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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, 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)
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WASHINGTON 91-1273645
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
6464 185TH AVENUE N.E. REDMOND, WASHINGTON 98052
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (425) 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, 1999 was $84,596,499 (based on the closing sale price
of $8.05 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, 1999 was 10,512,963.
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
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Item 1. Business.................................................... 1
Item 2. Properties.................................................. 11
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......... 11
PART II
Item 5. Market for the Registrant's Common Equity and Related 12
Stockholder Matters.........................................
Item 6. Selected Financial Data..................................... 13
Item 7. Management's Discussion and Analysis of Results of 14
Operations and Financial Condition..........................
Item 7A. Quantitative and Qualitative Disclosures about Market 24
Risk........................................................
Item 8. Financial Statements and Supplementary Data................. 25
Item 9. Changes in and Disagreements with Accountants on Accounting 25
and Financial Disclosure....................................
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 25
Item 11. Executive Compensation...................................... 25
Item 12. Security Ownership of Certain Beneficial Owners and 25
Management..................................................
Item 13. Certain Relationships and Related Transactions.............. 25
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 26
8-K.........................................................
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PART I
ITEM ONE
BUSINESS
Mosaix, Inc. and subsidiaries (hereinafter referred to as "Mosaix" or the
"Company") is a global provider of call center software, predictive dialers and
workflow applications that enable companies to acquire, retain, and develop
customer relationships. With these products, companies can integrate sales,
marketing, and customer services applications in their call centers with
back-office applications throughout the enterprise. Mosaix manages its
operations through two lines of business, Call Management Systems (CMS), and
Customer Relationship Management (CRM) applications.
CALL MANAGEMENT SYSTEMS (CMS)
Mosaix call management systems are sophisticated computer telephony
integration (CTI) enabled systems for processing and managing outbound and
blended inbound/outbound telephone communications. These predictive dialing
applications allow customer information to be captured and coordinated with a
telephone call and quickly routed to the person best equipped to manage the
customer relationship. With its technology of intelligently predicting the
availability of an agent to manage a phone call, either inbound or outbound,
Mosaix can optimally improve call center efficiencies. Mosaix offers a broad
range of professional services and support for these call management systems. In
addition, Mosaix also develops and markets applications designed to enhance and
develop the effectiveness of call center agents. Known as agent effectiveness
applications (AEA), these products are designed to improve call center managers'
ability to hire, train, coach and review call center agents. Mosaix call
management systems are found in a broad range of industries, including financial
services, credit card and consumer collections, telecommunications and
utilities, retail, cable television, healthcare, fund raising, education and
telemarketing.
CUSTOMER RELATIONSHIP MANAGEMENT (CRM)
Customer relationship management workflow applications are
client/server-based software that enables customers to automate and integrate
customer-facing business processes beginning in the contact center and extending
across the enterprise. This occurs through the implementation of the Company's
workflow software which is a family of integrated software modules that provide
an enterprise-ready framework for rapidly designing, developing, and deploying
customer-centric workflow applications across the enterprise. The workflow
software allows for front-office applications and fulfillment processes, or
back-office functions, to be tightly integrated with multiple channels of
interaction used by consumers to communicate with corporations. Whether it is
the telephone or the Internet, Mosaix CRM software will intelligently manage a
customer contact in the most efficient and effective manner by matching the
needs of the customer with the appropriate resources of a company. These
solutions 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.
Headquartered in Redmond, Washington, Mosaix has a sales, support and
product development facility in Alameda, California; and sales offices in
Wilmington, Delaware; Atlanta, Georgia; Chicago, Illinois; New York City, New
York; Charlotte, North Carolina; Dallas, Texas; and near London, England. Mosaix
also has established value-added reseller relationships in North America, Asia,
South America, Africa and Europe.
Mosaix, a Washington corporation, was incorporated in 1984.
INDUSTRY BACKGROUND
Over the past ten years, businesses and other organizations have
increasingly used dedicated call 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 relational database management to capture, store and report on
relevant customer
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information. As the importance of call centers has increased and as more
functions and capabilities have been combined, a parallel industry has emerged
to create and support the evolution of call centers. The industry includes
vendors who deliver systems, software and services that are designed to make
call centers efficient, effective and well matched to the broader corporate
mission of the enterprise. Call centers are transforming from merely handling
calls to becoming customer contact centers. They are also transforming from
functional cost centers to strategic "profit centers" as their mission evolves
to become highly integrated customer interaction and fulfillment centers that
can handle multiple channels of communication. These multiple channels include
correspondence, documents, faxes, e-mail, Internet contacts, as well as
traditional telephone calls. This resulting shift places a higher value on
customer care as the primary contact center mission and reflects the ascendancy
of customer service as a primary source of competitive differentiation
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) or Agents are responsible for meeting customer needs in a
variety of areas including reservations, product information, service requests,
order fulfillment, 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 the enterprise.
Call centers can range in size from fewer than five agents in one location
to thousands of agents 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 which brings together data
and voice
- Application software to enhance, facilitate and manage inbound and
outbound customer communications
- Agent performance management and quality assurance software tools
- Reporting tools to measure and report on agent effectiveness and overall
system performance
- 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 AUTOMATION (BPA) IN THE CALL CENTER
The growth of client/server computing has also had a dramatic effect on the
call center industry and has fueled the need for applications that process and
manage unstructured as well as structured data. Structured data, such as
financial or inventory data, are typically stored in the rows and columns of
databases. Traditional relational database systems and their underlying
technologies are not 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 scanned documents, faxes, electronic documents,
forms, mainframe-generated reports, digitized voice messages, electronic data
interchange (EDI) records and World Wide Web (Web) documents. For example,
customer service agents as well as loan officers who process 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 call centers today. Furthermore, BPA offers a flexible means for
implementing specific strategies, such as providing a level of service that is
commensurate with the value of
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the customer (service level management to the organization), designed to fully
leverage a company's relationship with its customers.
Initial efforts to automate data-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 software that addressed transaction-based applications focused on the
automated routing of document images and related information. Although this
software generated significant benefits both in improved operational 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 electronic access to document information, 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. These BPA
applications were the next step for workflow and document management offerings.
With the availability of the Internet and intranets, companies have also
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. They will extend the reach and value of BPA to include
business transactions with their partners and customers beyond their internal
enterprise. As a result, businesses now seek next-generation business process
automation solutions that include Internet and intranet capabilities.
SERVICE LEADERSHIP
As companies face increasing pressure to retain and grow their customer
base, corporate call centers are emerging as a strategic weapon in the fight for
customer loyalty and increased revenue. This is particularly true in industries
such as telecommunications, utilities and financial services where product
differentiation is difficult to discern. In industries where products are
difficult for consumers to distinguish, companies are seeking to differentiate
themselves based on the quality of service they deliver. The call center is the
natural leverage point for delivering the services that make a difference in
both acquiring and retaining customers. Corporate demand is on the rise for
systems that foster customer relationships and that create a competitive
advantage. This demand is driving the need to integrate telephony and
computer-based applications to provide a complete, company-wide view of customer
attributes and account history.
PRODUCTS
CALL MANAGEMENT SYSTEMS (CMS)
Mosaix Call Management Systems are the Company's suite of combined hardware
and software systems used for the processing and management of a call center's
inbound and outbound telephone activity. These systems utilize both UNIX- and
Microsoft Windows-based technologies. Integrating directly with an
organization's existing telecommunications system and customer databases, the
Mosaix call management system processes and manages inbound, outbound, and
blended inbound/outbound customer contacts. Typical functions provided by Mosaix
products for outbound calling include: acquiring, reviewing and organizing
customer data; quickly and automatically dialing phone numbers; monitoring,
interpreting and acting upon each telephone call's progress; programming redials
at the appropriate time and rate; routing live voice responses immediately to an
operator; and posting and reporting record updates. For customers who want to
efficiently manage incoming as well as outgoing telephone calls, Mosaix's
Intelligent Call Blending technology allows call centers to blend their inbound
(ACD) and outbound (Mosaix systems) call activity into a single
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environment, automatically moving calls between inbound and outbound agents to
optimally handle call center traffic.
Mosaix currently has two call center products available: the Mosaix 5000
and Mosaix 4000 Call Management Systems. The Mosaix 5000 is the Company's most
advanced system and is scaleable to 150 outbound workstations and 300 lines. The
Mosaix 5000 performs all of the standard functions described above and, in
addition, has Predictive Agent Blending, a patented technology that uses
sophisticated algorithms to anticipate call volumes and to move agents before
the expected inbound and outbound call workloads actually occur. The Mosaix 4000
is similar to the Mosaix 5000 though limited to 60 outbound workstations and 180
lines with no predictive blend capabilities.
In order to help companies more effectively manage their call centers,
Mosaix has also developed a variety of software products that work exclusively
with Mosaix call management systems.
Campaign Director -- ships with Mosaix systems and provides customers
with the ability to create campaigns using a Microsoft Windows-based point
and click interface. Campaign Director is also used to monitor, on a
real-time basis, the status of the campaign and the effectiveness of the
agents, and to make changes while the campaign is in process.
Producer -- a sophisticated configuration tool that enables customers
to dynamically manage the operation and system parameters of their Mosaix
CMS. Producer allows customers to record voice messages, design wait
queues, edit agent function keys, and create and modify completion codes
using a simple-to-use PC based software solution.
Campaign Surfer -- an Internet browser-based tool that enables a
company or its customers to view information about calling campaigns and
agent performance from virtually anywhere over the Internet.
Agent API -- simplifies the creation and maintenance of custom agent
interfaces, which allow agents access to the disparate information they
need to more effectively serve customers.
Mosaix's TM Express product is a packaged solution that includes predictive
dialing, scripting, list and campaign management applications. The package has
been designed to meet the needs of the new telemarketing call centers where a
complete turnkey solution is required. It also serves the needs of call centers
that are converting from older host-based telemarketing systems.
Campaign Analyst for the Enterprise software produces detailed reports,
integrating statistics from various vendor products, including the ACD/PBX
(telephone switch), the IVR system, host computer, predictive dialer and other
applications. It can also integrate with 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. Campaign
Analyst for the Enterprise also includes features that allow managers to
establish goals for their agents as well as extracting data that can be utilized
by other software programs. For example, Campaign Analyst can generate 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.
The Company has also designed a suite products to help call center managers
more successfully develop and enhance the effectiveness of call center agents.
These products are called agent effectiveness applications, or AEA products.
Guide -- allows a call center supervisor to control the content and
flow of each customer contact. Call guides (or scripts) for call center
employees have historically been programmed by the vendor or by application
specialists. Changes require system shut down and reprogramming. By
contrast, Guide allows call center supervisors with minimal programming
skills to design and maintain complex, sophisticated scripts without
relying on the vendor or third party application specialists. Supervisors
can modify scripts as necessary -- even mid-campaign -- providing increased
flexibility and enabling the organization to tailor scripts based on agent
skill levels and campaign objectives.
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Chronicle -- provides a set of integrated tools that aid call center
supervisors in measuring the performance of call center agents and the
quality of their interactions with customers. Chronicle is used to schedule
and automatically record agent conversations with callers. Both voice and
data (screen) recording is supported. Chronicle has built-in CTI
capabilities that broaden the set of criteria that can trigger call
recording. These characteristics include the number that was dialed by the
caller, IVR codes, area codes, etc. In addition, Chronicle includes a set
of evaluation and reporting tools designed to increase the efficiency with
which performance management programs can be implemented. Mosaix has
licensed Chronicle technology from a partner.
Concur -- enables call center agents to initiate recordings of their
conversation with customers. Typical applications include sales
verification, call escalation, and self evaluation. In addition, on demand
recording gives agents a way to capture customer comments verbatim to later
review by marketing or product development. Recordings can be retrieved
based on phone number, date, agent or comment field. Concur is licensed
from a partner.
Talent -- addresses the issue of call center agent effectiveness
during the hiring and training process. Talent is a training application
that duplicates the conditions of a "live" agent/customer interaction using
recorded voice and agent screen data. Talent uses a proprietary sensing
technology to detect breaks in a trainee's voice energy and automatically
delivers simulated customer responses at the appropriate time in the
conversation. A wide variety of customer types can be simulated -- from
accessible to guarded or hostile -- so that the agent-trainee's or
job-candidate's reactions can be evaluated. Talent can also be used to
record lessons created by senior agents. This enables junior agents to
benefit from their experience without taking them off the phones for
extended periods of time.
All of the Company's currently shipping CMS and AEA products are year 2000
compliant. In addition, whenever possible, the Company has made system upgrades
available to certain existing customers. Along with related hardware upgrades,
the system upgrades will enable customers to be year 2000 compliant. For others
where a simple upgrade is not possible and a complete system change is required,
the Company has offered attractive year 2000 compliant replacement system
pricing. In spite of this pricing strategy, the Company expects certain
customers will not purchase year 2000 compliant systems. While it is expected
that there will be some loss of support revenues, management does not expect the
year 2000 to have a material impact on the operations of the Company.
The Mosaix 4000 and 5000 Call Management Systems, related software
products, and the agent effectiveness applications are marketed through Mosaix's
telesales and direct sales force as well as a worldwide network of strategic
partners. The Mosaix 5000 and 4000 are designed for mid- and high-end financial
services, telecommunications, insurance, and telemarketing customers. Mosaix's
agent effectiveness applications are designed for use in inbound, outbound and
blended call center operations.
Mosaix's CMS are used in a broad range of industries, including financial
services, credit card and consumer collections, insurance, telecommunications,
utilities, retail, cable television, healthcare, fundraising, education and
telemarketing. Historically, the majority of sales have been to the financial
services and telecommunications industries.
CUSTOMER RELATIONSHIP MANAGEMENT SOFTWARE (CRM)
ViewStar is an enterprise-class, client/server application framework that
is built on Windows NT and utilizes Microsoft's enterprise-computing
architecture. It is designed to automate customer-facing business processes and
integrate structured and unstructured data, including imaged documents, faxes,
electronic documents, forms, mainframe-generated reports, digitized voice
messages, EDI records, and Web documents. In addition, this software will
intelligently manage telephone calls and the systems that route those calls. The
current version of this product is ViewStar 5.0, and this version is year 2000
compliant.
ViewStar 5.0 is comprised of the following four key components:
Process Architect -- Mosaix's visual workflow and process modeling
application framework that enables interactive definition, configuration
and deployment of complex business processes. Using Process
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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 from the interaction in a front-office
customer contact center to the back-office fulfillment of a customer's
request. 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 application with little impact on
downtime or re-training.
Process Manager -- Mosaix's workflow monitoring, tracking, and
reporting module that provides comprehensive analyses of customer processes
across the enterprise. Process Manager presents a detailed history of all
customer interactions regardless of the communication channel used. A
complete "step-by-step" view of all customer case activities performed
either by front-office customer service representatives or back-office
processors is available on demand. In addition, Process Manager records
overall system capacity and efficiency, user productivity, and current
customer case status. The Process Tracker interface can locate customer
cases across the enterprise whether they are active within the business
process or archived for long-term storage.
Business Process Interface (BPI) -- A set of automation interfaces
that enables the creation of custom workflow tasks, interaction channels,
and user applications using any ActiveX-compliant visual programming
environments. BPI consists of high-level automation objects and a set of
ActiveX controls. Any third-party development tool that supports ActiveX
interfaces, such as Visual Basic, Visual C++, Delphi and PowerBuilder, can
be used with BPI. In addition, BPI's COM-based component architecture
enables integration with enterprise application software and information
repositories, including document management, COLD, and relational database
subsystems, host and legacy subsystems, and enterprise applications, such
as PeopleSoft and SAP.
ViewStar Channel Services -- A series of bi-directional gateway
software and software components for customer interactions, including web,
fax, e-mail, scan, and telephony channels. ViewStar Channel Services
provides the functionality required to intelligently and consistently
manage customer interactions initiated from a wide variety of channels and
route them to qualified resources in the enterprise based on business
rules. Information captured about the customer, as well as other relevant
data extracted from disparate data repositories and applications across the
enterprise, is used to determine the appropriate resources needed to
fulfill that customer's requests. ViewStar Channel Services normalizes all
interaction channels and enables consistent reporting and monitoring,
reducing system administration and simplifying training requirements.
SERVICES
PROFESSIONAL SERVICES
Mosaix's professional services group provides fee-based business-process
consulting and CTI services. This group helps clients plan, budget, design and
implement new business processes and technologies with the goal of improving
customer relationship management and call center workflow. This group also
utilizes its network of service providers and system integration partners to
provide 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 products. This is particularly true as
these mission-critical products and services become more technologically
complex.
Mosaix earns system and software support fees by providing ongoing support
and training for all of its CMS products. 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
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service (four hours or less)." CMS support representatives are able to service
customer call center systems on a remote basis from the customer support center
in Redmond, Washington and London, England. If needed, CMS support
representatives will dispatch on-site support, which is provided by IBM in North
America and the United Kingdom. Mosaix charges separate fees to upgrade CMS
products to the latest version when a new product is released. Mosaix earns
other fees by providing, upon customer request, certain special services, such
as system relocation and additional training. The Company has CMS training
facilities located in Redmond, Washington, Wilmington, Delaware and at the
principal office of its subsidiary in the United Kingdom.
Customer support representatives in Alameda, California and London, England
support CRM customers. Mosaix offers a full range of product support options,
including various levels of telephone support that range 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)." CRM support representatives are able
to service customer call center systems on a remote basis from the customer
support center in Alameda, California and London, England. Fees are generally
charged on an annual basis and include upgrades to the latest version when a new
product is released. Mosaix earns other fees by providing, upon customer
request, certain special services, such as additional training. The Company has
CRM training facilities located in Alameda, California, and at the principal
office of its subsidiary in the United Kingdom.
PRODUCT DEVELOPMENT
Mosaix engineers continue to develop new products and new versions of
existing products designed to 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. On an ongoing basis Mosaix releases new features and
enhancements to existing products as well as, new products and services. Mosaix
supplements its product development efforts by reviewing customer feedback on
existing products and working with current and potential customers to anticipate
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 1998, 1997, and 1996, research and
development expenses were $15.0 million, $15.2 million and $14.9 million,
respectively, net of capitalized software development costs. During 1998 no
development costs were capitalized. In 1997 and 1996 Mosaix capitalized $0.3
million and $1.0 million, respectively, of software development costs.
The Mosaix CMS and Guide products have been localized for sale in the
Japanese and Korean markets. The ViewStar System has been double-byte enabled
for sales in the Japanese and Korean markets.
MANUFACTURING
Mosaix's manufacturing operations for CMS products are primarily performed
by an independent third-party on a turnkey basis. The third party contracts with
other vendors for components and subassemblies. Mosaix's CMS suppliers maintain
quality control by subjecting components and subassemblies to rigorous testing,
including in-circuit automated testing. Mosaix's manufacturing operations for
CRM products are performed in-house and consist mainly of CD duplication.
SALES AND MARKETING
Mosaix markets its CMS and CRM products and services through a direct sales
force operating from Mosaix's headquarters in Redmond, Washington and offices in
Alameda, California; Wilmington, Delaware; Atlanta, Georgia; Chicago, Illinois;
New York City, New York; Charlotte, North Carolina; Dallas, Texas; and near
London, England. Mosaix also has established value-added reseller relationships
in North and South America, Asia, Africa, and Europe.
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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 service and support.
Mosaix's principal competitors in the outbound call management systems
market include Davox Corporation, EIS International, Inc. and Melita
International Corporation. The potential entry into the market of major ACD and
PBX suppliers (suppliers of customer-premise call routing and switching systems)
also presents a strong competitive threat. These companies may elect to acquire
or align with 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. As Mosaix expands its
CMS offerings, it may also encounter increased competition from call center
application providers such as Information Management Associates.
The market for agent effectiveness applications is an emerging market.
Mosaix's principal competitors in this market include Teknekron Infoswitch,
Witness Systems, Nice Systems, Eyretel, Comverse, and Dictaphone. As in the
market for CMS products, the potential entry into the market of major ACD and
PBX vendors presents a strong competitive threat. Furthermore, any of these
companies may acquire, be acquired or otherwise align with Mosaix's competitors
in the CMS market. Because the market for these applications is new, and no
clear market leader has emerged to establish an "industry-standard" solution,
the potential exists for new market entrants to appear with strongly
differentiated solutions that would constitute a strong competitive threat.
The traditional competition for horizontal workflow technology has been
workflow software vendors, including direct competition from a number of public
and private companies or divisions thereof, including FileNET, IBM, Action
Technologies, Staffware, Optika, and Eastman Kodak. As ViewStar 5.0 extends its
value into the customer relationship management market, it will face competition
from new competitors, including process-oriented applications vendors such as
Pegasystems, Chordiant, and DST Systems. Mosaix's CRM applications may encounter
competition from a number of software companies that want to extend their reach
in the enterprise, including Vantive and Seibel Systems. Several of these
companies have already announced and others may announce document workflow
capabilities for their existing or future products.
Mosaix 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 Mosaix seeks to maintain
close relationships with these service providers, many of these third parties
have similar, and often more established relationships with Mosaix's principal
competitors. If Mosaix were unable to develop and retain effective, long-term
relationships with these third parties, Mosaix's competitive position would be
materially adversely affected. See "Forward Looking Statements-Risk Factors
Regarding Future Performance -- Uncertainties Relating to Competition and
Development of Industry and Distribution Relationships" in Item Seven.
INTERNATIONAL OPERATIONS
Mosaix's sales to customers in international markets outside the United
States comprised approximately 28.9%, 26.4% and 19.0% of total revenue in 1998,
1997, and 1996, respectively. In most cases, Mosaix markets its products and
services internationally through value-added resellers.
8
<PAGE> 11
The following table presents certain information relating to Mosaix's
foreign and domestic operations for the years ended December 31, 1998, 1997, and
1996.
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenue -- U.S. operations:
United States.................................... $ 78,257 $ 89,153 $ 94,870
United States export............................. 14,090 14,477 12,083
Revenue-foreign subsidiaries....................... 17,721 17,514 10,228
-------- -------- --------
$110,068 $121,144 $117,181
======== ======== ========
Operating income:
U.S. operations.................................. $ 599 $ 8,045 $ 4,235
Foreign subsidiaries............................. 2,451 3,936 1,867
Eliminations..................................... 227 (215) 130
-------- -------- --------
$ 3,277 $ 11,766 $ 6,232
======== ======== ========
Assets:
U.S. operations.................................. $ 64,619 $ 74,725 $ 85,235
Foreign subsidiaries............................. 9,439 9,653 5,528
-------- -------- --------
$ 74,058 $ 84,378 $ 90,763
======== ======== ========
</TABLE>
SEASONALITY
Mosaix's quarterly operating results are 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 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 it will experience relatively weaker demand in the quarter
ending September 30 due to reduced customer activity in Europe during the summer
months.
REGULATORY ENVIRONMENT
Mosaix's CMS 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 CMS products, certain existing laws and
regulations 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.
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 products can be used and the demand for its products.
9
<PAGE> 12
Mosaix fully supports legislation designed to promote the responsible use
of auto dialing equipment and automated recording/monitoring technology, and
laws which otherwise restrict abusive collections or telemarketing activities.
Mosaix endeavors to design its products to enable its customers to comply with
the requirements of current and anticipated 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. On March 30, 1992, U.S. Patent No. 5,101,425 was
issued to Mosaix on 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. Most recently, on
October 13, 1998, U.S. Patent No. 5,822,416 was issued to Mosaix for its System
and Method for Real-Time Screening and Routing of Telephone Calls, which
provides a method of automatically routing incoming telephone calls to either
internal phone call processing resources or to destination parties (system
users) as defined by the individual destination parties. Mosaix has an
additional eight patent applications pending. 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, copyright and
trade secret laws protect it. In addition, to protect its proprietary
technology, 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.
Mosaix has registered trademarks in the United States and various foreign
jurisdictions for certain of its product trademarks including Adapts(R),
Analyst(R), Campaign Director(R), Campaign Manager(TM), Guide(R),
Infostore@Work(R), Mosaix(R), Predictive Blend(R), Producer(R), Process
Architect(R), Screenbuilder(R), Searchlink(R), The Foresight Report(R) and
ViewStar(R).
Despite Mosaix's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy 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 these 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 -- Uncertainties Relating to Dependence on
Proprietary Rights, Infringement Claims, Uncertainty of Obtaining Licenses" in
Item Seven.
EMPLOYEES
As of December 31, 1998 Mosaix employed approximately 531 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.
10
<PAGE> 13
ITEM TWO
PROPERTIES
Mosaix's corporate offices are located in Redmond, Washington in an 83,000
square-foot leased office facility at 6464 185th Avenue N.E., Redmond,
Washington 98052. The lease expires February 28, 2004. The corporate offices
include sales and marketing, professional service and customer support,
engineering, and finance.
The Company also leases offices, which occupy approximately 48,000 square
feet in Alameda, California, under a lease that expires in May 31, 1999. The
Company has renewed the lease and expires on September 30, 2004. Additional
sales, marketing, engineering and service functions are located in Alameda.
Mosaix also leases domestic sales offices in Atlanta, Charlotte, Chicago,
Cleveland, Costa Mesa, Dallas, New York, and Wilmington. The Company's sales,
marketing, service and administrative function for Europe, the Middle East and
Africa is located in leased office space near London, England. The London
facility lease expires in 2017.
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
No matters have been submitted to a vote of Mosaix's shareholders since the
Company's last annual meeting of shareholders in April 1998.
11
<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" 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>
1998
4th Quarter.................................. $ 8.250 $ 4.625
3rd Quarter.................................. $ 9.875 $ 4.000
2nd Quarter.................................. $12.125 $ 9.813
1st Quarter.................................. $12.000 $ 8.750
1997
4th Quarter.................................. $11.313 $ 7.938
3rd Quarter.................................. $15.000 $ 9.000
2nd Quarter.................................. $15.250 $11.750
1st Quarter.................................. $16.000 $ 9.750
</TABLE>
There were approximately 3,600 shareholders of the Company's common stock
as of March 3, 1999. This includes approximately 3,200 street-name holders and
400 registered certificate holders.
No cash dividends were declared or paid by Mosaix during any of the periods
presented. Mosaix presently does not anticipate paying any cash dividends in the
foreseeable future.
12
<PAGE> 15
ITEM SIX
SELECTED FINANCIAL DATA
The selected financial data and balance sheet data presented below for each
of the five years in the period ended December 31, 1998 have been derived from
the consolidated financial statements of the Company which financial statements
have been audited by KPMG LLP, independent certified public accountants.
The following financial information should be read in conjunction with
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and the Consolidated Financial Statements of the Company and the
notes thereto, included elsewhere in this report.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenue............................... $110,068 $121,144 $117,181 $93,248 $76,090
Operating income (loss)............... 3,277 11,766 6,232 1,858 (8,357)
Net income (loss)..................... 4,240 9,757 3,618 (563) (6,482)
Net income (loss) per share:
Basic............................... 0.36 0.74 0.29 (0.06) (0.65)
Diluted............................. 0.35 0.71 0.27 (0.06) (0.65)
Weighted average common shares
outstanding:
Basic............................... 11,793 13,169 12,677 9,846 9,998
Diluted............................. 11,998 13,667 13,570 9,846 9,998
Working capital....................... $ 39,457 $ 46,257 $ 46,804 $37,624 $38,738
Total assets.......................... 74,058 84,378 90,763 93,571 95,796
Long-term obligations................. -- 97 575 1,085 1,123
Shareholders' equity.................. 47,868 55,805 57,343 48,683 52,799
</TABLE>
13
<PAGE> 16
ITEM SEVEN
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
The following table sets forth certain operating data for 1998, 1997 and
1996 expressed as a percentage of revenue for all items except cost of revenue
and gross profit which are shown as a percentage of the corresponding revenue:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Revenues:
System sales.......................................... 42.8% 40.6% 45.6%
Software licenses..................................... 17.9 19.8 17.6
Services and other.................................... 39.3 39.6 36.8
----- ----- -----
100.0 100.0 100.0
Cost of revenues:
System sales.......................................... 38.4 37.6 35.2
Software licenses..................................... 11.9 10.1 6.6
Services and other.................................... 59.3 51.1 50.0
----- ----- -----
41.8 37.5 35.6
Gross profit:
System sales.......................................... 61.6 62.4 64.8
Software licenses..................................... 88.1 89.9 93.4
Services and other.................................... 40.7 48.9 50.0
----- ----- -----
58.2 62.5 64.4
Operating expenses:
Selling, general and administrative................... 41.5 39.4 38.7
Research and development.............................. 13.7 12.6 12.7
Restructuring charges................................. -- 0.8 --
Write-off of capitalized software costs............... -- -- 0.6
Purchase of in-process research and development....... -- -- 3.7
Merger related costs.................................. -- -- 3.3
----- ----- -----
Total operating expenses......................... 55.2 52.8 59.0
----- ----- -----
Operating income........................................ 3.0 9.7 5.4
Interest and other income, net.......................... 1.7 1.8 1.4
----- ----- -----
Income before income taxes.............................. 4.7 11.5 6.8
Income tax expense...................................... 0.8 3.4 3.7
----- ----- -----
Net income.............................................. 3.9% 8.1% 3.1%
===== ===== =====
</TABLE>
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
For 1998, Mosaix reported net income of $4.2 million, or $0.35 diluted
earnings per share, compared to $9.8 million, or $0.71 diluted earnings per
share, for 1997. During 1997, Mosaix recorded a $0.9 million ($0.6 million after
tax) restructuring charge. Without this charge, net income and diluted earnings
per share for 1997 would have been $10.4 million and $0.76, respectively.
Revenue
Revenue of $110.1 million for 1998 represented a 9.1% decrease from 1997
revenue of $121.1 million, as the Company experienced a decline in all revenue
categories during 1998. System sales decreased $2.1 million, or 4.3%, to $47.1
million in 1998. Historically, a majority of the Company's system sales have
come from the
14
<PAGE> 17
large formal call center market segment, with a high percentage representing
repeat business with established customers. During 1998, Mosaix experienced a
decline in sales from its large formal domestic call center installed base. This
decrease was partially offset by increases in international sales, particularly
in Latin America.
Software licenses revenue decreased by 17.6% to $19.7 million for 1998
compared to $23.9 million in 1997. The decrease in software license revenue was
primarily due to lower Customer Relationship Management ("CRM") software license
sales, principally in the European marketplace. This decrease was partially
offset by increased domestic market Call Management Systems ("CMS") software
license sales.
Services and other revenue decreased by $4.7 million, or 9.8%, for 1998 as
a result of decreased level of billable professional services related to CRM
projects. 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
1998 revenues. These decreases were partially offset by a $1.4 million increase
in customer service and maintenance fees in 1998.
International revenue, in absolute dollars, decreased slightly to $31.8
million in 1998 from $32.0 million in 1997. However, international revenue, as a
percentage of total revenues, increased to 28.9% compared to 26.4% in 1997.
During 1998, the Company had increased Canadian software license revenues and
increased Latin American and Asian call center system sales while European
software license revenues decreased. In future periods the Company anticipates
continued improvements in international revenues as a percentage of total
revenues.
Currently, backlog is not significant in relation to Mosaix's revenue and
may not be indicative of future performance.
Gross Profit
Total gross profit decreased to 58.2% in 1998 from 62.5% in 1997. System
sales gross profit, which was 61.6% in 1998 and 62.4% in 1997, was negatively
influenced by decreased sales volume, and by the shift in the product mix to
lower margin products.
Gross profit on software licenses decreased to 88.1% in 1998 from 89.9% in
1997, primarily due to the first significant sales of the Company's third party
agent effectiveness application ("AEA"). The margins for this software product
are lower than the margins on the Company's internally developed software
products.
Gross profit on services and other revenue for 1998 was 40.7% compared to
48.9% in the prior year. The decrease was primarily due to the performance of
reduced rate consulting services for early adopters of the Company's CRM
solution.
Selling, General and Administrative
For 1998, selling, general and administrative ("SG&A") expenses decreased
to $45.7 million from $47.8 million in 1997. The decrease was a result of
decreased expenses resulting from the Company's cost containment initiatives
undertaken in the second half of 1998. In addition, reduced variable
compensation costs related to the reduced revenues also contributed to the
decline in 1998 SG&A expenses.
Research and Development
For 1998, research and development expenses were $15.0 million, or 13.7% of
revenue, compared to $15.2 million, or 12.6% of revenue, in 1997. Mosaix remains
committed to the ongoing development of enhancements to existing products as
well as the development of new products, and accordingly held 1998 expense
levels consistent with 1997 levels although total revenues decreased during
1998. During 1998, no software development costs were capitalized and during
1997, $0.3 million of software development costs were capitalized. As of
December 31, 1998, unamortized software development costs were reduced to $0
versus $0.9 million as of December 31, 1997.
15
<PAGE> 18
Restructuring Charges
As a result of the December 1996 ViewStar merger, Mosaix streamlined its
management structure and consolidated its sales, support and service operations
in 1997. These changes resulted in a charge of $0.9 million for severance and
other employee related costs. During 1997 and 1998, all compensation and other
restructuring costs that comprised the restructuring charge were paid in their
entirety.
Interest and Other Income, Net
Interest and other income, net decreased from $2.2 million in 1997 to $1.9
million in 1998. 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. During 1998, the Company repurchased 1,792,000
shares of its common stock for $14.7 million, which reduced the Company's funds
available for investment and, consequently interest income during 1998.
Income Taxes
The effective income tax rate for 1998 was 17.9% compared to 30.2% in 1997.
The effective rates differ from the statutory rate of 34% due primarily to the
utilization of ViewStar net operating loss carryforwards.
YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
For 1997, Mosaix reported net income of $9.8 million, or $0.71 diluted net
income per share, compared to $3.6 million, or $0.27 diluted net income per
share, for 1996. As previously discussed, during 1997, Mosaix incurred
restructuring charges of $0.9 million ($0.6 million after tax). During 1996,
Mosaix incurred the following charges: (a) the write-off of $4.3 million ($4.3
million after tax) of acquired in-process research and development costs related
to the 1996 acquisition of Caleo Software, Inc. ("Caleo"); (b) $0.7 million
($0.5 million after tax) of previously capitalized software development costs
also related to the Caleo acquisition; and (c) $3.9 million ($3.9 million after
tax) related to the merger with ViewStar. Excluding these charges net income for
1997 would have been $10.4 million, or $0.76 diluted net income per share,
compared to $12.3 million, or $0.91 diluted net income per share, for 1996.
Revenue
Revenue of $121.1 million in 1997 represented a 3.3% increase over 1996
revenue of $117.2 million. System sales, however, decreased $4.2 million, or
7.8%, to $49.2 million in 1997. Historically, system sales have come from the
large formal call center market segment, with a high percentage representing
repeat business with established customers. During 1997, Mosaix experienced a
decline in the number of large system sales, a decline in sales from its
domestic installed base and fewer new name customers than in prior years.
Software licenses revenue increased by 15.9% to $23.9 million for 1997.
This increase was primarily due to increased sales of workflow products.
Services and other revenue increased by $4.9 million, or 11.3%, for 1997 as
a result of increased professional services related to CRM projects. Customer
support revenue increased as a result of new system and software sales.
International revenue increased 43.4% to $32.0 million in 1997 and
accounted for 26.4% of total revenue. This increase was primarily due to
increased sales in the United Kingdom and the growing acceptance of Mosaix
products in international markets.
Gross Profit
Gross profit decreased to 62.5% in 1997 from 64.4% in 1996. System sales
gross profit, which was 62.4% in 1997 and 64.8% in 1996, was influenced by the
decrease in sales volume as well as changes in the product
16
<PAGE> 19
mix. Mosaix's highest gross margins occur on large system sales. During 1997,
Mosaix sold fewer large systems than in 1996, which negatively affected margins.
Gross profit on software licenses decreased to 89.9% in 1997 from 93.4% in
1996, primarily due to increased amortization of previously capitalized software
costs.
Gross profit on services and other revenue for 1997 was 48.9% compared to
50.0% in the prior year, due to the growth in professional services, which have
a lower margin and grew faster than systems and software support fees.
Selling, General and Administrative
For 1997, SG&A expenses were $47.8 million, or 39.4% of revenue, compared
to $45.4 million, or 38.7% of revenue, in 1996. The increase in spending was due
primarily to the expansion of marketing activities, investments in sales and
employee training and recruiting.
