<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition Period from ______ to ______.
Commission file number 0-18511
---------------------
MOSAIX, INC.
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1273645
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
6464 185TH AVE. N.E.
REDMOND, WASHINGTON 98052
(Address of principal executive offices) (Zip Code)
(425) 881-7544
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Common stock, par value $0.01 per share: 11,444,968 shares outstanding as of
October 31, 1998.
Page 1 of 16 sequentially numbered pages.
================================================================================
<PAGE> 2
MOSAIX, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
---------------------
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION PAGE NO.
--------
<S> <C> <C>
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial Condition 9
Item 3. Quantitative and Qualitative Disclosure about Market Risk 15
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
</TABLE>
<PAGE> 3
PART I
ITEM 1. FINANCIAL STATEMENTS
MOSAIX, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPT. 30, DEC. 31,
(IN THOUSANDS) 1998 1997
- -------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and short-term investments $33,513 $36,080
Trade accounts receivable, net 28,016 30,325
Inventories 1,164 2,532
Contracts receivable, net 173 1,555
Other current assets 5,377 4,219
------- -------
Total current assets 68,243 74,711
Furniture, equipment and leasehold improvements, net 7,947 7,449
Capitalized software costs, net 227 930
Other assets 934 1,288
------- -------
Total assets $77,351 $84,378
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,081 $ 5,455
Accrued compensation 7,854 8,762
Other accrued expenses 5,090 6,413
Current portion of long-term obligations 45 381
Customer deposits and unearned revenue 9,028 7,443
------- -------
Total current liabilities 27,098 28,454
Long-term liabilities -- 119
------- -------
Total liabilities 27,098 28,573
Shareholders' equity 50,253 55,805
------- -------
Total liabilities and shareholders' equity $77,351 $84,378
======= =======
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
Page 3
<PAGE> 4
MOSAIX, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA) SEPT. 30, SEPT. 30,
- -------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
System sales $ 12,009 $ 10,792 $ 32,930 $ 35,771
Software licenses 4,613 4,753 15,481 18,348
Services and other 10,477 12,498 33,162 36,212
-------- -------- -------- --------
Total revenue 27,099 28,043 81,573 90,331
-------- -------- -------- --------
Cost of revenue:
System sales 4,677 4,602 13,281 13,931
Software licenses 681 502 1,689 1,760
Services and other 5,800 5,967 19,901 18,038
-------- -------- -------- --------
Total cost of revenues 11,158 11,071 34,871 33,729
-------- -------- -------- --------
Gross profit 15,941 16,972 46,702 56,602
-------- -------- -------- --------
Operating expenses:
Selling, general and administrative 10,783 11,218 34,694 35,267
Research and development 3,672 3,815 11,123 11,384
Restructuring charge -- 948 -- 948
-------- -------- -------- --------
Total operating expenses 14,455 15,981 45,817 47,599
-------- -------- -------- --------
Operating income 1,486 991 885 9,003
Interest and other income, net 448 651 1,404 1,608
-------- -------- -------- --------
Income before income taxes 1,934 1,642 2,289 10,611
Income tax expense 329 493 435 3,208
-------- -------- -------- --------
Net income $ 1,605 $ 1,149 $ 1,854 $ 7,403
======== ======== ======== ========
Net income per share:
Basic $ 0.14 $ 0.09 $ 0.15 $ 0.55
Diluted $ 0.14 $ 0.08 $ 0.15 $ 0.53
Weighted average common shares outstanding:
Basic 11,700 13,418 11,998 13,341
Diluted 11,784 13,901 12,223 13,893
Comprehensive income:
Net income $ 1,605 $ 1,149 $ 1,854 $ 7,403
Foreign currency translation gain (loss) 387 12 211 (33)
-------- -------- -------- --------
Comprehensive income $ 1,992 $ 1,161 $ 2,065 $ 7,370
======== ======== ======== ========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
Page 4
<PAGE> 5
MOSAIX, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
(IN THOUSANDS) SEPT. 30,
- ---------------------------------------------------------------------------------------------------
1998 1997
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,854 $ 7,403
Depreciation and amortization 4,109 4,645
Trade and other receivables 3,691 3,214
Other assets 1,560 579
Accounts payable and accrued liabilities (2,605) (933)
Customer deposits and unearned revenue 1,585 (6,635)
-------- --------
Net cash provided by operating activities 10,194 8,273
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments (31,101) (35,978)
Proceeds from maturities of short-term investments 37,481 29,482
