equivalents:
Cash ................................................ $ 5,973 $ 2,905
Commercial paper .................................... -- 2,957
Money market instruments ............................ 5,011 1,884
------- -------
Total cash and cash equivalents ................. 10,984 7,746
------- -------
Short-term investments:
Municipal securities ................................ 10,212 19,595
Corporate notes and bonds ........................... 21,613 9,859
Commercial paper .................................... -- 4,394
------- -------
Total short-term investments .................... 31,825 33,848
------- -------
Total cash and cash equivalents and short-term
investments ..................................... $42,809 $41,594
======= =======
</TABLE>
The short-term investments are classified as held-to-maturity. Due to the
short-term nature of these investments, changes in market interest rates would
not have a significant impact on the fair value of these securities. These
securities are carried at amortized cost which approximates fair value.
Contractual maturities of investment securities at December 31, 1996 will occur
during 1997.
-32-
<PAGE> 35
4. INVENTORIES
A summary of inventories follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
------ ------
<S> <C> <C>
Raw materials ....................................... $1,879 $ 838
Work-in-process ..................................... 333 1,269
Finished goods ...................................... 136 26
Installations in progress ........................... 257 610
Spare parts ......................................... 209 215
------ ------
$2,814 $2,958
====== ======
</TABLE>
5. CONTRACTS RECEIVABLE
The future minimum payments to be received on contracts receivable as of
December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997 ................................................................ $1,865
1998 ................................................................ 815
1999 ................................................................ 389
2000 ................................................................ 83
------
3,152
Less amounts representing interest at rates ranging from 6.23% to 10% 295
------
Present value of contracts receivable ............................... 2,857
Less:
Current installments ........................................... 1,764
Allowance for doubtful contracts ............................... 423
------
Contracts receivable, excluding current installments................. $ 670
======
</TABLE>
-33-
<PAGE> 36
6. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furniture, equipment and leasehold improvements consist of the following as of
December 31:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Furniture and fixtures ............................... $ 2,620 $ 1,868
Computer equipment ................................... 15,012 14,615
Equipment under capital lease ........................ 6,500 5,990
Office equipment ..................................... 1,684 1,345
Leasehold improvements ............................... 1,390 1,563
------- -------
27,206 25,381
Less accumulated depreciation and amortization ....... 19,813 17,380
------- -------
$ 7,393 $ 8,001
======= =======
</TABLE>
7. BANK LINE OF CREDIT
At December 31, 1996, the Company had available a $10,000 unsecured domestic
bank line of credit. Restrictive terms of this line of credit require, among
other things, that the Company maintain minimum net worth and working capital.
The Company was in compliance with all terms and conditions of this line of
credit as of December 31, 1996. There were no borrowings outstanding under this
line as of December 31, 1996.
8. LONG-TERM OBLIGATIONS
A summary of long-term obligations as of December 31 follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Various obligations, final payment due 1999 ............................... $1,329 $1,947
Non interest bearing note payable to customer ............................. 180 270
------ ------
Total long-term obligations ............................................... 1,509 2,217
Less current installments ................................................. 934 1,132
------ ------
Long-term obligations, excluding current installments ................ $ 575 $1,085
====== ======
Principal maturities of long-term obligations at December 31, 1996 are as
follows:
1997 ...................................................................... $ 934
1998 ...................................................................... 478
1999 ...................................................................... 97
------
$1,509
======
</TABLE>
In May 1995, ViewStar obtained $2.0 million in cash from certain of its existing
shareholders in exchange for subordinated notes. The notes bore interest at 9%
per annum. The principal amount of these notes and accrued interest were due
upon demand at any time after April 15, 1996. In March 1996, the subordinated
notes were exchanged for shares of preferred stock.
9. SHAREHOLDERS' EQUITY
a. Stock Option Plans.
The Company's Restated 1987 Stock Option Plan (1987 Plan), which by its terms
terminated in December 1996, allowed for the reservation of 2,800,000 shares of
common stock for grants. Options granted under the 1987 Plan were designated as
qualified or nonqualified at the discretion of the Board of Directors. The
Company approved a new 1996 Stock Incentive Compensation Plan (1996 Plan) which
-34-
<PAGE> 37
allows for the reservation of 1,500,000 shares of common stock for grants.
Options granted under the 1996 Plan may be designated as qualified or
nonqualified at the discretion of the Board of Directors.
Generally, options vest over either a four-year period in cumulative increments
of 25% beginning one year from the date of grant or over a five-year period in
cumulative increments of 20% each year beginning either one year from the date
of grant or, in certain instances, one year from the individual's employment
date. All options expire ten years from the date of grant and are currently
granted at prices not less than fair market value.
The Company applies APB Opinion No. 25 in accounting for its plans. Had the
Company determined compensation cost based on the fair value at the grant date
for its stock options under SFAS No. 123 for options granted in 1996 and in
1995, the Company's net earnings (loss) would have been adjusted to the
proforma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C> <C>
Net earnings(loss) As reported $ 3,618 $ (563)
Proforma 1,933 (843)
Earnings (loss) per share As reported 0.27 (0.06)
Proforma 0.14 (0.09)
</TABLE>
The per share weighted-average fair value of stock options granted during 1996
and 1995 was $5.30 and $2.97, respectively on the date of grant using the Black
Scholes option-pricing model with the following weighted-average assumptions
in 1996 and 1995: expected dividend yield of 0.0%, volatility of 62%, an
expected life of 4.5 years, and a risk free interest rate of 6.29% for 1996
and 6.18% for 1995.
Proforma net earnings (loss) and earnings (loss) per share reflect only
options granted in 1996 and 1995. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not reflected in the
proforma net earnings (loss) and earnings (loss) per share amounts presented
above because compensation cost is reflected over the options' vesting period of
four to five years, and compensation cost for options granted prior to
January 1, 1995 is not considered.