Research and Development
For 1997, research and development expenses, net of amounts capitalized,
were $15.2 million, or 12.6% of revenue, compared to $14.9 million, or 12.7% of
revenue, in 1996. Research and development spending, without regard to amounts
capitalized, was $15.5 million in 1997 compared to $15.9 million in 1996.
Software costs capitalized were $0.3 million in 1997 and $1.0 million in
1996. Capitalized software decreased, and as of December 31, 1997, had been
reduced to $0.9 million versus $2.0 million as of December 31, 1996.
Write-Off of Capitalized Software Costs
When the Company completed the acquisition of Caleo, it replaced certain
technology it was developing with technology acquired in the Caleo purchase. The
Company had previously capitalized $0.7 million of costs related to the replaced
technology and, consequently, the costs were expensed.
Purchase of In-Process Research and Development
In February 1996, the Company purchased Caleo for approximately $4.8
million. The business combination was accounted for as a purchase and,
accordingly, the purchase price was allocated to the underlying net assets based
on the asset's fair values. Of the total purchase price, $4.3 million was
allocated to in-process research and development and expensed at the time of the
business combination. In 1998, the Company sold the technology acquired from
Caleo for $0.5 million which was included in software licenses revenues.
Merger Related Costs
In December 1996, the Company issued approximately 3.8 million shares of
its common stock in the acquisition of ViewStar Corporation, a provider of
workflow software. The business combination was accounted for as a pooling of
interests and, accordingly, the merger related costs of $3.9 million were
expensed.
Interest and Other Income, Net
Interest and other income, net increased from $1.7 million in 1996 to $2.2
million in 1997. The increase was primarily the result of increased yields on
investments and increased cash available for investment.
Income Taxes
The effective income tax rate for 1997 was 30.2% compared to 54.2% in 1996.
The 1997 variance from the statutory rate of 34% was primarily related to the
utilization of ViewStar net operating loss carryforwards. The
17
<PAGE> 20
unusually high effective tax rate in 1996 was primarily the result of
non-deductible merger related expenses and purchased in-process research and
development costs.
LIQUIDITY AND CAPITAL RESOURCES
Mosaix's financial condition remained strong as of December 31, 1998, with
cash and cash equivalents and short-term investments totaling $28.6 million. 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 December 31, 1998, Mosaix's working capital was $39.5 million, the current
ratio was 2.5 to 1.0 and during 1998, Mosaix generated $10.1 million of cash
from operations.
Historically, working capital used to finance Mosaix has been provided by
cash flow from operations, leases, and various forms of stock issuances,
including the exercise of stock options by employees. During 1998, Mosaix
invested $4.8 million to purchase furniture and equipment including investments
in internal customer management hardware and software systems.
On July 16, 1997, the Mosaix Board of Directors authorized, subject to
certain terms and conditions, the repurchase of up to 1,700,000 shares of 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 1998, the Company repurchased 1,792,000
shares at a total cost of $14.7 million. As of December 31, 1998, under these
authorizations, the Company had repurchased 3,229,500 shares at a total cost of
$28.7 million.
In addition to its cash and short-term investment balances, Mosaix has a
$10 million domestic line of credit available to meet cash flow needs. The line
of credit expires on May 31, 1999. The Company intends, however, 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 Mosaix's investment in capital assets 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.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("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 years 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.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The SOP will require the
capitalization of certain costs incurred after the date of adoption in
connection with developing or obtaining software for internal use purposes. SOP
98-1 is effective for fiscal years beginning after December 15, 1998. The
Company does not expect the adoption of this Statement to have a material impact
on the consolidated financial statements.
18
<PAGE> 21
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 involve risks and uncertainties. The Company cautions
that actual future quarterly and annual results are subject to a wide variety of
factors that could materially and adversely affect revenues and profitability,
including, without limitation, the following:
Uncertainties Relating to Market Acceptance of the Company's New Products,
including Market Acceptance of Underlying Technologies, such as the
Internet and the Microsoft NT Operating System, and Relating to the Nature
of the Emerging Customer Relationship Management Market
Rapid technological change and frequent product introductions and
improvements characterize the document management and workflow software market
and the call management market. Accordingly, the financial performance of the
Company will depend upon its ability to develop product enhancements and new
products that keep pace with continuing changes in technology and customer
preferences, while also remaining price competitive.
The Company has incurred, and expects to continue to incur, substantial
expenses associated with the introduction and promotion of new products. It is
possible that the expenses incurred will exceed development budgets, that the
Company will not be able to introduce products in a timely fashion, if at all,
or that such products will not achieve market acceptance or generate sales
sufficient to offset development costs or otherwise achieve forecasted or
expected revenue goals or plans. 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.
The success of many of the Company's products and potential products
further 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.
The Company has expended significant resources developing products for the
emerging CRM market. There continues to be substantial uncertainty about the
nature and functionality of those products that will ultimately gain acceptance
in this new market, as such there can be no assurance that the Company's
approach will be successful.
Uncertainties Relating to Year 2000 Computer Problems
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, and virtually every computer operation
will be affected in some way by the rollover of the two digit year value to 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
failures.
The Company has tested and believes all of the Company's currently shipping
products are year 2000 compliant. In addition, whenever possible, the Company
has made software and hardware upgrades available to existing customers that
will enable their systems to be year 2000 compliant. It is possible that the
Company's current products contain undetected errors related to year 2000 that
may result in material additional costs or liabilities, which could have a
material adverse effect on the Company.
The Company does have some customers who have purchased call management
systems in the past for which hardware upgrades are not available to allow the
customer to become year 2000 compliant. The Company has and will continue to
encourage such customers to migrate to current product versions. It is possible
that the Company will incur additional expenses in addressing these migration
issues. In addition, a
19
<PAGE> 22
significant number of existing customers, who are currently paying maintenance
fees, have not yet 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 subject 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. It
is also possible that support fee revenues may be adversely and materially
affected if customers choose not to upgrade or otherwise to discontinue use of
Mosaix products. The Company's international distributors, who support their end
user customers directly, may encounter similar issues, which may, in turn,
affect adversely their demand for Mosaix products in the coming quarters.
Year 2000 issues may negatively affect the Company's revenues in future
quarters in ways beyond non-renewal of maintenance service or support fees. Some
customers or prospects may decline to purchase new systems or products from the
Company until all of their internal systems have been upgraded to year 2000
compliant versions. The market for the Company's products may be materially
adversely affected by this internal focus of resources and available budgets on
resolving year 2000 problems. The potential for distraction from normal customer
purchasing cycles and activities will exist throughout fiscal year 1999, and
possibly into the fiscal year 2000.
With regard to the Company's internal processing and operational systems,
the Company has substantially completed installation of an enterprise-wide
financial and operational system from a major vendor that is year 2000
compliant. The Company anticipates that all critical components of this system
will be operational by mid-1999. Significant portions of this system are
currently operational. The Company has capitalized the price of this system and
third party consulting costs incurred to date and will continue to do so as the
system is completed. With regard to other systems, the Company is identifying,
reprogramming and testing all systems for year 2000 compliance. Although the
Company is not aware of any additional material operational issues or costs
associated with preparing the internal systems for the year 2000, it is possible
the Company will experience material adverse effects from undetected errors or
the failure of such systems to be year 2000 compliant.
The Company has further attempted to ascertain the year 2000 readiness
status of its primary vendors of goods and services to assess and minimize the
risk of interruptions of delivery of such goods and services. Although the
Company is not currently aware of any material vendor year 2000 performance
issues, it is possible that unknown or unforeseen vendor operational problems,
stemming from year 2000 problems, will materially adversely impact the Company's
financial performance.
While the Company continues to develop and implement readiness and
contingency plans intended to minimize the impacts of foreseeable year 2000
problems (the Company currently does not have a contingency plan to address
areas of potential failure, but anticipates developing contingency plans prior
to December 31, 1999 with regard to specific areas of risk where the Company has
not been able to gain reasonable assurance of year 2000 compliance), it is
possible the full and complete impact of the year 2000 on the future results of
the Company will be material and adverse. This risk is difficult to fully
determine at present, and should be considered in evaluating the financial
prospects and future growth of the Company. The Company does not believe that
the expenses incurred to date, or to be incurred in the future, in connection
with currently planned year 2000 remediation efforts, has had, or will have, a
material adverse effect on the Company.
Uncertainties Relating to Lengthy Sales and Implementation Cycles, Complex
Service Requirements and Seasonality
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
a sale 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 CMS or CRM
solution. System sales and software license revenues are difficult to forecast,
due to the fact that quarterly revenues depend on a relatively few large
contracts that are subject to changes in customer budgets and general economic
conditions. In
20
<PAGE> 23
addition, 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 may also require lengthy and complex implementation and
integration services, which services may be provided by the Company or by a
third party. It is becoming increasingly competitive to recruit the talent
required to perform the required services. The Company's future operating
results therefore depend upon its ability to coordinate these complex service
resources and ensure successful implementation of its products, while managing
costs. 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 on both an annual and quarterly basis, and are likely to
do so in the future. For these reasons, results of operations for any particular
period are not necessarily indicative of future performance.
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 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.
Uncertainties Relating to Competition and Development of Industry and
Distribution Relationships
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 service and support. 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, or form strategic alliances that provide a broader, better
integrated solution to certain of the Company's potential customers.
Mosaix's principal competitors in the outbound call management systems
market include Davox Corporation, EIS International, Inc. and Melita
International Corporation. The potential entry into the market of major ACD and
PBX suppliers (suppliers of customer-premise call routing and switching systems)
also presents a strong competitive threat. These companies may elect to acquire
or align with 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. As Mosaix expands its
CMS offerings, it may also encounter increased competition from call center
application providers such as Information Management Associates.
The market for agent effectiveness applications is an emerging market.
Mosaix's principal competitors in this market include Teknekron Infoswitch,
Witness Systems, Nice Systems, Eyretel, Comverse, and Dictaphone. As in the
market for CMS products, the potential entry into the market of major ACD and
PBX vendors presents a strong competitive threat. Furthermore, any of these
companies may elect to acquire, be acquired or otherwise align with Mosaix's
competitors in the CMS market. Because the market for these applications is new,
and no clear market leader has emerged to establish an "industry-standard"
solution, new market entrants may appear with strongly differentiated solutions
that would present a strong competitive threat.
The traditional competition for horizontal workflow technology has been
workflow software vendors, including direct competition from a number of public
and private companies or divisions thereof, including FileNET, IBM, Action
Technologies, Staffware, Optika, and Eastman Kodak. As ViewStar 5.0 extends into
the customer relationship management market, it will face competition from new
competitors, including process-oriented applications vendors such as
Pegasystems, Chordiant, and DST Systems. Mosaix's CRM
21
<PAGE> 24
applications may encounter competition from a number of software companies that
want to extend their reach in the enterprise, including Vantive and Seibel
Systems. Several of these companies have already announced and others may
announce document workflow capabilities for their existing or future products.
Many of the Company's current or potential competitors have greater
financial, technical and marketing resources. As the Company's markets mature
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.
The Company relies on a number of consulting and other system integration
firms for implementation and other services, as well as recommendations of its
products during the evaluation stage of the purchasing process. The Company also
relies upon a number of distribution relationships and intends to create new
channels for distribution of its products. Although the Company seeks to
maintain close relationships with these parties, many of them 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 party distributors, system integrators and
marketing partners, the Company's competitive position and financial performance
could be materially adversely affected.
Uncertainties Relating to the Management of Remote Operations
In December of 1996, the Company completed a merger with ViewStar, and
during 1997 and 1998, several administrative and management functions were
combined or reorganized. Certain sales, customer support, professional service
and development functions remain in Alameda, California. The Company does not
have significant experience in the management of remote operations, and the
geographical separation of Alameda operations may hinder efforts to integrate
operations and product development. The failure to effectively manage the
operations in Alameda or to realize the potential product synergies could have a
material adverse effect on the Company's business.
Uncertainties Relating to Competition for Employees
Competition for engineers, professional services, customer support and
sales employees has continued to increase in the high technology industry. In
order for the Company to develop new and enhanced versions of existing products
and to properly support customers, the Company must continue to successfully
retain existing employees and recruit additional skilled people. In the event
the Company is not able to attract personnel with the requisite skills in a
reasonable time frame or as the costs of doing so increase, the Company could be
materially adversely affected.
Uncertainties Relating to Limited Source of Supply
The Company purchases two principal components for its system product from
sole-source vendors. If these components become unavailable without sufficient
advance notice to enable the Company to develop alternative sources, or if
efforts to establish alternate sources are unsuccessful, this would adversely
affect the Company's ability to manufacture its call center system products. Any
such delay could materially adversely affect the operating results of the
Company.
Uncertainties Relating to Lack of Product Revenue Diversification
While the Company has developed new software products and services and has
multiple distribution channels, the Company expects that its CMS and CRM
products 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.
22
<PAGE> 25
Uncertainties Relating to International Sales and Economies
Mosaix sells products to customers in international markets, with such
sales accounting for 28.9% of the Company's total sales in 1998. Accordingly,
Mosaix 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 adverse effect on the Company's international sales. The current year
financial crisis in Asia adversely affected sales in the region in 1998 and may
continue to negatively affect anticipated growth in Asia in future quarters.
Additionally, similar crises could develop in other foreign markets in the
future and have a material adverse impact in a future period. Because the
Company invoices certain of its foreign sales in local currency (the British
Pound Sterling) 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.
Uncertainties Relating to 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 the Company is typically 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. While the Company currently has no
reason to believe or suspect that its products infringe the proprietary rights
of third parties, it is possible that third parties will 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, and could have a
material adverse effect on the Company's business, results of operations and
financial condition.
The Company also relies on certain software licensed from third parties,
including software that is integrated with internally developed software and
used in the Company's stand alone products, and in 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.
Uncertainties Relating to Risk of Product Defects
Software, system and other products as internally complex, with as many
interfaces to third party vendors as those offered by the Company, frequently
contain errors or defects, especially when first introduced or when new versions
are released. Although the Company conducts extensive product testing during
product development, it has experienced delays in the commercial release of
products pending the correction of software and hardware problems. In some
cases, the Company has provided product enhancements to correct errors or
defects in released products due to the difficulty of testing for all possible
conditions that may be encountered at a customer site. The Company could
therefore, in the future, lose revenues as a result of product defects. The
Company's products and future products are intended for use in applications that
are
23
<PAGE> 26
critical to a customer's business. As a result, the Company expects that its
customers and potential customers have a greater sensitivity to product defects
than the market for software and hardware products generally.
Uncertainties Relating to Governmental Regulation
While existing industry legislation does not directly regulate the
manufacture and sale of the Company's call management products, certain existing
legislation may affect the ability of the Company's customers to utilize some of
its products in certain ways. For example, 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 response to such regulations, telecommunications companies and
other service providers are developing products that allow consumers to block or
screen in-bound telemarketing phone calls. The development of these products may
reduce the effectiveness of the Company's products when used for such purposes.
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 the Company's call management systems, or some feature thereof, can
be used. Similarly, international regulations and laws, particularly in Europe
and Asia, could have a negative impact on the Company.
Conclusion
Due to all of the foregoing factors, it is likely that without advance
warning or notice, in some future quarter the Company's operating results will
be below the expectations of market analysts and investors. This may cause the
market price of the Company's common stock to fall. These risks are impossible
to fully determine at present, and should be considered in evaluating the
financial prospects and future growth of the Company.
ITEM SEVEN A
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Mosaix does not use derivative financial instruments in its investment
portfolio. Its financial instruments consist of cash and cash equivalents,
short-term investments, trade accounts and contracts receivable, accounts
payable, and long-term obligations. The Company considers investments in highly
liquid instruments purchased with an original maturity of 90 days or less to be
cash equivalents. All of Mosaix's cash equivalents and short-term investments,
principally consist of commercial paper and debt securities, and are classified
as held-to-maturity as of December 31, 1998. The Company's exposure to market
risk for changes in interest rates relates primarily to its short-term
investments and short-term obligations, thus, fluctuations in interest rates
would not have a material impact on the fair value of these securities. (See
note 3 and note 7 to the Company's consolidated financial statements contained
in ITEM EIGHT).
Sales to foreign countries accounted for approximately 29% of the total
sales for the year ended December 31, 1998 compared to 26% in 1997. Because the
Company invoices certain of its foreign sales in local currency (British Pound
Sterling) and does not hedge these transactions, fluctuations in exchange rates
could adversely affect the translated results of operations of the Company's
foreign subsidiary. Therefore, foreign exchange fluctuation could create a risk
of significant balance sheet gains or losses on the Company's consolidated
financial statements.
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<PAGE> 27
ITEM EIGHT
FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
For financial statements, see F-1 to F-20.
ITEM NINE
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
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.
25
<PAGE> 28
PART IV
ITEM FOURTEEN
EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
CONSOLIDATED FINANCIAL STATEMENTS:
See F-1 to F-20.
FINANCIAL STATEMENTS SCHEDULES:
Independent Auditors' Report (contained on page F-21)
Schedule II Valuation and Qualifying Accounts (contained on page F-22)
All other Schedules are omitted because they are inapplicable or because
the requested information is shown in the Consolidated Financial Statements of
the Company or in the related Notes thereto.
<TABLE>
<CAPTION>
EXHIBITS
- --------
<C> <S> <C>
3.1 Restated Articles of Incorporation of the Registrant (B)
3.2 Restated Bylaws of the Registrant (C)
4.1 Form of Certificate Evidencing Common Stock, par value $0.01
per share (B)
10.1 Restated 1987 Stock Option Plan, as amended* (F)
10.2 Amended and Restated 1996 Stock Incentive Compensation Plan* (A)
10.3 Restated 1992 Stock Option Plan for Non-Employee Directors,
as amended* (F)
10.4 1991 Employee Stock Purchase Plan, as amended* (D)
10.5 Executive Employment Agreement, dated April 28, 1998,
between Kim Mackay and the Registrant* (A)
10.6 Amendment No. 1, dated August 18, 1998, to Executive
Employment Agreement between Kim Mackay and the Registrant* (A)
10.7 1999 Management Bonus Plan* (A)
10.8 1999 Performance Bonus Plan* (A)
10.9 Executive Employment Agreement, dated March 1, 1995, between
John J. Flavio and the Registrant* (E)
10.10 Amendment No. 1, dated August 18, 1998, to Executive
Employment Agreement between John J. Flavio and the
Registrant* (A)
10.11 Lease for Building 17, dated May 20, 1991, among Michael R.
Mastro, Redmond East Associates and the Registrant (A)
10.12 Amendment No. 1 to Lease for Building 17, dated July 1991,
between Redmond East Associates and the Registrant (A)
10.13 Amendment No. 2 to Lease for Building 17, effective June 1,
1997, between Carr Redmond Corporation, successor in
interest to Redmond East, L.L.C, and the Registrant (A)
10.14 Amendment No. 3 to Lease for Building 17, dated November 2,
1998, between Carr Redmond Corporation, successor in
interest to Redmond East Associates, and the Registrant. (A)
10.15 Business Loan Agreement dated June 25, 1997 with
Seattle-First National Bank (H)
10.16 Customer Purchase Agreement dated December 27, 1990 with
Summa Four, Inc.** (C)
10.17 Software Source Code and Manufacturing Data Deposit and
Escrow Agreement dated December 27, 1990 with Summa Four,
Inc. and Data Securities and International Ind.** (C)
10.18 ViewStar Corporation Amended 1986 Incentive Stock Plan and
form of agreement thereunder* (G)
</TABLE>
26
<PAGE> 29
<TABLE>
<CAPTION>
EXHIBITS
- --------
<C> <S> <C>
10.19 ViewStar Corporation Amended 1994 Stock Plan, as amended,
and form of agreement thereunder* (G)
10.20 ViewStar Corporation 1996 Incentive Stock Plan* (G)
10.21 Sublease Agreement between the ASK Group, Inc. and ViewStar
Corporation dated October 8, 1993, for ViewStar's facility
located at 1101 Marina Village Parkway, Alameda, California (G)
10.22 First Amendment to Sublease Agreement between the ASK Group,
Inc. and ViewStar Corporation, dated September 8, 1994, for
ViewStar's facility located at 1101 Marina Village Parkway,
Alameda, California (H)
10.23 Executive Employment Agreement, dated October 14, 1996,
between Steven R. Russell and the Registrant* (H)
10.24 Executive Employment Agreement, dated February 5, 1998,
between Nicholas A. Tiliacos and the Registrant* (H)
10.25 Amendment No. 1, dated August 18, 1998, to Executive
Employment Agreement between Nicholas A. Tiliacos and the
Registrant* (A)
10.26 Executive Employment Agreement, dated April 28, 1998,
between Theodore Manakas and the Registrant* (A)
10.27 Amendment No. 1, dated August 18, 1998, to Executive
Employment Agreement between Theodore Manakas and the
Registrant* (A)
10.28 1998 Management and Performance Bonus Plans* (H)
10.29 Amendment No. 1, dated August 18, 1998, to Executive
Employment Agreement between Steven R. Russell and the
Registrant* (A)
21.1 List of Subsidiaries of the Registrant (A)
23.1 Consent of KPMG LLP (A)
27.1 Financial Data Schedule (A)
</TABLE>
- ---------------
* 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,
1992.
(D) 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.
(E) Incorporated by reference from exhibits filed in connection with the
Registrant's Quarterly Report on From 10-Q for the quarter ended March 31,
1995.
(F) 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.
(G) Incorporated by reference from exhibits filed in connection with the
Registrant's Registration Statement on Form S4 (Registration No.
333-14887) initially filed with the Securities and Exchange Commission on
October 25, 1996.
(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,
1997.
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<PAGE> 30
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: /s/ NICHOLAS A. TILIACOS
------------------------------------
Nicholas A. Tiliacos
Director and 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ HARVEY N. GILLIS Chairman of the Board and Director March 4, 1999
- ---------------------------------------------------
Harvey N. Gillis
/s/ NICHOLAS A. TILIACOS President, Chief Executive Officer March 4, 1999
- --------------------------------------------------- and Director
Nicholas A. Tiliacos
/s/ JOHN J. FLAVIO Senior Vice President and March 4, 1999
- --------------------------------------------------- Chief Financial Officer
John J. Flavio
/s/ MICHAEL A. JACOBSEN Controller and March 4, 1999
- --------------------------------------------------- Principal Accounting Officer
Michael A. Jacobsen
/s/ TOM A. ALBERG Director March 4, 1999
- ---------------------------------------------------
Tom A. Alberg
/s/ H. ROBERT GILL Director March 4, 1999
- ---------------------------------------------------
H. Robert Gill
/s/ UMANG GUPTA Director March 4, 1999
- ---------------------------------------------------
Umang Gupta
/s/ DAVID J. LADD Director March 4, 1999
- ---------------------------------------------------
David J. Ladd
/s/ ROBERT S. LEVENTHAL Director March 4, 1999
- ---------------------------------------------------
Robert S. Leventhal
</TABLE>
28
<PAGE> 31
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, 1998 and 1997 and the related
consolidated statements of income and comprehensive income, shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1998. 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, 1998 and 1997 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
KPMG SIGNATURE
Seattle, Washington
January 29, 1999
F-1
<PAGE> 32
MOSAIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Systems sales............................................ $ 47,059 $ 49,198 $ 53,384
Software licenses........................................ 19,732 23,947 20,654
Services and other....................................... 43,277 47,999 43,143
-------- -------- --------
Total revenue.................................... 110,068 121,144 117,181
-------- -------- --------
Cost of revenues:
Systems sales............................................ 18,073 18,510 18,813
Software licenses........................................ 2,342 2,416 1,364
Services and other....................................... 25,658 24,504 21,588
-------- -------- --------
Total cost of revenue............................ 46,073 45,430 41,765
-------- -------- --------
Gross profit............................................... 63,995 75,714 75,416
-------- -------- --------
Operating expenses:
Selling, general and administrative...................... 45,674 47,774 45,355
Research and development................................. 15,044 15,226 14,912
Restructuring charge..................................... -- 948 --
Write-off of capitalized software costs.................. -- -- 705
Purchase of in-process research and development.......... -- -- 4,307
Merger related costs..................................... -- -- 3,905
-------- -------- --------
Total operating expenses......................... 60,718 63,948 69,184
-------- -------- --------
Operating income........................................... 3,277 11,766 6,232
Interest and other income, net............................. 1,887 2,208 1,674
-------- -------- --------
Income before income taxes................................. 5,164 13,974 7,906
Income tax expense......................................... 924 4,217 4,288
-------- -------- --------
Net income................................................. $ 4,240 $ 9,757 $ 3,618
======== ======== ========
Net income per share:
Basic.................................................... $ 0.36 $ 0.74 $ 0.29
Diluted.................................................. $ 0.35 $ 0.71 $ 0.27
Weighted average common shares outstanding:
Basic.................................................... 11,793 13,169 12,677
Diluted.................................................. 11,998 13,667 13,570
Comprehensive income:
Net income............................................... $ 4,240 $ 9,757 $ 3,618
Foreign currency translation gain........................ 24 198 133
-------- -------- --------
Comprehensive income.................................. $ 4,264 $ 9,955 $ 3,751
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 33
MOSAIX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 5,423 $ 5,532
Short-term investments, at amortized cost................. 23,131 30,548
Trade accounts receivable, less allowance for doubtful
accounts
of $2,076 in 1998 and $1,749 in 1997................... 30,837 30,325
Inventories............................................... 591 2,532
Current installments of contracts receivable, less
allowance for
doubtful accounts of $497 in 1997...................... 98 1,555
Deferred income taxes..................................... 3,481 1,338
Prepaid expenses and other current assets................. 2,086 2,881
------- -------
Total current assets.............................. 65,647 74,711
Furniture, equipment and leasehold improvements, net........ 7,672 7,449
Capitalized software costs, net of accumulated amortization
of $701 in 1997........................................... -- 930
Deferred income taxes....................................... 739 837
Other assets, net........................................... -- 451
------- -------
Total assets...................................... $74,058 $84,378
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 5,301 $ 5,455
Accrued compensation...................................... 7,617 8,762
Other accrued expenses.................................... 6,862 6,413
Current portion of long-term obligations.................. 78 381
Customer deposits and unearned revenue.................... 6,332 7,443
------- -------
Total current liabilities......................... 26,190 28,454
Long-term obligations, excluding current installments....... -- 97
Unearned revenue, less current portion...................... -- 22
------- -------
Total liabilities................................. 26,190 28,573
Shareholders' equity:
Common stock, $.01 par value. Authorized 25,000 shares;
issued and
outstanding 10,841 shares in 1998 and 12,229 shares in
1997................................................... 108 122
Additional paid-in-capital................................ 37,581 50,040
Accumulated comprehensive income.......................... 21 (3)
Notes receivable from shareholders........................ -- (272)
Retained earnings......................................... 10,158 5,918
------- -------
Total shareholders' equity........................ 47,868 55,805
------- -------
Total liabilities and shareholders' equity........ $74,058 $84,378
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 34
MOSAIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES DEFERRED
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE ACCUMULATED STOCK OPTION
--------------- --------------- PAID-IN FROM COMPREHENSIVE COMPENSATION
SHARES AMOUNT SHARES AMOUNT CAPITAL SHAREHOLDERS INCOME EXPENSE
------ ------ ------ ------ ---------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995... 1,847 $ 18 9,768 $ 98 $ 56,688 $(299) $(334) $(31)
Issuance of preferred stock... 3,293 33 -- -- 3,294 -- -- --
Exercise of stock options..... -- -- 369 4 1,440 (136) -- --
Amortization of deferred
compensation expense........ -- -- -- -- -- -- -- 31
Tax benefit realized upon
exercise of stock options... -- -- -- -- 1,051 -- -- --
Common stock sold pursuant to
employee stock purchase
plan........................ -- -- 33 -- 388 -- -- --
Comprehensive income.......... -- -- -- -- -- -- 133 --
Restricted stock issued in
exchange for note
receivable.................. -- -- 311 3 152 (155) -- --
Conversion of preferred stock
to common stock............. (5,140) (51) 2,797 28 23 -- -- --
Exercise of stock warrants.... -- -- 42 -- 30 -- -- --
Repurchase of common stock.... -- -- (83) (1) (1,225) -- -- --
Net income.................... -- -- -- -- -- -- -- --
------ ---- ------ ---- -------- ----- ----- ----
Balances at December 31, 1996... -- -- 13,237 132 61,841 (590) (201) --
Exercise of stock options..... -- -- 409 4 1,161 -- -- --
Tax benefit realized upon
exercise of stock options... -- -- -- -- 700 -- -- --
Common stock sold pursuant to
employee stock purchase
plan........................ -- -- 38 1 365 -- -- --
Comprehensive income.......... -- -- -- -- -- -- 198 --
Collection of shareholder
notes....................... -- -- -- -- -- 318 -- --
Repurchase of common stock.... -- -- (1,455) (15) (14,027) -- -- --
Net income.................... -- -- -- -- -- -- -- --
------ ---- ------ ---- -------- ----- ----- ----
Balances at December 31, 1997... -- -- 12,229 122 50,040 (272) (3) --
Exercise of stock options..... -- -- 354 4 1,164 -- -- --
Tax benefit realized upon
exercise of stock options... -- -- -- -- 638 -- -- --
Common stock sold pursuant to
employee stock purchase
plan........................ -- -- 50 -- 376 -- -- --
Comprehensive income.......... -- -- -- -- -- -- 24 --
Collection of shareholder
notes....................... -- -- -- -- -- 272 -- --
Repurchase of common stock.... -- -- (1,792) (18) (14,637) -- -- --
Net income.................... -- -- -- -- -- -- -- --
------ ---- ------ ---- -------- ----- ----- ----
Balances at December 31, 1998... -- $ -- 10,841 $108 $ 37,581 $ -- $ 21 $ --
====== ==== ====== ==== ======== ===== ===== ====
<CAPTION>
RETAINED TOTAL
EARNINGS SHAREHOLDERS'
(DEFICIT) EQUITY
--------- -------------
<S> <C> <C>
Balances at December 31, 1995... $(7,457) $ 48,683
Issuance of preferred stock... -- 3,327
Exercise of stock options..... -- 1,308
Amortization of deferred
compensation expense........ -- 31
Tax benefit realized upon
exercise of stock options... -- 1,051
Common stock sold pursuant to
employee stock purchase
plan........................ -- 388
Comprehensive income.......... -- 133
Restricted stock issued in
exchange for note
receivable.................. -- --
Conversion of preferred stock
to common stock............. -- --
Exercise of stock warrants.... -- 30
Repurchase of common stock.... -- (1,226)
Net income.................... 3,618 3,618
------- --------
Balances at December 31, 1996... (3,839) 57,343
Exercise of stock options..... -- 1,165
Tax benefit realized upon
exercise of stock options... -- 700
Common stock sold pursuant to
employee stock purchase
plan........................ -- 366
Comprehensive income.......... -- 198
Collection of shareholder
notes....................... -- 318
Repurchase of common stock.... -- (14,042)
Net income.................... 9,757 9,757
------- --------
Balances at December 31, 1997... 5,918 55,805
Exercise of stock options..... -- 1,168
Tax benefit realized upon
exercise of stock options... -- 638
Common stock sold pursuant to
employee stock purchase
plan........................ -- 376
Comprehensive income.......... -- 24
Collection of shareholder
notes....................... -- 272
Repurchase of common stock.... -- (14,655)
Net income.................... 4,240 4,240
------- --------
Balances at December 31, 1998... $10,158 $ 47,868
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 35
MOSAIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 4,240 $ 9,757 $ 3,618
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 5,513 6,028 6,315
Changes in operating assets and liabilities:
Trade and other receivables.......................... 945 (3,385) 1,181
Other assets......................................... 1,328 1,927 (2,162)
Accounts payable and accrued expenses................ (850) (803) 2,977
Customer deposits and unearned revenue............... (1,111) (3,013) (7,023)
-------- -------- --------
Net cash provided by operating activities......... 10,065 10,511 4,906
-------- -------- --------
Cash flows from investing activities:
Purchase of short-term investments........................ (31,176) (35,978) (40,635)
Proceeds from maturities of short-term investments........ 38,532 37,255 42,658
Purchases of furniture and equipment...................... (4,780) (4,778) (3,456)
Increase in capitalized software costs.................... -- (256) (976)
Other..................................................... 487 820 207
-------- -------- --------
Net cash provided by (used in) investing
activities...................................... 3,063 (2,937) (2,202)
-------- -------- --------
Cash flows from financing activities:
Collection of shareholder notes receivable................ 272 318 --
Repayments of long-term obligations....................... (422) (1,031) (1,262)
Common stock repurchased.................................. (14,655) (14,042) (1,226)
Proceeds from issuance of preferred and common stock...... 1,544 1,531 2,905
-------- -------- --------
Net cash provided by (used in) financing
activities...................................... (13,261) (13,224) 417
-------- -------- --------
Effect of exchange rate changes on cash..................... 24 198 117
-------- -------- --------
Increase (decrease) in cash and cash equivalents............ (109) (5,452) 3,238
Cash and cash equivalents, beginning of year................ 5,532 10,984 7,746
-------- -------- --------
Cash and cash equivalents, end of year...................... 5,423 5,532 10,984
Short-term investments...................................... 23,131 30,548 31,825
-------- -------- --------
Cash and cash equivalents and short-term investments........ $ 28,554 $ 36,080 $ 42,809
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes........................................... $ 226 $ 1,816 $ 5,611
Interest............................................... $ 30 $ 105 $ 290
Noncash investing and financing activities:
Equipment transferred from inventory................... $ -- $ 14 $ 363
Tax benefit realized upon exercise of stock options.... $ 638 $ 700 $ 1,051
Equipment acquired under capital leases................ $ -- $ -- $ 554
Issuance of common stock in exchange for notes
receivable........................................... $ -- $ -- $ 291
Issuance of preferred stock in exchange for
subordinated notes payable and related accrued
interest............................................. $ -- $ -- $ 2,148
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 36
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. and subsidiaries (hereinafter referred to as "Mosaix" or the
"Company") is a global provider of call center software, predictive dialers and
workflow applications that enable companies to acquire, retain, and develop
customer relationships. With these products, companies can integrate sales,
marketing, and customer services applications in their call centers with
back-office applications throughout the enterprise. The two product areas
include call management systems (CMS), including agent effectiveness
applications (AEA), and customer relationship management (CRM) applications.
Mosaix' principal markets are North America, South America, Europe, and
Asia.
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's short-term
investments 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 spare parts and net realizable value for
work-in-process, finished goods, and installations in progress).
e. Furniture, Equipment and Leasehold Improvements
Furniture, equipment and leasehold improvements are stated at cost.
Depreciation of furniture and equipment is 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 their
estimated useful lives or the related lease term. Maintenance and repairs are
expensed as incurred. When furniture, equipment and leasehold improvements are
retired or otherwise disposed, gains and losses are reflected in the
consolidated statement of income.
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. Net
realizable value for a particular product is assessed based on anticipated gross
margins applicable to sales of the related product in future periods. All
capitalized software costs have been removed from the Company's accounts at
December 31, 1998.
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
F-6
<PAGE> 37
MOSAIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
method over the estimated life of the product. Fully amortized software
development costs are removed from the Company's accounts. Amortization expense
related to capitalized software costs amounted to $930, $1,318 and $1,448 for
1998, 1997 and 1996, respectively. These amounts are included in cost of systems
and software licenses revenue.
g. Revenue Recognition
The Company's revenues are primarily derived from: systems sales, software
licenses and services. Systems sales are comprised of revenue related to
products 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. Services revenue consists
of consulting services and annual recurring software and system support fees.
During 1998, the Company implemented Statement of Position (SOP) 97-2, "Software
Revenue Recognition" and the implementation had no material impact to the 1998
financial statements.
Revenue on system sales is generally recognized when the units are shipped.
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 installation is complete. Revenue from the sale of software
licenses is recognized when (i) a signed contract exists, (ii) delivery has
occurred, (iii) collectibility is probable, and (iv) significant acceptance
terms have been fulfilled. 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. Revenue from annual system
and software support services is recognized using the straight-line method over
the term of the contract. Revenue from professional services is recognized as
the related work is performed. Revenue from software arrangements involving
multiple elements is allocated to each element based on the relative fair values
of the elements.
