SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998.
[ ] 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: 0-20329
EIS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1017599
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
555 Herndon Parkway, Herndon, Virginia: 20170
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 478-9808
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 $.01 Per Share
Preferred Stock Purchase Rights, to purchase Series A Junior Participating
Preferred Stock, Par Value $.01 per Share
(Title of Class)
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.
[X] Yes [ ] 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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or an amendment to this
Form 10-K. [ ]
The aggregate market value as of January 22, 1999 of Common Stock held by
non-affiliates* of the Registrant was: $16,715,214.
The number of shares of Common Stock outstanding as of January 22, 1999 was:
11,221,860
*As used herein, "voting stock held by non-affiliates" means shares of Common
Stock held by persons other than executive officers, directors and persons known
to the Registrant holding in excess of 5% of the registrant's Common Stock. The
determination of market value of the Common Stock is based on the last reported
sale price as reported by the Nasdaq National Market System on the date
indicated. The determination of "affiliate" status for purposes of this report
on Form 10-K shall not be deemed a determination as to whether a person or
entity is an "affiliate" of the registrant for any other purpose.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive Proxy Statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December 31,
1998. Portions of such Proxy Statement are incorporated by reference in Part
III.
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
PART I
Item 1. Business
Cautionary Statement
In addition to historical information contained herein, this document contains
certain "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, and are subject to the safe harbors created thereby.
All statements included in this document regarding the Company's financial
position, business strategy and plans, objectives for future operations,
industry conditions -- other than statements of historical facts -- are
forward-looking statements. While these statements reflect the Company's
reasonable assumptions, based upon management's beliefs and information
currently available to it, EIS can give no assurance that such expectations will
prove to be correct.
These statements are subject to certain risks, uncertainties, and assumptions
related to certain factors including, without limitation, competitive factors,
general economic conditions, customer relations, technological change, product
introductions and acceptance, distribution networks, changes in industry
practices, one-time events and other factors described herein (see "Factors
Affecting Future Results" below). Based upon changing conditions, should any one
or more of these risks or uncertainties materialize, or should any underlying
assumptions prove incorrect, EIS may experience material fluctuations in its
future quarterly and annual operating results that may vary materially from
those described herein and that could materially and adversely affect its
business, financial condition, operating results and stock price. EIS does not
intend to update these forward-looking statements.
Background
EIS International, Inc. and its wholly owned subsidiaries ("EIS") provide
systems, software and services to businesses that use the telephone in campaigns
directed at large targeted audiences. EIS' products improve the productivity and
effectiveness of call centers (also known as "contact centers"), including
campaign management, staffing and technology integration. EIS is a supplier of
advanced technology for contact centers and a leading provider of such outbound
and integrated inbound/outbound technology.
EIS is a Delaware corporation organized in 1988. It is the successor by merger
to a Connecticut corporation founded in 1980 to engage in software consulting.
EIS sold its first contact center system in 1988 and became publicly traded in
July of 1992. EIS' headquarters are at 555 Herndon Parkway, Herndon, VA 20170,
and it may be contacted at (703) 478-9808, or through the World Wide Web at
http://www.eisi.com.
EIS designs, manufacturers, markets and supports sophisticated, full-featured
contact center systems for outbound and blended inbound applications, including
consumer direct marketing, fund-raising, market research, customer service and
credit and collections. EIS also provides system integration and support
services for its products and products of other vendors, including project
planning, requirements analysis, voice and data integration and systems
engineering.
EIS customers include many outbound telemarketing service bureaus, financial
institutions, major telecommunications companies, universities, cable operators,
direct response marketers and publishing companies.
EIS' systems employ computer telephony integration ("CTI") that adds to the
efficiency and management of contact centers and substantially increase the
productivity of their telephone agents. Software features of EIS' systems
provide for outbound intelligent/predictive dialing, database, calling list
management, scripting, real-time and historical reporting and integration with
the customer's computer and telephone systems. EIS' systems, incorporating
state-of-the-art dialing technology, including high-speed call switching,
patented voice detection technology, sophisticated pacing algorithms and call
classification, increase the percentage of time that call center telephone
agents are connected to called parties. EIS' systems automate non-productive
call center activities, leaving telephone agents free to spend 45-50 minutes per
hour in talktime, compared with 15-20 minutes per hour in a manually operated
environment. EIS' systems automate calling list management, including campaign
list segmentation, time zone controls and callback handling. The systems include
multi-page scripting capabilities that allow for conversation branching, account
history, product information, order forms and calculations presented to
telephone agents online. The systems' reporting and telephone
-3-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
agent monitoring capabilities allow supervisors and managers to track up-to-the
minute contact center activities and modify and improve the effectiveness of
telemarketing or other telephone campaigns in real time.