-35-
<PAGE> 38
A summary of stock options follows:
<TABLE>
<CAPTION>
SHARES NUMBER OF
AVAILABLE OPTIONS WEIGHTED
FOR GRANT OUTSTANDING AVERAGE
(in 000's) (in 000's) EXERCISE PRICE
---------- ----------- --------------
<S> <C> <C> <C>
Balance at December 31, 1993 421 1,670 $ 5.40
Plan amendment.............................. 557 -- --
Granted..................................... (1,415) 1,415 5.26
Exercised................................... -- (173) 3.42
Canceled.................................... 796 (796) 9.06
------ ------ -------
Balance at December 31, 1994 359 2,116 4.41
Plan amendment.............................. 400 -- --
Granted..................................... (521) 521 4.74
Exercised................................... -- (187) 2.88
Canceled.................................... 504 (504) 4.08
------ ------ -------
Balance at December 31, 1995 742 1,946 4.70
Plan amendment.............................. 2,659 -- --
Granted..................................... (721) 721 11.19
Exercised................................... -- (369) 3.91
Expired..................................... (343) -- --
Canceled.................................... 240 (240) 4.99
------ ------ -------
Balance at December 31, 1996................ 2,577 2,058 $ 6.62
====== ====== =======
</TABLE>
The following table summarizes options outstanding and exercisable at
December 31, 1996.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- ----------------------------------
Weighted
Average Weighted
Range of Exercise Number Remaining Average Number Weighted Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ----------------- ----------- ------------------- -------------- ----------- ----------------
<C> <C> <C> <C> <C> <C>
$0.51- 0.81 543,841 4.02 $ 0.51 241,944 $ 0.51
2.40- 4.00 303,525 6.77 3.66 191,993 3.61
4.13- 6.63 338,889 7.07 5.26 185,549 4.97
6.75-11.00 354,704 7.88 9.59 171,762 9.76
11.25-15.06 313,649 8.96 13.42 26,073 11.57
15.25-19.75 203,542 9.70 17.68 16,000 19.75
- ----------- --------- ---- ------ ------- ------
$0.81-19.75 2,058,150 8.38 $ 6.98 833,321 $ 4.84
</TABLE>
b. Stock Option Plan for Non-Employee Directors.
Under the Company's 1992 Stock Option Plan for Non-Employee Directors (1992
Plan), 125,000 shares of the Company's common stock are reserved for issuance to
non-employee directors of the Company.
An initial grant of 5,000 shares is automatically made to each non-employee
director upon appointment as a director of the Company. Initial grants vest over
a five-year period in cumulative increments of 20% each year beginning from the
date of the first subsequent annual meeting of shareholders following grant. An
additional 1,000 shares are granted following each annual shareholders meeting.
Each additional grant is immediately vested and exercisable.
-36-
<PAGE> 39
All options expire ten years from the date of grant or, if earlier, five years
after termination as a director of the Company. Options are exercisable at the
fair market value of the stock at the date of grant. At December 31, 1996,
48,000 shares were outstanding under the 1992 Plan at a weighted average
exercise price of $8.11 per share and 30,000 shares were exercisable at a
weighted average price of $7.75 per share.
c. Employee Stock Purchase Plan.
The Company's 1991 Employee Stock Purchase Plan provides for 200,000 shares of
the Company's common stock to be reserved for issuance upon exercise of purchase
rights granted to participating employees of the Company. The purchase rights
are exercisable semiannually on June 30 and December 31 of each year at a price
equal to the lesser of 85% of the fair market value of the Company's stock at
the beginning or end of the respective semi-annual periods.
d. Stock Repurchase Plan.
In 1995, the Company's Board of Directors authorized a plan to repurchase up to
1,600,000 shares of the Company's common stock, subject to certain limitations
and conditions. The Company had purchased 691,000 shares at a total cost of
$5,526. The shares are used primarily to service the Company's employee benefit
plans. On October 2, 1996 the plan was discontinued.
e. ViewStar Preferred Shares. In March and June 1996, ViewStar
completed the Series F preferred stock financing transaction in which a total of
3,293,467 shares were issued. ViewStar issued 2,126,024 shares in repayment of
the $2,000 subordinated notes outstanding plus the related accrued interest of
$148 and issued 1,167,444 shares for $1,179 in cash. In June 1996, Series A, B,
C, D, and E preferred shares were converted to common stock. As a result
1,847,436 shares of common stock were issued.
The remaining Series F preferred stock was converted to common stock in December
1996.
10. SIGNIFICANT CUSTOMERS
No single customer accounted for more than 10% of total revenue in 1996, 1995
and 1994.