Purchases of furniture, equipment and leasehold improvements (3,955) (3,719)
Increase in capitalized software costs -- (256)
Other (447) 21
-------- --------
Net cash provided by (used in) investing activities 1,978 (10,450)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1,340 1,142
Collection of shareholder notes receivable 243 311
Repayment of long-term obligations (455) (705)
Common stock repurchased (9,715) (3,712)
-------- --------
Net cash used in financing activities (8,587) (2,964)
-------- --------
Effect of exchange rate changes on cash 211 (33)
-------- --------
Increase (decrease) in cash and cash equivalents 3,796 (5,174)
Cash and cash equivalents, beginning of period 5,532 10,984
-------- --------
Cash and cash equivalents, end of period 9,328 5,810
Short-term investments 24,185 38,320
-------- --------
Cash, cash equivalents and short-term investments $ 33,513 $ 44,130
======== ========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
Page 5
<PAGE> 6
MOSAIX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of Mosaix, Inc. and its wholly owned subsidiaries, collectively
referred to as the ("Company"). The unaudited interim condensed
consolidated financial statements and related notes thereto have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
omitted pursuant to such rules and regulations. The accompanying interim
condensed consolidated financial statements and related notes thereto
should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company's annual report on
Form 10-K for the year ended December 31, 1997.
The information furnished reflects, in the opinion of management, all
adjustments, consisting of only normal recurring items, necessary for a
fair presentation of the results for the interim periods presented.
Interim results are not necessarily indicative of results for a full
year.
2. NET INCOME PER SHARE
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 128, Earnings Per Share, basic net income per share is computed
using the weighted average number of common shares outstanding. Diluted
net income 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. The September 30, 1997 amounts have
been restated to conform with SFAS No. 128.
The following tables reconcile the numerator and the denominator of the
basic and diluted per share computations for net income per share:
<TABLE>
<CAPTION>
Weighted
Net Income Average Shares Net Income
(In thousands, except per share data) (Numerator) (Denominator) Per Share
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Three months ended September 30, 1998:
Basic income per share $1,605 11,700 $ 0.14
Effect of dilutive stock options -- 84
------ ------
Diluted income per share $1,605 11,784 $ 0.14
====== ======
Three months ended September 30, 1997:
Basic income per share $1,149 13,418 $ 0.09
Effect of dilutive stock options -- 483
------ ------
Diluted income per share $1,149 13,901 $ 0.08
====== ======
</TABLE>
Page 6
<PAGE> 7
<TABLE>
<CAPTION>
Weighted
Net Income Average Shares Net Income
(In thousands, except per share data) (Numerator) (Denominator) Per Share
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Nine months ended September 30, 1998:
Basic income per share $1,854 11,998 $ 0.15
Effect of dilutive stock options -- 225
------ ------
Diluted income per share $1,854 12,223 $ 0.15
====== ======
Nine months ended September 30, 1997:
Basic income per share $7,403 13,341 $ 0.55
Effect of dilutive stock options -- 552
------ ------
Diluted income per share $7,403 13,893 $ 0.53
====== ======
</TABLE>
Options to purchase shares of common stock where the exercise price
exceeded the average market price were excluded from the computations
for 1998 and 1997 because they would be anti-dilutive. Anti-dilutive
stock options excluded from the computations are as follows:
<TABLE>
<CAPTION>
Anti-Dilutive Exercise
(In thousands) Options Price
-------------------------------------- ---------------- ---------------
<S> <C> <C>
Three months ended September 30, 1998 1,736 $6.50 - $19.75
Three months ended September 30, 1997 754 $12.63 - $19.75
Nine months ended September 30, 1998 1,319 $9.38 - $19.75
Nine months ended September 30, 1997 632 $12.88 - $19.75
</TABLE>
3. NEW ACCOUNTING STANDARDS
As of January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS 130 establishes new rules for the reporting
and disclosure of comprehensive income and its components. Comprehensive
income measures all changes in equity of an enterprise that do not
result from transactions with owners. SFAS 130 requires the Company's
foreign currency translation adjustments, which prior to adoption were
only reported separately in shareholders' equity, to be included in the
determination of comprehensive income. Prior year financial statements
have been reclassified to conform to the requirements of SFAS 130.
