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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 March 31, 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
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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)
(206) 881-7544
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Common stock, par value $0.01 per share: 12,093,726 shares outstanding
as of March 31, 1998.
Page 1 of 13 sequentially numbered pages.
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MOSAIX, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION PAGE NO.
--------
<S> <C>
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial Condition 8
Item 3. Quantitative and Qualitative Disclosure about Market Risk 10
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 12
Signature 13
</TABLE>
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MOSAIX, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(IN THOUSANDS) MARCH 31, 1998 DEC. 31, 1997
- ------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and short-term investments $37,370 $36,080
Trade accounts receivable, net 34,705 30,325
Inventories 2,305 2,532
Contracts receivable, net 1,176 1,555
Other current assets 3,662 4,219
------- -------
Total current assets 79,218 74,711
Furniture, equipment and leasehold improvements, net 8,030 7,449
Capitalized software costs, net 624 930
Other assets 1,108 1,288
------- -------
Total assets $88,980 $84,378
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,951 $ 5,455
Accrued compensation 7,694 8,762
Other accrued expenses 7,350 6,413
Current portion of long-term obligations 295 381
Customer deposits and unearned revenue 11,542 7,443
------- -------
Total current liabilities 32,832 28,454
Long-term liabilities -- 119
------- -------
Total liabilities 32,832 28,573
------- -------
Shareholders' equity 56,148 55,805
------- -------
Total liabilities and shareholders' equity $88,980 $84,378
======= =======
</TABLE>
See accompanying notes to the condensed consolidated financial
statements.
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MOSAIX, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA) THREE MONTHS ENDED MARCH 31,
- --------------------------------------------------------------------------------
1998 1997
(UNAUDITED)
<S> <C> <C>
Revenue:
Systems sales $ 11,658 $ 13,164
Software licenses 7,375 5,520
Services and other 11,321 11,930
-------- --------
Total revenue 30,354 30,614
-------- --------
Cost of Revenue:
Systems sales 4,645 4,694
Software licenses 548 601
Services and other 6,777 6,076
-------- --------
Total cost of revenue 11,970 11,371
-------- --------
Gross profit 18,384 19,243
-------- --------
Operating expenses:
Selling, general and administrative 12,197 11,987
Research and development 3,779 3,656
-------- --------
Total operating expenses 15,976 15,643
-------- --------
Operating income 2,408 3,600
Interest and other income, net 586 442
-------- --------
Income before income taxes 2,994 4,042
Income tax expense 898 1,124
-------- --------
Net income $ 2,096 $ 2,918
======== ========
Net income per share:
Basic $ 0.17 $ 0.22
Diluted $ 0.17 $ 0.21
Weighted average common shares outstanding:
Basic 12,200 13,256
Diluted 12,482 13,847
Comprehensive Income:
Net income $ 2,096 $ 2,918
Foreign currency translation 45 (140)
-------- --------
Comprehensive income $ 2,141 $ 2,778
======== ========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
Page 4
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MOSAIX, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(IN THOUSANDS) THREE MONTHS ENDED MARCH 31,
- ---------------------------------------------------------------------------------------------------
1998 1997
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,096 $ 2,918
Depreciation and amortization 1,469 1,563
Trade and other receivables (4,001) 486
Other assets 948 2,068
Accounts payable and accrued liabilities 365 (2,844)
Customer deposits and unearned revenue 4,099 (805)
-------- --------
Net cash provided by operating activities 4,976 3,386
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments (8,010) (6,897)
Proceeds from maturities of short-term investments 7,400 7,292
Purchases of furniture, equipment and leasehold improvements (1,778) (1,133)
Increase in Capitalized software costs -- (242)
Other 216 (28)
-------- --------
Net cash used in investing activities (2,172) (1,008)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term obligations (205) (299)
Common stock repurchased (2,407) (5)
Proceeds from issuance of common stock 442 60
-------- --------
Net cash used in financing activities (2,170) (244)
-------- --------
Effect of exchange rate changes on cash 45 (149)
-------- --------
Increase in cash and cash equivalents 679 1,985
Cash and cash equivalents, beginning of period 5,532 10,984
-------- --------
Cash and cash equivalents, end of period 6,211 12,969
Short-term investments 31,159 31,430
-------- --------
Cash, cash equivalents and short-term investments $ 37,370 $ 44,399
======== ========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
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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 March 31, 1997 amounts have been
restated to conform with SFAS No. 128.