11. INCOME TAXES
The components of earnings (loss) before income taxes are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- --------
<S> <C> <C> <C>
U.S. operations......................... $ 6,524 $ 2,906 $ (4,205)
Foreign................................. 1,382 682 295
-------- ------- --------
$ 7,906 $ 3,588 $ (3,910)
======== ======= ========
</TABLE>
Components of income tax expense are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal............................... $ 4,053 $ 3,493 $ 3,845
State................................. 446 522 229
Foreign............................... 705 276 275
-------- -------- --------
Total current................. 5,204 4,291 4,349
Deferred - federal......................... (916) (140) (1,777)
-------- -------- --------
$ 4,288 $ 4,151 $ 2,572
======== ======== ========
</TABLE>
-37-
<PAGE> 40
Income tax expense (benefit) on earnings (loss) before income taxes differs from
"expected" income tax expense (benefit) as computed by applying the U.S. federal
income tax rate of 34% as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit)................. $ 2,688 $ 1,220 $(1,329)
Research and experimentation tax credits and foreign tax
credits.............................................. (387) (100) (306)
State income taxes, net of federal benefit................ 296 355 158
Purchase of in -process research and development.......... 1,464 - -
Merger related costs...................................... 438 - -
Losses of subsidiary not currently deductible............. 301 2,503 3,660
Tax-exempt interest income................................ (179) (234) -
Foreign taxes withheld.................................... 161 226 275
Other..................................................... (494) 181 114
-------- ------- -------
$ 4,288 $ 4,151 $ 2,572
======== ======= =======
</TABLE>
Deferred tax assets and liabilities are comprised of the following at December
31:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Depreciation................................................... $ - $ 80
Capitalized software development costs, net of amortization.... 678 976
Contract revenue............................................... 415 855
Other.......................................................... - 197
-------- --------
Gross deferred tax liabilities................ 1,093 2,108
-------- --------
Provision for doubtful receivables............................. 940 688
Provision for inventory obsolescence........................... 219 300
Provision for warranties and returns........................... 143 230
Unearned revenue............................................... 1,044 1,486
Provision for vacation expense................................. 835 776
Provision for self insurance................................... 58 191
Net operating loss carryforward................................ 8,871 8,573
Research and development credits............................... 1,598 1,524
Other.......................................................... 1,227 977
-------- --------
Gross deferred tax assets..................... 14,935 14,745
Deferred tax asset valuation allowance......................... (12,104) (12,310)
-------- --------
Net deferred tax assets............................... 2,831 2,435
-------- --------
Net deferred income tax .............................. $ 1,738 $ 327
======== ========
</TABLE>
As of December 31, 1996 the Company has net operating loss carryforwards for
federal income tax purposes of approximately $22,900, expiring in the years 2003
through 2010, and net operating loss carryforwards for state income tax purposes
of approximately $6,200, expiring in the years 1997 through 2000. The Company
also had federal and state research and development credit carryforwards of
approximately $888 and $710, respectively, which expire in the years 2001
through 2011. Utilization of the Company's net operating loss carryforwards and
research and development credit carryforwards which relates primarily to
ViewStar are subject to limitation due to the change in ownership. Due to
uncertainty regarding their recoverability, the Company has established
valuation allowances for the related deferred tax assets.
The deferred tax valuation allowance decreased $206 in 1996 and increased $3,179
and $5,666 in 1995 and 1994, respectively.
-38-
<PAGE> 41
12. COMMITMENTS AND CONTINGENCIES
a. Profit Sharing and Deferred Compensation Plan.
The Company has a Profit Sharing and Deferred Compensation Plan (Profit Sharing
Plan) under Section 401(k) of the Internal Revenue Code of 1986, as amended.
Substantially all full-time employees are eligible to participate. The Company,
at its discretion, may elect to match the participants' contributions to the
Profit Sharing Plan. Participants will receive their share of the value of their
investments upon retirement or termination, subject to a vesting schedule. The
Company's matching contributions to the Profit Sharing Plan were $471, $409 and
$160 for 1996, 1995 and 1994, respectively.
b. Lease Commitments.
The Company leases its office and warehouse space under terms of noncancelable
operating leases expiring at various dates through 2000.
Future minimum lease payments under noncancelable operating leases at December
31, 1996 are as follows:
<TABLE>
<S> <C>
1997...................................... $ 2,499
1998...................................... 2,308
1999...................................... 431
2000...................................... 246
-------
$ 5,484
=======
</TABLE>
Rent expense under noncancelable operating leases amounted to $2,712, $2,907 and
$2,864 for 1996, 1995 and 1994, respectively.
c. Litigation.
In 1994, the Company settled a lawsuit it had filed, resulting in an increase to
non-operating income of approximately $3.2 million, net of legal costs.
The Company 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.
-39-
<PAGE> 42
13. GEOGRAPHIC SEGMENT INFORMATION
The Company's products are marketed internationally through its subsidiaries in
the United Kingdom, the U.S. parent and independent distributors.
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenue--U.S. operations:
United States........................ $ 94,870 $ 75,593 $ 67,230
United States export................. 12,083 12,289 4,605
Revenue -- International operations:
Foreign subsidiaries................. 10,228 5,366 4,255
-------- -------- --------
$117,181 $ 93,248 $ 76,090
-------- -------- --------
Operating income (loss):
U.S. operations...................... $ 4,235 $ 1,355 $ (8,785)
Foreign subsidiaries................. 1,867 382 30
Eliminations......................... 130 121 398
-------- -------- --------
$ 6,232 $ 1,858 $ (8,357)
-------- -------- --------
Assets:
U.S. operations...................... $ 88,740 $ 90,597 $ 91,803
Foreign subsidiaries................. 5,528 2,974 3,993
-------- -------- --------
$ 94,268 $ 93,571 $ 95,796
======== ======== ========
</TABLE>
14. OTHER NONRECURRING EXPENSES
During 1995, ViewStar incurred $1,740 of nonrecurring charges consisting of $500
for legal fees and other costs associated with the termination of a proposed
merger and $1,240 of expenses for severance pay, educational programs and job
search fees resulting from a reduction in headcount.
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the unaudited statements of operations for each
quarter of 1996 and 1995:
<TABLE>
<CAPTION>
QUARTERS FIRST SECOND THIRD FOURTH TOTAL
- ------------------------- -------- -------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
1996:
Revenue......................... $ 26,997 $ 28,585 $30,202 $31,397 $ 117,181
Operating income (loss)......... (1,829) 3,569 4,083 409 6,232
Net earnings (loss)............. (2,413) 2,643 3,292 96 3,618
Net earnings (loss) per share... $ (0.21) $ 0.19 $ 0.24 $ 0.01 $ 0.27
======== ======== ======= ======= =========
1995:
Revenue......................... $ 18,922 $ 22,445 $24,155 $27,726 $ 93,248
Operating income (loss)......... (3,455) (77) 2,498 2,892 1,858
Net earnings (loss)............. (3,443) (795) 1,682 1,993 (563)
Net earnings (loss) per share... $ (0.34) $ (0.08) $ 0.14 $ 0.16 $ (0.06)
======== ======== ======= ======= =========
</TABLE>
The quarterly earnings (loss) per share presented above will not total to the
year end total in 1996 and 1995 due to changes in the weighted average common
shares and common equivalent shares outstanding during the year.
