-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QBFjRMB+m7dpk5OQpoMw8Ytw5Bn0WSkTM3E/eP21vp0k0LCsv8EMyYLPMfr2Ak8P RXheN1jAC+fiPuUuWsz8/g== 0000891020-99-000423.txt : 19990315 0000891020-99-000423.hdr.sgml : 19990315 ACCESSION NUMBER: 0000891020-99-000423 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990312 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MOSAIX INC CENTRAL INDEX KEY: 0000853266 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING SERVICES [7371] IRS NUMBER: 911273645 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-18511 FILM NUMBER: 99564272 BUSINESS ADDRESS: STREET 1: 6464 185TH AVE NE CITY: REDMOND STATE: WA ZIP: 98052-5032 BUSINESS PHONE: 2068817544 MAIL ADDRESS: STREET 1: 6464 185TH AVENUE NE CITY: REDMOND STATE: WA ZIP: 98052-5032 10-K405 1 FORM 10-K FROM PERIOD ENDED DECEMBER 31, 1998 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ 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) 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)
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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 MOSAIX, INC. TABLE OF CONTENTS PART I
PAGE ---- 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.........................................................
i 3 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 1 4 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 2 5 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 3 6 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. 4 7 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 5 8 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 6 9 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. 7 10 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 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.
1998 1997 1996 -------- -------- -------- 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 ======== ======== ========
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 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 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 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.
HIGH LOW ------- ------- 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
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 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.
1998 1997 1996 1995 1994 -------- -------- -------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 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
13 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:
YEAR ENDED DECEMBER 31, --------------------------- 1998 1997 1996 ----- ----- ----- 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% ===== ===== =====
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 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 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 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 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 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 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 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 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 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 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. 24 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 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.
EXHIBITS - -------- 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)
26 29
EXHIBITS - -------- 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)
- --------------- * 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 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.
SIGNATURE TITLE DATE --------- ----- ---- /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
28 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 32 MOSAIX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 -------- -------- -------- 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 ======== ======== ========
See accompanying notes to consolidated financial statements. F-2 33 MOSAIX, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ASSETS
DECEMBER 31, ------------------ 1998 1997 ------- ------- 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 ======= =======
See accompanying notes to consolidated financial statements. F-3 34 MOSAIX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS)
NOTES DEFERRED PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE ACCUMULATED STOCK OPTION --------------- --------------- PAID-IN FROM COMPREHENSIVE COMPENSATION SHARES AMOUNT SHARES AMOUNT CAPITAL SHAREHOLDERS INCOME EXPENSE ------ ------ ------ ------ ---------- ------------ ------------- ------------ 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 $ -- ====== ==== ====== ==== ======== ===== ===== ==== RETAINED TOTAL EARNINGS SHAREHOLDERS' (DEFICIT) EQUITY --------- ------------- 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 ======= ========
See accompanying notes to consolidated financial statements. F-4 35 MOSAIX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------ 1998 1997 1996 -------- -------- -------- 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
See accompanying notes to consolidated financial statements. F-5 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 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 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 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 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:
1998 1997 ------- ------- 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 ======= =======
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:
1998 1997 ---- ------ 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 ==== ======
F-10 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:
1998 1997 ------- ------- 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 ======= =======
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:
1998 1997 ---- ---- 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 === ====
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 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:
SHARES WEIGHTED AVAILABLE NUMBER OF AVERAGE FOR OPTIONS EXERCISE GRANT OUTSTANDING PRICE --------- ----------- -------- 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 ====== ====== ======
F-12 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:
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 - --------------- ----------- ---------------- -------------- ----------- ---------------- $ 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 ============== ========= ==== ====== ======= ======
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:
1998 1997 1996 ------ ------ ------ 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
F-13 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:
1998 1997 1996 ---- ---- ---- 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%
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:
1998 1997 1996 ---- ---- ---- 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%
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:
1998 1997 1996 ------ ------- ------ U.S. operations......................................... $2,996 $10,073 $6,524 Foreign................................................. 2,168 3,901 1,382 ------ ------- ------ $5,164 $13,974 $7,906 ====== ======= ======
F-14 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:
1998 1997 1996 ------- ------ ------ 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 ======= ====== ======
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:
1998 1997 1996 ------ ------- ------ 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 ====== ======= ======
Deferred income tax assets and liabilities are comprised of the following at December 31:
1998 1997 ------- -------- 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 ======= ========
F-15 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.