The following table reconciles 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 March 31, 1998:
Basic earnings per share $ 2,096 12,200 $ 0.17
Effect of dilutive stock options -- 282
------- -------
Diluted earnings per share 2,096 $12,482 $ 0.17
======= =======
Three months ended March 31, 1997:
Basic earnings per share $ 2,918 13,256 $ 0.22
Effect of dilutive stock options -- 591
------- -------
Diluted earnings per share $ 2,918 13,847 $ 0.21
======= =======
</TABLE>
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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 March 31, 1998 652 $10.25 - $19.75
Three months ended March 31, 1997 1,194 $12.13 - $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 first quarter of 1998 and 1997, total comprehensive income
amounted to $2,141 and $2,778, respectively.
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.
4. RECLASSIFICATIONS
Certain reclassifications have been made to the prior period financial
statements to conform with the current period presentation.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
Overview
For the first quarter of 1998, revenue decreased to $30.4 million
compared with $30.6 million reported in the first quarter of 1997. The
Company had first quarter 1998 net income of $2.1 million, or $.17
diluted earnings per share, compared with $2.9 million, or $.21 diluted
earnings per share in the first quarter of 1997.
Revenue
Revenue of $30.4 million for the first quarter of 1998 represents a 1%
decrease over revenue of $30.6 million reported in the comparable
quarter of the prior year. Systems sales decreased $1.5 million, or 11%,
to $11.7 million in 1998 from $13.2 million in 1997. The decrease in
systems sales was due to lower sales of domestic call center systems as
compared to the same period in the prior year.
Software licenses revenue increased $1.9 million, or 34%, to $7.4
million in 1998 compared to $5.5 million in 1997, due to increased sales
of the Company's Customer Relationship Management ("CRM") software
solution. Software licenses revenue accounted for 24% of total revenue
up from 18% in the first quarter of 1997. The Company anticipates that
software licenses revenue will continue to grow at a faster rate than
overall revenue.
Services and other revenue decreased by $.6 million, or 5%, to $11.3
million in 1998 from $11.9 million in 1997. The decrease was primarily
due to the winding down of the Company's sales and business tax
collection services during the second half of 1997, partially offset by
increased customer service and maintenance fees.
International revenue increased to $9.4 million in the first quarter of
1998 from $7.1 million in the comparable quarter for 1997 primarily due
to increased Canadian software license revenues and increased product
sales in Asia.
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 61% of revenue in the first
quarter of 1998 as compared to 63% for the same period in the prior
year. Systems gross margin decreased to 60% in the first quarter of 1998
compared to 64% in the comparable period of the prior year. The decrease
was primarily the result of fewer domestic large system sales, which
historically have the highest gross margin. In addition, a greater
proportion of lower margin international system sales contributed to the
decline in first quarter system gross margins. Software licenses gross
margins, however, increased to 93% from 89% a year ago, due to the
increased
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CRM sales discussed above. Services and other gross margin declined to
40% from 49% in the comparable period of the prior year, due to
performing non-billable consulting services for a certain customer, and
the discontinuing of the business tax collection services discussed
above. Margins from the business tax collection services typically had
higher gross margins during the first quarter of 1998.
Selling, General and Administrative
Selling, general and administrative expenses were $12.2 million or 40%
of revenue in the first quarter of 1998, compared to $12.0 million or
39% of revenue in the comparable period of the prior year.
Research and Development
Research and development expense was $3.8 million or 12% of revenue in
the first quarter of 1998, compared to $3.7 million or 12% of revenue in
the comparable quarter of the prior year. These spending levels are
consistent with the Company's targeted range. Net capitalized software
costs remaining on the balance sheet continue to decrease, and as of
March 31, 1998, were $.6 million compared to $.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.
Interest and Other Income, Net
Interest and other income, net was $0.6 million in the first quarter of
1998 compared with $0.4 million for the same period of 1997. The
increase is primarily due to a shift in the Company's investment
portfolio holdings to taxable securities during the first quarter of
1998 from tax-free securities. Taxable securities typically earn a
higher rate of return than tax-free securities.
Income Taxes
The effective tax rate for the first quarter of 1998 was 30% compared to
the statutory rate of 34%. The lower rate is due mainly to the Company's
use of net operating loss carryforwards to reduce taxable income. The
utilization of net operating loss carryforwards and excess credit
carryforwards are restricted by the Internal Revenue Code. The Company
therefore, is limited each quarter in the amount of net operating loss
carryforwards that may be utilized.
FINANCIAL CONDITION
Liquidity and Capital Resources
The Company's combined cash and cash equivalents and short-term
investments were $37.4 million at March 31, 1998 versus $36.1 million at
December 31, 1997. The short-term investment portfolio is invested in
commercial paper and 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 March 31, 1998,
the Company's working capital was $46.4 million compared to $46.3
million at December 31, 1997.
During the first quarter of 1998, the Company generated $5.0 million in
cash from operations compared to $3.4 million in the comparable quarter
of 1997. Customer deposits and unearned revenue were $11.6 million at
March 31, 1998 versus $7.4 million at December 31, 1997. The increase is
primarily due to annual customer service and
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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.