ITEM NINE
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
-40-
<PAGE> 43
None.
PART III
ITEM TEN
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to the
Company's Proxy Statement to be filed with the Securities and Exchange
Commission within 120 days after the close of the Company's fiscal year.
ITEM ELEVEN
EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Company's Proxy Statement to be filed with the Securities and Exchange
Commission within 120 days after the close of the Company's fiscal year.
ITEM TWELVE
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Company's Proxy Statement to be filed with the Securities and Exchange
Commission within 120 days after the close of the Company's fiscal year.
ITEM THIRTEEN
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM FOURTEEN
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
1. CONSOLIDATED FINANCIAL STATEMENTS (INCLUDED IN ITEM EIGHT):
Independent Auditors' Report
Consolidated Balance sheets as of December 31, 1996 and 1995
Consolidated Statements of Operations for the years ended December 31,
1996, 1995 and 1994.
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995, and 1994
Notes to Consolidated Financial Statements
2 FINANCIAL STATEMENTS SCHEDULES:
<PAGE> 44
Independent Auditors' Report (contained on page)
Schedule II Valuation and Qualifying Accounts (contained on Page)
All other Schedules are omitted because they are inapplicable or
because the requested information is shown in the Consolidated
Financial Statements oft he Company or in the related Notes thereto.
3 EXHIBITS
2.1 Agreement and Plan of Merger, dated October 14, 1996, among (I)
the Registrant, Vision Merger Corporation and ViewStar
Corporation
3.1 Restated Articles of Incorporation of the Registrant (B)
3.2 Restated Bylaws of the Registrant (D)
4.1 Form of Certificate Evidencing Common Stock, par value $0.01 (B)
per share
4.2 Warrant to purchase 12,245 shares of ViewStar Common Stock (I)
issued to Comdisco, Inc. dated May 31, 1996
10.1 Restated 1987 Stock Option Plan, as amended* (H)
10.2 1996 Management and Company Performance Bonus Plan* (H)
10.3 1997 Management and Company Performance Bonus Plan* (A)
10.4 Restated 1992 Stock Option Plan for Non-Employee Directors, (H)
as amended*
10.5 1991 Employee Stock Purchase Plan, as amended* (F)
10.6 Executive Employment Agreement dated as of November 8, 1994 (E)
with Patrick S. Howard*
10.7 Executive Employment Agreement dated as of March 1, 1995 with (G)
Thomas R. Clark*
10.8 Executive Employment Agreement dated as of March 1, 1995 with (G)
John J. Flavio*
10.90 Executive Employment Agreement dated as of March 1, 1995 with (G)
Edmund D. Wilsbach*
10.10 Lease for Building 17 dated January 15, 1991 among Michael (C)
E. Mastro, Redmond East Associates and the Registrant
10.11 Business Loan Agreement dated May 31, 1995 with Seattle- (H)
First National Bank
10.12 Business Loan Agreement dated June 23, 1995 with U.S. Bank (H)
of Washington, National Association
10.13 Customer Purchase Agreement dated December 27, 1990 with (D)
Summa Four, Inc.**
-42-
<PAGE> 45
10.14 Software Source Code and Manufacturing Data Deposit and (D)
Escrow Agreement dated December 27, 1990 with Summa Four,
Inc. and Data Securities International Ind.**
10.15 Purchase Agreement (AWA 99) with Hewlett Packard, dated (H)
March 1, 1995
10.16 Shareholders Agreement, dated October 14, 1996, with certain (I)
former shareholders of ViewStar Corporation
10.17 ViewStar Corporation Amended 1986 Incentive Stock Plan and form (I)
of agreement thereunder*
10.18 ViewStar Corporation Amended 1994 Stock Plan, as amended, and (I)
form of agreement thereunder*
10.19 ViewStar Corporation 1996 Incentive Stock Plan* (I)
10.20 Sublease Agreement between the ASK Group, Inc. and ViewStar (I)
Corporation, dated October 8, 1993, for ViewStar's facility
located at 1101 Marina Village Parkway, Alameda, California
10.21 Promissory Note issued by Kamran Kheirolomoom to ViewStar (I)
Corporation dated July 2, 1996*
10.22 Executive Employment Agreement, dated October 14, 1996, (I)
between Kamran Kheirolomoom and the Registrant*
10.23 Executive Employment Agreement, dated October 14, 1996, (I)
between Robert I. Pender, Jr. And the Registrant*
10.24 Executive Employment Agreement, dated October 14, 1996, (I)
between Gayle A. Crowell and the Registrant*
21.1 List of subsidiaries of the Registrant (I)
23.1 Consent of KPMG Peat Marwick LLP (A)
27.1 Financial Data Schedule (A)
* Management contract or compensation plan.
** Confidential treatment has been requested with respect to portions of
the agreement.
(A) Filed herewith.
(B) Incorporated by reference from exhibits filed in connection with the
Registrant's Registration Statement on Form S-1 (Registration No.
33-34561) filed with the Securities and Exchange Commission on April
26, 1990, as amended.
(C) Incorporated by reference from exhibits filed in connection with the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1990.
(D) Incorporated by reference from exhibits filed in connection with the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1992.
-43-
<PAGE> 46
(E) Incorporated by reference from exhibits filed in connection with the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1994.
(F) Incorporated by reference from exhibits filed in connection with the
Registrant's Annual Report on Form 10-K/A for the year ended December
31, 1994.
(G) Incorporated by reference from exhibits filed in connection with the
Registrant's Quarterly Report on Form 10-Q for the quarter ended March
31, 1995.
(H) Incorporated by reference from exhibits filed in connection with the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1995.
(I) Incorporated by reference from exhibits filed in connection with the
Registrant's Registration Statement on Form S-4 (Registration No.