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 had historically sold and licensed systems pursuant to lease
agreements which qualify as sales type leases with an initial term of three
years or more. Revenue from these contracts was recognized when units were
shipped, at the present value of the minimum payments at the beginning of the
contract discounted at the Company's incremental borrowing rate. No such
contracts were sold in 1998 or 1997.
h. Research and Development Costs
Research and development costs are charged to expense as incurred, except
as described in note 1f. Capitalized Software Costs above.
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 that will more likely than not be realized.
The Company provides for Federal and state income tax expense on foreign
earnings without regard to whether such earnings will be permanently reinvested
outside the United States.
F-7
<PAGE> 38
MOSAIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
j. Product Warranties
The Company generally provides a 90-day warranty for all systems sold and a
30-day warranty for software products. A charge to the statement of operations
is made at the time of sale for estimated costs of repair or replacement of the
products during the warranty period as these costs are relatively minor.
k. Net Income Per Share
Basic net income per share is computed using the weighted average number of
common shares outstanding. Diluted net earnings 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 and convertible preferred stock.
l. 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 average rates of
exchange. The net gain or loss resulting from translation is shown as a
component of comprehensive income. Gains and losses from foreign currency
transactions are included in interest and other income, net.
m. Financial Instruments
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 that 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.
n. Concentrations of Credit Risk and Source of Supply
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.
The Company purchases two principal components for its system product from
sole-source vendors. If these components become unavailable without sufficient
advance notice to enable the Company to develop alternative sources, or if
efforts to establish alternate sources are unsuccessful, this would adversely
affect the Company's ability to manufacture its call center system products. Any
such delay could materially adversely affect the operating results of the
Company.
o. Stock Based Compensation
In accordance with the provisions of Statement of Financial Accounting
Standard (SFAS) No. 123, "Accounting for Stock Based Compensation," Mosaix has
elected to continue to apply the provisions of Accounting Principles Board
Opinion No. 25 and related interpretations in accounting for its stock option
and stock purchase plans for employees. Accordingly, Mosaix does not recognize
compensation expense for options granted to employees with an exercise price
equal to or in excess of the fair value of the related common stock at the date
of grant. Note 8 -- Shareholders' Equity to the consolidated financial
statements contains a summary of pro forma results of operations for 1998, 1997
and 1996 as if Mosaix had recognized
F-8
<PAGE> 39
MOSAIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
compensation expense based on the fair value of the options and stock purchase
rights granted at grant date as required by SFAS No. 123.
p. Comprehensive Income
In 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.
q. New Accounting Pronouncements
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 years 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.
In March 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." The SOP will require the capitalization of certain
costs incurred after the date of adoption in connection with developing or
obtaining software for internal use purposes. SOP 98-1 is effective for fiscal
years beginning after December 15, 1998. The Company does not expect the
adoption of this Statement to have a material impact on the consolidated
financial statements.
r. 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.
s. Reclassifications
Certain reclassifications have been made to the prior period financial
statements to conform with the current year presentation.
2. BUSINESS COMBINATIONS
a. 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 (ViewStar), a provider of client/server document management and
workflow software. This business combination was accounted for as a pooling-of-
F-9
<PAGE> 40
MOSAIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
interests and, accordingly, the consolidated financial statements for all
periods prior to the combination were restated to include the accounts and
results of operations of ViewStar. In connection with the business combination,
$3,905 of merger related costs were incurred and included in operating expenses
in 1996.
b. Caleo Software, Inc.
In February 1996, the Company purchased Caleo Software, Inc. (Caleo) 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 also wrote off $705 of
previously capitalized software costs representing technology replaced by
technology acquired with the Caleo purchase. The acquired technology did not
achieve the originally projected revenues which were the basis for the 1996
valuation of the in process research and development and in 1998, the Company
sold the technology acquired from Caleo for $500 which was included in software
licenses revenues.
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>
1998 1997
------- -------
<S> <C> <C>
Cash and cash equivalents:
Cash...................................................... $ 3,732 $ 1,682
Money market instruments.................................. 1,691 3,850
------- -------
Total cash and cash equivalents................... 5,423 5,532
------- -------
Short-term investments:
Commercial paper.......................................... 1,022 --
Corporate notes and bonds................................. 22,109 30,548
------- -------
Total short-term investments...................... 23,131 30,548
------- -------
Total cash and cash equivalents and short-term
investments..................................... $28,554 $36,080
======= =======
</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.
At December 31, 1998, all short-term investments have contractual
maturities of one year or less. Interest income for 1998, 1997 and 1996 was
$1,870, $2,355 and $1,665, respectively.
4. INVENTORIES
A summary of inventories at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ------
<S> <C> <C>
Raw materials and spare parts............................... $483 $1,114
Work-in-process............................................. 36 64
Finished goods.............................................. 13 501
Installations in progress................................... 59 853
---- ------
$591 $2,532
==== ======
</TABLE>
F-10
<PAGE> 41
MOSAIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
5. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furniture, equipment and leasehold improvements consist of the following as
of December 31:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Furniture and fixtures...................................... $ 2,276 $ 1,814
Computer equipment.......................................... 19,077 14,907
Equipment under capital lease............................... 5,015 5,327
Office equipment............................................ 1,079 825
Leasehold improvements...................................... 1,933 1,859
------- -------
29,380 24,732
Less accumulated depreciation and amortization.............. 21,708 17,283
------- -------
$ 7,672 $ 7,449
======= =======
</TABLE>
During 1998, 1997 and 1996, amortization expense related to equipment under
capital leases was $463, $717 and $627, respectively. Accumulated amortization
for equipment under capital leases at December 31, 1998 and 1997 was $4,951 and
$4,913, respectively.
6. BANK LINE OF CREDIT
At December 31, 1998, 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, 1998. There were no borrowings outstanding
under this line as of December 31, 1998.
7. LONG-TERM OBLIGATIONS
A summary of long-term obligations as of December 31 follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Capital lease obligations................................... $78 $433
Other....................................................... -- 45
--- ----
Total long-term obligations................................. 78 478
Less current installments................................... 78 381
--- ----
Long-term obligations, excluding current
installments.................................... $-- $ 97
=== ====
</TABLE>
8. SHAREHOLDERS' EQUITY
Stock Option Exchange
In 1998, the Company offered certain employees the right to have their
outstanding stock options exchanged for new options priced at $9.50 per share.
Those employees accepting the offer agreed to a 20% reduction in the options
outstanding and agreed not to exercise any of the new options for one year. The
exchange took place in January 1998, and 776,802 options with exercise prices of
$10.88 to $19.75, were returned and canceled, and 621,442 new options were
issued at $9.50. Of the options returned and canceled, 320,031 were Restated
1987 Stock Option Plan (1987 Plan) options that could not be regranted under the
expired 1987 Plan, and were replaced with 256,025 options issued under the 1997
Stock Incentive Compensation Plan (1997 Plan) and 1996 Stock Incentive
Compensation Plan (1996 Plan). The Restated 1992 Stock Option Plan for
Non-Employee Directors (1992 Plan) options were not exchanged.
F-11
<PAGE> 42
MOSAIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
Employee Stock Option Plans
The Company maintains two stock option plans for employees. The 1997 Plan
grants non-qualified options for non-officer employees, and the 1996 Plan grants
options designated as incentive stock options or non-qualified stock options at
the discretion of the Board of Directors. Generally, options vest over a
four-year period in cumulative increments of 25% beginning one year from the
date of grant or, in certain instances, one year from the individual's
employment date. All options expire ten years or less from the date of grant and
are currently granted at prices not less than fair market value.
Stock Option Plan for Outside Directors
An initial grant of 5,000 options is automatically made to each outside
director upon their appointment. 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 2,000
options are granted following each annual shareholders' meeting. Each additional
grant is immediately vested and exercisable. 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.
A summary of all stock option activity follows:
<TABLE>
<CAPTION>
SHARES WEIGHTED
AVAILABLE NUMBER OF AVERAGE
FOR OPTIONS EXERCISE
GRANT OUTSTANDING PRICE
--------- ----------- --------
<S> <C> <C> <C>
Balance at December 31, 1995................................ 811 1,946 $ 4.70
Plan amendment......................................... 2,659 -- --
Granted................................................ (721) 721 11.19
Exercised.............................................. -- (369) 3.91
Expired:
1987 Plan............................................ (412) -- --
ViewStar Plans....................................... (1,559) -- --
Canceled............................................. 240 (240) 4.99
------ ------ ------
Balance at December 31, 1996................................ 1,018 2,058 6.62
Additional authorization............................... 520 -- --
Granted................................................ (1,459) 1,459 11.91
Exercised.............................................. -- (409) 2.85
Expired................................................ (165) -- --
Canceled............................................... 479 (479) 10.51
------ ------ ------
Balance at December 31, 1997................................ 393 2,629 9.98
Additional authorization............................... 400 -- --
Granted................................................ (1,626) 1,626 8.51
Exercised.............................................. -- (354) 4.20
Expired................................................ (624) -- --
Canceled............................................... 1,753 (1,753) 12.23
------ ------ ------
Balance at December 31, 1998................................ 296 2,148 $ 8.24
====== ====== ======
</TABLE>
F-12
<PAGE> 43
MOSAIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
The following table summarizes options outstanding and exercisable at
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE WEIGHTED ------------------------------
RANGE OF NUMBER REMAINING AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ---------------- -------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.51 - 0.51 55,400 2.93 $ 0.51 42,500 $ 0.51
0.52 - 6.81 583,500 7.61 5.06 227,500 4.28
6.82 - 10.38 1,135,500 8.83 8.87 196,900 9.15
10.39 - 12.25 279,600 8.91 11.49 65,100 11.35
12.26 - 14.50 54,800 8.34 13.81 25,700 13.68
14.51 - 19.75 39,000 7.46 17.57 27,000 18.24
- -------------- --------- ---- ------ ------- ------
$ 0.51 - 19.75 2,147,800 8.32 $ 8.24 584,700 $ 7.49
============== ========= ==== ====== ======= ======
</TABLE>
Employee Stock Purchase Plan
In April 1998, the Company's 1991 Employee Stock Purchase Plan (1991 Plan)
was amended to reserve 400,000 shares of the Company's common stock 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. At December 31, 1998, 150,000 shares were reserved for
future issuance. During 1998, 50,000 shares were purchased under the 1991 Plan
at an average price of approximately $7.50 per share. During 1997 and 1996,
38,000 and 33,000 shares were purchased at average prices of approximately $9.60
and $11.75 per share, respectively.
Stock Based Compensation
The Company applies APB Opinion No. 25 in accounting for stock options and
stock purchase rights issued to employees. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options and stock purchase rights under SFAS No. 123 for options and purchase
rights granted since 1995, the Company's net income would have been adjusted to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Net income:
As reported............................................ $4,240 $9,757 $3,618
Pro forma.............................................. 1,279 6,517 1,786
Basic income per share:
As reported............................................ $ 0.36 $ 0.74 $ 0.29
Pro forma.............................................. 0.11 0.49 0.14
Diluted income per share:
As reported............................................ $ 0.35 $ 0.71 $ 0.27
Pro forma.............................................. 0.11 0.48 0.13
</TABLE>
F-13
<PAGE> 44
MOSAIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
The per share weighted-average fair value of stock options granted during
1998, 1997 and 1996 was $4.66, $6.78 and $5.30, respectively on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected dividend yield.................................... 0.0% 0.0% 0.0%
Volatility................................................. 75.6% 75.7% 62.0%
Expected weighted average life (in years).................. 4.0 3.8 4.5
Weighted average risk free interest rate................... 5.2% 5.8% 6.3%
</TABLE>
The per share weighted-average fair value of stock purchase rights during
1998, 1997 and 1996 was $3.40, $5.52 and $4.44, respectively, on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected dividend yield.................................... 0.0% 0.0% 0.0%
Volatility................................................. 75.6% 75.7% 62.0%
Expected weighted average life (in years).................. 0.5 0.5 0.5
Weighted average risk free interest rate................... 4.9% 5.6% 5.2%
</TABLE>
Pro forma net income and income per share reflect only options granted
after January 1, 1995. Therefore, the full impact of calculating compensation
cost for stock options under SFAS No. 123 is not reflected in the pro forma net
income and net income 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.
Stock Repurchase Plan
In 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 1998, the Company repurchased 1,792,000
shares for approximately $14,655. As of December 31, 1998, the Company had
repurchased 3,229,500 shares at a total cost of $28,690 under these
authorizations, and the Company is authorized to repurchase an additional
970,500 shares.
ViewStar Preferred Shares
In March and June 1996, ViewStar completed a preferred stock financing
transaction in which a total of 3,293,467 shares were issued. ViewStar issued
2,126,024 shares in repayment of $2,000 subordinated notes outstanding plus the
related accrued interest of $148 and issued 1,167,444 shares for $1,179 in cash.
All preferred shares were converted to common stock in 1996.
9. INCOME TAXES
The components of income before income taxes are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------- ------
<S> <C> <C> <C>
U.S. operations......................................... $2,996 $10,073 $6,524
Foreign................................................. 2,168 3,901 1,382
------ ------- ------
$5,164 $13,974 $7,906
====== ======= ======
</TABLE>
F-14
<PAGE> 45
MOSAIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
Components of income tax expense are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Current:
Federal............................................... $ 2,333 $2,871 $4,053
State................................................. 65 544 446
Foreign............................................... 571 1,239 705
------- ------ ------
Total current................................. 2,969 4,654 5,204
Deferred -- Federal..................................... (2,045) (437) (916)
------- ------ ------
$ 924 $4,217 $4,288
======= ====== ======
</TABLE>
Income tax expense on income before income taxes differs from "expected'
income tax expense as computed by applying the U.S. federal income tax rate of
34% as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------- ------
<S> <C> <C> <C>
Computed "expected" tax expense......................... $1,756 $ 4,751 $2,688
Reduction of valuation allowance........................ (415) (1,065) (940)
Research and experimentation tax credits and
foreign tax credits................................... (599) (462) (387)
State income taxes, net of federal benefit.............. 43 359 296
Losses of subsidiary not currently deductible........... -- -- 1,241
Purchase of in-process research and development......... -- -- 1,464
Merger related costs.................................... -- -- 438
Foreign taxes withheld.................................. -- -- 161
Other................................................... 139 634 (673)
------ ------- ------
$ 924 $ 4,217 $4,288
====== ======= ======
</TABLE>
Deferred income tax assets and liabilities are comprised of the following
at December 31:
<TABLE>
<CAPTION>
1998 1997
------- --------
<S> <C> <C>
Capitalized software development costs, net of
amortization.............................................. $ -- $ 316
Contract revenue............................................ -- 233
Other....................................................... -- --
------- --------
Deferred tax liabilities.................................. -- 549
------- --------
Provision for doubtful receivables.......................... 465 655
Provision for inventory obsolescence........................ 326 161
Provision for warranties and returns........................ 100 230
Unearned revenue............................................ 1,802 1,284
Provision for accrued compensation.......................... 1,908 1,595
Net operating loss carryforwards............................ 6,213 7,064
Research and experimentation tax credit carryforwards....... 1,879 1,211
Other....................................................... 1,324 736
------- --------
Gross deferred tax assets................................. 14,017 12,936
Deferred tax asset valuation allowance...................... (9,797) (10,212)
------- --------
Deferred tax assets....................................... 4,220 2,724
------- --------
Net deferred tax assets................................... $ 4,220 $ 2,175
======= ========
</TABLE>
F-15
<PAGE> 46
MOSAIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
As of December 31, 1998, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $16,864, expiring in the years
2008 through 2010, and net operating loss carryforwards for state income tax
purposes of approximately $1,410, expiring in the years 1999 through 2010. The
Company also had federal and state research and experimentation tax credit
carryforwards of approximately $1,597 and $828, respectively, which expire in
the years 2004 through 2013. Utilization of a significant portion of the
Company's net operating loss carryforwards and research and experimentation tax
credit carryforwards which relate primarily to the ViewStar subsidiary are
subject to Internal Revenue Code Section 382 limitations due to a change of
ownership. Due to uncertainty regarding their recoverability, the Company has
established valuation allowances for the related deferred income tax assets. The
remaining valuation allowance was determined by the Company after considering
taxes paid by the Company in 1998 and 1997 and projections of future taxable
income. With regard to the remaining deferred income tax assets, it is more
likely than not that the results of future operations will generate sufficient
taxable income to recognize the net deferred income tax assets.
The deferred income tax valuation allowance decreased $415, $1,065 and $940
in 1998, 1997 and 1996, respectively.
10. NET INCOME PER SHARE
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
NET INCOME AVERAGE SHARES PER
(NUMERATOR) (DENOMINATOR) SHARE
----------- -------------- ----------
<S> <C> <C> <C>
1998:
Basic earnings per share.................... $4,240 11,793 $0.36
Effect of dilutive stock options............ -- 205
------ ------
Diluted earnings per share.................. $4,240 11,998 $0.35
====== ======
1997:
Basic earnings per share.................... $9,757 13,169 $0.74
Effect of dilutive stock options............ -- 498
------ ------
Diluted earnings per share.................. $9,757 13,667 $0.71
====== ======
1996:
Basic earnings per share.................... $3,618 12,677 $0.29
Effect of dilutive stock options............ -- 893
------ ------
Diluted earnings per share.................. $3,618 13,570 $0.27
====== ======
</TABLE>
Options to purchase shares of common stock where the exercise price
exceeded the average market price were excluded from the computations in 1998,
1997 and 1996 because they would be anti-dilutive. The related shares of stock
excluded from the computations are as follows:
<TABLE>
<CAPTION>
SHARES
EXCLUDED
(IN 000'S) EXERCISE PRICE
---------- ---------------
<S> <C> <C>
1998...................................................... 1,111 $ 8.56 - $19.75
1997...................................................... 1,154 $12.13 - $19.75
1996...................................................... 251 $16.06 - $19.75
</TABLE>
F-16
<PAGE> 47
MOSAIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
11. 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 for Company matching contributions. The Company's matching
contributions to the Profit Sharing Plan were $673, $752 and $471 for 1998, 1997
and 1996, respectively.
b. Lease Commitments
The Company leases its office space under terms of noncancelable operating
leases expiring at various dates through 2017.
Future minimum lease payments under noncancelable operating leases at
December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999............................................... $ 2,367
2000............................................... 1,849
2001............................................... 1,669
2002............................................... 1,645
2003............................................... 1,544
Thereafter......................................... 3,386
-------
$12,460
=======
</TABLE>
Rent expense under noncancelable operating leases amounted to $3,057,
$3,176 and $2,712 for 1998, 1997 and 1996, respectively.
c. Litigation
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.
F-17
<PAGE> 48
MOSAIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
12. GEOGRAPHIC SEGMENT INFORMATION
The Company's products are marketed internationally through its subsidiary
in the United Kingdom, the U.S. parent and independent distributors.
International revenues are attributed to countries based on the location of the
customer. Substantially all revenue from the foreign subsidiary is from
customers located in the United Kingdom.
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenue -- U.S. operations:
United States.................................... $ 78,257 $ 89,153 $ 94,870
United States export............................. 14,090 14,477 12,083
Revenue -- International operations:
Foreign subsidiary............................... 17,721 17,514 10,228
-------- -------- --------
$110,068 $121,144 $117,181
======== ======== ========
Operating income:
U.S. operations.................................. $ 599 $ 8,045 $ 4,235
Foreign subsidiary............................... 2,451 3,936 1,867
Eliminations..................................... 227 (215) 130
-------- -------- --------
$ 3,277 $ 11,766 $ 6,232
======== ======== ========
Assets:
U.S. operations.................................. $ 64,619 $ 74,725 $ 85,235
Foreign subsidiary............................... 9,439 9,653 5,528
-------- -------- --------
$ 74,058 $ 84,378 $ 90,763
======== ======== ========
</TABLE>
13. BUSINESS SEGMENT INFORMATION
In 1998, Mosaix adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which requires disclosure of financial and
descriptive information about the Company's reportable operating segments. The
operating segments reported below are the segments of the Company for which
separate financial information is available and for which operating profit and
loss amounts are evaluated and used by the chief operating decision maker for
making operating decisions, assessing performance and deciding on how to
effectively allocate resources. Mosaix has two principal businesses and,
therefore, two reportable business segments: Call Management Systems (CMS) and
Customer Relationship Management (CRM) applications. The operating segment
information for 1998, 1997 and 1996 has been reported in accordance with the
provisions of SFAS No. 131.
The CMS segment develops, designs, manufactures and markets enterprise-wide
systems for processing and managing a call center's inbound and outbound
telephone communications. Mosaix call management systems are found in a broad
range of industries throughout the world, including financial services, credit
card and consumer collections, telecommunications and utilities, retail, cable
television, healthcare, fundraising, education and telemarketing.
The CRM segment develops, designs, manufactures and markets
client/server-based software applications enabling customers to automate and
integrate customer-facing business processes beginning in the call center and
extending across the enterprise. These solutions 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.
F-18
<PAGE> 49
MOSAIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
The Company evaluates performance and allocates resources based on profit
or loss from operations before income taxes, as well as other non-financial
criteria. The accounting policies of the reportable segments are the same as
those described in the summary of significant accounting policies.
Included in Reconciling Items are all operating costs associated with the
Company's international sales force and European subsidiary, as well as general
corporate expenses and non-recurring charges. These costs are generally not
allocated to either segment, as the chief operating decision maker does not
specifically consider these costs in the evaluation of the performance of the
individual reportable segments.
Information by operating segment is set forth below:
<TABLE>
<CAPTION>
RECONCILING
CMS CRM ITEMS CONSOLIDATED
------- ------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1998:
Net revenue............................... $75,551 $34,517 $ -- $110,068
Depreciation and amortization............. 4,473 731 309 5,513
Operating income (loss)................... 19,389 2,580 (18,692) 3,277
Capital expenditures...................... 4,225 405 150 4,780
Identifiable assets....................... 6,115 860 67,083 74,058
1997:
Net revenue............................... $80,983 $40,161 $ -- $121,144
Depreciation and amortization............. 4,569 549 910 6,028
Operating income (loss)................... 21,414 10,202 (19,850) 11,766
Capital expenditures...................... 3,427 791 560 4,778
Identifiable assets....................... 5,363 1,253 77,762 84,378
1996:
Net revenue............................... $84,956 $32,225 $ -- $117,181
Depreciation and amortization............. 4,989 379 947 6,315
Operating income (loss)................... 26,470 6,819 (27,057) 6,232
Capital expenditures...................... 2,665 415 376 3,456
Identifiable assets....................... 5,457 1,807 83,499 90,763
</TABLE>
14. RESTRUCTURING CHARGE
During 1997, Mosaix recorded $948 of operating expenses for severance pay
related to streamlining the Company's sales, support and service operations.
During 1997, the Company paid $770 of these costs and during 1998, the Company
paid the remainder.
F-19
<PAGE> 50
MOSAIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the unaudited statement of operations
information for each quarter of 1998 and 1997:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH TOTAL
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
1998:
Revenue........................... $30,354 $24,120 $27,099 $28,495 $110,068
Operating income (loss)........... 2,408 (3,008) 1,486 2,391 3,277
Net income (loss)................. 2,096 (1,847) 1,605 2,386 4,240
Basic income (loss) per share..... 0.17 (0.15) 0.14 0.21 0.36
Diluted income (loss) per share... 0.17 (0.15) 0.14 0.21 0.35
1997:
Revenue........................... $30,614 $31,674 $28,043 $30,813 $121,144
Operating income.................. 3,600 4,412 991 2,763 11,766
Net income........................ 2,918 3,336 1,149 2,354 9,757
Basic income per share............ 0.22 0.25 0.09 0.19 0.74
Diluted income per share.......... 0.21 0.24 0.08 0.18 0.71
</TABLE>
The quarterly net income (loss) per share presented above may not total to
the year end totals due to changes in the weighted average common shares and
common share equivalents outstanding during the year.
F-20
<PAGE> 51
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Mosaix, Inc.:
Under date of January 29, 1999, we reported on the consolidated balance
sheets of Mosaix, Inc. and subsidiaries as of December 31, 1998 and 1997 and the
related consolidated statements of income and comprehensive income,
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1998, as contained in the 1998 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 qualifying 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.
KPMG SIGNATURE
Seattle, Washington
January 29, 1999
F-21
<PAGE> 52
MOSAIX, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OTHER COSTS END
DESCRIPTION OF YEAR AND EXPENSES DEDUCTIONS(1) OF YEAR
----------- ---------- ------------ ------------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Valuation accounts deducted from assets:
Allowance for doubtful receivables........... $2,246 $264 $434 $2,076
Year ended December 31, 1997:
Valuation accounts deducted from assets:
Allowance for doubtful receivables........... $2,016 $694 $464 $2,246
Year ended December 31, 1996:
Valuation accounts deducted from assets:
Allowance for doubtful receivables........... $1,863 $395 $242 $2,016
</TABLE>
- ---------------
(1) Represents amounts written off.
F-22
<PAGE> 53
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS
- --------
<C> <S> <C>
3.1 Restated Articles of Incorporation of the Registrant (B)
3.2 Restated Bylaws of the Registrant (C)
4.1 Form of Certificate Evidencing Common Stock, par value $0.01
per share (B)
10.1 Restated 1987 Stock Option Plan, as amended* (F)
10.2 Amended and Restated 1996 Stock Incentive Compensation Plan* (A)
10.3 Restated 1992 Stock Option Plan for Non-Employee Directors,
as amended* (F)
10.4 1991 Employee Stock Purchase Plan, as amended* (D)
10.5 Executive Employment Agreement, dated April 28, 1998,
between Kim Mackay and the Registrant* (A)
10.6 Amendment No. 1, dated August 18, 1998, to Executive
Employment Agreement between Kim Mackay and the Registrant* (A)
10.7 1999 Management Bonus Plan* (A)
10.8 1999 Performance Bonus Plan* (A)
10.9 Executive Employment Agreement, dated March 1, 1995, between
John J. Flavio and the Registrant* (E)
10.10 Amendment No. 1, dated August 18, 1998, to Executive
Employment Agreement between John J. Flavio and the
Registrant* (A)
10.11 Lease for Building 17, dated May 20, 1991, among Michael R.
Mastro, Redmond East Associates and the Registrant (A)
10.12 Amendment No. 1 to Lease for Building 17, dated July 1991,
between Redmond East Associates and the Registrant (A)
10.13 Amendment No. 2 to Lease for Building 17, effective June 1,
1997, between Carr Redmond Corporation, successor in
interest to Redmond East, L.L.C, and the Registrant (A)
10.14 Amendment No. 3 to Lease for Building 17, dated November 2,
1998, between Carr Redmond Corporation, successor in
interest to Redmond East Associates, and the Registrant. (A)
10.15 Business Loan Agreement dated June 25, 1997 with
Seattle-First National Bank (H)
10.16 Customer Purchase Agreement dated December 27, 1990 with
Summa Four, Inc.** (C)
10.17 Software Source Code and Manufacturing Data Deposit and
Escrow Agreement dated December 27, 1990 with Summa Four,
Inc. and Data Securities and International Ind.** (C)
10.18 ViewStar Corporation Amended 1986 Incentive Stock Plan and
form of agreement thereunder* (G)
</TABLE>
26
<PAGE> 54
<TABLE>
<CAPTION>
EXHIBITS
- --------
<C> <S> <C>
10.19 ViewStar Corporation Amended 1994 Stock Plan, as amended,
and form of agreement thereunder* (G)
10.20 ViewStar Corporation 1996 Incentive Stock Plan* (G)
10.21 Sublease Agreement between the ASK Group, Inc. and ViewStar
Corporation dated October 8, 1993, for ViewStar's facility
located at 1101 Marina Village Parkway, Alameda, California (G)
10.22 First Amendment to Sublease Agreement between the ASK Group,
Inc. and ViewStar Corporation, dated September 8, 1994, for
ViewStar's facility located at 1101 Marina Village Parkway,
Alameda, California (H)
10.23 Executive Employment Agreement, dated October 14, 1996,
between Steven R. Russell and the Registrant* (H)
10.24 Executive Employment Agreement, dated February 5, 1998,
between Nicholas A. Tiliacos and the Registrant* (H)
10.25 Amendment No. 1, dated August 18, 1998, to Executive
Employment Agreement between Nicholas A. Tiliacos and the
Registrant* (A)
10.26 Executive Employment Agreement, dated April 28, 1998,
between Theodore Manakas and the Registrant* (A)
10.27 Amendment No. 1, dated August 18, 1998, to Executive
Employment Agreement between Theodore Manakas and the
Registrant* (A)
10.28 1998 Management and Performance Bonus Plans* (H)
10.29 Amendment No. 1, dated August 18, 1998, to Executive
Employment Agreement between Steven R. Russell and the
Registrant* (A)
21.1 List of Subsidiaries of the Registrant (A)
23.1 Consent of KPMG LLP (A)
27.1 Financial Data Schedule (A)
</TABLE>
- ---------------
* 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,
1992.
(D) 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.
(E) Incorporated by reference from exhibits filed in connection with the
Registrant's Quarterly Report on From 10-Q for the quarter ended March 31,
1995.
(F) 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.
(G) Incorporated by reference from exhibits filed in connection with the
Registrant's Registration Statement on Form S4 (Registration No.
333-14887) initially filed with the Securities and Exchange Commission on
October 25, 1996.
(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,
1997.
27
<PAGE> 1
EXHIBIT 10.2
MOSAIX, INC.
AMENDED AND RESTATED 1996 STOCK INCENTIVE COMPENSATION PLAN
SECTION 1. PURPOSE
The purpose of the Mosaix, Inc. 1996 Stock Incentive Compensation Plan
(the "Plan") is to enhance the long-term shareholder value of Mosaix, Inc., a
Washington corporation (the "Company"), by offering opportunities to employees,
directors, officers, consultants, agents, advisors and independent contractors
of the Company and its Subsidiaries (as defined in Section 2) to participate in
the Company's growth and success, and to encourage them to remain in the service
of the Company and its Subsidiaries and to acquire and maintain stock ownership
in the Company.
SECTION 2. DEFINITIONS
For purposes of the Plan, the following terms shall be defined as set
forth below:
2.1 AWARD
"Award" means an award or grant made pursuant to the Plan, including,
without limitation, awards or grants of Options and Stock Awards, or any
combination of the foregoing.
2.2 BOARD
"Board" means the Board of Directors of the Company.
2.3 CAUSE
"Cause" means dishonesty, fraud, misconduct, unauthorized use or
disclosure of confidential information or trade secrets, or conviction or
confession of a crime punishable by law (except minor violations), in each case
as determined by the Plan Administrator, and its determination shall be
conclusive and binding.
2.4 CODE
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
2.5 COMMON STOCK
"Common Stock" means the common stock, par value $.01 per share, of the
Company.
<PAGE> 2
2.6 CORPORATE TRANSACTION
"Corporate Transaction" means any of the following events:
(a) Consummation of any merger or consolidation of the Company
in which the Company is not the continuing or surviving corporation, or
pursuant to which shares of the Common Stock are converted into cash,
securities or other property, if following such merger or consolidation
the holders of the Company's outstanding voting securities immediately
prior to such merger or consolidation own less than 66-2/3% of the
outstanding voting securities of the surviving corporation;
(b) Consummation of any sale, lease, exchange or other
transfer in one transaction or a series of related transactions of all
or substantially all of the Company's assets other than a transfer of
the Company's assets to a majority-owned subsidiary corporation (as the
term "subsidiary corporation" is defined in Section 8.3) of the
Company;
(c) Approval by the holders of the Common Stock of any plan or
proposal for the liquidation or dissolution of the Company; or
(d) Acquisition by a person, within the meaning of Section
3(a)(9) or of Section 13(d)(3) (as in effect on the date of adoption of
the Plan) of the Exchange Act of a majority or more of the Company's
outstanding voting securities (whether directly or indirectly,
beneficially or of record).
Ownership of voting securities shall take into account and shall
include ownership as determined by applying Rule 13d-3(d)(1)(i) (as in effect on
the date of adoption of the Plan) pursuant to the Exchange Act.
2.7 DISABILITY
"Disability" means a mental or physical impairment of the Holder which
is expected to result in death or which has lasted or is expected to last for a
continuous period of 12 months or more and which causes the Holder to be unable,
in the opinion of the Company and two independent physicians, to perform his or
her duties for the Company and to be engaged in any substantial gainful
activity. Total disability shall be deemed to have occurred on the first day
after the Company and the two independent physicians have furnished their
opinion of total disability to the Plan Administrator.
2.8 EARLY RETIREMENT
"Early Retirement" means early retirement as that term is defined by
the Plan Administrator from time to time for purposes of the Plan.
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<PAGE> 3
2.9 EXCHANGE ACT
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
2.10 FAIR MARKET VALUE
"Fair Market Value" shall be as established in good faith by the Plan
Administrator or (a) if the Common Stock is listed on the Nasdaq National
Market, the closing price for the Common Stock as reported by the Nasdaq
National Market for a single trading day or (b) if the Common Stock is listed on
the New York Stock Exchange or the American Stock Exchange, the closing price
for the Common Stock as such price is officially quoted in the composite tape of
transactions on such exchange for a single trading day. If there is no such
reported price for the Common Stock for the date in question, then such price on
the last preceding date for which such price exists shall be determinative of
Fair Market Value.
2.11 GOOD REASON
"Good Reason" means the occurrence of any of the following events or
conditions and the failure of the Successor Corporation to cure such event or
condition within 30 days after receipt of written notice by the Holder:
(a) a change in the Holder's status, title, position or
responsibilities (including reporting responsibilities) that, in the Holder's
reasonable judgment, represents a substantial reduction in the status, title,
position or responsibilities as in effect immediately prior thereto; the
assignment to the Holder of any duties or responsibilities that, in the Holder's
reasonable judgment, are materially inconsistent with such status, title,
position or responsibilities; or any removal of the Holder from or failure to
reappoint or reelect the Holder to any of such positions, except in connection
with the termination of the Holder's employment for Cause, for Disability or as
a result of his or her death, or by the Holder other than for Good Reason;
(b) a reduction in the Holder's annual base salary;
(c) the Successor Corporation's requiring the Holder (without
the Holder's consent) to be based at any place outside a 35-mile radius of his
or her place of employment prior to a Corporate Transaction, except for
reasonably required travel on the Successor Corporation's business that is not
materially greater than such travel requirements prior to the Corporate
Transaction;
(d) the Successor Corporation's failure to (i) continue in
effect any material compensation or benefit plan (or the substantial equivalent
thereof) in which the Holder was participating at the time of a Corporate
Transaction, including, but not limited to, the Plan, or (ii) provide the Holder
with compensation and benefits substantially equivalent (in terms of benefit
levels and/or reward opportunities) to those provided for under each material
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<PAGE> 4
employee benefit plan, program and practice as in effect immediately prior to
the Corporate Transaction;
(e) any material breach by the Successor Corporation of its
obligations to the Holder under the Plan or any substantially equivalent plan of
the Successor Corporation; or
(f) any purported termination of the Holder's employment or
service for Cause by the Successor Corporation that does not comply with the
terms of the Plan or any substantially equivalent plan of the Successor
Corporation.
2.12 GRANT DATE
"Grant Date" means the date the Plan Administrator adopted the granting
resolution or a later date designated in a resolution of the Plan Administrator
as the date an Award is to be granted.
2.13 HOLDER
"Holder" means the person to whom an Award is granted, a permitted
assignee or transferee or, for a Holder who has died, the personal
representative of the Holder's estate, the person(s) to whom the Holder's rights
under the Award have passed by will or the applicable laws of descent and
distribution or the beneficiary designated pursuant to Section 11.
2.14 INCENTIVE STOCK OPTION
"Incentive Stock Option" means an Option to purchase Common Stock
granted under Section 7 with the intention that it qualify as an "incentive
stock option" as that term is defined in Section 422 of the Code.
2.15 NONQUALIFIED STOCK OPTION
"Nonqualified Stock Option" means an Option to purchase Common Stock
granted under Section 7 other than an Incentive Stock Option.
2.16 OPTION
"Option" means the right to purchase Common Stock granted under Section
7.
2.17 PLAN ADMINISTRATOR
"Plan Administrator" means the Board or any committee of the Board
designated to administer the Plan under Section 3.1.
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<PAGE> 5
2.18 RESTRICTED STOCK
"Restricted Stock" means shares of Common Stock granted under Section
9, the rights of ownership of which are subject to restrictions prescribed by
the Plan Administrator.