EIS' systems have an open-architecture that can interface with a variety of
third-party switches and software products and integrate easily with a
customer's host computer and database. The systems are modular, expandable and
flexible to respond to a customer's changing environment and expansion needs.
EIS' products include: (i) a Call Processing System(TM), a full-featured
solution for outbound and blended inbound/outbound contact centers involved
predominantly in direct marketing; (ii) OCM Gold, a product licensed by EIS from
AT&T since 1991 that EIS has enhanced to work seamlessly with Lucent's Definity
G3 switching platform; (iii) System 7000, a system acquired in a 1993 merger
with International Telesystems Corporation ("ITC") that is directed at the
credit and collections market; and (iv) Centenium(R), a powerful client/server
solution for outbound and blended inbound/outbound contact centers. EIS products
also include SmartAgent Manager(TM), a systems enhancement to blend outbound
campaigns with inbound operations. See "Business Products and Services" for more
information on EIS products and "Business - Intellectual Property" for
information about numerous patents held by EIS.
On February 28, 1997, at the recommendation of EIS' management, its Board of
Directors agreed to discontinue the operations of Surefind Information, Inc.
("Surefind"), a wholly owned subsidiary of EIS in the business of storing
electronic data. The decision to discontinue those operations was made after EIS
determined that a higher than anticipated level of funding would be required to
exploit Surefind's products. Since that funding level was considered excessive
due to the funding requirements of EIS' core business, Surefind's operations
were discontinued in March 1997. Surefind incurred a net loss of approximately
$3.7 million in 1996 and $2.1 million in 1995. In connection with the decision
to discontinue Surefind's operations, during the fourth quarter of 1996, EIS
recorded a $1.8 million estimated loss, net of tax benefits, including a
provision for anticipated operating losses prior to the complete disposition of
Surefind.
On March 3, 1997, EIS announced a restructuring and reorganization program (the
"Restructuring"), the purpose of which was to refocus efforts on EIS' core
business and to reduce costs. Under the Restructuring, the Fort Lauderdale,
Florida facility of Cybernetics Systems International, Inc. ("Cybernetics"), a
wholly owned subsidiary of EIS, was closed and sublet, and Cybernetics began to
concentrate on the development and marketing of Workforce Manager for Windows
("WMW"). During 1997, EIS also terminated Pulse's operations, a Chantilly,
Virginia based integration services business acquired in 1996, and integrated
Pulse with EIS' core business. EIS also closed its corporate headquarters in
Pittsburgh, Pennsylvania and relocated its headquarters to the Herndon facility.
Approximately 110 employees were terminated as a result of the Restructuring.
During the first quarter of 1997, in connection with the Restructuring, EIS
recorded charges of $2.9 million, including $1.1 million of severance costs,
$1.3 million of facilities leases and fixed asset disposal costs, and $0.5
million of other costs.
Effective June 30, 1998, EIS closed Cybernetics due to continuing losses and
management's decision to focus on EIS' core business. In connection with the
closure of Cybernetics, during the second quarter of 1998, EIS recorded
restructuring charges of $543,000, comprised of $350,000 of severance and
$193,000 of facilities, fixed asset disposal, and other costs.
During the second half of 1998, EIS took further action to cut expenses in
response to the decline in revenue during 1998 as compared to 1997. These
actions included staffing reductions in all areas of EIS and other expense
control measures designed to significantly reduce expenses commensurate with
recent trends in revenue (see "Item 7. Management's Discussion and Analysis of
Results of Operations and Financial Condition").
Market Position
EIS' systems are designed to improve efficiency, effectiveness, and
profitability of a variety of contact centers. The designation of the contact
center as a primary point of customer care is emerging as an important business
trend, parallel to the steady rise in consumer demand for improved service. The
modern contact center is evolving into a highly sophisticated marketing and
customer service medium that builds and reinforces consumer relationships, both
pre- and post-sales. Effectively, this transformation process will necessitate
greater agent and consumer access to critical information, such as customer
histories and preferences, and extensive product and service data, so that all
parties can
-4-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
make better decisions. Increased access, in turn, will require improved
multimedia connectivity that allows agents and consumers to take advantage of
emerging communication technologies. EIS is at the forefront of this
transformation with powerful, flexible, and comprehensive solutions, supported
by sophisticated CTI capabilities, that expand the scope and quality of agent
and consumer interactivity, thereby personalizing and strengthening an
organization's relationships with its customers.