333-14887) initially filed with the Securities and Exchange Commission
on October 25, 1996.
-44-
<PAGE> 47
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Mosaix, Inc.:
Under date of January 30, 1997, we reported on the consolidated balance
sheets of Mosaix, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1996, as contained in the 1996 annual report on Form 10-K. In connection with
our audits of the aforementioned consolidated financial statements, we also
audited the related consolidated financial statement schedule of valuation and
qualify accounts. This consolidated financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this consolidated financial statement schedule based on our audits.
In our opinion, such consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respect the, information set forth therein.
/s/ KPMG PEAT MARWICK LLP
Seattle, Washington
January 30, 1997
-45-
<PAGE> 48
MOSAIX, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- -------- -------- -------- -------- --------
BALANCE AT CHARGED TO BALANCE
BEGINNING OTHER COSTS (1) AT END
DESCRIPTION OF YEAR AND EXPENSES DEDUCTIONS OF YEAR
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1996:
Valuation accounts deducted from
assets:
Allowance for doubtful receivables $1,863 $ 395 $ 242 $2,016
====== ====== ====== ======
Year ended December 31, 1995:
Valuation accounts deducted from
assets:
Allowance for doubtful receivables 1,581 794 512 1,863
====== ====== ====== ======
Year ended December 31, 1994:
Valuation accounts deducted from
assets:
Allowance for doubtful receivables 2,598 1,441 2,458 1,581
====== ====== ====== ======
</TABLE>
(1) Represents amounts written off.
-46-
<PAGE> 49
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.
MOSAIX, INC.
By:_________________________________
Patrick S. Howard
Chairman of the Board,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
is signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- -------------------------- ----------------------------- -------------
/s/Patrick S. Howard
- --------------------------
Patrick S. Howard Chairman of the Board, March 7, 1997
Chief Executive Officer
/s/John J Flavio
- --------------------------
John J. Flavio Senior Vice President March 7, 1997
Chief Financial Officer
(Principal Financial Officer)
/s/ Tom A. Alberg
- --------------------------
Tom A. Alberg Director March 7, 1997
/s/ H. Robert Gill
- --------------------------
H. Robert Gill Director March 7, 1997
/s/ Harvey N. Gillis
- --------------------------
Harvey N. Gillis Director March 7, 1997
/s/ Umang Gupta
- --------------------------
Umang Gupta Director March 7, 1997
/s/Kamran Kheirolomoom
- --------------------------
Kamran Kheirolomoom Director March 7, 1997
/s/ David J. Ladd
- --------------------------
David J. Ladd Director March 7, 1997
/s/ Robert S. Leventahl
- --------------------------
Robert S. Leventhal Director March 7, 1997
/s/ Cyntia Stroum
- --------------------------
Cynthia Stroum Director March 7, 1997
-47-
<PAGE> 1
EXHIBIT 10.3
[MOSAIX LOGO] 1997 MANAGEMENT & COMPANY PERFORMANCE BONUS PLAN
================================================================================
OBJECTIVES
Objectives to be served by Mosaix's annual cash incentive compensation plan for
senior managers ("the Plan") include the following:
- - Motivate key managers to focus on the company's financial performance and
achieving superior financial results.
- - Reward key managers with significant upside bonus potential for company and
business unit financial results that exceed challenging target levels.
- - Reward contributions based on the manager's own individual performance.
PLAN DESIGN
With these basic objectives in mind, the Plan incorporates the following key
features:
- - The Plan has three levels of participation, as defined below. The levels
generally correspond with organizational levels, and higher participation
levels offer greater bonus opportunity.
- - For corporate plan participants, the company's annual net operating income
and revenue achieved versus plan will determine a percentage of annual base
salary to be paid out as a bonus. This percentage will be different across
the three participation levels but will be the same for each participant in
a particular level.
- - Participants in Mosaix's business units may receive incentive compensation
based on a combination of both corporate and business unit performance. The
performance measures for the business unit portion will be the unit's
revenue and contribution achieved versus plan.
- - A participant's final bonus may be increased or decreased by a factor that
is based on an assessment of the individual's performance, as described
below,
- - The maximum bonus that may be earned is 150% of eligible base salary.
PLAN PARTICIPATION AND RESPONSIBILITY LEVELS
The Plan's participating positions are described below. An employee must hold an
approved Plan position to participate in the Plan. Level I and Level II
participants will include both corporate participants only and participants in
the combination corporate/business unit portion of the Plan. The following
positions will participate in the Plan in 1997 at the responsibility level
indicated:
Level Participating Position(s)
CEO Chief Executive Officer
Level I President, Executive Vice Presidents, Senior Vice Presidents
Level II Vice Presidents and Directors, excluding those on sales
incentive plans
The Compensation Committee of the Board of Directors will approve the
participating positions in the Plan, based on recommendations by Mosaix's Chief
Executive Officer. Mosaix's CEO will have the discretion to add or remove
employees from the Plan, if they move into or leave positions previously
approved by the Compensation Committee.
- - If an employee leaves a Plan position but stays with the company in a
non-Plan position, he or she will participate in the Plan only for each
full quarter worked in the Plan position.
- - Likewise, if an employee moves into a Plan position from a non-Plan
position during the year, he or she will participate in the Plan only for
full quarters worked in the Plan position.
- - Finally, an individual must work at Mosaix for at least one full financial
quarter to participate in the Plan and must be employed by Mosaix at the
time bonus checks are distributed in order to receive a bonus under the
Plan.
- --------------------------------------------------------------------------------
January 29, 1997 Confidential
<PAGE> 2
1997 MANAGEMENT & COMPANY PERFORMANCE BONUS PLAN
DEFINITIONS
- - "Revenue" For "planned," the annual revenue target as
determined by Mosaix's Chief Executive Officer.
For "actual," yearly audited net revenues (total
revenues less returns and allowances). "Revenue"
will apply to both consolidated total revenues for
Mosaix and to business unit revenues.