During the third quarter of 1998 and 1997 comprehensive income amounted
to income of $2.0 million and income of $1.2 million, respectively.
Comprehensive income for the nine months ended September 30, 1998 and
1997 was $2.1 million and $7.4 million, respectively.
Page 7
<PAGE> 8
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, Disclosures about Segments of an Enterprise and Related
Information. SFAS 131 establishes standards for the manner in which
public business enterprises report information about operating segments
in annual financial statements and requires those enterprises to report
selected information about operating segments in interim financial
reports issued to stockholders. This Statement is effective for
financial statements for periods beginning after December 15, 1997. The
Company will make any required additional disclosures in its December
31, 1998 annual financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS
133 establishes accounting and reporting standards for derivative
instruments embedded in other contracts, and for hedging activities. The
Statement requires that entities recognize all derivatives as either
assets or liabilities on the balance sheet and measure these derivatives
at fair value. SFAS 133 also specifies a new method of accounting for
hedging transactions, prescribes the type of items and transactions that
may be hedged, and specifies detailed criteria to be met to qualify for
hedge accounting. This Statement is effective for financial statements
for periods beginning after June 15, 1999. The Company does not expect
the adoption of this Statement to have a material impact on the
consolidated financial statements, and the Company will make any
required disclosures in 1999.
4. RECLASSIFICATIONS
Certain reclassifications have been made to the prior period financial
statements to conform with the current period presentation.
Page 8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Overview
For the third quarter of 1998, revenue decreased 3% to $27.1 million
from $28.0 million reported in the third quarter of 1997. The Company's
third quarter 1998 net income was $1.6 million, or $0.14 diluted
earnings per share, compared with net income of $1.1 million, or $0.08
diluted earnings per share in the third quarter of 1997. Third quarter
1997 results included a $948,000 restructuring charge. Without this
charge net income and diluted earnings per share would have been $1.8
million and $0.13, respectively.
Revenue
Systems sales increased 11% to $12.0 million in the third quarter of
1998 from $10.8 million in the same period of the prior year. The
increase in systems sales was primarily due to increased sales of
domestic and Latin American call center systems. The increase was
partially offset by decreased call center system sales in European
markets.
Software licenses revenue decreased slightly to $4.6 million in the
third quarter of 1998 compared to $4.8 million in the third quarter of
1997. The decrease in software revenues was primarily due to lower
Customer Relationship Management ("CRM") software license sales,
partially offset by increases in Call Management Systems ("CMS")
software license sales. Software licenses revenue accounted for 17% of
total revenue for both the third quarters of 1998 and 1997.
Services and other revenue decreased 16% to $10.5 million in the third
quarter of 1998 from $12.5 million in the comparable quarter of 1997.
The decrease was primarily due to fewer CRM engagements for which the
Company provided service and the performance of reduced rate
professional service work for two early adopters of the Company's CRM
solution. These decreases were partially offset by a $517,000 increase
in customer service and maintenance fees over the prior year.
International revenue increased to $8.4 million in the third quarter of
1998 from $7.8 million in the same quarter for 1997. The increase is
primarily the result of strong Latin American revenues from the sale of
a large call center system to a single customer. Weaker European
software and service revenues, as well as weaker Asian market revenues
partially offset the increase in Latin American revenues.