2.19 RETIREMENT
"Retirement" means retirement as of the individual's normal retirement
date under the Company's 401(k) Plan or other similar successor plan applicable
to salaried employees or, if no such plan exists, as that term is defined by the
Plan Administrator from time to time for purposes of the Plan.
2.20 SECURITIES ACT
"Securities Act" means the Securities Act of 1933, as amended.
2.21 STOCK AWARD
"Stock Award" means an Award granted under Section 9.
2.22 SUBSIDIARY
"Subsidiary," except as provided in Section 8.3 in connection with
Incentive Stock Options, means any entity that is directly or indirectly
controlled by the Company or in which the Company has a significant ownership
interest, as determined by the Plan Administrator, and any entity that may
become a direct or indirect parent of the Company.
2.23 SUCCESSOR CORPORATION
"Successor Corporation" has the meaning set forth under Section 12.2.
SECTION 3. ADMINISTRATION
3.1 PLAN ADMINISTRATOR
The Plan shall be administered by the Board or a committee or
committees (which term includes subcommittees) appointed by, and consisting of
two or more members of, the Board. If and so long as the Common Stock is
registered under Section 12(b) or 12(g) of the Exchange Act, the Board shall
consider in selecting the Plan Administrator and the membership of any committee
acting as Plan Administrator of the Plan with respect to any persons subject or
likely to become subject to Section 16 under the Exchange Act the provisions
regarding (a) "outside directors," as contemplated by Section 162(m) of the
Code, and (b) "non-employee directors," as contemplated by Rule 16b-3 under the
Exchange Act. The Board may delegate the responsibility for administering the
Plan with respect to designated classes of eligible persons to different
committees, subject to such limitations as the
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<PAGE> 6
Board deems appropriate. Committee members shall serve for such term as the
Board may determine, subject to removal by the Board at any time.
3.2 ADMINISTRATION AND INTERPRETATION BY THE PLAN ADMINISTRATOR
Except for the terms and conditions explicitly set forth in the Plan,
the Plan Administrator shall have exclusive authority, in its discretion, to
determine all matters relating to Awards under the Plan, including the selection
of individuals to be granted Awards, the type of Awards, the number of shares of
Common Stock subject to an Award, all terms, conditions, restrictions and
limitations, if any, of an Award and the terms of any instrument that evidences
the Award. The Plan Administrator shall also have exclusive authority to
interpret the Plan and may from time to time adopt, and change, rules and
regulations of general application for the Plan's administration. The Plan
Administrator's interpretation of the Plan and its rules and regulations, and
all actions taken and determinations made by the Plan Administrator pursuant to
the Plan, shall be conclusive and binding on all parties involved or affected.
The Plan Administrator may delegate administrative duties to such of the
Company's officers as it so determines.
SECTION 4. STOCK SUBJECT TO THE PLAN
4.1 AUTHORIZED NUMBER OF SHARES
Subject to adjustment from time to time as provided in Section 12.1, a
maximum of 2,250,000 shares of Common Stock shall be available for issuance
under the Plan. Shares issued under the Plan shall be drawn from authorized and
unissued shares.
4.2 LIMITATIONS
(a) Subject to adjustment from time to time as provided in Section
12.1, not more than an aggregate of 300,000 shares shall be available for
issuance pursuant to grants of Stock Awards under the Plan.
(b) Subject to adjustment from time to time as provided in Section
12.1, not more than 300,000 shares of Common Stock may be made subject to Awards
under the Plan to any individual in the aggregate in any one fiscal year of the
Company except that the Company may make additional one-time grants of up to
300,000 shares to newly hired individual, such limitation to be applied in a
manner consistent with the requirements of, and only to the extent required for
compliance with, the exclusion from the limitation on deductibility of
compensation under Section 162(m) of the Code.
4.3 REUSE OF SHARES
Any shares of Common Stock that have been made subject to an Award that
cease to be subject to the Award (other than by reason of exercise or payment of
the Award to the extent it is exercised for or settled in shares) shall again be
available for issuance in connection
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<PAGE> 7
with future grants of Awards under the Plan; provided, however, that for
purposes of Section 4.2, any such shares shall be counted in accordance with the
requirements of Section 162(m) of the Code.
SECTION 5. ELIGIBILITY
Awards may be granted under the Plan to those officers, directors and
key employees of the Company and its Subsidiaries as the Plan Administrator from
time to time selects. Awards may also be made to consultants, agents, advisors
and independent contractors who provide services to the Company and its
Subsidiaries.
SECTION 6. AWARDS
6.1 FORM AND GRANT OF AWARDS
The Plan Administrator shall have the authority, in its sole
discretion, to determine the type or types of Awards to be made under the Plan.
Such Awards may include, but are not limited to, Incentive Stock Options,
Nonqualified Stock Options and Stock Awards. Awards may be granted singly or in
combination.
6.2 ACQUIRED COMPANY AWARDS
Notwithstanding anything in the Plan to the contrary, the Plan
Administrator may grant Awards under the Plan in substitution for awards issued
under other plans, or assume under the Plan awards issued under other plans, if
the other plans are or were plans of other acquired entities ("Acquired
Entities") (or the parent of the Acquired Entity) and the new Award is
substituted, or the old award is assumed, by reason of a merger, consolidation,
acquisition of property or of stock, reorganization or liquidation (the
"Acquisition Transaction"). In the event that a written agreement pursuant to
which the Acquisition Transaction is completed is approved by the Board and said
agreement sets forth the terms and conditions of the substitution for or
assumption of outstanding awards of the Acquired Entity, said terms and
conditions shall be deemed to be the action of the Plan Administrator without
any further action by the Plan Administrator, and the persons holding such
Awards shall be deemed to be Holders.
SECTION 7. AWARDS OF OPTIONS
7.1 GRANT OF OPTIONS
The Plan Administrator is authorized under the Plan, in its sole
discretion, to issue Options as Incentive Stock Options or as Nonqualified Stock
Options, which shall be appropriately designated.
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<PAGE> 8
7.2 OPTION EXERCISE PRICE
Subject to Section 6.2, the exercise price for shares purchased under
an Option shall be as determined by the Plan Administrator, but shall not be
less than 100% of the Fair Market Value of the Common Stock on the Grant Date.
7.3 TERM OF OPTIONS
The term of each Option shall be as established by the Plan
Administrator or, if not so established, shall be 10 years from the Grant Date.
7.4 EXERCISE OF OPTIONS
The Plan Administrator shall establish and set forth in each instrument
that evidences an Option the time at which or the installments in which the
Option shall become exercisable, which provisions may be waived or modified by
the Plan Administrator at any time. If not so established in the instrument
evidencing the Option, the Option will become exercisable according to the
following schedule, which may be waived or modified by the Plan Administrator at
any time:
<TABLE>
<CAPTION>
Period of Holder's Continuous Employment or Service With
the Company or Its Subsidiaries Percent of Total Option
From the Option Grant Date That Is Exercisable
-------------------------------------------------------- -----------------------
<S> <C>
After 1 year 25%
After 2 years 50%
After 3 years 75%
After 4 years 100%
</TABLE>
Unless the Plan Administrator determines otherwise, the vesting schedule of an
Option shall be adjusted proportionately to the extent a Holder's hours of
employment or service are reduced after the date of grant.
To the extent that the right to purchase shares has accrued thereunder,
an Option may be exercised from time to time by written notice to the Company,
in accordance with procedures established by the Plan Administrator, setting
forth the number of shares with respect to which the Option is being exercised
and accompanied by payment in full as described in Section 7.5. The Plan
Administrator may determine at any time that an Option may not be exercised as
to less than ten shares at any one time (or the lesser number of remaining
shares covered by the Option).
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<PAGE> 9
7.5 PAYMENT OF EXERCISE PRICE
The exercise price for shares purchased under an Option shall be paid
in full to the Company by delivery of consideration equal to the product of the
Option exercise price and the number of shares purchased. Such consideration
must be paid in cash or by check, or, unless the Plan Administrator at any time
determines otherwise, a combination of cash and/or check and one or both of the
following alternative forms: (a) tendering (either actually or, if and so long
as the Common Stock is registered under Section 12(b) or 12(g) of the Exchange
Act, by attestation) Common Stock already owned by the Holder for at least six
months (or any shorter period necessary to avoid a charge to the Company's
earnings for financial reporting purposes) having a Fair Market Value on the day
prior to the exercise date equal to the aggregate Option exercise price or (b)
if and so long as the Common Stock is registered under Section 12(b) or 12(g) of
the Exchange Act, delivery of a properly executed exercise notice, together with
irrevocable instructions, to (i) a brokerage firm designated by the Company to
deliver promptly to the Company the aggregate amount of sale or loan proceeds to
pay the Option exercise price and any withholding tax obligations that may arise
in connection with the exercise and (ii) the Company to deliver the certificates
for such purchased shares directly to such brokerage firm, all in accordance
with the regulations of the Federal Reserve Board. In addition, the exercise
price for shares purchased under an Option may be paid, either singly or in
combination with one or more of the alternative forms of payment authorized by
this Section 7.5, by (y) a promissory note delivered pursuant to Section 10; or
(z) such other consideration as the Plan Administrator may permit.
7.6 POST-TERMINATION EXERCISES
The Plan Administrator shall establish and set forth in each instrument
that evidences an Option whether the Option will continue to be exercisable, and
the terms and conditions of such exercise, if a Holder ceases to be employed by,
or to provide services to, the Company or its Subsidiaries, which provisions may
be waived or modified by the Plan Administrator at any time. If not so
established in the instrument evidencing the Option, the Option will be
exercisable according to the following terms and conditions, which may be waived
or modified by the Plan Administrator at any time.
In case of termination of the Holder's employment or services other
than by reason of death or Cause, the Option shall be exercisable, to the extent
of the number of shares purchasable by the Holder at the date of such
termination, only (a) within one year if the termination of the Holder's
employment or services is coincident with Retirement, Early Retirement at the
Company's request or Disability or (b) within three months after the date the
Holder ceases to be an employee, director, officer, consultant, agent, advisor
or independent contractor of the Company or a Subsidiary if termination of the
Holder's employment or services is for any reason other than Retirement, Early
Retirement at the Company's request or Disability, but in no event later than
the remaining term of the Option. Any Option exercisable at the time of the
Holder's death may be exercised, to the extent of the number of shares
purchasable by the Holder at the date of the Holder's death, by the personal
-9-
<PAGE> 10
representative of the Holder's estate, the person(s) to whom the Holder's rights
under the Award have passed by will or the applicable laws of descent and
distribution or the beneficiary designated pursuant to Section 11 at any time or
from time to time within one year after the date of death, but in no event later
than the remaining term of the Option. Any portion of an Option that is not
exercisable on the date of termination of the Holder's employment or services
shall terminate on such date, unless the Plan Administrator determines
otherwise. In case of termination of the Holder's employment or services for
Cause, the Option shall automatically terminate upon first notification to the
Holder of such termination, unless the Plan Administrator determines otherwise.
If a Holder's employment or services with the Company are suspended pending an
investigation of whether the Holder shall be terminated for Cause, all the
Holder's rights under any Option likewise shall be suspended during the period
of investigation.
A transfer of employment or services between or among the Company and
its Subsidiaries shall not be considered a termination of employment or
services. The effect of a Company-approved leave of absence on the terms and
conditions of an option shall be determined by the Plan Administrator, in its
sole discretion.
SECTION 8. INCENTIVE STOCK OPTION LIMITATIONS
To the extent required by Section 422 of the Code, Incentive Stock
Options shall be subject to the following additional terms and conditions:
8.1 DOLLAR LIMITATION
To the extent the aggregate Fair Market Value (determined as of the
Grant Date) of Common Stock with respect to which Incentive Stock Options are
exercisable for the first time during any calendar year (under the Plan and all
other stock option plans of the Company) exceeds $100,000, such portion in
excess of $100,000 shall be treated as a Nonqualified Stock Option. In the event
the optionee holds two or more such Options that become exercisable for the
first time in the same calendar year, such limitation shall be applied on the
basis of the order in which such Options are granted.
8.2 10% SHAREHOLDERS
If an individual owns more than 10% of the total voting power of all
classes of the Company's stock, then the exercise price per share of an
Incentive Stock Option shall not be less than 110% of the Fair Market Value of
the Common Stock on the Grant Date and the Option term shall not exceed five
years. The determination of 10% ownership shall be made in accordance with
Section 422 of the Code.
8.3 ELIGIBLE EMPLOYEES
Individuals who are not employees of the Company or one of its parent
corporations or subsidiary corporations may not be granted Incentive Stock
Options. For purposes of this
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<PAGE> 11
Section 8.3, "parent corporation" and "subsidiary corporation" shall have the
meanings attributed to those terms for purposes of Section 422 of the Code.
8.4 TERM
The term of an Incentive Stock Option shall not exceed 10 years.
8.5 EXERCISABILITY
To qualify for Incentive Stock Option tax treatment, an Option
designated as an Incentive Stock Option must be exercised within three months
after termination of employment for reasons other than death, except that, in
the case of termination of employment due to total disability, such Option must
be exercised within one year after such termination. Employment shall not be
deemed to continue beyond the first 90 days of a leave of absence unless the
Holder's reemployment rights are guaranteed by statute or contract. For purposes
of this Section 8.5, "total disability" shall mean a mental or physical
impairment of the Holder that is expected to result in death or that has lasted
or is expected to last for a continuous period of 12 months or more and that
causes the Holder to be unable, in the opinion of the Company and two
independent physicians, to perform his or her duties for the Company and to be
engaged in any substantial gainful activity. Total disability shall be deemed to
have occurred on the first day after the Company and the two independent
physicians have furnished their opinion of total disability to the Plan
Administrator.
8.6 TAXATION OF INCENTIVE STOCK OPTIONS
In order to obtain certain tax benefits afforded to Incentive Stock
Options under Section 422 of the Code, the Holder must hold the shares issued
upon the exercise of an Incentive Stock Option for two years after the Grant
Date of the Incentive Stock Option and one year from the date of exercise. A
Holder may be subject to the alternative minimum tax at the time of exercise of
an Incentive Stock Option. The Plan Administrator may require a Holder to give
the Company prompt notice of any disposition of shares acquired by the exercise
of an Incentive Stock Option prior to the expiration of such holding periods.
8.7 PROMISSORY NOTES
The amount of any promissory note delivered pursuant to Section 10 in
connection with an Incentive Stock Option shall bear interest at a rate
specified by the Plan Administrator but in no case less than the rate required
to avoid imputation of interest (taking into account any exceptions to the
imputed interest rules) for federal income tax purposes.
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<PAGE> 12
SECTION 9. STOCK AWARDS
9.1 GRANT OF STOCK AWARDS
The Plan Administrator is authorized to make Awards of Common Stock on
such terms and conditions and subject to such restrictions, if any (which may be
based on continuous service with the Company or the achievement of performance
goals related to operating profit as a percentage of revenues, revenue and
profit growth, profit-related return ratios, such as return on equity, or cash
flow, where such goals may be stated in absolute terms or relative to comparison
companies), as the Plan Administrator shall determine, in its sole discretion,
which terms, conditions and restrictions shall be set forth in the instrument
evidencing the Award. The terms, conditions and restrictions that the Plan
Administrator shall have the power to determine shall include, without
limitation, the manner in which shares subject to Stock Awards are held during
the periods they are subject to restrictions and the circumstances under which
forfeiture of Restricted Stock shall occur by reason of termination of the
Holder's services.
9.2 ISSUANCE OF SHARES
Upon the satisfaction of any terms, conditions and restrictions
prescribed in respect to a Stock Award, or upon the Holder's release from any
terms, conditions and restrictions of a Stock Award, as determined by the Plan
Administrator, the Company shall deliver, as soon as practicable, to the Holder
or, in the case of the Holder's death, to the personal representative of the
Holder's estate or as the appropriate court directs, a stock certificate for the
appropriate number of shares of Common Stock.
9.3 WAIVER OF RESTRICTIONS
Notwithstanding any other provisions of the Plan, the Plan
Administrator may, in its sole discretion, waive the forfeiture period and any
other terms, conditions or restrictions on any Restricted Stock under such
circumstances and subject to such terms and conditions as the Plan Administrator
shall deem appropriate.
SECTION 10. LOANS, INSTALLMENT PAYMENTS AND LOAN GUARANTEES
To assist a Holder (including a Holder who is an officer or director of
the Company) in acquiring shares of Common Stock pursuant to an Award granted
under the Plan, the Plan Administrator, in its sole discretion, may authorize,
either at the Grant Date or at any time before the acquisition of Common Stock
pursuant to the Award, (a) the extension of a loan to the Holder by the Company,
(b) the payment by the Holder of the purchase price, if any, of the Common Stock
in installments, or (c) the guarantee by the Company of a loan obtained by the
grantee from a third party. The terms of any loans, installment payments or loan
guarantees, including the interest rate and terms of and security for repayment,
will be subject to the Plan Administrator's discretion. Loans, installment
payments and loan guarantees may
-12-
<PAGE> 13
be granted with or without security. The maximum credit available is the
purchase price, if any, of the Common Stock acquired, plus the maximum federal
and state income and employment tax liability that may be incurred in connection
with the acquisition.
SECTION 11. ASSIGNABILITY
No Option granted under the Plan may be assigned or transferred by the
Holder other than by will or by the laws of descent and distribution, and,
during the Holder's lifetime, such Awards may be exercised only by the Holder or
a permitted assignee or transferee of the Holder (as provided below).
Notwithstanding the foregoing, and to the extent permitted by Section 422 of the
Code, the Plan Administrator, in its sole discretion, may permit such
assignment, transfer and exercisability and may permit a Holder of such Awards
to designate a beneficiary who may exercise the Award or receive compensation
under the Award after the Holder's death; provided, however, that any Award so
assigned or transferred shall be subject to all the same terms and conditions
contained in the instrument evidencing the Award.
SECTION 12. ADJUSTMENTS
12.1 ADJUSTMENT OF SHARES
In the event that, at any time or from time to time, a stock dividend,
stock split, spin-off, combination or exchange of shares, recapitalization,
merger, consolidation, distribution to shareholders other than a normal cash
dividend or other change in the Company's corporate or capital structure results
in (a) the outstanding shares, or any securities exchanged therefor or received
in their place, being exchanged for a different number or class of securities of
the Company or of any other corporation or (b) new, different or additional
securities of the Company or of any other corporation being received by the
holders of shares of Common Stock of the Company, then the Plan Administrator
shall make proportional adjustments in (i) the maximum number and class of
securities subject to the Plan as set forth in Section 4.1, (ii) the maximum
number and class of securities that may be made subject to Awards to any
individual as set forth in Section 4.2, and (iii) the number and class of
securities that are subject to any outstanding Award and the per share price of
such securities, without any change in the aggregate price to be paid therefor.
The determination by the Plan Administrator as to the terms of any of the
foregoing adjustments shall be conclusive and binding.
12.2 CORPORATE TRANSACTION
Except as otherwise provided in the instrument that evidences the
Award, in the event of any Corporate Transaction, each Award that is at the time
outstanding shall automatically accelerate so that each such Award shall,
immediately prior to the specified effective date for the Corporate Transaction,
become 100% vested, except that such acceleration will not occur if, in the
opinion of the Company's accountants, it would render unavailable "pooling of
interest" accounting for a Corporate Transaction that would otherwise qualify
for such accounting treatment. Awards to persons other than executive officers,
as designated by the
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<PAGE> 14
Board from time to time, shall not so accelerate, however, if and to the extent
that (a) such Award is, in connection with the Corporate Transaction, either to
be assumed by the successor corporation or parent thereof (the "Successor
Corporation") or to be replaced with a comparable award for the purchase of
shares of the capital stock of the Successor Corporation or (b) such Award is to
be replaced with a cash incentive program of the Successor Corporation that
preserves the spread existing at the time of the Corporate Transaction and
provides for subsequent payout in accordance with the same vesting schedule
applicable to such Award. The determination of Award comparability above shall
be made by the Plan Administrator, and its determination shall be conclusive and
binding. All such Awards shall terminate and cease to remain outstanding
immediately following the consummation of the Corporate Transaction, except to
the extent assumed by the Successor Corporation. Any such Awards that are
assumed or replaced in the Corporate Transaction and do not otherwise accelerate
at that time shall be accelerated in the event that the Holder's employment or
services should subsequently terminate within two years following such Corporate
Transaction, unless such employment or services are terminated by the Successor
Corporation for Cause or by the Holder voluntarily without Good Reason.
12.3 FURTHER ADJUSTMENT OF AWARDS
Subject to Section 12.2, the Plan Administrator shall have the
discretion, exercisable at any time before a sale, merger, consolidation,
reorganization, liquidation or change in control of the Company, as defined by
the Plan Administrator, to take such further action as it determines to be
necessary or advisable, and fair and equitable to Holders, with respect to
Awards. Such authorized action may include (but shall not be limited to)
establishing, amending or waiving the type, terms, conditions or duration of, or
restrictions on, Awards so as to provide for earlier, later, extended or
additional time for exercise, lifting restrictions and other modifications, and
the Plan Administrator may take such actions with respect to all Holders, to
certain categories of Holders or only to individual Holders. The Plan
Administrator may take such action before or after granting Awards to which the
action relates and before or after any public announcement with respect to such
sale, merger, consolidation, reorganization, liquidation or change in control
that is the reason for such action.
12.4 LIMITATIONS
The grant of Awards will in no way affect the Company's right to
adjust, reclassify, reorganize or otherwise change its capital or business
structure or to merge, consolidate, dissolve, liquidate or sell or transfer all
or any part of its business or assets.
SECTION 13. WITHHOLDING
The Company may require the Holder to pay to the Company the amount of
any withholding taxes that the Company is required to withhold with respect to
the grant or exercise of any Award. Subject to the Plan and applicable law, the
Plan Administrator, in its sole discretion, may permit the Holder to satisfy
withholding obligations, in whole or in part,
-14-
<PAGE> 15
by electing to have the Company withhold shares of Common Stock or by
transferring shares of Common Stock to the Company, in such amounts as are
equivalent to the Fair Market Value of the withholding obligation. The Company
shall have the right to withhold from any Award or any shares of Common Stock
issuable pursuant to an Award or from any cash amounts otherwise due or to
become due from the Company to the Holder an amount equal to such taxes. The
Company may also deduct from any Award any other amounts due from the Holder to
the Company or a Subsidiary.
SECTION 14. AMENDMENT AND TERMINATION OF PLAN
14.1 AMENDMENT OF PLAN
The Plan may be amended only by the Board as it shall deem advisable;
however, to the extent required for compliance with Section 422 of the Code or
any applicable law or regulation, shareholder approval will be required for any
amendment that will (a) increase the total number of shares as to which Awards
may be granted under the Plan or that may be issued as Stock Awards, (b) modify
the class of persons eligible to receive Options, or (c) otherwise require
shareholder approval under any applicable law or regulation.
14.2 TERMINATION OF PLAN
The Company's shareholders or the Board may suspend or terminate the
Plan at any time. The Plan will have no fixed expiration date; provided,
however, that no Incentive Stock Options may be granted more than 10 years after
the earlier of the Plan's adoption by the Board and approval by the
shareholders.
14.3 CONSENT OF HOLDER
The amendment or termination of the Plan shall not, without the consent
of the Holder of any Award under the Plan, impair or diminish any rights or
obligations under any Award theretofore granted under the Plan. Any change or
adjustment to an outstanding Incentive Stock Option shall not, without the
consent of the Holder, be made in a manner so as to constitute a "modification"
that would cause such Incentive Stock Option to fail to continue to qualify as
an Incentive Stock Option.
SECTION 15. GENERAL
15.1 AWARD AGREEMENTS
Awards granted under the Plan shall be evidenced by a written agreement
that shall contain such terms, conditions, limitations and restrictions as the
Plan Administrator shall deem advisable and that are not inconsistent with the
Plan.
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<PAGE> 16
15.2 CONTINUED EMPLOYMENT OR SERVICES; RIGHTS IN AWARDS
None of the Plan, participation in the Plan as a Holder or any action
of the Plan Administrator taken under the Plan shall be construed as giving any
Holder or employee of the Company any right to be retained in the employ of the
Company or limit the Company's right to terminate the employment or services of
the Holder.
15.3 REGISTRATION; CERTIFICATES FOR SHARES
The Company shall be under no obligation to any Holder to register for
offering or resale or to qualify for exemption under the Securities Act, or to
register or qualify under state securities laws, any shares of Common Stock,
security or interest in a security paid or issued under, or created by, the
Plan, or to continue in effect any such registrations or qualifications if made.
The Company may issue certificates for shares with such legends and subject to
such restrictions on transfer and stop-transfer instructions as counsel for the
Company deems necessary or desirable for compliance by the Company with federal
and state securities laws.
Inability of the Company to obtain, from any regulatory body having
jurisdiction, the authority deemed by the Company's counsel to be necessary for
the lawful issuance and sale of any shares hereunder or the unavailability of an
exemption from registration for the issuance and sale of any shares hereunder
shall relieve the Company of any liability in respect of the nonissuance or sale
of such shares as to which such requisite authority shall not have been
obtained.
15.4 NO RIGHTS AS A SHAREHOLDER
No Award shall entitle the Holder to any cash dividend, voting or other
right of a shareholder unless and until the date of issuance under the Plan of
the shares that are the subject of such Award, free of all applicable
restrictions.
15.5 COMPLIANCE WITH LAWS AND REGULATIONS
It is the Company's intention that, if and so long as any of the
Company's equity securities are registered pursuant to Section 12(b) or 12(g) of
the Exchange Act, the Plan shall comply in all respects with Rule 16b-3 under
the Exchange Act and, if any Plan provision is later found not to be in
compliance with such Rule 16b-3, the provision shall be deemed null and void,
and in all events the Plan shall be construed in favor of its meeting the
requirements of Rule 16b-3. Notwithstanding anything in the Plan to the
contrary, the Board, in its sole discretion, may bifurcate the Plan so as to
restrict, limit or condition the use of any provision of the Plan to Holders who
are officers or directors subject to Section 16 of the Exchange Act without so
restricting, limiting or conditioning the Plan with respect to other Holders.
Additionally, in interpreting and applying the provisions of the Plan, any
Option granted as an Incentive Stock Option pursuant to the Plan shall, to the
extent permitted by law, be construed as an "incentive stock option" within the
meaning of Section 422 of the Code.
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<PAGE> 17
15.6 NO TRUST OR FUND
The Plan is intended to constitute an "unfunded" plan. Nothing
contained herein shall require the Company to segregate any monies or other
property, or shares of Common Stock, or to create any trusts, or to make any
special deposits for any immediate or deferred amounts payable to any Holder,
and no Holder shall have any rights that are greater than those of a general
unsecured creditor of the Company.
15.7 SEVERABILITY
If any provision of the Plan or any Award is determined to be invalid,
illegal or unenforceable in any jurisdiction, or as to any person, or would
disqualify the Plan or any Award under any law deemed applicable by the Plan
Administrator, such provision shall be construed or deemed amended to conform to
applicable laws, or, if it cannot be so construed or deemed amended without, in
the Plan Administrator's determination, materially altering the intent of the
Plan or the Award, such provision shall be stricken as to such jurisdiction,
person or Award, and the remainder of the Plan and any such Award shall remain
in full force and effect.
SECTION 16. EFFECTIVE DATE
The Plan's effective date is the date on which it is adopted by the
Board, so long as it is approved by the Company's shareholders at any time
within 12 months of such adoption or, if earlier, and to the extent required for
compliance with Rule 16b-3 under the Exchange Act, at the next annual meeting of
the Company's shareholders after adoption of the Plan by the Board.
-17-
<PAGE> 1
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of the 28th day of April, 1998, between KIM MACKAY, a
Washington resident ("Executive"), and MOSAIX, INC., a Washington corporation
("Company").
IN CONSIDERATION of the mutual covenants and promises contained herein, the
parties agree as follows:
1. EMPLOYMENT.
The Company hereby employs Executive, and Executive hereby accepts employment by
the Company, as Company's Vice President, Corporate Development, responsible for
the management and direction of the business development operations of the
Company, subject to the direction and control of the President and Chief
Executive Officer of the Company. The Executive will perform such additional
duties as may be assigned from time to time by the President & CEO of the
Company which relate to the business of the Company, its subsidiaries or any
business ventures in which the Company or its subsidiaries may participate.
2. ATTENTION AND EFFORT.
Executive will devote her full business time, attention and effort to the
Company's business and will use her skills and render services to the best of
her ability to serve the interests of the Company.
3. TERM.
Unless otherwise terminated as provided in Section 6 of this Agreement,
Executive's term of employment under this Agreement shall expire upon
Executive's resignation or termination.
4. COMPENSATION.
4.1 BASE SALARY
Executive's compensation shall consist, in part, of an annual base
salary of $125,000 before all customary payroll deductions (the "Base
Salary"). The Base Salary shall be paid in substantially equal
installments at the same interval as other officers of the Company are
paid, or otherwise in conformance with the Company's standard payroll
practices. The Board of Directors of the Company shall determine any
increases in the Base Salary in future years.
<PAGE> 2
4.2 BONUS
Executive may be entitled to receive, in addition to the Base Salary,
an annual bonus (the "Bonus") in an amount to be determined pursuant to
the Company's Management Bonus Plan, at appropriate level, as approved
by the Board of Directors of the Company, in effect for each calendar
year.
4.3 STOCK OPTIONS
Executive has been granted incentive stock options &/or nonqualified
stock options to purchase 45,000 shares of common stock of the Company
pursuant to the terms of the Company's 1996 Stock Incentive
Compensation Plan (the "Option Plan"). For the purposes of such Plan,
Executive shall be considered an "Executive Officer" of the Company.
5. BENEFITS AND EXPENSES.
5.1 EXPENSES
The Company shall promptly reimburse Executive for all reasonable and
necessary business expenses incurred and advanced by him in carrying
out her duties under this Agreement, consistent with Company policies
in connection therewith. Executive shall present to the Company from
time to time an itemized account of such expenses in such form as
Company policies may require.
5.2 BENEFITS
During the term of employment hereunder, Executive shall be entitled to
participate fully in any benefit plans, programs, policies and fringe
benefits which may be made available to the senior executives of the
Company generally, including medical, dental, disability, pension and
retirement benefits, life insurance and other death benefits. Executive
will initially be entitled to 2 weeks vacation per year and any other
vacation or personal time off in accordance with Company policy.
5.3 OTHER
The Company shall provide Executive an office and with secretarial
support suitable to the position of Vice President.
-2-
<PAGE> 3
5.4 MOVING EXPENSES
To the extent required, the Company will reimburse Executive for normal
and reasonable household moving expenses in accordance with standard
Company policy or as otherwise agreed between the parties.
6. TERMINATION.
6.1 BY THE COMPANY
With or without "Cause" (as defined in the Option Plan), the Company
may terminate the employment of Executive at any time during the term
upon giving Notice of Termination (as defined below).
6.2 BY EXECUTIVE
Executive may terminate her employment at any time for Good Reason (as
defined below) or otherwise upon giving Notice of Termination.
6.3 AUTOMATIC TERMINATION
Employment shall terminate automatically upon death or total disability
of Executive. The term "total disability" as used herein means an
inability to perform the duties set forth in paragraph 1 of this
Agreement because of illness or physical or mental disability for a
period or periods aggregating 180 calendar days in any 12-month period,
unless Executive is granted a leave of absence by the President or the
Board of Directors of the Company. Executive and Company hereby
acknowledge that Executive's ability to perform the duties specified in
paragraph 1 hereof is of the essence of this Agreement. Termination
hereunder shall be deemed to be effective immediately upon Executive's
death or 30 days following a Notice of Termination based upon a
determination by the Board of Directors of the Company of Executive's
total disability as defined herein.
6.4 NOTICE
The term "Notice of Termination" means written notice of termination of
Executive's employment. At the election of the Company, as set forth in
its Notice of Termination or in a written response to Executive's
Notice of Termination, Executive's employment and performance of
services shall continue for a period of 30 days following the Notice of
Termination. Otherwise Executive's employment shall terminate effective
upon receipt of the Notice of Termination, unless otherwise agreed
between the parties.
-3-
<PAGE> 4
6.5 GOOD REASON
For the purposes of this Agreement, "Good Reason" means, as a result of
or following a "Corporate Transaction" (as defined in the Option Plan),
a material alteration of Executive's position or duties, a reduction of
Executive's Base Salary, or a requirement that Executive move more than
100 miles, provided that Executive gives Notice of Termination within
30 days of such change.
7. SEVERANCE PAYMENTS.
In the event of termination of the employment of Executive, all compensation and
benefits set forth in this Agreement shall terminate as of the effective date of
termination, provided, however, that if the Company terminates Executive's
employment without Cause, or if Executive terminates her employment for Good
Reason, the Company shall be obligated to pay to Executive her then regular Base
Salary for a period of 6 months after the effective date of termination of
employment.
8. AGREEMENT NOT TO COMPETE OR SOLICIT EMPLOYEES.
As a condition of her employment hereunder, Executive has executed and delivered
to the Company an agreement addressing her obligation not to compete with the
business of the Company (the "Non-Compete Agreement") in accordance with
standard Company policy, which Non-Compete Agreement shall survive termination
of Executive's employment. During the term of this Agreement, and for 12 months
following termination of employment hereunder, Executive will not solicit or
otherwise recruit, directly or indirectly, any employees of the Company for
employment elsewhere.
9. AGREEMENT NOT TO DISCLOSE CONFIDENTIAL INFORMATION.
As a condition of her employment hereunder, Executive has executed and delivered
to the Company an agreement addressing the nondisclosure of confidential
information and ownership of inventions (the "Non-Disclosure Agreement") in
accordance with standard Company policy, which Non-Disclosure Agreement shall
survive termination of Executive's employment.
10. FORM OF NOTICE.
Every notice required by the terms of this Agreement shall be given in writing
by serving the same upon the party to whom it was addressed personally, by
courier, by facsimile transmission (with hard copy delivered by overnight
courier) or by registered or certified mail, return receipt requested, at the
address set forth below or
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<PAGE> 5
at such other address as may hereafter be designated by notice given in
compliance with the terms hereof:
If to Executive: 16627 NE 37th Court, #102
Redmond, WA 98052
If to Company: Mosaix, Inc.
6464 185th Avenue NE
Redmond, WA 98052
Attn.: Wm. Bradford Weller,
General Counsel
Notice shall be effective upon personal delivery, delivery by courier, receipt
of facsimile transmission or three days after mailing.
11. ASSIGNMENT.
Executive agrees that this Agreement may be transferred or assigned by the
Company to (a) any corporation resulting from any merger, consolidation or other
reorganization to which the Company is a party or (b) any corporation,
partnership, association or other person to which the Company may transfer all
or substantially all of the assets and business, and such assignee or transferee
shall succeed to the rights and obligations of the Company hereunder. This
Agreement may not be assigned by Executive.
12. WAIVER.
No waiver of any of the provisions of this Agreement shall be valid unless in
writing, signed by the party against whom such claim or waiver is sought to be
enforced, nor shall failure to enforce any right hereunder constitute a
continuing waiver of the same of a waiver of any other right hereunder.
13. AMENDMENTS IN WRITING.
No amendment, modification, waiver, termination or discharge of any provision of
this Agreement, nor consent to any departure therefrom by either party hereto,
shall in any event be effective unless the same shall be in writing,
specifically identifying this Agreement and the provision intended to be
amended, modified, waived, terminated or discharged, and signed by the Company
and Executive. No provision of this Agreement shall be varied, contradicted or
explained by any oral agreement, course of dealing or performance or any other
matter not set forth in an agreement in writing and signed by the Company and
Executive.
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<PAGE> 6
14. APPLICABLE LAW -- VENUE.
This Agreement shall be governed by the laws of the state of Washington, without
regard to its conflicts of laws provisions. Venue of any action brought to
enforce or interpret this Agreement shall be in Seattle, Washington, and the
parties consent to jurisdiction in the federal and state courts in such venue.
15. SEVERABILITY.
In the event that any provision of this Agreement shall be determined by any
court or arbitrator of competent jurisdiction to be unenforceable or otherwise
invalid for any reason, such provision shall be enforced and validated to the
extent permitted by law, and the court or arbitrator shall have the power to
reform such provision to the extent necessary for such provision to be
enforceable under applicable law. All provisions of this Agreement are
severable, and the unenforceability of any single provision hereof shall not
affect the remaining provisions.