Factors that distinguish EIS' systems include a modular design and open
architecture to provide customers with the flexibility of integrating EIS'
products with customer supplied call management software. Proprietary features
include predictive dialing with a patented pacing algorithm, high speed call
switching, patented voice detection technology, sophisticated call management
software and multi-page customer scripting capability. The systems' open
architecture, modularity and operating features provide a high level of
flexibility, and easy integration with a customer's software and hardware
systems. EIS believes that its systems offer significant price-performance
advantages over competitors, resulting in highly efficient contact centers. The
system is configured in contact centers to address calling campaign objectives
of specific customers or specific industries.
Strategy
EIS' strategy is to offer innovative, mission-critical products and services
that play pivotal roles in providing total solutions to the contact center
market. EIS intends to maintain its position as a leading provider of outbound
call processing solutions and extend this strength to the overall contact center
market, including inbound, blended inbound/outbound, Internet-enabled, and next
generation middleware technologies. EIS believes this strategy will lead the way
for the contact center industry to realize the full potential of customer
centered technologies. EIS intends to continue its plan to provide products and
services that support all media types (e.g. voice, web chat, email, etc.) in the
contact center. EIS will expand its traditional focus on improving agent
efficiency and effectiveness to improving the overall performance of the contact
center as a business unit.
Expand and Enhance Core Competencies. EIS has significant expertise in its core
business of outbound contact center management and CTI. Based on that expertise,
EIS plans to continue to expand and enhance its product offerings, including new
features for outbound applications as well as robust capabilities for inbound
and blended inbound/outbound applications. EIS will remain focused on improving
agent efficiency and effectiveness by providing information to agents through
its CTI expertise.
Enhance Systems Integration Capabilities. EIS believes that contact centers will
increasingly involve the introduction and inter-working of many media types,
data sources and components from different vendors. EIS plans to direct its
systems integration capabilities to complement its products and effectively
integrate different media, data sources and vendor products providing the
customer with the best overall solution.
Strengthen Strategic Alliances and Combinations. EIS has established and
continues to strengthen alliances with other leading vendors in the customer
contact market so that EIS can offer comprehensive customer contact solutions.
These relationships extend worldwide and include alternative channels of
distribution. EIS has also worked with vendors of contact center applications
software to enable such vendors to offer versions of their software that can
operate with EIS systems. EIS will continue to expand its alliance and vendor
relationships, and work closely with leading vendors of telecommunications
switches so that EIS products may be easily integrated with their switches.
Capitalize on Opportunities for International Growth. EIS believes that
international markets provide EIS with a significant opportunity for future
growth. EIS is positioning itself to increase its international presence by
developing new and strengthening existing relationships with several foreign
distributors and by qualifying its products for sale in additional countries.
EIS intends to continue to pursue opportunities to increase its presence in its
existing markets and expand into new international markets through an increase
in staff and assets in Europe, Latin America and Asia, and by adding
distributors in certain markets.
Focus on Customer Satisfaction. EIS believes that customer satisfaction is
derived from the focus of every employee in every area of EIS on the customer
experience. EIS plans to continue strengthening its partnerships with its
customers to attain the highest level of customer satisfaction through
continuing emphasis on customer support. EIS has invested in its customer
support infrastructure, which has substantially enhanced its ability to
effectively service its customers.
-5-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
EIS will also continue its emphasis on enhancing the knowledge and skill set of
its global sales force to more effectively identify and serve the mission
critical business requirements of new and existing customers.
Products and Services
EIS' outbound call processing systems consist of either EIS proprietary digital
switches which place calls, monitor call results and switch live calls to agents
or interface to switches from vendors such as Aspect and Lucent that operate in
conjunction with call management software provided by EIS. These systems are
identified by the product names Centenium(R), Call Processing System(TM)
("CPS"), System 7000 and OCM. EIS' proprietary switches can be combined with
EIS' Gateway middleware product to enable such systems to be integrated with
third party software applications.
Centenium. In September 1994, EIS introduced Centenium, its advanced contact
center system that integrates outbound calling with the customer's inbound
system. The Centenium system is built on a flexible, client/server architecture
that distributes processing tasks and automates many facets of contact center
operations from agent screen displays to management reporting. The core software
for Centenium runs on a UNIX operating system with screen presentations in the
Microsoft Windows environment. Centenium is designed to operate with a variety
of computer platforms and several telecommunication switches, including Lucent's
Definity G3, Aspect's CallCenter and Northern Telecom's Meridian 1, as well as
EIS' proprietary switches. In addition to marketing Centenium to potential new
customers, EIS markets Centenium to its existing customers, as well as an
upgrade alternative to older systems for their expansion needs.