As discussed in the Company's 1997 Annual Report on Form 10-K, the
Company may from time to time experience quarterly fluctuations in
revenue due to a small number of contracts in any one quarter, no
material backlog, changes in customer budgets and general economic
conditions.
Gross Margin
Total gross margin declined to approximately 59% of revenue in the third
quarter of 1998 as compared to 61% for the same period in the prior
year. Systems gross margin increased to
Page 9
<PAGE> 10
61% in the third quarter of 1998 compared to 57% in the comparable
period of the prior year. The increase was primarily the result of
increased sales of domestic and Latin American large systems, as well as
a reduction in the cost of a key system hardware component.
Software licenses gross margins decreased to 85% from 89% a year ago.
Current year margins were impacted by the first significant sale of a
third party Agent Effectiveness Application ("AEA"). The margins for
this third party software application are lower than the margins on the
Company's internally developed software products whose margins have
historically approximated 90%.
Services and other gross margins were 45% compared to 52% in the third
quarter of 1997. As previously discussed, the decrease is primarily the
result of performing reduced rate consulting services for two customers.
In addition, during the third quarter of 1997, the Company provided
services for a European-based CRM customer that resulted in higher than
normal margins that did not reoccur in the third quarter of 1998.
Selling, General and Administrative
Selling, general and administrative expenses were $10.8 million or 40%
of revenue in the third quarter of 1998, compared to $11.2 million or
40% of revenue in the comparable period of the prior year. The decrease,
in absolute dollars, of selling, general and administrative expenses was
a result of decreased expenses resulting from the Company's cost
containment initiatives undertaken during the quarter.
Research and Development
Research and development expense was $3.7 million or 14% of revenue in
the third quarter of 1998, compared to $3.8 million or 14% of revenue in
the third quarter of 1997. These spending levels are consistent with the
Company's historic norms. Net capitalized software costs remaining on
the balance sheet continue to decrease, and as of September 30, 1998,
were $0.2 million compared to $0.9 million at December 31, 1997. The
Company remains committed to the ongoing development of new products and
improvements to existing products as a key source of future revenue.
Restructuring Charge
During the third quarter of 1997, the Company recorded a restructuring
charge of $948,000, consisting primarily of compensation related costs
due to the consolidation of the Company's sales, support and service
operations. Excluding the restructuring charge, net income for the third
quarter would have been $1.8 million or $0.13 diluted earnings per
share. As of September 30, 1998, all compensation and other
restructuring costs that comprised the $948,000 restructuring charge
have been paid in entirety. The Company does not anticipate any
additional restructuring costs will be expended during the remainder of
1998.
Interest and Other Income, Net
Interest and other income, net decreased to $0.4 million in the third
quarter of 1998 from $0.7 million for the same period of 1997. The
decrease is attributable to reduced interest earnings due to lower cash,
cash equivalents and short-term investment balances and reduced interest
rates during 1998. The Company's investment portfolio decreased during
the third quarter of 1998 due to the repurchase of 519,700 shares of the
Company's common stock for approximately $3.1 million.
Page 10
<PAGE> 11
Income Taxes
The effective tax rate for the third quarter of 1998 was 17% compared to
the statutory rate of 34%. The lower rate is primarily due to the
Company's use of net operating loss carryforwards to reduce taxable
income.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Overview
For the first nine months of 1998, revenue decreased 10% to $81.6
million from $90.3 million reported in the comparable period of 1997.
The Company had net income of $1.9 million for the first nine months of
1998, or $0.15 diluted earnings per share, compared with net income of
$7.4 million, or $0.53 diluted earnings per share in the same period of
the prior year. The decrease in current year revenues and earnings was
primarily due to the Company's drop in revenue in the second quarter of
1998. In 1997, the Company recorded a $948,000 restructuring charge,
without this charge net income and diluted earnings per share for the
nine months ended September 30, 1997 would have been $8.1 million and
$0.58, respectively.
Revenue
Systems sales decreased 8% to $32.9 million in the first nine months of
1998 from $35.8 million in the same period of the prior year. The
decrease in systems sales was due to lower sales of domestic and
European call center systems partially offset by increased call center
system sales in the Latin American and Asian markets.