16. HEADINGS.
All headings or titles in this Agreement are for the purpose of reference only
and shall not in any way affect the interpretation or construction of this
Agreement.
17. ATTORNEYS FEES & COSTS.
In any action or proceeding brought by either party against the other arising
out of or in any way relating to this Agreement, the prevailing party shall, in
addition to other allowable costs and remedies, be entitled to an award of
reasonable attorneys' fees and costs incurred in connection with such action or
proceeding.
IN WITNESS WHEREOF, the parties have executed and entered into this Agreement as
of the date above first written.
EXECUTIVE: COMPANY:
MOSAIX, INC.,
a Washington Corporation
/s/ Kim Mackay By: /s/ Wm. Bradford Weller
- ----------------------------- ------------------------------------------
KIM MACKAY Wm. Bradford Weller
Its General Counsel & Assistant Secretary
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<PAGE> 1
EXHIBIT 10.6
1ST AMENDMENT TO
EXECUTIVE EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of the 18th day of August, 1998, between KIM MACKAY, a
Washington resident ("Executive"), and MOSAIX, INC., a Washington corporation
("Company").
The parties agree as follows:
1. AMENDMENT OF PRIOR AGREEMENT.
This Agreement amends that certain "Executive Employment Agreement" dated as of
April 28, 1998 between Executive and the Company. Except as expressly provided
herein, the terms and conditions of that agreement remain in effect between the
parties, and defined terms therein shall have the same meaning when used in this
Agreement.
2. SEVERANCE PAYMENTS.
Section 7 of the Executive Employment Agreement is hereby amended so that, in
the event Executive terminates his employment for Good Reason, or if the Company
terminates employment without cause following a Corporate Transaction, the
Company shall be obligated to pay to Executive his then regular base salary for
a period of eighteen months after the effective date of termination of
employment (as opposed to 6 months, as originally provided). This amendment will
not apply in the event of any termination unrelated to a Corporate Transaction.
IN WITNESS WHEREOF, the parties have executed and entered into this Agreement as
of the date above first written.
EXECUTIVE: COMPANY:
MOSAIX, INC.,
a Washington Corporation
/s/ Kim Mackay By: /s/ Wm. Bradford Weller
- ------------------------------ ------------------------------------------
KIM MACKAY Wm. Bradford Weller
Its General Counsel & Assistant Secretary
<PAGE> 1
[MOSAIX LOGO] 1999 MANAGEMENT BONUS PLAN
OBJECTIVES
Objectives to be served by Mosaix's annual cash incentive compensation plan for
senior managers (the "Plan" or the "MBP") 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 line-of-business financial results that exceed challenging target
levels.
- - Reward contributions based on the manager's own individual performance.
- - Provide a market-competitive level of compensation for each Plan
participant.
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 earnings per share
achieved versus the annual operating 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 lines of business will receive incentive
compensation based on a combination of both corporate and
line-of-business (LOB) performance. The performance measures for the
line-of-business portion will be the LOB revenue and operating income
achieved versus the annual operating plan.
- - A participant's final bonus may be increased or decreased by a
performance 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 who
have both corporate and line-of-business bonus components. The following
positions will participate in the 1999 MBP at the levels shown.
Level Participating Position(s)
- ----- -------------------------
CEO President & Chief Executive Officer
Level I Senior Vice Presidents
Level II Vice Presidents and Directors, excluding those on sales incentive
compensation plans
The annual bonus targets, expressed as a percentage of annual base salary, will
be as follows:
<TABLE>
<CAPTION>
Level I Level II
----------------------- ------------------------
Corporate/ Corporate/
Corporate Line of Corporate Line of
CEO Only Business Only Business
----- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Corporate 50% 35% 25% 20% 10%
Line of Business -- -- 10% -- 10%
--- --- --- --- ---
Total 50% 35% 35% 20% 20%
</TABLE>
<PAGE> 2
1999 MANAGEMENT BONUS PLAN PAGE 2 OF 6
Mosaix's CEO will have the discretion to add or remove employees from the Plan
if they move into or leave positions previously approved for Management Bonus
Plan participation.
- - If an employee moves into a Plan position during the year, he or she
will participate in the Plan only for each full month 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 that bonus checks are distributed in order to receive
a bonus under the Plan.
DEFINITIONS
- - "Earnings Per Share" Annual net income divided by average number of
shares outstanding on a fully diluted basis.
Determined on a consolidated basis, and reported to
the public.
- - "Revenue" For "planned," the annual total revenue target for a
line of business as determined by Mosaix's Chief
Executive Officer. For "actual," yearly audited net
revenues (total revenues less returns and
allowances).
- - "Operating Income" For "planned," the annual consolidated net operating
income target for a line of business as determined by
Mosaix's Chief Executive Officer, including budgeted
management bonuses under this Plan but excluding
allocations. For "actual," the annual audited net
operating income for the line of business, plus
actual accrued management bonus expenses.
- - "Line of Business" The valid lines of business for 1999 shall be the
Customer Relationship Management (CRM) and Call
Management Systems (CMS) lines.
- - "Payout Table" A table mapping the percentage achievement of planned
performance 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 EPS performance. There will be two payout
tables for corporate/line-of-business participants:
one based on corporate performance and the other
based on line-of-business 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 additive percentages for
corporate/line-of-business participants.
- - "Performance Factor" A factor to be multiplied by the individual's bonus
percentage(s) 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 performance factor may be expressed in .1
increments, such as 1.1. It is expected that
factors will be tightly distributed around 1.0.
- The same performance factor will be applied
against both bonus percentages for
corporate/line-of-business 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
- Commissions, incentive, or bonus pay
- Pay associated with carrying an electronic pager
- Salary for months for which the participant is
not a Plan participant
<PAGE> 3
1999 MANAGEMENT BONUS PLAN PAGE 3 OF 6
CORPORATE PLAN PARTICIPANTS
For corporate plan participants, bonus percentages will be extracted from the
payout table below. The table will determine bonus percentages from actual
audited consolidated earnings per share results achieved, using interpolations
or extrapolations as necessary. No bonuses will be earned if earnings per share
falls below 75% of targeted EPS. The bonus percentage determined for each level
will apply to each manager at that level.
BONUS LEVERAGE CURVES AND PAYOUT TABLE
Bonuses as a percent of base salary will be determined by EPS performance as
follows:
<TABLE>
<CAPTION>
Percent Percent of Bonus as Percent
of EPS Bonus of Base Salary
Target Target ---------------------------------------
Achieved Leverage Curve Achieved CEO Level I Level II
- -------- -------------- ---------- --- ---------------- --------
<S> <C> <C> <C> <C> <C>
75% 62.5% 31% 22% 13%
80% 1.5 to 1 Decreasing 70.0% 35% 25% 14%
85% 77.5% 39% 27% 16%
- ------------------------------------------------------------------------------------------------------
90% 90.0% 45% 32% 18%
95% 95.0% 48% 33% 19%
100% 100% 50% 35% 20%
105% 1 to 1 Linear 105% 53% 37% 21%
110% 110% 55% 39% 22%
115% 115% 58% 40% 23%
119.9% 119.9% 60% 42% 24%
- ------------------------------------------------------------------------------------------------------
120% 140% 70% 49% 28%
125% 150% 75% 53% 30%
130% 2 to 1 Increasing 160% 80% 56% 32%
135% 170% 85% 60% 34%
140% 180% 90% 63% 36%
</TABLE>
The following table contains examples of how the payout table works for a Level
II corporate participant with a bonus target of 20% of base salary.
<TABLE>
<CAPTION>
Performance Bonus to Performance
vs. Plan Increase/Decrease Ratio Bonus Payout
----------- ----------------------- ------------
<S> <C> <C>
75% - 89.9% Decrease 1.5% for each 1% 16.4% of Salary Bonus (-18%) for 88% (-12%) Performance
90% - 99.9% Decrease 1% for each 1% 18.8% of Salary Bonus (-6%) for 94% (-6%) Performance
100% - 119.9% Increase 1% for each 1% 22.4% of Salary Bonus (+12%) for 112% (+12%) Performance
120% - 140% Increase 2% for each 1% 31.2% of Salary Bonus (+56%) for 128% (+28%) Performance
</TABLE>
<PAGE> 4
1999 MANAGEMENT BONUS PLAN PAGE 4 OF 6
Some of the bonus payout percentages in the table on the preceding page have
been rounded for ease of presentation. The exact value will be used in the
calculation of bonuses. For example, at 105% of the EPS target, the Level I
bonus will actually be 36.75% of base salary, not 37%.
Also, the bonus percentages will be interpolated for financial results that fall
between the major increments shown on the table. For example, for earnings per
share of 96% of target, the bonus percentages will be 48.0% for the CEO level,
33.6% for Level I, and 19.2% for Level II. Above 140% net operating income
and/or revenue achievement, the bonus percentages will be extrapolated based on
the 2:1 bonus to performance ratio.
PERFORMANCE FACTOR AND PERFORMANCE APPRAISAL
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 the annual
EPS target. This 22% equals the 20% bonus percentage at target multiplied by the
1.1 performance factor.
The performance factor is discretionary in nature, but should be correlative to
the individual's performance level for 1999 as assessed in February 2000. 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.
Individual Performance --------------- Better Performance --------------
Performance Factor 0.0 1.0 2.0
As part of the Plan administration, a performance appraisal will be completed
for each Plan participant by the end of February 2000.
- - Mosaix's Chief Executive Officer will be evaluated by the Compensation
Committee of the Board of Directors.
- - The Chief Executive Officer will evaluate direct-report Plan
participants.
- - 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.
A Management Bonus Plan Oversight Committee will review the performance ratings
for 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.
CORPORATE/LINE-OF-BUSINESS MANAGEMENT BONUS PLAN PARTICIPANTS
Corporate/line-of-business MBP participants will include those Plan participants
responsible for the effective operation and profitability of their lines of
business, as determined by Mosaix's CEO. Each participant will be notified as to
whether he or she is a corporate participant or a corporate/line-of-business
participant.
CORPORATE BONUS FOR LEVEL I PARTICIPANTS
The target bonus of 35% of base salary for 100% plan achievement will be
composed of 25% for corporate performance and 10% for line-of-business
performance.
- - The corporate performance measure will be earnings per share.
- - The line-of-business performance measures will be revenue and net
operating income achieved versus target.
- - The payout table on the following page presents the corporate bonus
payout levels for Level I participants.
<PAGE> 5
1999 MANAGEMENT BONUS PLAN PAGE 5 OF 6
CORPORATE BONUS FOR LEVEL II PARTICIPANTS
For corporate/line-of-business MBP participants, the target bonus of 20% of base
salary for 100% plan achievement will be composed of 10% for corporate
performance and 10% for line-of-business performance.
- - The corporate and line-of-business performance measures will be the same
as for Level I.
- - The payout table below presents the corporate bonus payout levels for
Level II participants.
CORPORATE BONUS PAYOUT TABLE FOR CORPORATE/LOB MBP PARTICIPANTS
<TABLE>
<CAPTION>
Percent Percent of Bonus as Percent
of EPS Bonus of Base Salary
Target Target -------------------
Achieved Leverage Curve Achieved Level I Level II
- -------- -------------- ---------- ------- --------
<S> <C> <C> <C> <C>
75% 0% 0.0% 0.0%
75% 1.5 to 1 Decreasing 62.5% 15.6% 6.3%
80% 70.0% 17.5% 7.0%
85% 77.5% 19.4% 7.8%
- ------------------------------------------------------------------------------
90% 90.0% 22.5% 9.0%
95% 95.0% 23.8% 9.5%
100% 100% 25.0% 10.0%
105% 1 to 1 Linear 105% 26.3% 10.5%
110% 110% 27.5% 11.0%
115% 115% 28.8% 11.5%
119.9% 119.9% 30.0% 12.0%
- ------------------------------------------------------------------------------
120% 140% 35.0% 14.0%
125% 150% 37.5% 15.0%
130% 2 to 1 Increasing 160% 40.0% 16.0%
135% 170% 42.5% 17.0%
140% 180% 45.0% 18.0%
</TABLE>
LINE-OF-BUSINESS BONUS FOR LEVEL I AND LEVEL II PARTICIPANTS
The following matrix will be used to determine bonuses based on line-of-business
performance for both Level I and level II participants:
<TABLE>
<CAPTION>
Actual % of Planned LOB Operating Income
75% 90% 100% 119.9% 120% 140%
--------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Actual 75% 6.3% 7.6% 8.1% 9.1% 10.1% 12.1%
---------------------------------------------------
% of 90% 7.6% 9.0% 9.5% 10.5% 11.3% 13.3%
---------------------------------------------------
Planned 100% 8.1% 9.5% 10.0% 11.0% 12.0% 14.0%
---------------------------------------------------
LOB 119.9% 9.1% 10.5% 11.0% 12.0% 13.0% 15.0%
---------------------------------------------------
Revenue 120% 10.1% 11.3% 12.0% 13.0% 14.0% 16.0%
---------------------------------------------------
140% 12.1% 13.3% 14.0% 15.0% 16.0% 18.0%
---------------------------------------------------
</TABLE>
No bonuses based on line-of-business performance may be earned for either level
of participation unless EPS performance exceeds 75% of the annual target. If
this condition is met, the bonuses determined for the corporate and
line-of-business bonus components will be additive. For example, if corporate
performance yields an 11.25% bonus percentage and line-of-business performance
yields a 3.75% percentage, the total bonus will be 15.00%. This percentage will
continue to be increased or decreased on an individual basis by a performance
factor as described above.
<PAGE> 6
1999 MANAGEMENT BONUS PLAN PAGE 6 OF 6
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/line-of-business participant is 150% of eligible
base salary.
CORPORATE AND LINE-OF-BUSINESS PERFORMANCE TARGETS
The applicable EPS, revenue, and operating income targets will be communicated
to Plan participants under separate cover.
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. The
target date for payouts will be February 29, 2000. 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
performance achieved versus planned. 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 number of months at each
responsibility level. Likewise, any staff member who is added to the Plan after
January 4, 1999 will have his or her bonus calculated on a prorated basis, based
on full months worked while on the Plan.
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, 1999 and is effective for 1999
only. The Plan can be amended or terminated at any time by action of the
Compensation Committee of the Board of Directors.
- - Should EPS 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.
<PAGE> 1
[MOSAIX LOGO] 1999 PERFORMANCE BONUS PLAN
OBJECTIVES
The 1999 Performance Bonus Plan (the "Plan" or the "PBP") is designed to:
- - Focus Plan participants on achieving important team goals that are
critical to business success.
- - Reward the top individual performers among Plan participants.
PLAN SUMMARY
1) The TEAM BONUS COMPONENT is a quarterly bonus component that pays out
bonuses based on the achievement of team objectives that are established
at the beginning of each quarter.
- Each eligible participant will receive the team bonus earned in
accordance with the following bonus targets, expressed as
percent of annual base salary.
<TABLE>
<CAPTION>
Quarterly Total Full-Year Opportunity
--------- ---------------------------
<S> <C>
1.25% 5.00%
</TABLE>
- If objectives are based on projects, milestones, and deadlines,
100%, 75%, or 0% of the target bonus associated with each
objective may be achieved, so the total team bonus associated
with the quarter may range between 0% and 100%.
- If objectives are based on quantitative metrics, 0% - 100% of
the target bonus may be earned based on a schedule to be
established at the beginning of the quarter.
- The Team Component will not pay out unless the company has
positive net operating income for the quarter, including the
accrual for the Plan.
- An individual must maintain an individual performance rating of
Meets Standards or higher to be eligible for any bonus under
this Plan.
2) The TOP PERFORMER BONUS COMPONENT is an annual discretionary bonus plan
component based on corporate performance that is designed to reward
outstanding individual performance.
- A discretionary bonus pool will be created based on the
company's performance versus the annual earnings per share
target. At 100% of the annual earnings per share (EPS) target,
the pool will be funded at 100% of eligible salaries, as
follows:
<TABLE>
<CAPTION>
Percent of Annual Possible Bonus Award as
Participants in Grades Salary Used to Create Pool Percent of Annual Salary
---------------------- -------------------------- ------------------------
<S> <C> <C>
27 - 28 7.0% 0% - 10%
20 - 26 3.0% 0% - 10%
</TABLE>
- The intent of the Top Performer bonus is to reward the top
25% - 30% of PBP participants. Employees in grades 10-19 are
eligible for the Top Performer bonus, but their salaries will
not fund the Top Performer bonus pool.
- EPS must be at least 75% of the annual target, and the pool will
fund linearly up to 100% of target. EPS is defined as net income
divided by average shares outstanding.
- An employee must be with the company for at least one quarter to
receive a bonus. Both pool funding for an employee and actual
bonuses earned may be prorated.
- At the end of the year, management will determine the top
performers and award individual bonuses at the department level.
Bonus payments will be made in February 2000.
3) The OVERACHIEVEMENT BONUS COMPONENT to the Plan will fund an additional
$5,000 for each $.01 in EPS above the annual target. The additional
funds will be distributed through both the team bonus component and the
top performer bonus component of the Plan.
Effective January 1, 1999
<PAGE> 2
1999 PERFORMANCE BONUS PLAN PAGE 2 OF 5
DEFINITIONS
"Earnings Per Share" Annual net income divided by average number of
shares outstanding on a fully diluted basis.
Determined on a consolidated basis and reported
to the public.
"Eligible Base Salary Rate" The participant's annual base salary or wage rate
at the end of the quarter or at the end of the
year, applied over the entire quarter or year. If
the individual is a regular part-time employee or
is part-time during the bonus period, the
individual's prorated salary will be used to
determine a bonus. 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
- Overtime earnings, shift differential pay, or
pay for weekend work
- Salary for quarters for which the participant
is not eligible
Note: If the participant is non-exempt, bonuses
will be computed based on earnings, not eligible
base salary rate.
"Quarter," "Annual" The periods for measurement for the bonus component
of the Plan, as follows:
- 1st Quarter January - March 1999
- 2nd Quarter April - June 1999
- 3rd Quarter July - September 1999
- 4th Quarter October - December 1999
- Annual January - December 1999
"Regular Staff" Regular full-time and regular part-time employees
on Mosaix's payroll. Temporary employees,
contractors, and employees in foreign subsidiaries
will not qualify.
TEAM BONUS COMPONENT
At the beginning of each quarter, the departmental leader should determine
whether quantitative or qualitative objectives, or some combination of both,
should be used for the team bonus component. The departmental leader, senior
vice president and/or general manager and Mosaix's Chief Executive Officer must
sign off on the quarterly objectives prior to the start of the performance
period. Teams that do not have objectives defined and approved by the
designated time will be ineligible to participate in the team bonus program.
QUANTITATIVE PERFORMANCE MEASUREMENTS
If quantitative performance measurements are used, the departmental leader may
establish a schedule mapping the percentage of salary to be earned as a team
bonus is to results versus targets for one or two performance measures. Examples
of viable performance measures would include customer satisfaction or team
productivity versus established metrics. The schedule cannot pay out more than
the quarterly team bonus target, even if performance is greater than 100%
achievement. Such a bonus schedule must be reviewed and approved at the
corporate level before it can be communicated.
QUALITATIVE PERFORMANCE OBJECTIVES
If qualitative team performance objectives are used, the set of objectives
should include the key departmental objectives for the quarter. An example of a
qualitative objective would the deliverable of product or completion of a
project by a specified date, where the content and quality of the deliverable
are specified beforehand. Team objectives must meet the following criteria:
<PAGE> 3
1999 PERFORMANCE BONUS PLAN PAGE 3 OF 5
- - They must be linked to the department's overall annual objectives, which
in turn must be linked to the company's strategy.
- - The objectives must be specific, measurable, achievable,
results-oriented, and timebound.
- - The objectives must include a quality component.
- - The objectives must be given a weight such that the sum of weights adds
up to 100%.
- - The objectives must be described so that 100% and 75% achievement are
clearly defined.
BONUS ACHIEVEMENT AND COMPUTATION
At the end of each quarter, the departmental (senior) vice president will
determine the achievement of the objectives and the bonus achievement, both of
which must be approved by Mosaix's Chief Executive Officer. Bonus achievement of
each objective may 100%, 75%, or 0%, but may not be increments in between since
performance relating to those increments will not have been defined.
Each Plan participant in the department will receive the same bonus as a
percentage of base salary based on the total results of the team. For each
objective, the weighting times the achievement percentage times the
percent-of-salary bonus target times the individual's base salary at the end of
the quarter will determine the individual bonus for the component. The bonuses
for each objective will be totaled to yield a total team bonus for each
participant.
EXAMPLE
In this example, there are four performance objectives and 100% achievement of
each objective:
<TABLE>
<CAPTION>
Percent of
Achievement Salary at Bonus Earned
Objective Weighting Percentage 1.25% Target at $40,000 Salary
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1) Objective 1 40% 100% .500% $200.00
-----------------------------------------------------------------------------------
2) Objective 2 30% 100% .375% $150.00
-----------------------------------------------------------------------------------
3) Objective 3 20% 100% .250% $100.00
-----------------------------------------------------------------------------------
4) Objective 4 10% 100% .125% $50.00
-----------------------------------------------------------------------------------
Totals 100% 1.250% $500.00
-----------------------------------------------------------------------------------
</TABLE>
TEAM BONUS COMPONENT PAYOUTS
Team bonus component payouts will be made as soon as is administratively
feasible following the end of a performance period. This will most likely be in
the second pay period following the end of the performance period, but may occur
in the third pay period. Plan participants must be active employees of the
company at the time of payout to receive a bonus payout. If the employee is
non-exempt rather than exempt, his or her earnings over the period will be used
to calculate the Team Bonus under the Plan.
TOP PERFORMER BONUS COMPONENT
The top performer bonus will work as described on page one. All employees will
be eligible, but funding for bonuses will occur only for those employees in
grades 20 and above.
BONUS FUNDING AND CORPORATE PERFORMANCE
The annual top performer bonus pool will fund at 100% of the salary percentages
on page one, provided that 100% of the annual earnings per share target is
achieved.
- - If annual EPS performance is less than 75% of the target, the top
performer bonus pool will not be funded.
<PAGE> 4
1999 PERFORMANCE BONUS PLAN PAGE 4 OF 5
- - For EPS performance between 75% and 100% of the target, the pool will
fund linearly based on EPS performance.
- For example, at 90% EPS achievement, the pool will be funded at
90% x 3% of base salary for participants in grades 20-26.
- As described below in the overachievement bonus section, the top
performer bonus pool will receive additional funding if the EPS
target is exceeded.
The top performer bonus pool will be based on the participants' annual eligible
base salary rates at the end of the year, not their base salary earnings during
the year. What this means is that the applicable base salary rate to fund the
pool for a grade 24 participant who is hired on July 1 at a $40,000 annual base
salary will be $40,000, not $20,000. The pool will fund at 3% x $40,000, or
$1,200, not at 3% x $20,000, or $600.
BONUS DETERMINATION
Top performer bonuses will be determined at the department level by the
department (senior) vice president based on recommendations from line
management. The criteria used to determine recipients and awards will include
performance ratings, departmental rankings of performance and value, and
assessments of contributions during the year. The primary behaviors that will be
rewarded will be teamwork, leadership, customer satisfaction, and work quality.
It is expected that approximately 25% to 30% of the eligible PBP participants
will receive top performer bonuses.
TOP PERFORMER BONUS COMPONENT PAYOUTS
Top performer bonus component payouts will be made in February 2000. Plan
participants must be active employees of the company at the time of payout to
receive a bonus payout.
ELIGIBILITY FOR PARTICIPATION
All regular staff members who are employed as of the effective date and are not
excluded as listed below shall participate in the Plan as of the effective date.
- - For payments under the team bonus component of the Plan, participants
must be on the payroll and be actively employed as of the first working
day of the quarter and for the full duration of the quarter to earn any
team bonus for that quarter.
- - If an employee works the whole quarter but is part-time for any or all
of it, his or her bonus will be prorated to reflect part-time
contribution.
- - Employees on leaves of absence will not be eligible to earn a bonus
pertaining to the leave period, even if they are on paid leave.
- Quarterly team bonuses will be prorated to reflect leaves of
absence. However, if the employee is on leave of absence for one
month or more in a given quarter, he or she will not be eligible
to receive any team bonus for that quarter.
- However, the company will allow up to a total of ten (10) days
of leave to be treated as normal working days under the Plan for
the purpose of team bonus administration.
- Since the annual top performer bonus component is discretionary
in nature, a top performer bonus may be awarded to an individual
who was on leave during the year.
No bonus of any kind may be earned under this Plan for a participant who is on a
performance improvement plan or whose last performance rating is less than 3.0.
Staff members who are participants in the following plans shall not be eligible
to participate in the Performance Bonus Plan:
- - Management Bonus Plan
- - Sales compensation plans, including distribution compensation plans
- - Compensation plans in Professional Services
- - Other approved special cash incentive or bonus plans at Mosaix
<PAGE> 5
1999 PERFORMANCE BONUS PLAN PAGE 5 OF 5
OVERACHIEVEMENT BONUS
As described on page one, there will be additional Plan funding if $5,000 for
each $.01 in EPS above the annual target. The additional funds will be
distributed through both the team bonus component and the top performer bonus
component of the Plan. The distribution of the additional funds between the two
bonus components will determined at the end of the year when the amount of
overachievement funding is known.
EFFECTIVE DATE
The Plan is effective January 1, 1999, and supersedes all past and previous
Mosaix, Inc. ("Mosaix") Performance Bonus Plans. The Plan is effective for 1999
only.
PLAN COMMUNICATION
The Performance Bonus Plan document (this document) is available to all Plan
participants. In the event that the Plan is revised, eligible participants shall
receive a copy of the revised Plan as soon as is administratively feasible. An
announcement regarding quarterly bonuses earned shall be communicated to the
employees after the company's quarterly financial statements are released to the
public. A similar announcement will be made for the annual Corporate Bonus
Component of this Performance Bonus Plan.
DESIGNATION OF BENEFICIARY
Any amount 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.
PLAN ADMINISTRATION
The Plan will be administered by the departmental (senior) vice president or
general manager, Executive Director of Human Resources, Compensation Manager,
and assigned directors within the department. Mosaix's Chief Executive Officer
must review the objectives at the start of the performance period and approve
payouts at the end of it. In addition to the power with respect to the award of
a Performance Bonus described elsewhere in the Plan, the Company is authorized
to administer and interpret the Plan subject to its express provisions and to
make all determinations necessary or advisable for the administration of the
Plan.
Nothing in this Plan shall be construed to limit in any way the right of the
Company to terminate a staff member's employment at any time; nor shall it be
evidence of any agreement, expressed in any form, to ensure continuation of
employment, participation in this Plan, or the granting of an award from this
Plan.
While the Company expects to continue the Plan, believing it to be of value to
both the eligible staff members and the Company, it reserves the right to amend,
modify or terminate the Plan at any time and at its sole discretion.
<PAGE> 1
EXHIBIT 10.10
1ST AMENDMENT TO
EXECUTIVE EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of the 18th day of August, 1998, between JOHN J.
FLAVIO, a Washington resident ("Executive"), and MOSAIX, INC., a Washington
corporation ("Company").
The parties agree as follows:
1. AMENDMENT OF PRIOR AGREEMENT.
This Agreement amends that certain "Executive Employment Agreement" dated as of
March 1, 1995 between Executive and the Company. Except as expressly provided
herein, the terms and conditions of that agreement remain in effect between the
parties, and defined terms therein shall have the same meaning when used in this
Agreement.
2. SEVERANCE PAYMENTS.
Section 7 of the Executive Employment Agreement is hereby amended so that, in
the event Executive terminates his employment for Good Reason, or if the Company
terminates employment without cause following a Change of Control, the Company
shall be obligated to pay to Executive his then regular base salary for a period
of eighteen months after the effective date of termination of employment (as
opposed to 6 months, as originally provided). This amendment will not apply in
the event of any termination unrelated to a Corporate Transaction.
IN WITNESS WHEREOF, the parties have executed and entered into this Agreement as
of the date above first written.
EXECUTIVE: COMPANY:
MOSAIX, INC.,
a Washington Corporation
/s/ John J. Flavio By: /s/ Wm. Bradford Weller
- ------------------------------ -----------------------------------------
JOHN J. FLAVIO Wm. Bradford Weller
Its General Counsel & Assistant Secretary
<PAGE> 1
EXHIBIT 10.11
REDMOND EAST BUSINESS CAMPUS
LEASE
THIS LEASE, dated as of the 20th day of May, 1991, is between MICHAEL R.
MASTRO, a married man as to his separate estate, and REDMOND EAST ASSOCIATES, a
Washington general partnership (together "Lessor") and DIGITAL SYSTEMS
INTERNATIONAL, INC., a Washington corporation, ("Lessee").
R E C I T A L S
Lessor holds an enforceable right to purchase certain real property
legally described on Exhibit A attached. Lessor intends to construct an office
building known as Building 17 ("Building") on a portion of said real property
with approximately 165,125 square feet of land area. The location of the
Building and the general configuration of such portion of the real property
(such portion being referred to herein as the "Property") shall be as indicated
on the site plan attached as Exhibit B. The Building shall contain approximately
83,000 square feet. Lessee wishes to lease the Property and the Building (herein
"Premises") from Lessor on the terms and conditions set out below.
A G R E E M E N T
1. Premises. Lessor hereby leases the Premises to Lessee, upon the terms
and conditions herein set forth. Upon commencement of the Lease Term, the
parties shall sign a statement confirming the total square footage of the
Premises as shown on the architect's plan.
2. Common Areas. Lessee shall have nonexclusive use of all areas of the
Property designated by Lessor as common areas for the use generally of tenants
of the Property.
3. Use of Premises. The Premises shall be used for corporate
headquarters, general office uses, manufacturing, assembly, and production of
computer equipment and products developed by Lessee, and uses incidental thereto
and for no other purpose without the prior consent of Lessor. Lessee shall not
allow undue noise or vibration. Lessee shall not allow use of the Premises in a
manner which would increase Lessor's insurance premiums, in a manner which would
interfere with any other tenant in the Property, or for any illegal purpose.
Lessee shall comply with all governmental rules, orders , regulations, or
requirements relating to the use and occupancy of the Premises. Lessee shall not
use, store or dispose of any hazardous or toxic waste or materials on the
Premises or the Property at any time except in accordance with all applicable
laws, rules, regulations, and ordinances.
4. Term. This Lease shall be for a term of seven (7) years, commencing
on the Commencement Date as set out in Section 40 below. In the event that the
lease term commences on a day other than the first day of a calendar month, then
the lease term as specified in the preceding sentence shall be deemed to have
commenced as of the first day of the next calendar month, and the Tenant shall
be deemed to have been given early occupancy as of the date specified in the
preceding sentence, with all terms of the Lease, including rent, and other
amounts due to Lessor, which shall be prorated on an actual per diem basis,
applicable to the period of early occupancy.
5. Rental. Lessee agrees to pay Lessor, at Lessor's address set forth in
Section 27 hereof or at such other place as Lessor may designate in writing,
monthly rent ("Basic Rental") in accordance with Section 41 below.
Upon execution of this Lease, Lessee shall pay to Lessor the sum of
$53,400 to be applied against payment of the Basic Rental due for the first
month of the Lease term. The obligation of Lessee to pay Basic Rental and
Additional Rental is absolute and unconditional, and shall not at any time be
subject to offset, discount, or reduction of any kind whatsoever.
6. Additional Rental. This is a "triple-net" lease. In addition to the
Basic Rental provided in Section 5 above and subject to the provisions of
Section 42 of this Lease, Lessee agrees to pay Lessor "Additional Rental" during
each Lease Year equal to the "Operating Expenses" of the Premises.
The term "Operating Expenses" means all costs of ownership, management,
operation, and maintenance of the Premises, including, without limitation, the
following: wages and salaries of employees; janitorial, cleaning, landscaping,
guard and other services; gas, electricity, water, sewer, waste disposal, and
other utilities; heating, ventilation and air-conditioning; window-washing;
materials and supplies; painting, repairs, and other maintenance; parking lot
resurfacing and restriping; maintenance, repair and service agreements of any
kind, including without limitation those for the HVAC system, alarm systems,
elevator equipment, and other equipment; reserves for any common area
improvements; costs of independent contractors; management fees; insurance;
depreciation on personal property; and any other expense or charge which in
accordance with generally accepted accounting and management principles would be
considered a cost of ownership, management, operation, and maintenance of the
Premises, subject, however, to the limitations in paragraph 42 hereof. The
determination of Operating Expenses shall be made by Lessor.
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<PAGE> 2
Prior to commencement of each Lease Year, or as soon thereafter as
practicable, Lessor shall give Lessee notice of its estimate of amounts payable
under this section for the ensuing Lease Year. On the first day of each month
during the ensuing Lease Year, Lessee shall pay to Lessor 1/12th of such
estimated amounts, provided, that if such notice is not given prior to the
commencement of such ensuing Lease Year, Lessee shall continue to pay on the
basis of the prior Lease Year's estimate until the month after such notice is
given. If at any time or times it appears to Lessor that the amounts payable
under this section for the current Lease Year will vary from its estimate,
Lessor may, by thirty (30) days prior written notice to Lessee, revise its
estimate for such Lease Year, and subsequent payments by Lessee for such Lease
Year shall be based upon such revised estimate.
"Lease Year" shall mean calendar year. If this Lease commences or
terminates on a day other than the first or last day of a calendar year, the
amount of additional rental payable by Lessee applicable to the Lease Year in
which such commencement or termination occurs shall be prorated on the basis of
a 365-day year.
7. [intentionally deleted]
8. [intentionally deleted]
9. Quiet Enjoyment. Lessor covenants and agrees that so long as Lessee
remains in full compliance with all of Lessee's obligations under this Lease,
Lessee shall lawfully and quietly hold, occupy, and enjoy the Premises during
the term of this Lease, subject to the other terms and provisions of this Lease
and subject to all mortgages, underlying leases, and other underlying matters of
record to which this Lease is or may become subject and subordinate.
10. Construction; Acceptance of Premises.
[replaced by Section 43]
11. Utilities and Other Services by Lessor. Lessor agrees that there
will be available at the Premises the following utilities and services:
(a) Electricity.
(b) Water for drinking, restroom and office cleaning purposes.
(c) Heating, air conditioning, and ventilation required for Lessee's
normal business operations.
(d) Gas.
All such utilities and services shall be paid for by Lessee by separate
metering. Lessor does not warrant the adequacy of such utilities for Lessee's
needs or that any of the foregoing utilities and services will be free from
interruption. Interruption of utilities or services shall not be deemed an
eviction or excuse performance of any of Lessee's obligations under this Lease
or render Lessor liable for damages unless caused by the gross negligence or
willful misconduct of Lessor, its agents, employees, invitees, licensees, or
contractors. Lessee agrees to pay for all utility service provided to the
Premises when due. Lessee shall, at Lessee's expense, provide all other
utilities and other services to the Premises required by Lessee, and shall pay
for the same when due.
12. Maintenance by Lessor. Lessor shall maintain in good condition
(normal wear and tear excepted) the structural and exterior components of the
Building including, without limitation, the foundations, bearing and exterior
walls, subflooring, roof, unexposed electrical, plumbing and sewage systems,
heating, ventilating, and air conditioning systems. Lessor shall maintain in
good condition and repair the plumbing and the electrical system. However,
Lessor shall not be obligated to repair or replace any fixtures or equipment
installed by Lessee and Lessor shall not be obligated to make any repair or
replacement occasioned by any act or omission of Lessee, its employees, agents,
invitees, or licensees. Lessor shall maintain the Building in first class
condition.
Upon written notice given by Lessee of the need for repairs for which
Lessor is responsible hereunder, Lessor shall promptly repair the Premises in a
good, workmanlike manner. Lessor shall have thirty (30) days after notice from
Lessee to commence to perform its obligations under this paragraph, except that
Lessor shall perform its obligations as promptly as reasonably possible if the
nature of the problem presents a hazard or emergency. If Lessor fails to perform
its obligations within the time limits herein provided, Lessee may perform the
obligations and Lessee shall have the right to be reimbursed by Lessor for the
sum Lessee actually expends in the performance thereof.