- - "Operating Income" For "planned," the annual net operating income
target for Mosaix as determined by Mosaix's Chief
Executive Officer, including budgeted management
bonuses under this Plan. For "actual," the annual
audited net operating income for Mosaix, plus
actual accrued management bonus expenses.
- - "Contribution" A business unit performance measure that is
defined as revenues minus cost of sales minus
direct expenses.
- - "Business Units" For 1997, there will be three Mosaix business
units for Plan purposes:
- Call Center Applications Group
- ViewStar Enterprise Applications Group
- Professional Services Group
- - "Payout Table" A table mapping the percentage achievement of
planned revenue and net operating income or
contribution to a percentage of eligible base
salary to be earned as a bonus. There will be one
payout table for a corporate Plan participant
based on corporate performance. There will be two
payout tables for corporate/business unit
participants: one based on corporate performance
and the other based on business unit performance.
- - "Bonus Percentage" The percentage of eligible base salary to be
earned as a bonus, obtained from the payout
table(s). There will be one bonus percentage for
corporate participants and two for
corporate/business unit participants.
- - "Performance Factor" A factor to be multiplied by the individual's
bonus percentage to determine a final bonus payout
amount.
- The factor is discretionary and is based on
a subjective evaluation of the participant's
performance for the year.
- The factor may range from 0 to 2.0, meaning
that the bonus payout may be eliminated or
doubled, to a maximum bonus of 150% of base
salary.
- The factor may be fractional and may be
greater or lower than 1.0. It is expected
that Performance Factors will be tightly
distributed around 1.0.
- There will only be one performance factor
per participant, to be applied against both
bonus percentages for corporate/business
unit participants.
- - "Eligible Base Salary" The participant's annual base salary rate at the
end of the year, applied over the entire year. The
eligible base salary rate does not include:
- Stipend, premium, or salary supplement
- Mileage, per diem, or benefits payments
- Incentive or bonus pay
- Commissions
- Pay associated with carrying an electronic
pager
- Salary for quarters for which the
participant is not eligible
- --------------------------------------------------------------------------------
January 29, 1997 Page 2 of 6
<PAGE> 3
1997 MANAGEMENT & COMPANY PERFORMANCE BONUS PLAN
CORPORATE PLAN PARTICIPANTS
For corporate plan participants, bonus percentages will be extracted from the
payout tables below. The tables will determine bonus percentages from actual
audited consolidated financial results achieved, using interpolations or
extrapolations as necessary. No bonuses will be earned if net operating income
or revenue achievement falls below the minimum levels shown on the tables. The
minimum hurdle for payouts is achievement of 75% of planned operating income and
75% of planned revenues. The bonus percentage determined for each level will
apply to each manager at that level.
CEO LEVEL Actual % Of Target Operating Income
<TABLE>
<CAPTION>
75% 90% 100% 120% 140%
----------------------------------------
<S> <C> <C> <C> <C> <C>
Actual 75% 25.0% 32.5% 37.5% 55.0% 70.0%
----------------------------------------
% Of 90% 32.5% 40.0% 45.0% 60.0% 75.0%
----------------------------------------
Target 100% 37.5% 45.0% 50.0% 70.0% 85.0%
----------------------------------------
Total 120% 45.0% 50.0% 55.0% 75.0% 95.0%
----------------------------------------
Revenues 140% 50.0% 55.0% 60.0% 85.0% 105.0%
----------------------------------------
</TABLE>
LEVEL 1 Actual % Of Target Operating Income
<TABLE>
<CAPTION>
75% 90% 100% 120% 140%
---------------------------------------------
<S> <C> <C> <C> <C> <C>
Actual 75% 17.50% 22.75% 26.25% 40.00% 55.00%
---------------------------------------------
% Of 90% 22.75% 28.00% 31.50% 45.00% 60.00%
---------------------------------------------
Target 100% 26.25% 31.50% 35.00% 55.00% 70.00%
---------------------------------------------
Total 120% 31.50% 35.00% 40.00% 60.00% 80.00%
---------------------------------------------
Revenues 140% 35.00% 40.00% 45.00% 70.00% 95.00%
---------------------------------------------
</TABLE>
LEVEL II Actual % Of Target Operating Income
<TABLE>
<CAPTION>
75% 90% 100% 120% 140%
----------------------------------
<S> <C> <C> <C> <C> <C>
Actual 75% 10% 13% 15% 25% 40%
----------------------------------
% Of 90% 13% 16% 18% 30% 45%
----------------------------------
Target 100% 15% 18% 20% 40% 55%
----------------------------------
Total 120% 18% 20% 25% 45% 65%
----------------------------------
Revenues 140% 20% 25% 30% 55% 80%
----------------------------------
</TABLE>
The bonus percentages will be interpolated within these tables for financial
results that fall between the major increments shown. For example, for net
operating and revenue achievement of 95% of target, the bonus percentages will
be interpolated as shown below. Above 140% net operating income and/or revenue
achievement, the bonus percentages will be extrapolated based on the linear
relationships between 120% and 140% plan achievement expressed in the tables.
<TABLE>
<CAPTION>
95% NOI, 95% Revenue 150% NOI, 150% Revenue
-------------------- ----------------------
<S> <C> <C>
- CEO Level 45.0% 120%
- Level I 31.5% 115%
- Level II 18.0% 100%
</TABLE>
PERFORMANCE FACTOR
A performance factor may be used to increase or decrease the Plan participant's
bonus payout based on a subjective assessment of the individual's performance
and contributions over the course of the year. The performance factor will be
multiplied by the participant's bonus percentage(s) to yield a final bonus
payout percentage. A Level II corporate participant with a performance factor of
1.1 would receive a bonus payout of 22%, given 100% achievement of corporate
revenue and net operating income targets. This 22% equals the 20% bonus
percentage at target multiplied by the 1.1 performance factor.