Year-to-date 1998 software licenses revenue decreased 16% to $15.5
million compared to $18.3 million in 1997. The decrease in software
revenues was primarily due to lower CRM software license sales and the
absence of significant add-on license revenues as experienced in 1997.
Year-to-date software licenses revenue accounted for 19% of total
revenue, down slightly from 20% in the same period of 1997.
Services and other revenue decreased 8% to $33.2 million in the first
nine months of 1998 from $36.2 million in the first nine months of 1997.
The decrease was primarily due to the reduced level of CRM engagement
professional services, as well as the performance of non-billable and
lower margin professional services. In addition, the discontinuance of
the Company's sales and business tax collection services in the second
half of 1997 contributed to the decline in current year revenues. These
decreases were partially offset by increased customer service and
maintenance fees in 1998.
International revenue increased to $25.6 million for year-to-date 1998
from $23.9 million in the same period for 1997. The increase is
primarily the result of increased Canadian software license revenues and
increased Asian and Latin American call center system sales. These
increases were partially offset by reduced European software license
revenues.
Gross Margin
Total gross margin declined to approximately 57% of revenue in the first
nine months of 1998 as compared to 63% for the first nine months of
1997. Systems gross margin was 60% in 1998 compared to 61% in the
comparable period of the prior year. The decrease was primarily the
result of fewer large domestic and European system sales, which tend to
have higher margins, as well as fewer higher margin system upgrades.
Software licenses gross margins of 89% were consistent with prior year
margins of 90%. Services and other gross margin
Page 11
<PAGE> 12
declined to 40% from 50% in the comparable period of the prior year. The
decrease is primarily a result of performing non-billable and lower
margin consulting services for certain customers and the discontinuance
of the Company's business tax collection services.
Selling, General and Administrative
Selling, general and administrative expenses were $34.7 million or 43%
of revenue in the first nine months of 1998, compared to $35.3 million
or 39% of revenue in 1997. The decrease in selling, general and
administrative expenses, in absolute dollars, was primarily a result of
reduced revenue and profitability-based compensation expenses.
Research and Development
Research and development expense was $11.1 million or 14% of revenue for
the first three quarters of 1998, compared to $11.4 million or 13% of
revenue in the same period of 1997. The Company remains committed to the
ongoing development of new products and improvements to existing
products as a key source of future revenue.
Interest and Other Income, Net
Interest and other income was $1.4 million in the first nine months of
1998 which was $204,000 or 13% less than the same period for 1997.
During 1998, the Company has repurchased 1,130,200 shares of the
Company's common stock for approximately $9.7 million, which has reduced
the Company's funds available for investment and consequently interest
income. This decrease in interest income was partially offset by the
Company shifting a higher portion of its investment portfolio to higher
yielding taxable securities in 1998.
Income Taxes
The effective tax rate for the first nine months of 1998 was 19%
compared to the statutory rate of 34%. The lower rate is due mainly to
the Company's anticipated use of net operating loss carryforwards to
reduce taxable income. The utilization of net operating loss
carryforwards is restricted by Section 382 of the Internal Revenue Code.
FINANCIAL CONDITION
Liquidity and Capital Resources
The Company's combined cash and cash equivalents and short-term
investments were $33.5 million at September 30, 1998 versus $36.1
million at December 31, 1997. The short-term investment portfolio is
primarily invested in corporate debt securities with maturities of one
year or less. The portfolio is diversified among security types and
issuers and does not include any derivative products. At September 30,
1998, the Company's working capital was $41.1 million compared to $46.3
million at December 31, 1997.
During the first nine months of 1998, the Company generated $10.2
million in cash from operations compared to $8.3 million in the
comparable period of 1997. Customer deposits and unearned revenue were
$9.0 million at September 30, 1998 versus $7.4 million at December 31,
1997. The increase is primarily due to annual customer service and
maintenance fees being renewed during the first quarter of 1998. These
fees will be amortized to service and other revenue over the remainder
of the year.