13. Alterations, Repairs, and Maintenance by Lessee. After the
Commencement Date, Lessee shall make no changes, improvements, or alterations to
the Premises costing more than $25,000 without the prior consent of Lessor which
shall not be unreasonably withheld, conditioned, or delayed for nonstructural
alterations or for structural alterations which do not impair the structural
integrity of the Building. Such consent shall be deemed to have been given if
not denied in writing within ten (10) business days of Lessee's request therefor
which request shall be in writing and shall describe the proposed alterations in
reasonable detail. All such changes, improvements, and alterations and repairs,
if any, made by Lessee (other than to Lessee's trade fixtures)
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<PAGE> 3
shall remain on the Premises and shall become the property of Lessor upon the
expiration or sooner termination of this Lease.
Lessee shall keep the Premises in a neat, clean, and sanitary condition,
and shall keep the Premises and all items therein installed by Lessee in good
condition, except only for reasonable wear and tear. Lessee shall provide, at
its sole expense, janitorial services for the Premises. All maintenance of the
Premises shall be conducted by Lessee, except as provided in Section 12.
14. Taxes. Subject to Sections 6 and 42, Lessor shall pay, before the
same become delinquent, all taxes and special assessments levied against the
Property. Lessee shall pay, before the same become delinquent, all taxes
assessed against Lessee's furniture, fixtures, equipment, and other property in
the Premises.
Lessee shall pay to Lessor as additional rental, within 10 days after
notice of the amount thereof, any tax upon rent payable under this Lease or any
tax or fee in any form payable by Lessor because of or measured by receipts or
income of Lessor derived from this Lease. The preceding sentence shall not apply
to general income tax or business and occupation tax of Lessor, except to the
extent a rental receipt tax is imposed as a business and occupation tax.
15. Signs. Lessee will not cause or permit the display of any sign,
notice, or advertising matter in or about the Premises or the Property without
Lessor's prior written consent which will not be unreasonably withheld, delayed,
or conditioned.
16. Lessor's Access to Premises. Lessor may inspect the Premises at all
reasonable times after reasonable prior notice to Lessee (except in the case of
emergency) and enter the same for the purpose of cleaning, repairing, altering,
improving, or during the last three (3) months of the Lease term, exhibiting the
same, but nothing herein shall be construed as imposing any obligation on Lessor
to perform any such work except as is set forth in Section 12 hereof. Lessor
shall repair any damage to the Premises or Lessee's property therein or thereon
which is caused by such entry. Lessor shall conduct its activities on the
Premises in a manner which causes the least inconvenience reasonably possible to
Lessee.
17. Liability Insurance. Commencing on the Commencement Date, Lessee
shall, at Lessee's sole expense, maintain public liability and property damage
insurance insuring against any and all claims for injury to or death of persons
and loss of or damage to property occurring upon, in, or outside of the
Premises. Such insurance shall have liability limits of not less than $1,000,000
in respect of injury or death to any one person, not less than $1,000,000 in
respect of any and one occurrence or accident, and not less than $500,000 for
property damage with a maximum deductible amount of $2,500. All such insurance
shall name Lessor and Lessee as co-insureds, with severability of interests
endorsement. All such insurance shall be issued by carriers acceptable to Lessor
and shall contain provision whereby the carrier agrees not to cancel or modify
the insurance without thirty (30) days' prior written notice to Lessor.
On or before taking possession of the Premises pursuant to this Lease,
Lessee shall furnish Lessor with a certificate evidencing the aforesaid
insurance coverage, and renewal certificates shall be furnished to Lessor at
least 30 days prior to the expiration date of each policy for which a
certificate was theretofore furnished.
18. Lessee's Fire Insurance. Lessee shall, at Lessee's sole expense,
maintain on all of Lessee's personal property and leasehold improvements and
alterations on the Premises, a policy of standard fire insurance, with extended
coverage, in the amount of their replacement value. Such insurance shall name
Lessor and Lessee as co-insureds. All proceeds of any such insurance shall be
applied to the restoration of fixtures, improvements, and alterations to the
extent provided in Sections 21 and 45. Any proceeds of such insurance remaining
after such restoration shall belong to Lessee.
19. Lessor's Fire Insurance. Subject to Section 6, Lessor shall maintain
on the Building a policy of standard fire insurance with extended coverage in an
amount of its replacement value. All proceeds of any such insurance shall be
payable to Lessor and shall be applied to the restoration of the Building to the
extent provided in Sections 21 and 45. Any proceeds of such insurance remaining
after such restoration shall belong to Lessor.
20. Assignment and Subletting. Subject to Section 60, neither this Lease
nor any right hereunder may be assigned, transferred, encumbered, or sublet in
whole or in part by Lessee, by operation of law or otherwise, without Lessor's
prior consent, which shall not be unreasonably withheld, delayed, or
conditioned. No assignment or sublease shall relieve Lessee of its liabilities
hereunder and no consent to any assignment or sublease shall be deemed a consent
to any further assignment or sublease. Except as provided in Section 60, if
Lessee is a corporation, any merger, consolidation, liquidation, or any change
in ownership of or the power to vote the majority of its outstanding voting
stock, shall constitute an assignment, whether the result of a single
transaction or a series of transactions. Lessor may assign its interest in this
Lease.
21. Damage or Destruction. Subject to Section 45, if the Premises are
damaged or destroyed by fire or any other cause, Lessor shall restore the
Premises (except for tenant improvements, trade fixtures, and personal property
which shall be restored by Lessee at Lessee's sole expense) as nearly as
practicable to their condition immediately prior to such damage or destruction.
The obligations to restore provided in this paragraph shall be subject to
Lessor's termination rights provided below and shall be subject to any
institutional lender
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<PAGE> 4
which holds a mortgage or deed of trust against the Property and Building making
insurance proceeds available for restoration provided that Lessor shall have
used its reasonable best efforts to obtain the agreement of such lender to make
the proceeds available for restoration. Any restoration shall be promptly
commenced and diligently prosecuted. Lessor shall not be liable for any
consequential damages by reason of any such damage or destruction.
Notwithstanding any of the foregoing provisions of this section, in the
event the Premises shall be destroyed or damaged to the extent of thirty percent
(30%) of their insurable value and Lessor deems that it is not economically
feasible to restore the same, then Lessor may terminate this Lease as of the
date of the damage or destruction by giving Lessee written notice to that effect
within thirty (30) days after the date of such damage or destruction.
If Lessor undertakes to restore the Premises as provided above in this
section, then commencing with the date of the damage or destruction and
continuing through the period of restoration, the rent for the Premises shall be
abated for such period in the same proportion as the untenantable portion of the
Premises bears to the whole thereof.
22. Liens. Lessee shall not suffer or permit any lien to be filed
against the Property or any part thereof or the Lessee's leasehold interest, by
reason of work, labor, services, or materials performed or supplied to Lessee or
anyone holding the Premises or any part thereof under Lessee. Subject to Section
46, if any such lien is filed against the Property or Lessee's leasehold
interest, Lessee shall cause the same to be discharged of record within 30 days
after the date of filing the same.
23. Indemnity by Lessee. Lessee agrees that Lessor shall not be liable
for any claims for death of or injury to persons or damages to or destruction of
property sustained by Lessee or by any other person in or outside of the
Premises, including without limiting the generality of the foregoing, any claims
caused by or arising from the condition or maintenance of any part of the
Premises, unless such damage is caused by the negligence or intentional
misconduct of Lessor or the breach of this Lease by Lessor. Lessee hereby waives
all claims therefor and agrees to indemnify Lessor against any such loss,
damage, or liability or any expense (including attorneys' fees) incurred by
Lessor in connection therewith.
24. Default; Remedies; Late Charges. The occurrence of any one or more
of the following events shall be a default under this Lease, namely: If Lessee
shall fail to pay rent or any other charge within five (5) business days after
written notice from Lessor, or if Lessee shall fail to perform any other
obligations under this Lease within thirty (30) days after written notice from
Lessor (or if such performance cannot reasonably be completed within thirty (30)
days, within a reasonable period of time provided Lessee is diligently pursuing
performance to completion); or if Lessee shall make an assignment for the
benefit of creditors or shall file a voluntary petition under any bankruptcy act
or under any other law for the relief of debtors' or if an involuntary petition
is filed against Lessee under any such law and is not dismissed within sixty
(60) days after filing; or if a receiver be appointed for the property of Lessee
and is not discharged or removed within sixty (60) days; or if any department of
any government or any officer thereof shall take possession of the business or
property of Lessee; or if the Lessee is adjudicated a bankrupt. Upon any such
occurrence Lessor, at its option, may terminate this Lease by notice to Lessee
and upon such termination Lessee shall quit and surrender the Premises to
Lessor, but Lessee shall remain liable as hereinafter provided.
If this Lease shall be terminated as herein provided, Lessor may
immediately or at any time thereafter re-enter the Premises and remove any and
all persons and property therefrom, by any suitable proceeding at law or
otherwise, without liability therefor, and re-enter the Premises, without such
re-entry diminishing Lessee's obligation to pay rental for the full term hereof,
and Lessee agrees to pay Lessor any deficiency arising from re-entry and
reletting of the Premises at a lesser rental than provided herein. Lessor shall
apply the proceeds of any reletting in the following order:
(a) First, to the payment of such reasonable expenses as Lessor
may have incurred in recovering possession of the Premises, including without
limitation, removing persons and property therefrom, and in putting the same
into good order or condition;
(b) Second, to all reasonable expenses incurred by Lessor for
reletting the Premises, including without limitation, preparing and/or altering
the same for reletting; and
(c) Then to Lessee's obligation to pay rental. Any such reletting
may be for the remainder of the term of this Lease or for a longer or shorter
period. In any such case, and whether or not the Premises or any part thereof be
relet, Lessee shall pay to Lessor the rent and all other charges required to be
paid by Lessee up to the time of such termination of this Lease, and thereafter,
Lessee agrees to pay the equivalent of the amount of all rent reserved herein
and all other charges required to be paid by Lessee, less the net proceeds of
reletting, if any, and the same shall be due and payable by Lessee monthly as
the amount thereof is ascertained by Lessor, and Lessor may bring an action
therefor as such monthly deficiencies arise. In any of the circumstances
hereinabove mentioned, Lessor shall have the option, instead of holding Lessee
liable for the amount of all rent and all other charges required to be paid by
lessee less the net proceeds of reletting, if any, forthwith to recover from
Lessee an aggregate sum representing, at the time of such termination of this
Lease, the then present worth of the excess, if
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<PAGE> 5
any, of the aggregate of the rent and all other charges payable by Lessee
hereunder that would have accrued until the end of the Lease term over the
aggregate rental value of the Premises during such term.
In the event Lessee fails to pay any Basic Rental, Additional Rental, or
other payment or reimbursement due to Lessor within ten (10) days of the date
when due, the amount so delinquent shall bear interest at the rate of fifteen
percent (15%) per annum from the due date until paid. In addition, Lessee shall
pay to Lessor a late charge equal to five percent (5%) of the amount so
delinquent, which late charge shall be liquidated damages (and not a penalty) to
compensate Lessor for the costs of handling such delinquency, the parties
agreeing that actual damages would be inconvenient, uncertain, and difficult to
ascertain. Such interest and late charges shall be deemed Additional Rental and
shall be due upon demand.
25. Trade Fixtures. Lessee may install on the Premises such equipment as
is customarily used in the type of business conducted by Lessee on the Premises.
Upon the expiration or sooner termination of this Lease, Lessee shall, at
Lessee's expense, remove from the Premises all such equipment and all other
property of Lessee and repair any damage to the Premises occasioned by the
removal thereof. Any property left in the Premises after the expiration or
sooner termination of this Lease shall be deemed to have been abandoned by
Lessee and become the property of Lessor to dispose of as Lessor deems expedient
without accounting to Lessee therefor.
26. Condemnation. If all of the Building or Property are taken by any
public authority under the power of eminent domain, this Lease shall terminate
as of the date possession is taken by said public authority pursuant to such
condemnation.
If any part of the Building or Property is so taken and, in the opinion
of either Lessor or Lessee, it is not economically feasible to continue this
Lease in effect, either party may terminate this Lease. Such termination by
either party shall be made by written notice to the other given not later than
30 days after possession is so taken, the termination to be effective as of the
later of 30 days after said notice or the date possession is so taken.
If part of the Premises or part of the Property is so taken, and neither
Lessor nor Lessee elects to terminate this Lease, or until termination is
effective, as the case may be, the rental shall be abated in the same proportion
as the portion of the Premises so taken bears to the whole of the Premises, and
Lessor shall make such repairs or alterations, if any, as are required to render
the remainder of the Premises tenantable.
All damages awarded for the taking or damaging of all or any part of the
Property or the Premises shall belong to and be the property of Lessor, and
Lessee hereby assigns to Lessor any and all claims to such award, but nothing
herein contained shall be construed as precluding Lessee from asserting any
claim Lessee may have against such public authority for disruption or relocation
of Lessee's business on the Premises or for damages to Lessee's property in the
Premises.
27. Notices. All notices, demands, and requests to be given by either
party to the other shall be in writing. All notices, demands, and requests by
Lessor to Lessee shall be personally delivered or sent by United States
registered or certified mail, postage prepaid, (or by private overnight courier)
addressed to Lessee at the Premises after the Commencement Date and at Redmond
Science Park, 7659 - 178th Place N.E., Redmond, Washington 98052, Attn: Vice
President - Finance and Administration, prior to the Commencement Date or to
such other place as Lessee may from time to time designate by written notice to
Lessor. All notices, demands, and requests by Lessee to the Lessor shall be
personally delivered or sent by United States registered or certified mail,
postage prepaid, (or by private overnight courier) addressed to Lessor at: 10800
N.E. Eighth Street, Suite 1080, Bellevue, Washington 98004, or such other place
as Lessor may from time to time designate by notice to Lessee. Notices, demands,
and requests served upon Lessor or Lessee as provided in this section in the
manner aforesaid shall be deemed sufficiently served or given for all purposes
hereunder upon personal delivery or one (1) business day after such notice,
demand, or request shall be so deposited with private courier or three (3)
business days after mailed.
28. Performance of Covenants. If Lessee shall fail to make any payment
or perform any of Lessee's obligations under this Lease, Lessor may, without
notice to or demand upon Lessee and without waiving or releasing Lessee from any
obligations of Lessee under this Lease, make any such payment or perform any
such obligation on Lessee's behalf in such manner and to such extent as Lessor
deems desirable. All sums so paid by Lessor and all necessary costs and expenses
in connection with the performance of any such obligation by Lessor, together
with interest thereon at the rate of fifteen (15%) per annum from the date of
the making of such expenditure by Lessor, shall be deemed Additional Rental
hereunder and shall be payable to Lessor on demand.
29. For Rent Signs; Showing Premises. During the last six (6) months of
the Lease term or any Renewal Term, Lessor may place for rent or for sale signs
on the exterior of the Premises and may enter the Premises for the purpose of
showing the Premises or the Property to prospective tenants, purchasers, and
lenders.
30. Waiver of Subrogation. Lessor and Lessee shall each procure, if
obtainable without payment of an additional premium, an appropriate clause in,
or an endorsement on, any policy of fire or extended coverage insurance covering
the Premises and the Property, and the personal property, fixtures, and
equipment located in or on the Premises, pursuant to which the insurance
companies waive subrogation or consent to a waiver of right of recovery, and,
conditioned upon a party having obtained such clauses or endorsements or waiver
of subrogation or consent to a waiver or right of recovery, such party hereby
agrees that it shall not make any claim
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<PAGE> 6
against or seek to recover from the other for any loss or damage to its
property, or the property of the other, resulting from fire or other hazards
covered by such insurance, notwithstanding other provisions of this Lease;
provided, however, that the release, discharge, exoneration, and covenant not to
sue herein contained shall be limited by the terms and provisions of the waiver
of subrogation clauses or endorsement consenting to a waiver of right of
recovery, and shall be coextensive therewith. If either Lessor or Lessee is
unable to obtain such clause or endorsement, such party shall promptly give the
other party notice of such inability and the other party shall be relieved of
its obligations under this Section. If either Lessor or Lessee is able to obtain
such clause or endorsement only upon payment of an additional premium, such
party shall promptly give the other party notice to that effect, in which event
the other party shall have the right to pay such additional premium, and upon
such payment, the party whose insurer requires such payment shall promptly
procure such clause or endorsement.
31. Subordination of Lessee's Interest. [See Section 49.]
32. Surrender of Premises. Lessee, at the expiration or sooner
termination of this Lease, shall quit and surrender the Premises in broom clean
and sanitary condition, except for reasonable wear and tear and damage by the
elements.
33. Rules and Regulations. Provided Lessor has given Lessee written
notice thereof, Lessee shall use the Premises and the common areas in the
Property in accordance with such reasonable rules and regulations not
inconsistent with this Lease as may from time to time be made by Lessor for the
general safety, comfort, and convenience of Lessor and tenants of the Property,
and shall cause Lessee's employees, agents, invitees, and licensees to abide by
such rules and regulations.
34. Holdover. If Lessee holds over after the expiration of the term of
this Lease, such tenancy shall be a month-to-month tenancy. During such tenancy
Lessee agrees to pay Lessor one hundred fifty percent (150%) the rate of rental
as provided herein, and to be bound by all of the terms, covenants, and
conditions herein specified.
35. Memorandum of Lease. If either party so requests, Lessee and Lessor
agree to execute and place of record an instrument, in recordable form, and in
the form attached as Exhibit D, evidencing the commencement date and expiration
date of this Lease and Lessee's options under Sections 50 and 56.
36. Force Majeure. Except as expressly provided in this Lease, Lessee
and Lessor shall have no liability whatsoever on account of the following acts
of "force majeure," which shall include (a) the inability to fulfill, or delay
in fulfilling, any of their obligations under this Lease by reason of strike,
lockout, other labor trouble, dispute or disturbance; (b) governmental
regulation, moratorium, action, preemption or priorities or other controls; (c)
shortages of fuel, supplies or labor; (d) any failure or defect in the supply,
quantity or character of electricity or water furnished to the Premises by
reason of any requirement, act or omission of the public utility or others
furnishing the Premises with electricity or water; and (e) for any other reason,
other than financial inability whether similar or dissimilar to the above, or
for Act of God, beyond Lessee's or Lessor's reasonable control. If this Lease
specifies a time period for performance of an obligation of Lessor, that time
period shall be extended by the period of any delay in Lessor's or Lessee's
performance caused by any of the events of force majeure described herein.
37. Light, Air, and View. Lessor does not guarantee the continued
present status of light, air, or view over any premises adjoining or in the
vicinity of the Property.
38. Lessor's Liability. Anything in this Lease to the contrary
notwithstanding, covenants, undertakings and agreements herein made on the part
of Lessor are made and intended not as personal covenants, undertakings and
agreements for the purpose of binding Lessor personally or the assets of Lessor
except Lessor's interest in the Premises and the proceeds thereof, but are made
and intended for the purpose of binding only the Lessor's interest in the
Premises and the proceeds thereof, as the same may from time to time be
encumbered. While Lessee may bring a legal action against Lessor, judgments may
be enforced only against Lessor's interest in the Premises and the proceeds
thereof. No personal liability or personal responsibility is assumed by, nor
shall at any time be asserted or enforceable against, Lessor or its partners or
agents or their respective heirs, legal representatives, successors, and assigns
on account of this Lease or on account of any covenant, undertaking or agreement
of Lessor in this Lease contained.
39. Miscellaneous.
(a) Nonwaiver. No failure of Lessor to insist upon the strict
performance of any provision of this Lease shall be construed as depriving
Lessor of the right to insist on strict performance of such provision or any
other provision in the future. No waiver by Lessor of any provision of this
Lease shall be deemed to have been made unless expressed in writing and signed
by Lessor. No acceptance of rent or of any other payment by Lessor from Lessee
after any default by Lessee shall constitute a waiver of any such default or any
other default. Consent by Lessor in any one instance shall not dispense with
necessity of consent by Lessor in any other instance.
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<PAGE> 7
(b) Attorneys' Fees. If an action be commenced to enforce any of
the provisions of this Lease, the prevailing party shall, in addition to its
other remedies, be entitled to recover its reasonable attorneys' fees.
(c) Captions and Construction. The captions in this Lease are for
the convenience of the reader and are not to be considered in the interpretation
of its terms.
(d) Partial Invalidity. If any term or provision of this Lease or
the application thereof to any person or circumstance shall to any extent be
invalid or unenforceable, the remainder of this Lease, or the application of
such term or provision to persons or circumstances other than those as to which
it is invalid or unenforceable, shall not be affected thereby, and each term and
provision of this Lease shall be valid and be enforced as written to the fullest
extent permitted by law.
(e) Governing Law. This Lease shall be governed by the laws of
the State of Washington.
(f) Estoppel Certificates. Lessee shall, from time to time, upon
written request of Lessor, execute, acknowledge and deliver to Lessor or its
designee a written statement stating: The date this Lease was executed and the
date it expires; the date the term commenced and the date Lessee accepted the
Premises; the amount of Basic Rental and Additional Rental and the date to which
such Basic and Additional Rental has been paid; and certifying, if true and
correct: That this Lease is in full force and effect and has not been assigned,
modified, supplemented or amended in any way (or specifying the date and terms
of agreement so affecting this Lease); that this Lease represents the entire
agreement between the parties as to this leasing; that as of such date all
conditions under this Lease to be performed by the Lessor have been satisfied;
that all required contributions by Lessor to Lessee on account of Lessor's
improvements as of such date have been received; that to the best of Lessee's
knowledge there are no existing claims, defenses or offsets which the Lessee has
against the enforcement of this Lease by the Lessor; that no Rental has been
paid more than one month in advance; and the amount of any security has been
deposited with Lessor. It is intended that any such statement delivered pursuant
to this section may be relied upon by a prospective purchaser or assignee of
Lessor's interest or by any lender. If Lessee shall fail to respond within ten
(10) business days of receipt by Lessee of a written request by Lessor as herein
provided, Lessee shall be deemed to have given such certificate as above
provided without modification and shall be deemed to have admitted that this
Lease is in full force and effect, that there are no uncured defaults in
Lessor's performance, that the security deposit is as stated in this Lease, and
that not more than one month's Rental has been paid in advance.
(g) Transfer of Lessor's Interest. In the event of any transfer
or transfers of Lessor's interest in the Premises, other than a transfer for
security purposes only, the transferor shall be automatically relieved of any
and all obligations and liabilities on the part of Lessor accruing from and
after the date of such transfer and Lessee agrees to attorn to the transferee
upon the receipt of written notice of such transfer from Lessor, which shall
specify the transferee's name and address for notices and the payment of rent
hereunder. Any such transfer shall be made expressly subject to this Lease, and
the transferee must assume Lessor's obligations hereunder.
(h) Entire Agreement. This document contains the entire and
integrated agreement of the parties, supersedes and replaces any and all other
agreements, leases, or understandings between the parties in any way related to
the Premises, and may not be modified except in writing signed and acknowledged
by both parties.
(i) Interpretation. This Lease has been submitted to the scrutiny
of all parties hereto and their counsel if desired, and shall be given a fair
and reasonable interpretation in accordance with the words hereof, without
consideration or weight being given to its having been drafted by any party
hereto or its counsel.
(j) Remedies Cumulative. The specified remedies to which Lessor
may resort under the terms of this Lease are cumulative and are not intended to
be exclusive of any other remedies or means of redress to which Lessor may
lawfully be entitled in case of any breach or threatened breach by Lessee of any
provision of this Lease. In addition to the other remedies in this Lease
provided, Lessor shall be entitled to the restraint by injunction of the
violation, or attempted or threatened violation, of any of the covenants,
conditions, provisions of this lease.
(k) Number; Gender; Permissive Versus Mandatory Usage. Where the
context permits, references to the singular shall include the plural and vice
versa, and to the neuter gender shall include the feminine and masculine. Use of
the word "may" shall denote an option or privilege and shall impose no
obligation upon the party which may exercise such option or privilege; use of
the word "shall" shall denote a duty or an obligation.
(1) Lessee's Liability. Each Lessee, and all general partners of
any partnership which is a Lessee, shall be jointly and severally liable under
this Lease.
(m) Time. Time is of the essence to this Lease.
-7-
<PAGE> 8
(n) Binding Effect. Subject to the provisions of Sections 20 and
60 hereof, this Agreement shall be binding upon the parties hereto and upon
their respective executors, administrators, legal representatives, successors,
and assigns.
SEE RIDER ATTACHED AND MADE A PART HEREOF.
EXECUTED as of the date first above written.
LESSOR:
/s/ Michael R. Mastro
----------------------------------------
MICHAEL R. MASTRO, a married man as to
his separate estate
REDMOND EAST ASSOCIATES
By /s/ Stavros Anastasiou
--------------------------------------
Stavros Anastasiou
By /s/ Perry Vyzis
--------------------------------------
Perry Vyzis
By /s/ Michael R. Mastro
--------------------------------------
Michael R. Mastro
LESSEE:
DIGITAL SYSTEMS INTERNATIONAL, INC.
By /s/ Michael Osborn
-----------------------------------
Name: MICHAEL OSBORN
------------------------------------
Title: VP, Finance
------------------------------------
-8-
<PAGE> 9
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this day personally appeared before me MICHAEL R. MASTRO, to me known
to be the individual described in and who executed the within and foregoing
instrument as Lessor, and acknowledged that he signed the same as his free and
voluntary act and deed, for the uses and purposes therein mentioned.
Given under my hand and official seal this 16th day of May, 1991.
[Notarial Seal] /s/ Donna J. Reid
Donna J. Reid
---------------------------------------
NOTARY PUBLIC in and for the
State of Washington, residing at Auburn
------
My commission expires 2/17/94
-----------------
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this 20th day of May, 1991, before me, the undersigned, a Notary
Public in and for the Sate of Washington, duly commissioned and sworn,
personally appeared Stavros Anastasiou, to me known to be a general partner of
REDMOND EAST ASSOCIATES, a Washington general partnership and, on behalf of such
general partnership, acknowledged to me that he signed and sealed the foregoing
instrument as the free and voluntary act and deed of said general partnership,
for the uses and purposes therein mentioned.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year first above written.
[Notarial Seal] /s/ M. Neagle
M. Neagle
---------------------------------------
NOTARY PUBLIC in and for the State of
Washington, residing at Bellevue
---------------
My commission expires 12/27/94
-----------------
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this 20th day of May, 1991, before me, the undersigned, a Notary
Public in and for the Sate of Washington, duly commissioned and sworn,
personally appeared Perry Vyzis, to me known to be a general partner of REDMOND
EAST ASSOCIATES, a Washington general partnership and, on behalf of such general
partnership, acknowledged to me that he signed and sealed the foregoing
instrument as the free and voluntary act and deed of said general partnership,
for the uses and purposes therein mentioned.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year first above written.
[Notarial Seal] /s/ M. Neagle
M. Neagle
---------------------------------------
NOTARY PUBLIC in and for the State of
Washington, residing at Bellevue
---------------
My commission expires 12/27/94
-----------------
-9-
<PAGE> 10
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this 16th day of May, 1991, before me, the undersigned, a Notary
Public in and for the Sate of Washington, duly commissioned and sworn,
personally appeared Michael R. Mastro, to me known to be a general partner of
REDMOND EAST ASSOCIATES, a Washington general partnership and, on behalf of such
general partnership, acknowledged to me that he signed and sealed the foregoing
instrument as the free and voluntary act and deed of said general partnership,
for the uses and purposes therein mentioned.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year first above written.
[Notarial Seal] /s/ Donna J. Reid
Donna J. Reid
---------------------------------------
NOTARY PUBLIC in and for the
State of Washington, residing at Auburn
------
My commission expires 2/17/94
-----------------
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this day personally appeared before me MICHAEL T. OSBORNE, to me
known to be the VP, Finance of DIGITAL SYSTEMS INTERNATIONAL, the corporation
that executed the foregoing instrument as Lessee, and acknowledged the same
instrument to be the free and voluntary act and deed of said corporation for the
uses and purposes therein mentioned, and on oath stated that he was authorized
to execute the said instrument, and that the seal affixed (if any) is the
corporate seal of said corporation.
WITNESS MY HAND AND OFFICIAL SEAL HERETO AFFIXED this 13th day of May,
1991.
/s/ Steve [SIC]
---------------------------------------
NOTARY PUBLIC in and for the State
of Washington, residing at Redmond
------------
My commission expires 5/5/95
-----------------
-10-
<PAGE> 11
EXHIBIT A
Legal Description
The land referred to is situated in the county of King, State of
Washington, and described as follows:
That portion of the southeast quarter of the southwest quarter of
Section 7, Township 25 North, Range 6 East, W.M., described as
follows:
Commencing at the south quarter of Section 7, Township 25 North,
Range 6 East, W.M., in King County, Washington;
thence north 581.58 feet along the east line of the southwest
quarter to the northeast corner of tract conveyed to Florence M.
Harris by deed of record under Recording Number 2648544 of said
county;
thence south 89 degrees12'47" west along the north line of said
Harris Tract 550 feet for the TRUE POINT OF BEGINNING of this
description;
thence south 89 degrees12'47" west along the north line of said
Harris Tract 568.52 feet, more or less, to the east line of James
Campbell County Road Number 2712, as the same was conveyed to
King County by deed recorded under Recording Number 2646727;
thence northerly and easterly along the easterly and southerly
line of the said James Campbell Road to an intersection with the
west line of the east half of the southeast quarter of the
southwest quarter of said Section 7;
thence southerly along said line 200 feet, more or less, to the
southwest corner of a tract of land conveyed to Redmond Sportman
Assoc., Inc. by deed recorded under Recording Number 2647686;
thence north 88 degrees54'06" east along the south line of said
Redmond Sportman Assoc., Inc. Tract 100 feet, more or less, to a
point from which the TRUE POINT OF BEGINNING bears south
01'34'27" east; thence south 01 degrees34'27" east 544.335 feet,
more or less, to the TRUE POINT OF BEGINNING
-11-
<PAGE> 12
EXHIBIT B
Map of Property and Building
[Graphic omitted]
-12-
<PAGE> 13
EXHIBIT C
General Specifications for Building
1. 5" structural reinforced first floor slab.
2. Roof structure of steel columns, steel beams and metal decking.
3. Exterior walls of reinforced job cast, tilt-up concrete panels with
two coats of paint on the exterior surfaces; windows shall be insulated tinted
glass with anodized aluminum frames. (Contrary to the Preliminary Plans there
will be no exposed aggregate on the Building exterior.)
4. Insulation of exterior walls and roof, such insulation shall meet the
applicable requirements of the Washington Energy Code.
5. Fire protection to meet City of Redmond requirements on a standard
grid with fire sprinkler heads, installed for fire protection of the building
shell.
6. 480/277 volt three phase, 1600 amp electrical service.
7. Covered parking areas for at least eight (8) spaces with covered
walkway to the building entrance.
8. Roof skylights as required by space plan to be prepared by Lessee.
(Provided, however that no more than 400 square feet of skylights will be paid
for by Lessor and the increased cost attributable to additional square footage
of skylights will be included within the Leasehold Improvements (See Section
43)).
9. Sewer and water lines stubbed to two restroom areas on the first
floor.
-13-
<PAGE> 14
EXHIBIT D
Short Form of Lease
After recording, return to:
Perkins Coie
1201 Third Avenue, 40th Floor
Seattle, WA 98101-3099
Attention: William L. Green
SHORT FORM LEASE
This Short Form Lease ("Short Form Lease"), dated as of ______________,
1991, is made by and between MICHAEL R. MASTRO, a married man, with respect to
his separate property, and REDMOND EAST ASSOCIATES, a Washington general
partnership (collectively, "Lessor"), and DIGITAL SYSTEMS INTERNATIONAL, INC., a
Washington corporation ("Lessee").
1. LONG FORM LEASE.
Lessor and Lessee entered into a lease dated May ____, 1991 ("Long Form
Lease") for certain space ("Premises") in the building ("Building 17") that is
located on the parcel of real property situated in the City of Redmond, King
County, Washington ("Property") that is more particularly described on EXHIBIT A
attached hereto and made a part thereof.
2. INCORPORATION OF LONG FORM LEASE.
All the terms and conditions of the Long Form Lease are incorporated
herein and made a part hereof. The Long Form Lease and this Short Form Lease
shall be construed to be one lease, but if there is any conflict between the
terms and conditions of the Long Form Lease and the terms and conditions of this
Short Form Lease, the terms and conditions of the Long Form Lease shall prevail.
(The Long Form Lease and this Short Form Lease are collectively referred to as
the "Lease".)
3. SHORT FORM LEASE.
Lessor and lessee are entering into this Short Form Lease in order to
record the Lease and give notice of the terms and conditions of the Lease.
4. TERM.
The initial term of the Lease shall be 7 years, commencing on
________________________ and expiring on _____________________________.
5. OPTIONS.
Under the Lease, Lessee has options to (a) extend the term of the Lease
for one period of 5 years, (b) lease additional space in the building that may
be located on the property more particularly described on EXHIBIT B attached
hereto and made a part hereof ("Building 19"), which is located adjacent to the
Property.
6. RIGHT OF FIRST REFUSAL.
Under the Lease, Lessee has a right of first refusal to lease additional
space in Building 19.
7. ADDITIONAL PROVISIONS.
Additional and supplementary terms, conditions, covenants and agreements
pertaining to Building 17, the Property and Building 19 are set forth in the
Long Form Lease, executed copies of which shall be retained by Lessor and Lessee
to exhibit to any person having lawful right to knowledge of the details
thereof, including without limitation, any purchasers, prospective purchasers,
lenders, prospective lenders and title insurance companies in connection with
Building 17, the Property and Building 19.
8. TERMINATION OF SHORT FORM LEASE.
This Short Form Lease shall terminate, be of no further force or effect
and be automatically removed as a matter of record upon the earlier to occur of
(a) the expiration of the term of the Long Form Lease or (b) the termination of
the Long Form Lease pursuant to the terms thereof.
-14-
<PAGE> 15
LESSOR:
----------------------------------------
MICHAEL R. MASTRO, a married man, with
respect to his separate property
REDMOND EAST ASSOCIATES,
a Washington general partnership
By
--------------------------------------
Stavros Anastasiou
General Partner
By /s/ Perry D. Vyzis
--------------------------------------
Perry Vyzis
General Partner
By
--------------------------------------
Michael R. Mastro
General Partner
LESSEE:
DIGITAL SYSTEMS INTERNATIONAL, INC., a
Washington corporation
By
--------------------------------------
Its
-----------------------------------
-15-
<PAGE> 16
STATE OF WASHINGTON )
) ss.
COUNTY OF ___________ )
On this _____________ day of ______________________, 199___, before me,
a Notary Public in and for the State of Washington, duly commissioned and sworn,
personally appeared Michael R. Mastro, to me known to be the individual who
executed the within and foregoing instrument, and acknowledged that he signed
the same as his free and voluntary act and deed, for the uses and purposes
therein mentioned.
Given under my hand and official seal hereto affixed the day and year in
this certificate first above written.
---------------------------------------
NOTARY PUBLIC in and for the State of
Washington, residing at .
----------------
My commission expires .
------------------
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this _______ day of _________________, 19___, before me, the
undersigned, a Notary Public in and for the Sate of Washington, duly
commissioned and sworn, personally appeared STAVROS ANASTASIOU, to me known to
be the person who signed as General Partner of REDMOND EAST ASSOCIATES, the
Washington general partnership that executed the within and foregoing
instrument, and acknowledged said instrument to be the free and voluntary act
and deed of REDMOND EAST ASSOCIATES for the uses and purposes therein mentioned;
and on oath stated that he was authorized to execute the said instrument on
behalf of REDMOND EAST ASSOCIATES.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year first above written.
_______________________________________
NOTARY PUBLIC in and for the State of
Washington, residing at ______________.
My commission expires ________________.
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this _______ day of _________________, 19___, before me, the
undersigned, a Notary Public in and for the Sate of Washington, duly
commissioned and sworn, personally appeared PERRY VYZIS, to me known to be the
person who signed as General Partner of REDMOND EAST ASSOCIATES, the Washington
general partnership that executed the within and foregoing instrument, and
acknowledged said instrument to be the free and voluntary act and deed of
REDMOND EAST ASSOCIATES for the uses and purposes therein mentioned; and on oath
stated that he was authorized to execute the said instrument on behalf of
REDMOND EAST ASSOCIATES.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year first above written.