- --------------------------------------------------------------------------------
January 29, 1997 Page 3 of 6
<PAGE> 4
1997 MANAGEMENT & COMPANY PERFORMANCE BONUS PLAN
The performance factor is discretionary in nature, but should be correlative to
the individual's performance level for 1997 as assessed in January 1998. The
factor may vary between 0 and 2.0 and may be fractional. It is anticipated that
performance factors will be tightly distributed around 1.0.
<TABLE>
<S> <C> <C> <C>
Individual Performance [arrows pointing right] Better Performance [arrows pointing right]
Performance Factor 0.0 1.0 2.0
</TABLE>
As part of the Plan administration, a performance appraisal will be completed
for each Plan participant by the end of January 1998. This annual performance
evaluation is the only appraisal required for the Plan participant.
- - Mosaix's Chief Executive Officer will be evaluated by the Compensation
Committee of the Board of Directors by the end of February 1998.
- - The Chief Executive Officer will evaluate direct-report Plan participants
by January 31, 1998.
- - The managers included in the Plan who are not direct reports to the Chief
Executive Officer will be evaluated by the appropriate Level I executive by
January 31, 1998.
A Management & Company Performance Bonus Plan Oversight Committee will review
the performance of all Vice President- and director-level participants to ensure
consistency and fairness in performance ratings. Committee membership will
include Mosaix's Chief Executive Officer and Executive Director, Human
Resources.
BONUS PAYOUTS
100% of bonuses earned will be paid as soon as is practical following
publication of audited financial statements for the year and approval of
recommended bonuses by the Compensation Committee of the Board of Directors.
Estimated federal income taxes of at least 28% and other required payroll taxes
will be withheld. Estimated bonuses payable will be accrued throughout the year
in proportion to planned revenue and operating income. Adjustments in accruals
will be made periodically to reflect actual performance relative to plan.
Staff members who are assigned to different responsibility levels during the
year will have their bonuses calculated based on the quarters assigned to each
responsibility level. Likewise, any staff member who is added to the Plan after
January 1, 1997 will have his or her bonus calculated on a prorated basis, based
on full quarters worked while on the Plan.
EXAMPLE PAYOUT CALCULATIONS
Examples of bonus calculations are presented below for all three participation
levels, a variety of company financial performance levels, and a number of
different performance factors.
<TABLE>
<CAPTION>
Revenue NOI Final
Participation Achievement Achievement Bonus Performance Payout
Level Percentage Percentage Percentage Factor Percentage
----- ---------- ---------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C>
CEO 100% 100% 50% 1.3 65.00%
CEO 90% 95% 42.5% 1.1 46.75%
CEO 100% 120% 70% 1.2 84.00%
Level I 100% 100% 35% 1.3 45.50%
Level I 90% 95% 29.75% 1.1 32.73%
Level I 100% 120% 55% 1.2 66.00%
Level II 100% 100% 20% 1.3 26.00%
Level II 90% 95% 17% 1.1 18.70%
Level II 100% 120% 40% 1.2 48.00%
</TABLE>
- --------------------------------------------------------------------------------
January 29, 1997 Page 4 of 6
<PAGE> 5
1997 MANAGEMENT & COMPANY PERFORMANCE BONUS PLAN
CORPORATE/BUSINESS UNIT PLAN PARTICIPANTS
Corporate/business unit MCPBP participants will include those Plan participants
responsible for the effective operation and profitability of their business
units, as determined by Mosaix's CEO. Each participant will be notified as to
whether he or she is a corporate participant or a corporate/business unit
participant.
LEVEL I PARTICIPANTS
The corporate/business unit MCPBP will base approximately 70% of a Level I
participant's performance bonus target on corporate performance and 30% on
business unit performance.
- - Therefore, the target bonus of 35% of base salary for 100% plan achievement
will be composed of 25% for corporate performance and 10% for business unit
performance.
- - The corporate performance measures will continue to be annual net operating
income and revenue achieved versus target.
- - The business unit performance measures will be the unit's annual revenue
and contribution achieved versus target.
- - The following payout tables will apply for Level I participants:
CORPORATE Actual % Of Target
Corporate Operating Income
<TABLE>
<CAPTION>
75% 90% 100% 120% 140%
-----------------------------------------
<S> <C> <C> <C> <C> <C>
Actual 75% 12.50% 16.25% 18.75% 28.50% 39.25%
-----------------------------------------
% Of 90% 16.25% 20.00% 22.50% 32.00% 42.75%
-----------------------------------------
Target 100% 18.75% 22.50% 25.00% 39.25% 50.00%
-----------------------------------------
Corporate 120% 22.50% 25.00% 28.50% 42.75% 57.00%
-----------------------------------------
Revenue 140% 25.00% 28.50% 32.00% 50.00% 68.00%
-----------------------------------------
--------
Target = 35% of Salary
--------
</TABLE>
BUSINESS Actual % Of Target
UNIT Unit Contribution
<TABLE>
<CAPTION>
75% 90% 100% 120% 140%
-----------------------------------------
<S> <C> <C> <C> <C> <C>
Actual 75% 5.00% 6.50% 7.50% 11.50% 15.75%
-----------------------------------------
% Of 90% 6.50% 8.00% 9.00% 13.00% 17.25%
-----------------------------------------
Target 100% 7.50% 9.00% 10.00% 15.75% 20.00%
-----------------------------------------
Unit 120% 9.00% 10.00% 11.50% 17.25% 23.00%
-----------------------------------------
Revenue 140% 10.00% 11.50% 13.00% 20.00% 27.00%
-----------------------------------------
</TABLE>
LEVEL II PARTICIPANTS
The corporate/business unit MCPBP will base 75% of a Level II participant's
performance bonus target on corporate performance and 25% of the bonus target on
business unit performance.
- - Therefore, the target bonus of 20% of base salary for 100% plan achievement
will be composed of 15% for corporate performance and 5% for business unit
performance.