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, 1998, and the Company
intends to renew the line of credit for another year. Management
believes that existing cash and short-term investments and cash flow
from operations, together with its available credit line, will continue
to be sufficient to meet ongoing operating requirements as well as the
Company's planned future investments in capital additions and research
and development activities. In connection with research and development
and market expansion, cash may be used to acquire technology or to fund
strategic ventures.
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 1998, the Board of Directors
authorized the repurchase of an additional 1,000,000 shares of the
Company's common stock. During the first quarter of 1998, the Company
repurchased 242,500 shares for approximately $2.4 million. As of March
31, 1998, the Company had repurchased 1,680,000 shares at a total cost
of $16.4 million.
The Company does not currently hedge against changes in foreign currency
exchange rates. The majority of the Company's sales are denominated in
US dollars with customers assuming foreign currency exchange rate risks.
The Company's United Kingdom subsidiaries' sales are generally
denominated in British Pounds, which is the functional currency of the
UK subsidiary. As of March 31, 1998 outstanding receivables at the UK
subsidiaries totaled $7.6 million dollars or 22% of total accounts
receivable. Because the Company invoices certain of its foreign sales in
local currency and does not hedge these transactions, fluctuations in
exchange rates could adversely affect the Company's revenues and costs
and could create significant foreign currency 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:
uncertainties relating to integration of operations, uncertainty of
future operating results, fluctuations in operating results,
seasonality, lengthy sales and implementation cycle, complex service
requirements, competition, technological change and new products,
limited source of supply, dependence on Windows NT and other core
Microsoft technologies, lack of product revenue diversification,
international sales, dependence on proprietary rights, infringement
claims, uncertainty of obtaining licenses, risk of product defects, and
governmental regulation. Reference is made to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997 filed with the
SEC on March 13, 1998 for a more detailed description of such risks and
uncertainties.
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PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Mosaix is subject to various legal proceedings that arise in the
ordinary course of its business. While the outcome of these
proceedings cannot be predicted with certainty, the Company
believes that none of such proceedings, individually or in the
aggregate will have a material adverse effect on the Company's
business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following five items were submitted to the shareholders
during the annual meeting of shareholders held April 28, 1998:
The following nominees for election as Directors were elected:
<TABLE>
<CAPTION>
NOMINEE FOR WITHHELD
------- --- --------
<S> <C> <C>
Tom A. Alberg 8,954,254 1,279,978
Nicholas A. Tiliacos 8,951,232 1,283,000
</TABLE>
The proposal to approve the amendment to the 1991 Employee Stock
Purchase Plan to increase the number of shares authorized for
issuance from 200,000 to 400,000 shares:
<TABLE>
<S> <C>
For 9,972,106
Against 191,476
Abstain 70,650
</TABLE>
The proposal to approve the amendment to the 1996 Stock Incentive
Compensation Plan to increase the number of shares authorized for
issuance from 1,500,000 to 1,800,000 shares:
<TABLE>
<S> <C>
For 7,300,167
Against 2,853,565
Abstain 80,500
</TABLE>
The proposal to approve the amendment to the Restated 1992 Stock
Option Plan for Non-Employee Directors to increase the number of
shares authorized for issuance from 125,000 to 225,000 shares:
<TABLE>
<S> <C>
For 8,042,209
Against 2,115,995
Abstain 76,028
</TABLE>
The proposal to ratify KPMG Peat Marwick LLP as independent
auditors for the Company received the following votes:
<TABLE>
<S> <C>
For 9,609,503
Against 597,665
Abstain 27,064
</TABLE>
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K
None
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOSAIX, INC.
(Registrant)
DATE: May 11, 1998 BY: /s/ John J Flavio
-------------------------------------
John J. Flavio
Chief Financial Officer
(Principal Financial Officer)
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Exhibit Index
Exhibit 27 Financial Data Schedule
<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>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 6,211
<SECURITIES> 31,159
<RECEIVABLES> 37,357
<ALLOWANCES> 2,652
<INVENTORY> 2,305
<CURRENT-ASSETS> 79,218
<PP&E> 26,379
<DEPRECIATION> 18,349
<TOTAL-ASSETS> 88,980
<CURRENT-LIABILITIES> 32,832
<BONDS> 0
0
0
<COMMON> 125
<OTHER-SE> 56,023
<TOTAL-LIABILITY-AND-EQUITY> 88,980
<SALES> 19,033
<TOTAL-REVENUES> 30,354
<CGS> 5,193
<TOTAL-COSTS> 11,970
<OTHER-EXPENSES> 15,976
<LOSS-PROVISION> 82
<INTEREST-EXPENSE> 22
<INCOME-PRETAX> 2,994
<INCOME-TAX> 898
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,096
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.17
</TABLE>