WEIGHTED NET INCOME NET INCOME AVERAGE SHARES PER (NUMERATOR) (DENOMINATOR) SHARE ----------- -------------- ---------- 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 ====== ======
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:
SHARES EXCLUDED (IN 000'S) EXERCISE PRICE ---------- --------------- 1998...................................................... 1,111 $ 8.56 - $19.75 1997...................................................... 1,154 $12.13 - $19.75 1996...................................................... 251 $16.06 - $19.75
F-16 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: 1999............................................... $ 2,367 2000............................................... 1,849 2001............................................... 1,669 2002............................................... 1,645 2003............................................... 1,544 Thereafter......................................... 3,386 ------- $12,460 =======
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 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.
1998 1997 1996 -------- -------- -------- 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 ======== ======== ========
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 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:
RECONCILING CMS CRM ITEMS CONSOLIDATED ------- ------- ----------- ------------ (IN THOUSANDS) 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
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 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:
FIRST SECOND THIRD FOURTH TOTAL ------- ------- ------- ------- -------- 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
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 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 52 MOSAIX, INC. VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS)
ADDITIONS BALANCE AT CHARGED TO BALANCE AT BEGINNING OTHER COSTS END DESCRIPTION OF YEAR AND EXPENSES DEDUCTIONS(1) OF YEAR ----------- ---------- ------------ ------------- ---------- 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
- --------------- (1) Represents amounts written off. F-22 53 EXHIBIT INDEX
EXHIBITS - -------- 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)
26 54
EXHIBITS - -------- 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)
- --------------- * 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 EX-10.2 2 AMENDED AND RESTATED 1996 STOCK INCENTIVE PLAN 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. 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. -2- 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 -3- 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. -4- 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 -5- 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 -6- 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. -7- 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:
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 -------------------------------------------------------- ----------------------- After 1 year 25% After 2 years 50% After 3 years 75% After 4 years 100%
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). -8- 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- 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 -10- 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. -11- 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- 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 -13- 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- 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. -15- 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. -16- 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- EX-10.5 3 EXECUTIVE EMPLOYMENT AGREEMENT, DATED 04/28/98 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. 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- 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- 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 -4- 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. -5- 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 -6- EX-10.6 4 AMENDMENT NO.1 TO EXECUTIVE EMPLOYMENT AGREEMENT 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 EX-10.7 5 1999 MANAGEMENT BONUS PLAN 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:
Level I Level II ----------------------- ------------------------ Corporate/ Corporate/ Corporate Line of Corporate Line of CEO Only Business Only Business ----- --------- ---------- --------- ---------- Corporate 50% 35% 25% 20% 10% Line of Business -- -- 10% -- 10% --- --- --- --- --- Total 50% 35% 35% 20% 20%
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 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:
Percent Percent of Bonus as Percent of EPS Bonus of Base Salary Target Target --------------------------------------- Achieved Leverage Curve Achieved CEO Level I Level II - -------- -------------- ---------- --- ---------------- -------- 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%
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.
Performance Bonus to Performance vs. Plan Increase/Decrease Ratio Bonus Payout ----------- ----------------------- ------------ 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
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. 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
Percent Percent of Bonus as Percent of EPS Bonus of Base Salary Target Target ------------------- Achieved Leverage Curve Achieved Level I Level II - -------- -------------- ---------- ------- -------- 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%
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:
Actual % of Planned LOB Operating Income 75% 90% 100% 119.9% 120% 140% -------------------------------------------------- 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% ---------------------------------------------------
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. 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. EX-10.8 6 1999 PERFORMANCE BONUS PLAN 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.