Page 12
<PAGE> 13
In addition to its cash and short-term investment balances, the Company
has available a $10.0 million domestic line of credit to meet cash flow
needs. The line of credit expires on May 31, 1999. 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 the Company's commitment to the development of new
products and the improvement of existing products as well as ongoing
operating requirements.
In July 1997, the Company's Board of Directors authorized, subject to
certain terms and conditions, the repurchase of up to 1,700,000 shares
of the Company's common stock. In February and September 1998, the Board
of Directors authorized the repurchase of an additional 1,000,000 and
1,500,000 shares of the Company's common stock, respectively. During the
first nine months of 1998, the Company repurchased 1,130,200 shares for
approximately $9.7 million. As of September 30, 1998, the Company had
repurchased 2,567,700 shares at a total cost of $23.8 million under
these authorizations, and the Company is authorized to repurchase an
additional 1,632,300 shares.
In December 1997, the Company entered into an office lease agreement in
anticipation of relocating its corporate headquarters to the new
Redmond, Washington location in the fourth quarter of 1998. The Company
terminated this lease agreement in October 1998, and signed a new 5-year
lease agreement with its current landlord. The costs associated with the
new building and the termination of the lease were insignificant.
The Company does not currently hedge against changes in foreign currency
exchange rates. The majority of the Company's sales are denominated in
US dollars with customers assuming foreign currency exchange rate risks.
The Company's United Kingdom subsidiary's sales are generally
denominated in British Pounds, which is the functional currency of the
UK subsidiary. As of September 30, 1998 outstanding receivables at the
UK subsidiary totaled $6.5 million or 23% of total accounts receivable.
Because the Company does not hedge these foreign denoted receivables,
fluctuations in exchange rates could adversely affect the Company's
revenues and could create significant foreign currency gains and losses.
FORWARD LOOKING STATEMENTS-RISK FACTORS REGARDING FUTURE PERFORMANCE
Certain statements in this Form 10-Q contain "forward-looking"
information (as defined in the Private Securities Litigation Reform Act
of 1995) that involve risks and uncertainties, which may cause the
actual results, performance or achievements of the Company or industry
results to be significantly different from any future results,
performance or achievement expressed or implied by such forward-looking
information. Such risks and uncertainties include among other things:
uncertainty of future operating results, seasonality, lengthy sales and
implementation cycle, complex service requirements, competition,
technological change and new products, limited source of supply,
dependence on Windows NT and other core Microsoft technologies, lack of
product revenue diversification, international sales, dependence on
proprietary rights, infringement claims, uncertainty of obtaining
licenses, risk of product defects, and governmental regulation.
Reference is made to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 filed with the SEC on March 13, 1998 for a
more detailed description of such risks and uncertainties.
Year 2000
The Company is aware of the issues associated with the programming code
in existing computer systems as the millennium (year 2000) approaches.
The "year 2000" problem is pervasive and complex as virtually every
computer operation will be affected in some way by
Page 13
<PAGE> 14
the rollover of the two digit year value, 00. The issue is whether
computer systems will properly recognize date sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause system failure.
All of the Company's currently shipping products are year 2000
compliant. In addition, wherever possible, the Company has made software
and hardware upgrades available to existing customers that will enable
such customers to be year 2000 compliant. The Company has some customers
who have purchased systems in the past where a hardware or software
upgrade is not available to allow the customer to become year 2000
compliant. The Company has and will continue to offer such customers an
opportunity to migrate to current product versions. It is possible that
the Company may incur additional expense in addressing these migration
issues. In addition, the Company is aware that a significant number of
existing customers, who are currently paying maintenance fees, have not
yet been upgraded to the latest year 2000 compliant products. The demand
for upgrade services by these customers will be significant, and may
exceed the Company's resources of skilled technical personnel dedicated
to providing year 2000 upgrade services, thus resulting in customers
with non-compliant systems at January 1, 2000. Because of these issues
the Company may be made party to litigation seeking damages relating to
non-year 2000 compliant products sold in the past, and for business
interruptions caused by the Company's inability to upgrade all customers
to a year 2000 compliant system. Additionally, there can be no
assurances that the Company's current products do not contain undetected
errors related to year 2000 that may result in material additional cost
or liabilities, the magnitude of which cannot be predicted, which could
have a material adverse effect on the Company.