- - The corporate and business unit performance measures will be the same as
for Level I.
- - The following payout tables will apply for Level II participants:
CORPORATE Actual % Of Target
Corporate Operating Income
<TABLE>
<CAPTION>
75% 90% 100% 120% 140%
-----------------------------------------
<S> <C> <C> <C> <C> <C>
Actual 75% 7.50% 9.75% 11.25% 18.75% 30.00%
-----------------------------------------
% Of 90% 9.75% 12.00% 13.50% 22.50% 33.75%
-----------------------------------------
Target 100% 11.25% 13.50% 15.00% 30.00% 41.25%
-----------------------------------------
Corporate 120% 13.50% 15.00% 18.75% 33.75% 48.75%
-----------------------------------------
Revenue 140% 15.00% 18.75% 22.50% 41.25% 60.00%
-----------------------------------------
--------
Target = 20% of Salary
--------
</TABLE>
BUSINESS Actual % Of Target
UNIT Unit Contribution
<TABLE>
<CAPTION>
75% 90% 100% 120% 140%
----------------------------------------
<S> <C> <C> <C> <C> <C>
Actual 75% 2.50% 3.25% 3.75% 6.25% 10.00%
----------------------------------------
% Of 90% 3.25% 4.00% 4.50% 7.50% 11.25%
----------------------------------------
Target 100% 3.75% 4.50% 5.00% 10.00% 13.75%
----------------------------------------
Unit 120% 4.50% 5.00% 6.25% 11.25% 16.25%
----------------------------------------
Revenue 140% 5.00% 6.25% 7.50% 13.75% 20.00%
----------------------------------------
</TABLE>
No bonuses based on business unit performance may be earned for either level of
participation unless corporate performance exceeds both 75% of target revenue
and net operating income. If this condition is met, the bonuses determined by
the two payout tables will be additive. For example, if corporate performance
yields an 11.25% bonus percentage and business unit performance yields a 3.75%
percentage, the total bonus will be 15.00%. This
- --------------------------------------------------------------------------------
January 29, 1997 Page 5 of 6
<PAGE> 6
1997 MANAGEMENT & COMPANY PERFORMANCE BONUS PLAN
percentage will continue to be increased or decreased on an individual basis by
a performance factor as described above.
- --------------------------------------------------------------------------------
January 29, 1997 Page 6 of 6
<PAGE> 7
1997 MANAGEMENT & COMPANY PERFORMANCE BONUS PLAN
For results between the increments shown, bonus percentages will be interpolated
as described above. For results above 140% of plan, bonus percentages will be
extrapolated in the same manner as described above. The maximum total bonus that
may be earned by a corporate/business unit participant is 150% of eligible base
salary.
DESIGNATION OF BENEFICIARY
Any payment actually payable under this Plan but which is unpaid at the time of
a participant's death shall be paid to the beneficiary designated by the
participant on Mosaix's group life insurance/ accidental death & dismemberment
Beneficiary Designation form. This form is filed in the participant's personnel
file.
The designated beneficiary may be changed from time to time by filing a new
Beneficiary Designation form. The designation last filed shall control the
person to whom Plan payments will be made.
In the event that no beneficiary is designated or the designated beneficiary
shall predecease the participant, any unpaid amount shall be paid to the
participant's executor or administrator. Payments to the beneficiary, executor,
or administrator of a deceased participant shall be made in a lump sum as soon
as is administratively feasible.
GENERAL PROVISIONS
- - The Plan is effective as of January 1, 1997 and is effective for 1997 only.
The Plan can be amended or terminated at any time by action of the
Compensation Committee of the Board of Directors.
- - Should operating income or revenues fall below 75% of target for the year,
the Board of Directors, in its discretion, may make special bonus payments
to Plan participants.
- - Managers included in the Plan must be active employees of Mosaix, Inc. on
the date that bonuses are paid to receive a bonus.
- - The Plan is not a contract between the Company and any employee. Nothing
contained in the Plan gives any employee the right to be retained in the
employ of the Company, or interferes with the right of the Company to
terminate the employment of any employee at any time without regard to the
effect that such termination may have on any opportunities under the Plan.
- --------------------------------------------------------------------------------
January 29, 1997 Page 7 of 6
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
- -----------------------------------------------------
The Board of Directors
Mosaix, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
333-18577, 33-93948, 33-88544, 33-51620, 33-41199, 33-41197 and 33-36617) on
Form S-8 of Mosaix, Inc. and subsidiaries (the "Company") of our reports dated
January 30, 1997, relating to the consolidated balance sheets of the Company as
of December 31, 1996, and 1995, and the related consolidated statements of
operations, shareholders' equity, and cash flows and the related financial
statement schedule for each of the years in the three-year period ended
December 31, 1996, which reports are contained in the Company's Annual Report
on Form 10-K for the year ended December 31, 1996.
/s/ KPMG PEAT MARWICK LLP
Seattle, Washington
March 10, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> NOV-30-1997
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 10,984
<SECURITIES> 31,825
<RECEIVABLES> 31,159
<ALLOWANCES> 1,593
<INVENTORY> 2,814
<CURRENT-ASSETS> 82,790
<PP&E> 27,206
<DEPRECIATION> 19,813
<TOTAL-ASSETS> 94,268
<CURRENT-LIABILITIES> 35,986
<BONDS> 0
0
0
<COMMON> 132
<OTHER-SE> 57,211
<TOTAL-LIABILITY-AND-EQUITY> 94,268
<SALES> 74,038
<TOTAL-REVENUES> 117,181
<CGS> 20,177
<TOTAL-COSTS> 41,765
<OTHER-EXPENSES> 69,184
<LOSS-PROVISION> 395
<INTEREST-EXPENSE> 290
<INCOME-PRETAX> 7,906
<INCOME-TAX> 4,288
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,618
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0
</TABLE>