_______________________________________
NOTARY PUBLIC in and for the State of
Washington, residing at ______________.
My commission expires ________________.
-16-
<PAGE> 17
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this _______ day of _________________, 19___, before me, the
undersigned, a Notary Public in and for the Sate of Washington, duly
commissioned and sworn, personally appeared MICHAEL R. MASTRO, to me known to be
the person who signed as General Partner of REDMOND EAST ASSOCIATES, the
Washington general partnership that executed the within and foregoing
instrument, and acknowledged said instrument to be the free and voluntary act
and deed of REDMOND EAST ASSOCIATES for the uses and purposes therein mentioned;
and on oath stated that he was authorized to execute the said instrument on
behalf of REDMOND EAST ASSOCIATES.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year first above written.
_______________________________________
NOTARY PUBLIC in and for the State of
Washington, residing at ______________.
My commission expires ________________.
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this _______ day of _________________, 19___, before me, the
undersigned, a Notary Public in and for the Sate of Washington, duly
commissioned and sworn, personally appeared __________________________________,
to me known to be the person who signed as ________________________ of DIGITAL
SYSTEMS INTERNATIONAL, INC., the Washington corporation that executed the within
and foregoing instrument, and acknowledged said instrument to be the free and
voluntary act and deed of said corporation for the uses and purposes therein
mentioned, and on oath stated that ________ was duly elected, qualified and
acting as said officer of the corporation, that __________ was authorized to
execute said instrument and that the seal affixed, if any, is the corporate seal
of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and the year first above written.
_______________________________________
NOTARY PUBLIC in and for the State of
Washington, residing at ______________.
My commission expires ________________.
-17-
<PAGE> 18
EXHIBIT E
Preliminary Plans Submitted as Design Review Documents to the City of Redmond
(2 pages)
[Graphics omitted]
-18-
<PAGE> 19
RIDER attached to and forming a part of the lease between MICHAEL R. MASTRO and
REDMOND EAST ASSOCIATES as Lessor and DIGITAL SYSTEMS INTERNATIONAL, INC. as
Lessee.
- --------------------------------------------------------------------------------
ADDITIONAL PROVISIONS
40. Term. Supplementing Section 4 hereof, the term of this Lease shall commence
upon the date ("Commencement Date") which is the earlier to occur of (a) the
later of (i) August 1, 1991, or (ii) the date upon which the Building and the
Leasehold Improvements are substantially completed (as defined in Section 43
hereof) or (b) the date Lessee actually occupies the Premises for the conduct of
its business, and the term shall expire on the last day of the 84th full month
thereafter. When the Commencement Date has been determined, Lessor and Lessee
shall, within 5 business days thereafter, execute a written agreement confirming
such date as the Commencement Date.
41. Basic Rental. The Basic Rental shall be $0.91 per square foot of the
Building per month through the 60th month of the term of this Lease and $0.92
per square foot of the Building per month thereafter.
42. Operating Expenses and Real Property Taxes. This Section supplements Section
6.
(a) Operating Expenses. Supplementing Section 6 hereof, commencing on
the Commencement Date Lessee shall pay to Lessor as "Additional Rental", the
Operating Expenses (as defined in Section 6 hereof) of the Premises.
(1) Exclusions.
(A) Notwithstanding anything in Section 6 to the contrary,
Operating Expenses shall exclude or have deducted from them:
(i) Leasing commissions;
(ii) Managing agents' fees or commissions in excess
of four percent (4%) of the Basic Rental payable under this Lease;
(iii) Executive's salaries above the grade of
building manager;
(iv) Expenditures for capital improvements except
those which, under generally accepted accounting principles, are expenses or
regarded as deferred expenses and except for capital expenditures required by
law;
(v) Amounts received by Lessor through proceeds of
insurance to the extent the proceeds are compensation for expenses which were
previously included in Operating Expenses hereunder;
(vi) Cost of repair or replacements incurred by
reason of fire or other casualty or by the exercise of the right of eminent
domain;
(vii) Consulting fees, marketing fees, advertising
and promotional expenditures;
(viii) Legal fees in connection with the
negotiation and preparation of leases of space or legal fees in connection with
the sale of all or any portion of the Property, or an interest therein, or the
refinancing of Lessor's interest in all or any portion of the Property, or in
connection with disputes with tenants, and legal and auditing fees, other than
legal and auditing fees reasonably incurred in connection with the maintenance
and operation of all or any portion of the Property or in connection with the
preparation of the statements required pursuant to Additional Rental or lease
escalation provisions contained in leases of space in the Building;
(ix) Principal and interest payments on loans
secured by mortgages or deeds of trust on, or assignment of rents from, all or
any portion of the Property;
(x) Rents payable in connection with any ground or
underlying lease of all or any portion of the Property;
(xi) All Operating Expenses for which Lessor has
received reimbursement, except by way of Basic Rental or escalation rents;
(xii) Depreciation, except for depreciation on
equipment used in the repair and maintenance of the Property over the useful
life of such equipment;
(xiii) Costs resulting from the correction of any
latent construction defects in all or any portion of the Property;
(xiv) Penalties due to any violation of law by
Lessor or other tenants;
(xv) Costs of preparing tenant space for tenant
occupancy;
-19-
<PAGE> 20
(xvi) Costs of any utilities, services, or capital
improvements relating to all or any portion of the Property which were paid
directly by Lessee or any other tenant;
(xvii) Costs allocable to properties other than the
Property in which Lessor has an interest;
(xviii) Damages incurred by Lessor for any default,
breach, claim, judgment or settlement;
(xix) Costs related to public transportation,
transit or van pool unless imposed by governmental authority;
(xx) Structural repairs or replacements;
(xxi) Costs incurred in performing work or
furnishing services for individual tenants (including Lessee) at such tenant's
expense to the extent that such work or service is in excess of any work or
service Lessor at its expense is obligated to furnish to Lessee; costs of
performing work or furnishing services to tenants other than Lessee at Lessor's
expense to the extent that such work or service in excess of any work or service
Lessor is obligated to furnish to Lessee at Lessor's expense; and
(xxii) Lessor's general administrative overhead.
(2) Reconciliation of Operating Expenses. Within 90 days
following the expiration of each Lease Year, Lessor shall prepare and deliver to
Lessee an itemized accounting (together with copies of bills and invoices) of
actual Operating Expenses incurred during the prior Lease Year with respect to
the Property. If the Additional Rental paid by Lessee under this Section during
the preceding Lease Year was less than the actual amount of the Operating
Expenses payable by Lessee under this Lease for such Lease Year, Lessor shall so
notify Lessee and Lessee shall pay the difference to Lessor within 30 days after
receipt of such notice. Such amount shall be deemed to have accrued during the
prior Lease Year and shall be due and payable from Lessee even though the term
of this Lease shall have expired or this Lease shall have been terminated prior
to Lessee's receipt of this notice. If the Additional Rental paid by Lessee
under this Section was greater than the actual amount of the Operating Expenses
payable by Lessee under this Lease for such Lease Year, then the amount of such
overpayment shall be promptly refunded to Lessee.
(3) Statements Binding. The statements of Operating Expenses to
be furnished by Lessor under paragraph (3) as provided above shall be certified
as true and correct by Lessor, and shall be prepared in reasonable detail by
Lessor. The statements thus furnished to Lessee shall constitute a final
determination as between Lessor and Lessee of Operating Expenses for the periods
represented thereby, unless Lessee, within 30 days after they are furnished,
shall give notice to Lessor that it disputes their accuracy or their
appropriateness, which notice shall specify the particular respects in which the
statement is inaccurate or inappropriate. Pending the resolution of such
dispute, Lessee shall pay to Lessor the uncontested portion of Operating
Expenses. Any such dispute shall be resolved by binding arbitration in
accordance with Section 54 of this Lease. Within 30 days after the resolution of
such dispute, Lessee shall pay to Lessor any deficiency in the amount of
Operating Expenses previously paid by it to Lessor. Lessee shall have the right,
during business hours and upon 3 business days' prior written notice to Lessor,
to examine and/or audit Lessor's books and records with respect to Operating
Expenses paid or payable by Lessee, and if such examination reveals that Lessor
overstated Operating Expenses by 5% or more, the cost of such examination and/or
audit shall be paid by Lessor upon demand.
(b) Real Property Taxes. Real Property Taxes against the Property and
the Building shall be prorated between Lessor and Lessee as of the Commencement
Date. On the Commencement Date, Lessee shall pay Lessor Lessee's prorated share
of such Real Property Taxes for the half of the fiscal year in which the
Commencement Date occurs. Thereafter, Lessee shall pay as Additional Rental all
Real Property Taxes against the Property and the Building at least twenty (20)
days before delinquency and shall promptly provide Lessor with proof of each
such payment.
(1) Real Property Taxes Defined. "Real Property Taxes" shall mean
all taxes, assessments (general and special) and other impositions or charges
which may be taxed, charged, levied, assessed or imposed upon all or any portion
of, or in relation to the Property or the Building (other than estate,
inheritance, net income or franchise taxes).
(2) Statement of Real Property Taxes. No later than 30 days prior
to the Commencement Date, Lessor shall deliver to Lessee a copy of the statement
from the taxing authority for Real Property Taxes for the fiscal year in which
the Commencement Date occurs.
Within 10 business days after Lessor's receipt of a statement from the
taxing authority for Real Property Taxes for each Lease Year following the Lease
Year in which the Commencement Date occurs, Lessor shall deliver the original of
such statement to Lessee. Lessee shall pay the Real Property Taxes for each
Lease Year, based upon such statements, in as many installments as Lessor is
permitted to pay Real Property Taxes for such Lease Year, and Lessee shall pay
each such installment to the taxing authority no later than twenty (20) days
prior to delinquency. If any lender which holds a mortgage or deed of trust
against the Property requires the periodic payment of reserves for Real Property
Taxes, Lessee shall pay to Lessor the amount of the required installments for
reserves no less than 5 business days prior to each installment due date. Lessor
will use its reasonable best efforts to persuade any such lender to waive the
reserve requirement.
-20-
<PAGE> 21
(3) Reconciliation of Real Property Taxes. If, after Lessee shall
have made a payment of Additional Rental under this Section 42(b), Lessor shall
receive a refund of any Real Property Taxes payable during any Lease Year on
which such payment shall have been based, as a result of a reduction of Real
Property Taxes by final determination of legal proceedings, settlement or
otherwise, Lessor shall, within 10 days of receiving such refund, pay to Lessee
such refund.
43. Construction; Substantial Completion.
(a) Construction of Building and Premises. Lessor shall be responsible
for construction of the Building and the payment of all the costs of
construction. The Building shall be a concrete, two-story, tilt wall building
containing approximately 83,000 square feet. The general specifications for the
Building are outlined on Exhibit C attached. Included within the general
specifications for the Building are 400 feet of skylights. Lessee may require
more than 400 feet of skylights in the Building, provided that Lessor is able to
secure the necessary building permits. However, Lessor shall not be required to
pay for more than 400 feet of skylights and any increased cost attributable to
additional skylights shall be included within the Leasehold Improvements
(defined below). Lessor shall also be responsible for construction of all site
improvements required for the Building and for all landscaping and for paying
the entire cost thereof. Lessor shall also be responsible for finishing the
interior of the Premises (herein "Leasehold Improvements") and for payment of
the costs thereof to a maximum of $75,000 plus $32.10 per square foot of the
Premises (inclusive of sales tax and the costs of permits, but exclusive of the
costs of plans and specifications) and reduced by one-half of the actual cost to
construct the temporary water tank required by the City of Redmond as a
condition to issuance of a building permit for the Building; provided, however,
that such reduction on account of the water tank shall not exceed $62,500.00
("Lessee's Improvement Allowance"). Construction of the Building and the site
improvements, installation of the landscaping and construction of the Leasehold
Improvements shall be done in a good and workmanlike manner and in accordance
with the final plans and specifications provided for herein and in accordance
with all applicable laws, rules, regulations and ordinances. Lessor will by the
date of substantial completion of the Building or as soon thereafter as
reasonably possible, provide to Lessee reasonably acceptable evidence of the
cost of construction of the temporary water tank. Lessor agrees to pay Lessee
one-half of any amount realized by Lessor from the sale of the water tank (or
any component parts thereof) after deducting any costs incurred by Lessor in
realizing such amount, such payment to Lessee to be made promptly upon receipt
of such amount by Lessor.
(b) Preparation and Approval of Plans and Specifications for Building
and Property. At the request of Lessor, Lance Mueller & Associates, Inc.,
("Architect") has prepared preliminary plans and specifications dated September
13, 1990, Revision 3, November, 1990, for the Building and the landscaping and
other site improvements (including parking) on the Property (the "Preliminary
Plans"). The Preliminary Plans have been submitted as design review documents to
the City of Redmond (File #SPR-90-66) and copies thereof are attached hereto as
Exhibit E. Lessee has approved the Preliminary Plans. When the City of Redmond
has completed its review and has given design review approval Lessor will
proceed as quickly as reasonably possible to prepare final plans and
specifications for the Building and the landscaping and other site improvements
(including parking) on the Property. The final plans and specifications shall
include the skylights requested by Lessee provided that the Architect believes
the same are structurally feasible. The final plans and specifications shall be
submitted to Lessee for approval, but so long as there is no material deviation
from the Preliminary Plans, Lessee's approval shall be required and shall be
promptly given in writing. If there are material changes so that Lessee's
approval is required, it shall not be unreasonably withheld, delayed, or
conditioned and shall be deemed to have been given if Lessee does not disapprove
the final plans and specifications within ten (10) business days after
submittal.
(c) Preparation of Plans and Specifications for Leasehold Improvements.
Lessor shall be responsible for payment of the costs of designing the Leasehold
Improvements (the "Design Costs") up to a maximum of $0.75 per square foot of
the Building (the "Design Allowance"). If the Design Costs exceed the Design
Allowance, the excess shall be paid by Lessee when the costs are due and
payable. The Design Costs shall include the costs of space planning through the
preparation of final plans and specifications for the Leasehold Improvements.
Lessee shall work with a space planner or architect reasonably acceptable to
Lessor to develop a space plan and plans and specifications for the Leasehold
Improvements. From the space plan such architect or space planner (or another
architect or space planner reasonably acceptable to Lessor) shall prepare plans
and specifications for the Leasehold Improvements which fairly incorporate the
space plan. Lessee may require revisions to the plans and specifications prior
to finalization and shall be given reasonable time for "value engineering", but
Lessee agrees to act in a commercially reasonable manner in doing so and to not
delay the preparation of final plans and specifications for the Leasehold
Improvements beyond a date when construction of the Leasehold Improvements must
commence in order for Lessor to meet the construction schedule set out below.
(d) Construction Contract. Lessor will enter into a construction
contract for construction of the Building and the Leasehold Improvements with a
contractor or contractors who shall be from a list of contractors approved by
Lessee, which approval shall not be unreasonably withheld, delayed, or
conditioned. If required by Tenant, the final plans and specifications for the
Leasehold Improvements shall be submitted for bid to at least three contractors
from the approved list of contractors. Lessor shall provide copies of the bids
to Lessee and Lessee may discuss the bids with such contractors so long as
Lessee acts reasonably. Lessor will keep Lessee informed as to the bidding and
contracting process. Lessor will award the construction contract for the
Leasehold Improvements to the lowest bidder unless directed otherwise by Lessee.
Each construction contract shall identify by line item breakdown, the entire
construction cost of the Building and the Leasehold Improvements, separately
designated and identified including the additional cost attributable to more
than 400 feet in skylights. Each construction contract shall include a
guaranteed maximum price, subject to
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increases only for the matters recited in the AIA form general construction
contract and change orders initiated or approved by Lessee. If the construction
cost of the Leasehold Improvements, as set out in the construction contract,
including any increases resulting from change orders initiated or approved by
Lessee in writing, exceeds Lessee's Improvement Allowance, Lessor shall pay the
excess to the contractor as and when due and Lessee shall be responsible for
reimbursement to Lessor of the excess
[Graphics Omitted of:
Network/Evans Conceptual Site Grading and Utility Plan
Redmond East Business Campus (Evans Property)
Redmond East (Evans Property)
Redmond East Business Campus (Evans Property)]
(herein "Lessee's Share"). Lessee shall have the option to pay all or a portion
of Lessee's Share in cash on the Commencement Date or to increase the Basic
Rental payable under this Lease by $0.008 per square foot for each $0.50 per
square foot of the cost of the Leasehold Improvements above Lessee's Improvement
Allowance if and to the extent not paid in cash on the Commencement Date. If the
construction cost for the Leasehold Improvements as set out in the construction
contract, including any increases for change orders initiated or approved by
Lessee, is less than Lessee's Improvement Allowance, the difference will be paid
by Lessor to Lessee in cash on the Commencement Date (or as soon thereafter as
the amount due can be calculated with certainty).
(e) Substantial Completion. Construction of the Building and the
Leasehold Improvements shall be deemed substantially completed when: (1) the
supervising architect has executed a certificate to Lessor and Lessee certifying
that the Building and the Leasehold Improvements have been substantially
completed in accordance with the final plans and specifications, and (2) the
appropriate governmental authority has issued a certificate of occupancy for the
Premises, and (3) the landscaping of the Property has been substantially
completed in accordance with landscaping plans approved by Lessee (unless
landscaping cannot then be completed because of weather conditions in which case
it shall be completed as soon as reasonably possible). Lessor shall give Lessee
at least 30 days' prior written notice of the date Lessor anticipates that the
Building and the Leasehold Improvements will be substantially completed. Within
5 business days thereafter, Lessor, the contractor, Lessee and the supervising
architect will jointly conduct an inspection of the Premises and create a
punchlist of items to be completed by Lessor. Lessor shall cause the punchlist
items to be completed as soon as reasonably possible. Final completion shall be
evidenced by a certificate of final completion to Lessor and Lessee executed by
the supervising architect.
(f) Commencement and Completion. Lessor agrees to commence construction
of the Building as soon as Lessor obtains the necessary permits from the City of
Redmond, Washington, permitting it to commence construction. Lessor agrees to
use its reasonable best efforts to obtain the permits as soon as possible. If
Lessor has not obtained clearing and grading permits for the Building by July
15, 1991, Lessee may at its option terminate this Lease by giving Lessor written
notice by no later than July 31, 1991. If Lessee does not elect to terminate
this Lease Lessor shall continue to use its reasonable best efforts to obtain
the building permits as soon as possible. If Lessor has not obtained the
building permits necessary for construction of the Building by September 15,
1991 (unless prevented for reasons beyond Lessor's reasonable control) Lessee
may, at its option, terminate this lease by giving written notice to Lessor by
no later than October 1, 1991. If Lessor was prevented from obtaining such
building permits for reasons beyond Lessor's reasonable control or if Lessee
does not exercise its option to terminate this Lease, Lessor shall continue to
use its reasonable best efforts to obtain such building permits as soon as
possible. If, however, despite its reasonable best efforts Lessor has not
obtained such building permits by December 15, 1991, either Lessor or Lessee may
terminate this Lease by written notice to the other given by December 31, 1991.
After construction has commenced, Lessor will diligently and continuously
proceed with construction and agrees to substantially complete construction of
the Building and the Leasehold Improvements within one hundred thirty-five (135)
days after the necessary building permits have been issued by the City of
Redmond. If construction of the Building and the Leasehold Improvements is not
substantially completed within said one hundred thirty-five (135) day period,
Lessor shall continue to diligently proceed with construction and agrees to pay
to Lessee, within ten (10) business days after Lessee's request and submittal of
paid receipts, any and all temporary occupancy costs reasonably incurred by
Lessee as a result of construction of the Building and Leasehold Improvements
not being substantially completed within said one hundred thirty-five (135) day
period. Such costs shall include, without limitation, moving costs associated
with moving to temporary space and rental (including minimum rent, additional
rent, and holdover rent) in excess of the Basic Rental and a reasonable estimate
of Additional Rental that would have been payable under this Lease for the same
period. In any event, if the Building and Leasehold Improvements are not
substantially completed for any reason, including events force majeure within
two hundred seventy (270) days after the necessary building permits have been
first issued, Lessee shall have the right, by irrevocable written notice to
Lessor to terminate this Lease. Upon such termination, (except for any unpaid
temporary occupancy costs incurred up to the date of termination) neither Lessor
nor Lessee shall have any further rights or obligations hereunder. In addition,
if at any time it reasonably appears to Lessee and the supervising architect
that construction is not progressing with sufficient speed to substantially
complete within said two hundred seventy (270) day period, Lessee may give
Lessor written notice thereof. If within thirty (30) days of such notice Lessor
does not take action which, in the good faith opinion of the supervising
architect, will permit construction to be substantially completed by that
deadline, Lessee may terminate this Lease by irrevocable written notice to
Lessor. Except for the payment of temporary occupancy costs as provided above
(which obligation shall cease to accrue on the date this Lease is terminated),
termination of this Lease shall be Lessee's sole and exclusive remedy for
failure to proceed with or complete construction (unless Lessor has failed
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<PAGE> 23
or refused to use its reasonable best efforts). Notwithstanding the foregoing,
the time limits for completion of construction set out above shall be extended
to accommodate the delay caused by change orders initiated or approved by
Lessee.
(g) Measurement of Premises. Lessor and Lessee acknowledge and agree
that the precise square foot area of the Building cannot be determined until
such time as the Building is substantially completed. Upon the substantial
completion of the Building, Lessor and Lessee shall, at Lessor's expense,
determine the precise square feet of rentable area of the Building using the
BOMA standard of measurement except that the rentable area of the second floor
of the Building shall be reduced by vertical penetrations as defined in the BOMA
standards. However, no more than 400 square feet of skylights or lightwells
shall be considered as vertical penetrations. Upon such determination, Lessor
and Lessee shall execute a certificate setting forth such area and based upon
such area, the Basic Rental payable under Section 5 hereof and Lessee's
Improvement Allowance under this Section 43. If Lessor and Lessee fail to agree
upon such area within 30 days after the substantial completion of the Building,
such area shall be determined by binding arbitration pursuant to Section 54
hereof. Until such determination is made, the amount by which Lessor's
determination of Basic Rental exceeds Lessee's determination shall be deposited
into an escrow and disbursed in accordance with the decision of the arbitrator.
Any reference in this Lease to "square feet" shall mean the "rentable area" as
defined in the BOMA American National Standard (ANSI Z65-1-1980) ("BOMA") with
the exclusion of second floor vertical penetrations as set out above.
(h) Correction of Lessor's Work. Lessor shall promptly correct all
defects in the Building and the interior of the Premises and all failures of
construction to conform to the final plans and specifications, which defects or
nonconformities are discovered before or within one year after the Commencement
Date. Lessor shall bear all costs of correcting such work. Lessor and Lessee
shall each give the other prompt written notice after discovering the existence
of any such defects or nonconformities in such work.
44. Parking. Lessor grants to Lessee, and its agents, employees, suppliers,
customers, invitees, and licensees a non-exclusive license to use the designated
parking areas on the Property. Lessor agrees during the term of this Lease to
provide parking on the Property for no less than two hundred forty-seven (247)
vehicles.
45. Damage or Destruction. Supplementing Section 21 hereof, if in Lessor's
reasonable estimation the Premises cannot be restored within 12 months following
any damage or destruction, (including the unavailability of insurance proceeds)
Lessor shall immediately notify Lessee thereof in writing and Lessee may
terminate this Lease by delivering irrevocable written notice to Lessor within
30 days of its receipt of Lessor's notice. If Lessor does not or is not
permitted to terminate this Lease, and if in Lessor's reasonable estimation the
Premises can be restored within 12 months, then Lessor shall commence to restore
the Premises and the Building in compliance with then-existing laws, and shall
complete such restoration with due diligence. In such event, this Lease shall
remain in full force and effect, but there shall be an abatement of rent between
the date of destruction and the date restoration is completed, based on the
extent to which the destruction interferes, in the determination of Lessor and
Lessee, with the use of the Premises for Lessee's normal business operations. If
Lessor and Lessee fail within 30 days of the date of the casualty to agree upon
the extent to which rent shall be abated, then the determination thereof shall
be submitted to binding arbitration pursuant to Section 54 of this Lease, and
until such determination is made, any excess in the rent claimed by Lessor over
that claimed by Lessee shall be deposited into an escrow and after such
determination is made, disbursed in accordance with the decision of the
arbitrator. The foregoing notwithstanding, if Lessor elects to restore the
Premises but fails to complete the restoration within 12 months of the date of
the casualty, Lessee may terminate this Lease by giving Lessor irrevocable
written notice of termination within 20 days after the expiration of such 12
month period. Notwithstanding anything contained in this Section 45 to the
contrary, either Lessor or Lessee may terminate this Lease by written notice
given within 30 days after any damage or destruction occurring during the last
12 months of the Lease term or any renewal term.
46. Lessee's Right to Contest Liens. Supplementing Section 22 hereof, Lessee
shall have the right to contest the validity of any lien, tax or assessment
which Lessee is required to bear, pay and discharge hereunder by appropriate
legal proceedings, provided that Lessee, before instituting any such contest,
(a) gives Lessor written notice of its intention to contest such lien, tax or
assessment, and (b) pays such lien, tax or assessment in full under protest or
posts with Lessor such bond as Lessor may reasonably deem appropriate to protect
Lessor and the Premises or Property against the nonpayment of such lien, tax or
assessment (including interest, penalties and attorneys' fees). Lessor agrees to
cooperate with Lessee in good faith during the course of such contest, at
Lessee's cost and expense. Lessee shall diligently prosecute any such contest,
at all times effectually stay or prevent any official or judicial sale therefor
under any execution or otherwise, and pay any final judgment enforcing the tax
or assessment so contested and thereafter promptly procure record satisfaction
thereof.
47. Indemnity by Lessee and Lessor. Supplementing Section 23 hereof, Lessee
shall indemnify and hold Lessor harmless from all damages arising out of (a) any
damage to any person or property occurring in, or about the Premises, (b)
Lessee's use of the Premises, or (c) Lessee's breach of the terms of this Lease,
except to the extent any of the foregoing is due to the negligence or wilful
misconduct of Lessor or Lessor's agents, employees, invitees, licensees or
contractors. Lessor shall indemnify, defend, and hold Lessee harmless from all
damages arising out of: (a) negligence or willful misconduct of Lessor or
Lessor's agents, employees, invitees, licensees, or contractors including,
without limitation, damage to any person or property, and (b) Lessor's breach of
any of the terms of this Lease (except as otherwise limited herein).
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<PAGE> 24
Notwithstanding the foregoing, in the event of the concurrent negligence
of Lessee, its agents, employees, sublessees, invitees, licensees or
contractors, on the one hand, and that of Lessor, its partners, directors,
officers, agents, employees, invitees, licensees or contractors, on the other
hand, which concurrent negligence results in injury or damage to persons or
property and relates to the construction, alteration, repair, addition to,
subtraction from, improvement to or maintenance of the Premises, Lessee's and
Lessor's obligation to indemnify the other as set forth in this Section shall be
limited to the extent of Lessee's or Lessor's (as the case may be) negligence
and that of its agents, employees, lessee's, sublessees, invitees, licensees or
contractors and shall include Lessee's or Lessor's (as the case may be)
proportional share of costs, reasonable attorneys' fees, and expenses incurred
in connection with any claim, action or proceeding brought with respect to such
injury or damage.
48. Default; Remedies.
(a) Default by Lessor. Supplementing Section 24 hereof, the occurrence
of the following shall constitute a default by Lessor: a failure to perform any
provision of this Lease within 30 days after written notice of default from
Lessee, or, if such performance cannot reasonably be completed within 30 days,
within a reasonable period of time, provided Lessor is diligently pursuing
performance to completion.
(b) Remedies of Lessee. Without limiting Lessee's rights under Section
43(f), Lessee shall have the following remedy if Lessor is in default: Lessee
may at its option pay any sum or perform any act on Lessor's part to be paid or
performed under this Lease. Lessor shall, within 5 business days after receiving
a written statement therefor, refund to Lessee the amount of any such payment
made or any such expense incurred by Lessee on account of Lessor's default,
together with interest thereon at the rate of fifteen (15%) per annum from the
date Lessee makes such expenditure.
49. Subordination of Lessee's Interest. Subject to the provisions of this
Section, at the election of Lessor or any mortgagee or any beneficiary of a deed
of trust with a lien on the Premises, this Lease shall be subject and
subordinate at all times to the lien of any mortgage or deed of trust which may
now exist or hereafter be executed for which the Premises is specified as
security. In the event that any such mortgage or deed of trust is foreclosed, or
a conveyance in lieu of foreclosure is made for any reason, Lessee shall,
notwithstanding any subordination, attorn to and become the Lessee of the
successor in interest to Lessor, at the option of such successor in interest,
provided that Lessee shall not so subordinate or attorn unless such successor in
interest shall have delivered to Lessee an agreement, in recordable form,
whereby such successor agrees not to disturb Lessee's possession and occupancy
(so long as Lessee is not in default hereunder) and agrees to perform all of
Lessor's obligations hereunder and recognize all Lessee's rights hereunder
during the term of such successor's ownership of the Building. Lessor agrees
that it will not cause the Property to be encumbered by a mortgage or deed of
trust unless the holder thereof agrees to give Lessee a non-disturbance
agreement in the form typically required by institutional first mortgage
lenders.
50. Right of First Refusal to Lease Building No. 19. On the map attached as
Exhibit B, there is shown adjacent to the Property to the south the location of
proposed Building No. 19 which is to contain between 50,000 and 80,000 square
feet and which is to be located on a portion of the real property legally,
described on Exhibit A attached (such portion to be configured generally as
shown on Exhibit B and referred to herein as the "Building 19 Property"). The
Building 19 Property includes approximately 101,074 square feet of land area.
One of the reasons Lessee is entering into this Lease with Lessor is because
Lessee may wish to lease all or a portion of Building No. 19 from Lessor. During
the term of this Lease, Lessor will give Lessee prior written notice if Lessor
intends to accept an offer to enter into a lease with respect to all or any
portion of Building No. 19, which notice shall describe the size and location of
the area to be leased, the economic terms of any such lease and the expected
commencement date. Lessor will not accept any such third party offer prior to
Commencement Date of this Lease. If during the initial term of this Lease,
Lessee wishes to lease such space in Building No. 19 on the economic terms and
the expected commencement date set out in such notice, it shall, within ten (10)
business days after receipt of such notice, notify Lessor in writing. Lessor and
Lessee shall then enter into a lease for the area described in Lessor's notice
to Lessee which shall incorporate such economic terms and commencement date and
shall otherwise be in the form of this Lease. If Lessee does not exercise this
right of first refusal with respect to such space in Building No. 19, such right
of first refusal shall terminate as to such space until the expiration of the
lease for such space between Lessor and such third party and shall continue with
respect to any other space in Building No. 19. If Lessee does not exercise its
right of first refusal with respect to such space, and if Lessor fails to enter
into a lease for such space with such third party within ninety (90) days after
the date of Lessor's notice to Lessee offering such space, Lessee's right of
first refusal shall continue in full force with respect to such space. Nothing
in this section is intended or shall be constructed to obligate Lessor to build
Building 19.
51. [INTENTIONALLY DELETED]
52. Brokers. At the signing of this Lease, Evergreen Management Company
("Broker") represented Lessee. Each party signing this document confirms that
prior oral and/or written disclosure of agency was provided to it in this
transaction by the Broker.
Lessor agrees to pay any and all commissions due to the Broker in
conjunction with this transaction, subject to this Lease not being terminated
prior to the Commencement Date. Lessor and Lessee each represent to the other
that there are no other brokers or selling/leasing agents involved in this
transaction other than the Broker, and shall indemnify, defend, and hold each
other harmless from and against any breach of this representation.
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<PAGE> 25
53. Hazardous Substances. Lessor represents and warrants to Lessee that as of
the date hereof and as of the Commencement Date (a) it has not received
notification of any kind from any regulatory agency stating that the Property is
or may be targeted for a federal or state Hazardous Substances cleanup or may be
contaminated with any Hazardous Substances, and (b) Lessor has no actual
knowledge of a release of any Hazardous Substances on the Property. "Hazardous
Substances" shall mean any substances designated as, or containing components
designated as, hazardous, dangerous, toxic or harmful or which are subject to
regulation by any federal, state or local law, regulation, statute or ordinance.
Lessor shall indemnify, defend, and hold Lessee harmless from and
against any and all loss, damage, claims, penalties, liabilities, suits, costs
and expenses (including, without limitation, reasonable attorneys' fees and also
including, without limitation, cost of remedial action or cleanup), suffered or
incurred by Lessee arising out of or related to the use, disposal,
transportation, generation or sale of Hazardous Substances in or about the
Property or the breach of the above representation, including, without
limitation, any such matter suffered or incurred arising out of the matters
described in the Level I Site Assessment for the "Evans Property" prepared for
Network Real Estate Services (W-6661) by Rittenhouse Zeman dated February, 1990.
This indemnity shall not apply to Hazardous Substances which are placed on,
under or in the Property by Lessee, its employees, agents, licensees,
contractors or invitees or Hazardous Substances which are placed on, under or in
the Property after the Commencement Date and before Lessee vacates the Premises
(unless placed on, under, or in the Property by Lessor, its employees, agents,
contractors, licensees or invitees), and Lessee shall hold harmless, protect,
indemnify and defend Lessor with respect thereto. Lessee covenants and agrees
with Lessor that Lessee will not permit the use of any Hazardous Substance in
connection with any of its activities on the Property except in strict
accordance with all the requirements of all applicable laws, rules, regulations
and ordinances, and Lessee agrees to hold harmless, protect, indemnify and
defend Lessor with respect to any breach of this covenant and agreement.
54. Arbitration. If Lessor and Lessee cannot mutually agree upon (1) Operating
Expenses pursuant to Section 42(a) hereof, or (2) the actual rentable square
foot area of the Building or any portion thereof pursuant to Section 43(g)
hereof, or (3) the extent to which the rent shall be abated under Section 45
hereof, or (4) the market rental under Section 56 hereof, then the determination
shall be submitted to binding arbitration upon the written demand of either
party delivered to the other party. Such arbitration shall be conducted in
accordance with the commercial arbitration rules or the real estate valuation
rules, as appropriate, of the American Arbitration Association then in effect
and judgment upon the award may be entered in any court having jurisdiction. The
costs and expenses of the arbitration shall be divided equally between Lessor
and Lessee.
55. Lessor's Representations, Warranties and Covenants. Lessor represents,
warrants and covenants to Lessee that: (a) as of the date the Building and the
Leasehold Improvements are substantially completed, all persons and entities
supplying labor, materials and equipment to the Premises, Building or Property
will be paid when due, and there shall be no claims of liens affecting the
Premises, Building or Property; (b) as of the Commencement Date, the Premises,
Building and Property do not and shall not, to the best of Lessor's actual
knowledge after reasonable inquiry, violate any applicable building or zoning
ordinances; (c) as of the Commencement Date, no assessments for public
improvements will have been made against the Premises, Building or Property
which are delinquent; (d) Lessor has good right and full power to execute and
enter into this Lease; (e) as of the commencement of construction Lessor will be
the sole owner in fee of the Property and as of the Commencement Date, Lessor
will be the sole owner in fee of the Building 19 Property; (f) as of the
Commencement Date, the Property and the Building 19 Property will each be a
separate legal lot or parcel and will be properly subdivided, platted,
designated, and zoned so as to permit the uses of the Property and the Building
19 Property contemplated by this Lease. Upon the Property and the Building 19
Property being properly subdivided, the parties agree to substitute for Exhibit
A separate legal descriptions of the Property and the Building 19 Property.
Lessor warrants and represents to Lessee that as of the date hereof Lessor
(either by itself or through an affiliate whose interests are freely assignable
to Lessor) holds an enforceable right to purchase the Property and the Building
19 Property. Lessor agrees that it will keep its right to purchase the Property
and the Building 19 Property in good standing and in full force and effect and
that it will take all necessary steps to close the purchase of the Property and
the Building 19 Property in sufficient time to perform all its obligations
hereunder. On or before the commencement of construction Lessor shall deliver to
Lessee a copy of the recorded deed and the owner's title insurance policy
showing that Lessor is vested in title to the Property and by the Commencement
Date Lessor shall deliver to Lessee a copy of the recorded deed and the owner's
title insurance policy showing that Lessor is vested in title to the Building 19
Property.