Year 2000 issues may also negatively impact the Company's revenues in
future quarters. The potential lack of skilled technical personnel
available to provide year 2000 upgrades to existing customers could
adversely impact future maintenance renewals and the service and other
revenues associated with these renewals. Additionally, some existing
customers may decline to purchase additional systems from the Company
until all of their current internal systems have been upgraded to year
2000 compliant versions. Because of the significant attention potential
new customers will dedicate to resolving their own internal year 2000
issues, future revenues of the Company may be lost or postponed to
periods after the year 2000. Finally, some companies in the Company's
target markets are planning on spending a significant portion of their
1999 IT budget on year 2000 compliance. Again, these actions may result
in the postponing of new or additional orders for the Company's
products.
With regard to the Company's internal processing and operational
systems, the Company is substantially complete in installing an
enterprise-wide financial and operational system from a major vendor
that has been certified year 2000 compliant. Significant portions of the
system are currently operational and the Company anticipates all
critical components of the system will be operational by mid-1999. The
Company has capitalized the acquisition cost of the system and
third-party implementation costs incurred to date and will continue to
do so as the systems are completed. With regard to other systems, the
Company is identifying, reprogramming and testing all systems for year
2000 compliance. The Company is also endeavoring to seek assurance from
its key vendors that the operations of such vendors will not be
adversely affected by year 2000 problems. While the Company is not aware
of any additional material operational issues or costs associated with
preparing such internal systems for the year 2000, there can be no
assurances that the Company will not experience material adverse effects
from undetected errors or the failure of such systems to be year 2000
compliant. Because of these year 2000 compliance uncertainties and risks
involving the Company's internal systems and key third party systems,
the Company's management will continue to implement existing plans and
develop contingency plans.
Page 14
<PAGE> 15
The full and complete impact of the year 2000 on the future results of
the Company is difficult to fully determine at present, and is a risk to
be considered in evaluating the future growth of the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable
PART II
ITEM 1. LEGAL PROCEEDINGS
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K
None
Page 15
<PAGE> 16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOSAIX, INC.
(Registrant)
DATE: November 10, 1998 BY: /s/ John J. Flavio
---------------------------------
John J. Flavio
Chief Financial Officer
(Principal Financial Officer)
Page 16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MOSAIX, INC.
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10K.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<EXCHANGE-RATE> 1 1
<CASH> 9,328 9,328
<SECURITIES> 24,185 24,185
<RECEIVABLES> 29,992 29,992
<ALLOWANCES> 1,976 1,976
<INVENTORY> 1,164 1,164
<CURRENT-ASSETS> 68,243 68,243
<PP&E> 28,556 28,556
<DEPRECIATION> 20,609 20,609
<TOTAL-ASSETS> 77,351 77,351
<CURRENT-LIABILITIES> 27,098 27,098
<BONDS> 0 0
0 0
0 0
<COMMON> 129 129
<OTHER-SE> 50,124 50,124
<TOTAL-LIABILITY-AND-EQUITY> 77,351 77,351
<SALES> 16,622 48,411
<TOTAL-REVENUES> 27,099 81,573
<CGS> 5,358 14,970
<TOTAL-COSTS> 11,158 34,871
<OTHER-EXPENSES> 14,455 45,817
<LOSS-PROVISION> 60 202
<INTEREST-EXPENSE> (11) 28
<INCOME-PRETAX> 1,934 2,289
<INCOME-TAX> 329 435
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,605<F1> 1,854<F1>
<EPS-PRIMARY> 0.14 0.15
<EPS-DILUTED> 0.14 0.15
<FN>
<F1>For purposes of this exhibit, Primary means Basic.
</FN>
</TABLE>