Centenium can be configured to meet a wide range of customer requirements.
Centenium provides agents, administrators and supervisors with the information
they need to handle contact center activities, including scripting, list
management and center activity reporting. Centenium utilizes a sophisticated
scripting package to provide users with the ability to create agent scripts to
lead agents through presentations. The scripting package supports logical
branching, formula calculation, support for graphics, data acquisition and other
powerful features designed to make the agent more efficient and effective.
Centenium users can prepare their own reports, combining data from Centenium
with other databases. Supervisors can assign scripts to lists, segment lists and
assign them to separate groups of agents, or filter records in real time during
a campaign using Centenium tools. Centenium uses SQL (structured query
language), an industry standard, to enable users to find and manipulate data in
multiple formats.
On September 1, 1998, EIS announced the release of Centenium XL. Centenium XL is
a significantly enhanced version of the Centenium call management system,
offering several new capabilities designed to enhance user flexibility and
improve call center productivity. Centenium XL provides full inbound and
blending functionality plus inbound scripting. It also offers substantially
enhanced capabilities and features for system administrators, supervisors, and
agents, including increased reporting capabilities.
Call Processing System. The CPS system consists of a digital switch, combined
with either (i) EIS call management software and related computer hardware or
(ii) EIS Gateway(TM) product and the customer's host computer software. Using
EIS call management software, the system is a turnkey outbound processing
system, with predictive dialing, voice detection, scripting and data management
functions designed primarily for direct marketing applications. Used with the
EIS Gateway product, the system integrates third party software applications
with EIS call processing functions. The digital switch can handle 8 to 144 agent
stations and can operate up to 112 analog lines, 336 digital T-1 lines, or a mix
of both analog and T-1 lines. In addition, the CPS system has the ability to add
both stations and trunk lines in modular increments.
On February 3, 1999, EIS announced the availability of CPS Version 5.1. The new
release of the CPS 5.1 solution features inbound call management and full agent
blending capabilities. The system also includes upgrades to several existing
features, all of which are designed to help call centers achieve their
continuous performance improvement goals.
System 7000. The System 7000 provides a turnkey outbound call processing system
with predictive dialing, voice detection, scripting and data management
functions designed primarily for credit/collections applications. The System
7000 product line was acquired by EIS through its merger with ITC in November
1993. The System 7000 digital switch can handle up to 80 agent stations and can
operate up to 144 digital lines. Both stations and trunk lines can be added to
the System 7000 in modular increments.
-6-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
OCM Gold. OCM Gold is a software product that provides call management and
predictive dialing through Lucent PBX switches and is designed to operate with
customer host computer databases. EIS obtained exclusive third party worldwide
licensing rights (except as to AT&T for certain purposes) to OCM from AT&T in
June 1991. In 1993, EIS introduced OCM Gold, its first outbound call management
system that can be integrated with the customer's inbound system.
SmartAgent Manager(TM). The SmartAgent Manager ("SAM") option for Centenium,
System 7000 and OCM integrates those products with inbound switches from third
parties including Lucent, Aspect and Northern Telecom. With SAM, the system
automatically monitors the demand for agents to answer inbound calls and
switches them from outbound campaigns at the same workstation to meet the
contact center's specified quality levels. When the peak demand subsides, SAM
moves the agents back to outbound to maximize agent productivity. EIS has
utilized advanced CTI techniques in partnership with the inbound switch vendors
to provide this seamless operation.
Professional Services. The Company's Professional Services group provides CTI
application development, inbound/outbound integration, network analysis,
performance assessment, systems data integration, general contact center
consulting, custom software development, and training.
Product Features
Important features of EIS systems include the following:
o Open Architecture -- By separating call processing and call management
functions and employing industry standard operating system software, EIS is
able to offer the ability to integrate a digital switch with a customer's
existing call management software and host computer database. The separation
of these functions allows EIS to offer a cost effective solution to customers
who already have data automation systems in place and prefer to automate call
processing without replacing their existing call and data management systems.