56. Renewal Option. Lessee shall have the option to renew this Lease for an
additional period of 5 years ("Renewal Term") on all the terms and conditions of
this Lease, except that the Basic Rental shall be adjusted to ninety-five
percent (95%) of the then current market rent, but in no event less than $0.92
per square foot of the Premises. In determining market rent, the rental value
for tenant improvements that are installed and paid for by Lessee or that
installed by Lessor and paid for by Lessee shall not be included. In order to
exercise its option to renew, Lessee shall deliver to Lessor written notice of
its election to renew at least 180 days prior to the expiration of the initial
term. If Lessor and Lessee cannot agree on market rent within sixty (60) days
after the date of such notice, market rent shall be established by arbitration
pursuant to Section 54 hereof. If at the Commencement Date of the Renewal Term,
the amount of Basic Rental payable during the Renewal Term shall not have been
determined, pending such determination Lessee shall pay to Lessor the Basic
Rental last payable before the Renewal Term commenced.
Prior to commencement of the Renewal Term, Lessor shall, upon Lessee's
written request and at Lessor's cost and expense, repaint the interior walls and
ceilings of the Premises and recarpet the floors of the Premises.
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<PAGE> 26
57. Financial Information. Upon request from Lessor, Lessee agrees to provide
such financial statements and other financial information concerning Lessee as
may be reasonably required by any institutional lender to whom Lessor is
applying for financing on the Property.
58. Construction of Rider. If there is any conflict or discrepancy between the
provisions of this Rider and the provisions of the printed lease form to which
this Rider is attached, the provisions of this Rider shall prevail.
59. Submission of Lease. Lessor and Lessee agree that this Lease shall not bind
Lessor and Lessee until (a) Lessor has executed, acknowledge, and delivered
originals of this Lease to Lessee, and (b) Lessee has duly executed and
delivered one of such of originals to Lessor. The foregoing notwithstanding,
this Lease shall be voidable by written notice from either party if the events
described in items (a), and (b) of this Section do not occur on or before May
21, 1991.
60. Assignment and Subletting. Supplementing Section 20 hereof, any assignment
or transfer of this Lease and any encumbrance or subletting in whole or in part
of the Premises by Lessee by operation of law or otherwise shall not be
permitted without Lessor's prior written consent, which shall not be
unreasonably withheld, conditioned, or delayed. If Lessee requests that Lessor
consent to any assignment, transfer, encumbrance or subletting of all or any
part of the Premises, Lessee shall pay Lessor's reasonable attorneys' fees
incurred in connection with such request, not to exceed $500 for each request.
Fifty percent (50%) of the amount by which any rental or other compensation or
consideration payable to Lessee with respect to any such assignment or
subletting exceeds (after deducting the reasonable out of pocket costs incurred
by Lessee in effecting such assignment or subletting including, without
limitation, commission, alteration costs, and legal fees) the Basic Rental and
Additional Rental payable to Lessor under this Lease (with respect to the
portion of the Premises which is sublet or assigned) shall be payable to Lessor
and shall be deemed to have increased the Basic Rental due hereunder until the
expiration of the sublease.
The restrictions on transfer of stock set out in Section 20 hereof shall
not apply to corporations, the stock of which is traded through an exchange or
over-the-counter. Anything contained herein to the contrary notwithstanding,
Lessor hereby consents to an assignment of this Lease or subletting of all or
part of the Premises to: (a) the parent of Lessee or the parent of such parent
or to a wholly owned subsidiary of Lessee or of such parent or the parent of
such parent; (b) any corporation in whom or with which Lessee may be merged or
consolidated, provided that the net worth of the resulting corporation is at
least equal to the greater of (1) the net worth of Lessee on the date hereof, or
(2) the net worth of Lessee immediately prior to such merger or consolidation;
or (c) any entity to whom Lessee sells all or substantially all of its assets,
provided that such entity expressly assumes all Lessee's obligations hereunder.
No assignment or subletting shall relieve Lessee of any of its
obligations under this Lease and Lessee shall continue to be primarily liable
therefor.
END OF RIDER
-26-
<PAGE> 1
EXHIBIT 10.12
REDMOND EAST ASSOCIATES
10800 NE 8th Street, Suite 1080
Bellevue, Washington 98004
(206) 455-2309
Facsimile (206) 462-7267
Digital Systems International, Inc.
Attn: Vice President Finance and Administration
Redmond Science Park
7659 178th Place NE
Redmond, Washington 98052
Re: Redmond East Business Park
You requested that the windows on the building being constructed by us under our
lease with you dated May 20, 1991, be recessed from the exterior walls of the
building. This would have the effect of reducing the square footage of the
building as calculated under the lease. We are willing to accommodate that
design change in consideration of your agreement that the square footage of the
building will be calculated as if the windows were not recessed. Please evidence
your agreement to the foregoing by signing and returning the enclosed copy of
this letter.
Sincerely,
REDMOND EAST ASSOCIATES
By: [Illegible]
---------------------------------
Partner
Accepted and Agreed to this __________ day of July, 1991.
DIGITAL SYSTEMS INTERNATIONAL, INC.
By: /s/ Michael Jacobsen
-------------------------------
Its: VP Finance
------------------------------
<PAGE> 1
EXHIBIT 10.13
SECOND AMENDMENT TO LEASE
That certain Lease dated May 20th, 1991, (the "Lease"), by and between
Carr Redmond Corporation, a Washington corporation, successor in interest to
Redmond East, L.L.C. ("Lessor") and Digital Systems International, Inc., a
Washington corporation ("Lessee"), for the Premises located at 6464 185th Avenue
NE, Suite 151, Redmond, Washington 98052, is amended this _________ day of June
1997, solely as hereinafter described.
Effective the 1st day of June 1997, Lessor and Lessee desire to amend
the Lease as set forth below:
Lessor's name shall be changed from Digital Systems International, Inc.
to Mosaix, Inc.
All other terms and conditions of the above-described Lease shall
remain in full force and effect.
LESSOR: Carr Redmond Corporation, LESSEE: Mosaix, Inc.,
a Washington corporation a Washington corporation
By: /s/ Philip L. Hawkins By: /s/ Wm. Bradford Weller
--------------------------- ---------------------------
Printed: Philip L. Hawkins Printed: Wm. Bradford Weller
--------------------------- ---------------------------
Its: Managing Director Its: General Counsel and
--------------------------- ---------------------------
Assistant Secretary
--------------------------- ---------------------------
Date: 7/15/97 Date: 7/10/98
--------------------------- ---------------------------
<PAGE> 1
EXHIBIT 10.14
THIRD AMENDMENT TO LEASE
THIS THIRD AMENDMENT TO LEASE ("Amendment"), is made and entered into
as of this 2nd day of November, 1998, between Carr Redmond Corporation, a
Washington corporation, successor in interest to Redmond East Associates, as
Lessor, and Mosaix, Inc., a Washington corporation, as Lessee.
W I T N E S S E T H:
WHEREAS, by written Lease dated as of May 20, 1991 and as first amended
by letter agreement dated July 1991 and by the Second Amendment to the Lease
dated June 1, 1997, Lessor leased to Lessee those certain Premises commonly
known as Building 17, with a street address of 6464 185th Avenue NE, Redmond, WA
98052 and legally described on the attached Appendix "A". The Premises are
located within a Project known as Redmond East Business Campus; and
WHEREAS, the term of Lease expires February 28, 1999; and
WHEREAS, the parties hereto desire to enter into an amendment to the
Lease to provide for the extension of the term of the Lease pursuant to the
terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual convenants and
conditions contained herein, the parties agree as follows:
1. TERM. Commencing March 1, 1999, the term of the Lease shall be
extended for a period of five (5) years and shall expire on February 28, 2004,
subject to and in accordance with the remaining terms and provisions set forth
in this Amendment.
2. OPTION TO TERMINATE. Lessee shall have a one-time option to
terminate ("Option to Terminate") the Lease. If Lessee elects to exercise its
Option to Terminate, Lessee shall use good faith efforts to inform Lessor in
writing of such intention, no later than the 30th month of the renewal term, or
on or before August 31, 2001. Notwithstanding the foregoing, Lessee shall have
the Option to Terminate the lease effective August 31, 2002, the 42nd month of
the Lease, with advanced written notice which must be delivered to Lessor no
later than February 28, 2002, along with payment of a termination fee in the
amount of $550,000. Time is of the essence hereof. Lessee's failure for any
reason to deliver the termination notice on or before February 28, 2002,
together with said termination fee, shall be deemed a waiver of Lessee's Option
to Terminate.
3. BASIC RENTAL. Lessee covenants and agrees to pay to Lessor
commencing March 1, 1999, in advance and without offset or deduction of any
kind, Basic Rental for the Premises as follows:
<PAGE> 2
<TABLE>
<CAPTION>
RENT ANNUAL RENT MONTHLY RENT
PERIOD PER S.F. PER S.F. PER S.F.
------ -------- ----------- ------------
<S> <C> <C> <C>
Year 1-3 $14.40 $1,195,617.60 $ 99,634.80
Year 4-5 $15.70 $1,303,555.30 $108,629.61
</TABLE>
Address for payment of rent:
Carr Redmond Corporation
t/a Redmond East Business Campus
P.O. Box 277918
Atlanta, GA 30384-7918
Or, by wire transfer:
Nations Bank (South)
ABA #061-000-052
Account Number 3251832509
1-800-305-2510
4. TENANT IMPROVEMENTS. Lessor shall provide Tenant Improvements
including carpet, paint and miscellaneous HVAC modifications in accordance with
the attached Appendix "B."
5. ADDITIONAL RENTAL. (a) Lessee's Proportionate Share as to all
Operating Costs relating solely to Building 17 is 100%, including, without
limitation, taxes, property insurance, HVAC maintenance and repairs, elevator
maintenance and repairs, building management fee, and window cleaning; (b)
Lessee's Proportionate Share (based upon a total of 399,741 rentable square feet
in the buildings) of all Operating Costs in the Project, excluding all Operating
costs attributable to all or any part of any building in the Project, including,
without limitation, landscape costs, parking lot repair and maintenance, and
Lessor's property and liability insurance costs, shall be 20.77% and (c) an
amount fairly and equitably apportioned by Landlord, based on the square feet in
the Premises and the total square feet in the remainder of the buildings in the
Lessor's portfolio, of Lessor's administration, overhead and salary costs.
6. NOTICES. All notices, consents, approvals and similar communications
to be given by one party to the other under this Lease, shall be given in
writing, mailed or personally delivered as follows:
-2-
<PAGE> 3
<TABLE>
<S> <C>
A. Lessor. To Lessor as follows: with a copy to:
CARR REDMOND CORPORATION CARRAMERICA REALTY CORPORATION
10785 Willows Road NE, Suite 250 1850 "K" Street NW, Suite 500
Redmond, Washington 98052 Washington, DC 20006
Attn: Market Officer Attn: Lease Administration
</TABLE>
or to such other person at such other address as Lessor may designate by notice
to Lessee.
B. Lessee. To Lessee as follows:
MOSAIX, INC.
6464 18th Avenue NE
Redmond, Washington 98052
Attn: John Flavio
or to such other person at such other address as Lessee may designate by notice
to Lessor.
Mailed notices shall be sent by United States certified or registered
mail, or by a reputable national overnight courier service, postage prepaid.
Mailed notices shall be deemed to have been given on the earlier of actual
delivery or three (3) business days after posting in the United States mail in
the case of registered or certified mail, and one business day in the case of
overnight courier.
7. COMMISSIONS. Within thirty (30) days after the execution of this
Amendment by both parties and receipt by Lessor of Pacific Real Estate Partner's
commission invoice therefor, Lessor agrees to pay to Pacific Real Estate
Partners a commission of 2.5% of the Basic Rental payable hereunder for the
first 42 months of the Lease. If Lessee does not give Lessor notice by February
28, 2002 of its intent to exercise its Option to Terminate the Lease, then
Lessor agrees to pay a 2.5% commission of the Basic Rentable payable for the
remaining eighteen (18) months of the Term, within thirty (30) days after
receipt of Pacific Real Estate Partner's commission invoice therefor. Lessor and
Lessee each represent and warrant to the other that neither has dealt with any
other broker or agent other than Pacific Real Estate Partners in connection with
this transaction and each shall indemnify and hold the other harmless from any
commissions or fees claimed by any person or entity with whom the indemnifying
party has dealt in connection herewith except that Lessee shall have no
indemnification obligation with respect to Pacific Real Estate Partners.
8. NO OTHER MODIFICATIONS. Except as expressly modified by this Sixth
Amendment, the terms and conditions of the Lease, as previously amended, shall
remain in full force and effect.
-3-
<PAGE> 4
IN WITNESS WHEREOF, the parties have executed this First Amendment to
Lease.
LESSOR: LESSEE:
CARR REDMOND CORPORATION, MOSAIX, INC.,
a Washington corporation a Washington corporation
By: /s/ Philip L. Hawkins By: /s/ Wm. Bradford Weller
------------------------------- -----------------------------------
Print Name: Philip L. Hawkins Print Name: Wm. Bradford Weller
----------------------- ---------------------------
Print Title: Managing Director Print Title: General Counsel and
---------------------- --------------------------
Assistant Secretary
--------------------------
-4-
<PAGE> 5
APPENDIX A
LEGAL DESCRIPTION
Lot 1, Evans Shortplat SPL-91-0009, as filed under File No. 9111159007, Records
of King County, Washington.
<PAGE> 6
APPENDIX B
TENANT IMPROVEMENT AGREEMENT
1. TENANT IMPROVEMENTS. Lessor shall cause to be performed the
improvements (the "Tenant Improvements") in the Premises in accordance with
specifications approved by Lessee and Lessor (the "Specifications") which
approvals shall not be unreasonably withheld. The Tenant Improvements shall be
performed at the Lessee's cost, subject to the Lessor's Contribution
(hereinafter defined).
The final Specifications for the Tenant Improvements shall be prepared
by Lessor's licensed architect (or such other designated person as may be agreed
upon by the parties, if a licensed architect is not required for the scope of
the improvements) at Lessee's cost, and shall be mutually agreed upon by the
parties as set forth herein. Within sixty days after this Lease Amendment is
fully executed, Lessee, working with Lessor, shall furnish its proposed
Specifications for Lessor's review and approval. Lessor shall, within one (1)
week after receipt either approve such Specifications, or provide Lessee with
detailed comments prepared by Lessor's architect incorporating Lessee's proposed
Specifications and identifying any Lessor comments and/or modifications to the
same. If Lessor provides such detailed comments, Lessee shall, with one (1) week
after receipt of the same, either provide additional comments or approve of the
same. Lessee shall be deemed to have approved such Plans if it does not provide
comments within such time period. The process described above shall be repeated,
if necessary, until the specifications have been approved by the parties.
Notwithstanding any other term or provisions hereof, the parties agree to
cooperate with each other in good faith and to use their best reasonable efforts
to reach agreement so as to enable Lessor to submit the agreed upon
Specifications and any accompanying plans, for permit to the City of Redmond,
Washington, (if required) no later than _____________________, 1998.
Lessor, using its business expertise and knowledge of the market, and
with consultation of Lessee, shall select contractors and or subcontractors to
perform the construction of the Tenant Improvements at a commercially reasonable
cost. Mechanical and electrical engineers shall be selected by Lessor. Lessor
shall use commercially reasonable efforts to cause the Tenant Improvements to be
substantially completed, except for minor "Punch List" items, on or before
December 1, 1999, subject to Tenant Delays (as defined in Section 4 hereof) and
Force Majeure.
Lessor, or an agent of Lessor, shall provide project management
services in connection with the construction of the Tenant Improvements and the
Change Orders (hereinafter defined). Such project management services shall be
performed, at Lessee's cost, for a fee of five percent (5%) of all costs related
to the preparation of the Plans and the construction of the Initial Improvements
and the Change Orders.
<PAGE> 7
2. CHANGE ORDERS. If, prior to the Commencement Date, Lessee shall
require improvements or changes (individually or collectively, "Change Orders")
to the Premises in addition to, revision of, or substitution for the Tenant
Improvements, Lessee shall deliver to Lessor for its approval plans and
specifications for such Change Orders. If Lessor does not approve of the plans
for Change Orders, Lessor shall advise Lessee of the revisions required. Lessee
shall revise and redeliver the plans and specifications to Lessor within five
(5) business days of Lessor's advice or Lessee shall be deemed to have abandoned
its request for such Change Orders. Lessee shall pay for all preparations and
revisions of plans and specifications, and the construction of all Change
Orders, subject to Lessor's Contribution.
3. LESSOR'S CONTRIBUTION. Lessor shall contribute an amount up to
$415,145 ("Lessor's Contribution") toward the costs incurred for the Tenant
Improvements, inclusive of Lessor's project management services, and any Change
Orders. Lessor has no obligation to pay for costs of the Tenant Improvements or
Change Orders in excess of Lessor's Contribution, notwithstanding any other
provision hereof. If the cost of the Tenant Improvements and/or Change Orders
exceeds the Lessor's Contribution, Lessee shall pay such overage to Lessor prior
to commencement of construction of the Tenant Improvements and/or Change Orders.
4. TENANT DELAY. Tenant Improvements shall be substantially completed
by December 1, 1999 except to the extent that the delay shall be caused by any
one or more of the following (a "Tenant Delay"):
(a) Lessee's request for Change Orders whether or not any such
Change Orders are actually performed; or
(b) Contractor's performance of any Change Orders; or
(c) Lessee's request for materials, finishes or installations
requiring unusually long lead times; or
(d) Lessee's delay in reviewing, revising or approving plans
and specifications beyond the periods set forth herein; or (e) Lessee's delay in
providing information critical to the normal progression of the project. Lessee
shall provide such information as soon as reasonably possible, but in no event
longer than one week after receipt of such request for information from the
Lessor;or
(f) Lessee's delay in making payments to Lessor for costs of
the Tenant Improvements and/or Change Orders in excess of the Lessor's
Contribution; or
-2-
<PAGE> 8
(g) Any other act or omission by Lessee, its agents,
contractors or persons employed by any of such persons.
5. MISCELLANEOUS.
Terms used in this Appendix B shall have the meanings assigned to them
in the Lease. The terms of this Appendix B are subject to the terms of the
Lease.
-3-
<PAGE> 9
DISTRICT OF COLUMBIA )
) ss.
)
On this 6th day of November 1998, before me, the undersigned, a Notary
Public in and for the District of Columbia, duly commissioned and sworn as such,
personally appeared Philip L. Hawkins, to me known to be the Managing Director
of Carr Redmond Corporation, the corporation that executed the within and
foregoing instrument, and acknowledged the said instrument to be the free and
voluntary act and deed of said corporation for the uses and purposes therein
mentioned, and on oath stated that he was authorized to execute said instrument,
and that the seal affixed is the corporate seal of said corporation.
WITNESS my hand and official seal the day and year in this certificate
first above written.
/s/ Diana C. Pratts
-----------------------------------------
Signature
Diana C. Pratts
-----------------------------------------
Printed Name
NOTARY PUBLIC in and for the District of
Columbia, residing at 1850 K Street, N.W.
My commission expires: March 14, 2003
------------------
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this 2nd day of November 1998, before me, the undersigned, a Notary
Public in and for the State of Washington, duly commissioned and sworn as such,
personally appeared Wm. Bradford Weller, to me known to be the General Counsel
of Mosaix, Inc., the corporation that executed the within and foregoing
instrument, and acknowledged the said instrument to be the free and voluntary
act and deed of said corporation for the uses and purposes therein mentioned,
and on oath stated that he/she was authorized to execute said instrument, and
that the seal affixed is the corporate seal of said corporation.
WITNESS my hand and official seal the day and year in this certificate
first above written.
/s/ T. A. Parkinson
-----------------------------------------
Signature
T. A. Parkinson
-----------------------------------------
Printed Name
NOTARY PUBLIC in and for the State of
Washington, residing at Kirkland
-----------------
My commission expires: 10/29/01
------------------
-4-
<PAGE> 1
EXHIBIT 10.25
1ST AMENDMENT TO
EXECUTIVE EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of the 18th day of August, 1998, between NICHOLAS A.
TILIACOS, a Washington resident ("Executive"), and MOSAIX, INC., a Washington
corporation ("Company").
The parties agree as follows:
1. AMENDMENT OF PRIOR AGREEMENT.
This Agreement amends that certain "Executive Employment Agreement" dated as of
February 5, 1998 between Executive and the Company. Except as expressly provided
herein, the terms and conditions of that agreement remain in effect between the
parties, and defined terms therein shall have the same meaning when used in this
Agreement.
2. SEVERANCE PAYMENTS.
Section 8 of the Executive Employment Agreement is hereby amended so that, in
the event Executive terminates his employment for Good Reason, or if the Company
terminates employment without cause following a Corporate Transaction, the
Company shall be obligated to pay to Executive his then regular base salary for
a period of two years after the effective date of termination of employment (as
opposed to 12 months, as originally provided). This amendment will not apply in
the event of any termination unrelated to a Corporate Transaction.
IN WITNESS WHEREOF, the parties have executed and entered into this Agreement as
of the date above first written.
EXECUTIVE: COMPANY:
MOSAIX, INC.,
a Washington Corporation
/s/ Nicholas A. Tiliacos By: /s/ Wm. Bradford Weller
- ------------------------------ -----------------------------------------
NICHOLAS A. TILIACOS Wm. Bradford Weller
Its General Counsel & Assistant Secretary
<PAGE> 1
EXHIBIT 10.26
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of the 28th day of April, 1998, between THEODORE
MANAKAS, a Washington resident ("Executive"), and MOSAIX, INC., a Washington
corporation ("Company").
IN CONSIDERATION of the mutual covenants and promises contained herein, the
parties agree as follows:
1. EMPLOYMENT.
The Company hereby employs Executive, and Executive hereby accepts employment by
the Company, as Company's Senior Vice President & General Manager, CMS,
responsible for the management and direction of the Call Management Systems
operations of the Company, subject to the direction and control of the President
and Chief Executive Officer of the Company. The Executive will perform such
additional duties as may be assigned from time to time by the President & CEO of
the Company which relate to the business of the Company, its subsidiaries or any
business ventures in which the Company or its subsidiaries may participate.
2. ATTENTION AND EFFORT.
Executive will devote his full business time, attention and effort to the
Company's business and will use his skills and render services to the best of
his ability to serve the interests of the Company.
3. TERM.
Unless otherwise terminated as provided in Section 6 of this Agreement,
Executive's term of employment under this Agreement shall expire upon
Executive's resignation or termination.
4. COMPENSATION.
4.1 BASE SALARY
Executive's compensation shall consist, in part, of an annual base
salary of $175,000 before all customary payroll deductions (the "Base
Salary"). The Base Salary shall be paid in substantially equal
installments at the same interval as other officers of the Company are
paid, or otherwise in conformance with the Company's standard payroll
practices. The Board of Directors of the Company shall determine any
increases in the Base Salary in future years.
<PAGE> 2
4.2 BONUS
Executive may be entitled to receive, in addition to the Base Salary,
an annual bonus (the "Bonus") in an amount to be determined pursuant to
the Company's Management Bonus Plan, at appropriate level, as approved
by the Board of Directors of the Company, in effect for each calendar
year.
4.3 STOCK OPTIONS
Executive has been granted incentive stock options &/or nonqualified
stock options to purchase 80,000 shares of common stock of the Company
pursuant to the terms of the Company's 1996 Stock Incentive
Compensation Plan (the "Option Plan"). For the purposes of such Plan,
Executive shall be considered an "Executive Officer" of the Company.
5. BENEFITS AND EXPENSES.
5.1 EXPENSES
The Company shall promptly reimburse Executive for all reasonable and
necessary business expenses incurred and advanced by him in carrying
out his duties under this Agreement, consistent with Company policies
in connection therewith. Executive shall present to the Company from
time to time an itemized account of such expenses in such form as
Company policies may require.
5.2 BENEFITS
During the term of employment hereunder, Executive shall be entitled to
participate fully in any benefit plans, programs, policies and fringe
benefits which may be made available to the senior executives of the
Company generally, including medical, dental, disability, pension and
retirement benefits, life insurance and other death benefits. Executive
will initially be entitled to 2 weeks vacation per year and any other
vacation or personal time off in accordance with Company policy.
5.3 OTHER
The Company shall provide Executive an office and with secretarial
support suitable to the position of Vice President.
-2-
<PAGE> 3
5.4 MOVING EXPENSES
To the extent required, the Company will reimburse Executive for normal
and reasonable household moving expenses in accordance with standard
Company policy or as otherwise agreed between the parties.
6. TERMINATION.
6.1 BY THE COMPANY
With or without "Cause" (as defined in the Option Plan), the Company
may terminate the employment of Executive at any time during the term
upon giving Notice of Termination (as defined below).
6.2 BY EXECUTIVE
Executive may terminate his employment at any time for Good Reason (as
defined below) or otherwise upon giving Notice of Termination.
6.3 AUTOMATIC TERMINATION
Employment shall terminate automatically upon death or total disability
of Executive. The term "total disability" as used herein means an
inability to perform the duties set forth in paragraph 1 of this
Agreement because of illness or physical or mental disability for a
period or periods aggregating 180 calendar days in any 12-month period,
unless Executive is granted a leave of absence by the President or the
Board of Directors of the Company. Executive and Company hereby
acknowledge that Executive's ability to perform the duties specified in
paragraph 1 hereof is of the essence of this Agreement. Termination
hereunder shall be deemed to be effective immediately upon Executive's
death or 30 days following a Notice of Termination based upon a
determination by the Board of Directors of the Company of Executive's
total disability as defined herein.
6.4 NOTICE
The term "Notice of Termination" means written notice of termination of
Executive's employment. At the election of the Company, as set forth in
its Notice of Termination or in a written response to Executive's
Notice of Termination, Executive's employment and performance of
services shall continue for a period of 30 days following the Notice of
Termination. Otherwise Executive's employment shall terminate effective
upon receipt of the Notice of Termination, unless otherwise agreed
between the parties.
-3-
<PAGE> 4
6.5 GOOD REASON
For the purposes of this Agreement, "Good Reason" means, as a result of
or following a "Corporate Transaction" (as defined in the Option Plan),
a material alteration of Executive's position or duties, a reduction of
Executive's Base Salary, or a requirement that Executive move more than
100 miles, provided that Executive gives Notice of Termination within
30 days of such change.
7. SEVERANCE PAYMENTS.
In the event of termination of the employment of Executive, all compensation and
benefits set forth in this Agreement shall terminate as of the effective date of
termination, provided, however, that if the Company terminates Executive's
employment without Cause, or if Executive terminates his employment for Good
Reason, the Company shall be obligated to pay to Executive his then regular Base
Salary for a period of 6 months after the effective date of termination of
employment.
8. AGREEMENT NOT TO COMPETE OR SOLICIT EMPLOYEES.
As a condition of his employment hereunder, Executive has executed and delivered
to the Company an agreement addressing his obligation not to compete with the
business of the Company (the "Non-Compete Agreement") in accordance with
standard Company policy, which Non-Compete Agreement shall survive termination
of Executive's employment. During the term of this Agreement, and for 12 months
following termination of employment hereunder, Executive will not solicit or
otherwise recruit, directly or indirectly, any employees of the Company for
employment elsewhere.
9. AGREEMENT NOT TO DISCLOSE CONFIDENTIAL INFORMATION.
As a condition of his employment hereunder, Executive has executed and delivered
to the Company an agreement addressing the nondisclosure of confidential
information and ownership of inventions (the "Non-Disclosure Agreement") in
accordance with standard Company policy, which Non-Disclosure Agreement shall
survive termination of Executive's employment.
10. FORM OF NOTICE.
Every notice required by the terms of this Agreement shall be given in writing
by serving the same upon the party to whom it was addressed personally, by
courier, by facsimile transmission (with hard copy delivered by overnight
courier) or by registered or certified mail, return receipt requested, at the
address set forth below or
-4-
<PAGE> 5
at such other address as may hereafter be designated
by notice given in compliance with the terms hereof:
If to Executive: Chandlers Reach Apartments, OH2049
4250 W. Lake Sammamish Parkway
Redmond, WA 98052
If to Company: Mosaix, Inc.
6464 185th Avenue NE
Redmond, WA 98052
Attn.: Wm. Bradford Weller,
General Counsel
Notice shall be effective upon personal delivery, delivery by courier, receipt
of facsimile transmission or three days after mailing.
11. ASSIGNMENT.
Executive agrees that this Agreement may be transferred or assigned by the
Company to (a) any corporation resulting from any merger, consolidation or other
reorganization to which the Company is a party or (b) any corporation,
partnership, association or other person to which the Company may transfer all
or substantially all of the assets and business, and such assignee or transferee
shall succeed to the rights and obligations of the Company hereunder. This
Agreement may not be assigned by Executive.
12. WAIVER.
No waiver of any of the provisions of this Agreement shall be valid unless in
writing, signed by the party against whom such claim or waiver is sought to be
enforced, nor shall failure to enforce any right hereunder constitute a
continuing waiver of the same of a waiver of any other right hereunder.
13. AMENDMENTS IN WRITING.
No amendment, modification, waiver, termination or discharge of any provision of
this Agreement, nor consent to any departure therefrom by either party hereto,
shall in any event be effective unless the same shall be in writing,
specifically identifying this Agreement and the provision intended to be
amended, modified, waived, terminated or discharged, and signed by the Company
and Executive. No provision of this Agreement shall be varied, contradicted or
explained by any oral agreement, course of dealing or performance or any other
matter not set forth in an agreement in writing and signed by the Company and
Executive.
-5-
<PAGE> 6
14. APPLICABLE LAW -- VENUE.
This Agreement shall be governed by the laws of the state of Washington, without
regard to its conflicts of laws provisions. Venue of any action brought to
enforce or interpret this Agreement shall be in Seattle, Washington, and the
parties consent to jurisdiction in the federal and state courts in such venue.
15. SEVERABILITY.
In the event that any provision of this Agreement shall be determined by any
court or arbitrator of competent jurisdiction to be unenforceable or otherwise
invalid for any reason, such provision shall be enforced and validated to the
extent permitted by law, and the court or arbitrator shall have the power to
reform such provision to the extent necessary for such provision to be
enforceable under applicable law. All provisions of this Agreement are
severable, and the unenforceability of any single provision hereof shall not
affect the remaining provisions.
16. HEADINGS.
All headings or titles in this Agreement are for the purpose of reference only
and shall not in any way affect the interpretation or construction of this
Agreement.
17. ATTORNEYS FEES & COSTS.
In any action or proceeding brought by either party against the other arising
out of or in any way relating to this Agreement, the prevailing party shall, in
addition to other allowable costs and remedies, be entitled to an award of
reasonable attorneys' fees and costs incurred in connection with such action or
proceeding.
IN WITNESS WHEREOF, the parties have executed and entered into this Agreement as
of the date above first written.
EXECUTIVE: COMPANY:
MOSAIX, INC.,
a Washington Corporation
/s/ Theodore Manakas By: /s/ Wm. Bradford Weller
- ------------------------------- -----------------------------------------
THEODORE MANAKAS Wm. Bradford Weller
Its General Counsel & Assistant Secretary
-6-
<PAGE> 1
EXHIBIT 10.27
1ST AMENDMENT TO
EXECUTIVE EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of the 18th day of August, 1998, between THEODORE
MANAKAS, a Washington resident ("Executive"), and MOSAIX, INC., a Washington
corporation ("Company").
The parties agree as follows:
1. AMENDMENT OF PRIOR AGREEMENT.
This Agreement amends that certain "Executive Employment Agreement" dated as of
April 28, 1998 between Executive and the Company. Except as expressly provided
herein, the terms and conditions of that agreement remain in effect between the
parties, and defined terms therein shall have the same meaning when used in this
Agreement.
2. SEVERANCE PAYMENTS.
Section 7 of the Executive Employment Agreement is hereby amended so that, in
the event Executive terminates his employment for Good Reason, or if the Company
terminates employment without cause following a Corporate Transaction, the
Company shall be obligated to pay to Executive his then regular base salary for
a period of eighteen months after the effective date of termination of
employment (as opposed to 6 months, as originally provided). This amendment will
not apply in the event of any termination unrelated to a Corporate Transaction.
IN WITNESS WHEREOF, the parties have executed and entered into this Agreement as
of the date above first written.
EXECUTIVE: COMPANY:
MOSAIX, INC.,
a Washington Corporation
/s/ Theodore Manakas By: /s/ Wm. Bradford Weller
- ------------------------------- -----------------------------------------
THEODORE MANAKAS Wm. Bradford Weller
Its General Counsel & Assistant Secretary
<PAGE> 1
1ST AMENDMENT TO
EXECUTIVE EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of the 18th day of August, 1998, between STEVE
RUSSELL, a Washington resident ("Executive"), and MOSAIX, INC., a Washington
corporation ("Company").
The parties agree as follows:
1. AMENDMENT OF PRIOR AGREEMENT.
This Agreement amends that certain "Executive Employment Agreement"
dated as of October 14, 1996 between Executive and the Company. Except as
expressly provided herein, the terms and conditions of that agreement remain in
effect between the parties, and defined terms therein shall have the same
meaning when used in this Agreement.
2. SEVERANCE PAYMENTS.
Section 7 of the Executive Employment Agreement is hereby amended so
that, in the event Executive terminates his employment for Good Reason, or if
the Company terminates employment without cause following a Corporate
Transaction, the Company shall be obligated to pay to Executive his then regular
base salary for a period of eighteen months after the effective date of
termination of employment (as opposed to 6 months, as originally provided). This
amendment will not apply in the event of any termination unrelated to a
Corporate Transaction.
IN WITNESS WHEREOF, the parties have executed and entered into this
Agreement as of the date above first written.
EXECUTIVE: COMPANY:
MOSAIX, INC.,
a Washington Corporation
/s/ Steve Russell By: /s/ Wm. Bradford Weller
- ---------------------------------- -------------------------------
STEVE RUSSELL Wm. Bradford Weller
Its: General Counsel & Assistant
Secretary
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF MOSAIX, INC.
<TABLE>
<CAPTION>
SUBSIDIARY NAME OWNERSHIP PERCENTAGE JURISDICTION
<S> <C> <C>
Caleo Software, Inc.* 100% Georgia
Mosaix FSC, Inc. 100% Guam
ViewStar Corporation* 100% California
Mosaix Limited 100% United Kingdom
</TABLE>
- -----------------
* The assets and operations of each of these subsidiaries were assumed by
Mosaix, Inc., and each subsidiary was dissolved, effective January 1,
1999.
<PAGE> 1
[KPMG LETTERHEAD]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Mosaix, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
333-53677, 333-18577, 33-93948, 33-88544, 33-51620, 33-41199, 33-41197, and
33-36617) on Form S-8 of Mosaix, Inc. and subsidiaries (Company) of our reports
dated January 29, 1999 relating to the consolidated balance sheets of the
Company as of December 31, 1998 and 1997, and the related/consolidated
statements of income and comprehensive income, shareholders' equity, and cash
flows and the related financial statement schedule for each of the years in the
three-year period ended December 31, 1998, which reports appear in the
December 31, 1998 annual report on Form 10-K of the Company.
/s/ KPMG LLP
Seattle, Washington
March 11, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS OF MOSAIX, INC. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH 10K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,423
<SECURITIES> 23,131
<RECEIVABLES> 32,913
<ALLOWANCES> 2,076
<INVENTORY> 591
<CURRENT-ASSETS> 65,647
<PP&E> 29,380
<DEPRECIATION> 21,708
<TOTAL-ASSETS> 74,058
<CURRENT-LIABILITIES> 26,190
<BONDS> 0
0
0
<COMMON> 108
<OTHER-SE> 47,760
<TOTAL-LIABILITY-AND-EQUITY> 74,058
<SALES> 66,791
<TOTAL-REVENUES> 110,068
<CGS> 20,415
<TOTAL-COSTS> 46,073
<OTHER-EXPENSES> 60,718
<LOSS-PROVISION> 264
<INTEREST-EXPENSE> 30
<INCOME-PRETAX> 5,164
<INCOME-TAX> 924
<INCOME-CONTINUING> 4,240
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,240
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.35
</TABLE>