Quarterly Total Full-Year Opportunity --------- --------------------------- 1.25% 5.00%
- 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:
Percent of Annual Possible Bonus Award as Participants in Grades Salary Used to Create Pool Percent of Annual Salary ---------------------- -------------------------- ------------------------ 27 - 28 7.0% 0% - 10% 20 - 26 3.0% 0% - 10%
- 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 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: 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:
Percent of Achievement Salary at Bonus Earned Objective Weighting Percentage 1.25% Target at $40,000 Salary ----------------------------------------------------------------------------------- 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 -----------------------------------------------------------------------------------
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. 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 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. EX-10.10 7 AMENDMENT NO.1 TO EXECUTIVE EMPLOYMENT AGREEMENT 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 EX-10.11 8 LEASE FOR BUILDING 17, DATED MAY 20, 1991 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. -1- 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) -2- 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 -3- 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 -4- 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 -5- 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. -6- 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- 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- 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- 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- 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- 12 EXHIBIT B Map of Property and Building [Graphic omitted] -12- 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- 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- 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- 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- 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- 18 EXHIBIT E Preliminary Plans Submitted as Design Review Documents to the City of Redmond (2 pages) [Graphics omitted] -18- 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- 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- 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 -21- 22 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 -22- 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). -23- 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. -24- 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. -25- 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- EX-10.12 9 AMENDMENT NO.1 TO LEASE FOR BUILDING 17 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 ------------------------------ EX-10.13 10 AMENDMENT NO.2 TO LEASE FOR BUILDING 17 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 --------------------------- --------------------------- EX-10.14 11 AMENDMENT NO.3 FOR LEASE TO BUILDING 17 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: 2
RENT ANNUAL RENT MONTHLY RENT PERIOD PER S.F. PER S.F. PER S.F. ------ -------- ----------- ------------ Year 1-3 $14.40 $1,195,617.60 $ 99,634.80 Year 4-5 $15.70 $1,303,555.30 $108,629.61
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- 3 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
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- 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- 5 APPENDIX A LEGAL DESCRIPTION Lot 1, Evans Shortplat SPL-91-0009, as filed under File No. 9111159007, Records of King County, Washington. 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. 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- 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- 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- EX-10.25 12 AMENDMENT NO.1 TO EXECUTIVE AGREEMENT 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 EX-10.26 13 EXECUTIVE EMPLOYMENT AGREEMENT DATED 04/28/98 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. 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- 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- 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- 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- 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- EX-10.27 14 AMENDMENT NO.1 DATED AUGUST 18, 1998 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 EX-10.29 15 AMENDMENT NO.1, DATED AUGUST 18, 1998 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 EX-21.1 16 LIST OF SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 SUBSIDIARIES OF MOSAIX, INC.
SUBSIDIARY NAME OWNERSHIP PERCENTAGE JURISDICTION Caleo Software, Inc.* 100% Georgia Mosaix FSC, Inc. 100% Guam ViewStar Corporation* 100% California Mosaix Limited 100% United Kingdom
- ----------------- * The assets and operations of each of these subsidiaries were assumed by Mosaix, Inc., and each subsidiary was dissolved, effective January 1, 1999. EX-23.1 17 CONSENT OF KPMG LLP 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 EX-27.1 18 FINANCIAL DATA SCHEDULE
5 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. 1,000 12-MOS DEC-31-1998 DEC-31-1998 5,423 23,131 32,913 2,076 591 65,647 29,380 21,708 74,058 26,190 0 0 0 108 47,760 74,058 66,791 110,068 20,415 46,073 60,718 264 30 5,164 924 4,240 0 0 0 4,240 0.36 0.35
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