By adopting a client/server architecture for Centenium, EIS has expanded the
number of software applications and switches that can function with its
product offering.
o Highly-Efficient Predictive Dialing -- EIS' patented, predictive dialing
algorithms automatically adjust a system's dialing rate according to
customer-established parameters. These algorithms are included in the
software of the Centenium architecture and in the firmware of EIS digital
switches enabling EIS systems to achieve highly effective call pacing,
thereby maximizing agent utilization while reducing the incidence of calls
for which no agent is available to as little as 1% of answered calls.
o High Speed Voice Detection and Switching -- EIS' patented voice detection and
proprietary call switching technology, used in EIS' digital switch in
Centenium and CPS, enables it to distinguish a voice and switch the call to
an agent within 20 milliseconds (1/50th of a second), so quickly that the
agent is able to hear the called party's first "Hello." This permits the
agent to begin a conversation naturally, as if the agent had manually placed
the call. The digital switches also automatically distinguish and dispose of
busy signals, unanswered calls, telephone company recorded messages,
answering and facsimile machines and modems.
o Sophisticated Call Management -- EIS systems have data management and system
control capabilities, including retrieval of phone lists and associated
files, data updating, call results analysis and system activity reporting.
The call management software can, among other things, be programmed to
automatically delete non-working numbers from phone lists, redial busy or
unanswered calls after designated intervals and tailor phone list usage to
implement calling campaigns during predetermined hours across multiple time
zones. EIS has augmented these capabilities in the Centenium product by
introducing a sophisticated message structure for communicating between
elements of the system. Users gain increased control over their operations
and improved ability to observe the results of campaigns through graphical
representation of reports.
o Inbound/Outbound Call Management -- EIS also offers products that can control
and monitor centers that perform both inbound and outbound calling
activities. EIS' SmartAgent Manager product for Centenium, System 7000 and
OCM provides dynamic control of agents based upon quality levels that are set
by the customer.
-7-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
o Custom Scripting -- EIS call management software provides on-screen scripting
capabilities for EIS' Centenium and CPS systems. These scripts are
automatically presented to the agent by the system and provide a consistent
and comprehensive support function to agents in conversations with consumers.
Scripts can be created by the customer's administrators without assistance
from EIS. Scripts can be designed to utilize automatic conditional branching
that will cause the appropriate page, field or window to be displayed based
upon responses entered in particular fields by an agent.
o Modular Expansion -- EIS' digital switch can be expanded by adding circuit
boards in increments of eight agent stations, eight analog trunk lines, and
24 T-1 trunk lines for EIS Centenium, CPS and System 7000 products. This
modular design permits a system to grow with the customer's needs and reduces
system disruption in the event of a trunk or station board failure.
Year 2000 Issues
Background. Many existing computer programs use only two digits to identify a
year in the date field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If not corrected,
many computer applications could fail or create erroneous results by or at the
Year 2000. The Year 2000 issue affects nearly all companies and organizations.
Impact on EIS. All EIS products will be or have been affected in some manner by
Year 2000 issues. EIS has developed and is continuing the implementation of a
plan (the "Year 2000 Product Plan") that makes necessary modifications to its
products. The current total estimated cost to update those products is expected
not to exceed $1.5 million. During 1998, EIS incurred $1,096,000 of costs
associated with the Year 2000 Product Plan. No costs were incurred prior to
1998. These costs are included in research and development in the accompanying
consolidated statements of operations. The Year 2000 Product Plan was
substantially complete by the end of February 1999.
On July 30, 1998, EIS announced that a Year 2000-compliant release of its CPS
software was complete and available for sale. CPS is EIS' most widely used and
sold software. EIS has also announced that its EIS Gateway, Outbound Call
Manager (on certain hardware platforms), SmartAgent Manager, System 7000, and
Centenium products are Year 2000 compliant. EIS has begun and is planning to
continue to provide updated software to its customers under EIS maintenance
contracts, and to charge fees for on-site visits and certain other services, if
necessary, to upgrade EIS' customers' software. Although EIS has substantially
completed the Year 2000 Product Plan changes in all of its products, upgrading
all customers' systems that require such upgrades prior to the Year 2000 cannot
be assured since a substantial part of the upgrade process will be dependent on
EIS' customers. EIS expects to continue to supplement its internal resources
with subcontract labor to install Year 2000 upgrades on customer systems.
EIS has substantially completed the process of reviewing and estimating the cost
of updating its internal software and hardware information technology ("IT")
systems and non-IT systems (collectively, "Internal Systems") to be Year 2000
compliant. EIS has determined that its mission critical Internal Systems,
including its financial systems, customer support, network, and desktop
applications, are Year 2000 compliant. Although EIS could incur additional costs
in this regard, EIS believes that those costs will not have a material effect on
its operations and financial condition. No material costs have been incurred to
date with respect to updating EIS' Internal Systems for Year 2000 compliance.
EIS has continued to investigate but has not identified any major vendor or
distributor the failure of which to be Year 2000 compliant could cause any
adverse impact on EIS. The most reasonably likely worst case scenario would
include: (1) corruption of data contained in the Company's internal information
systems, (2) hardware failure, and (3) the failure of infrastructure services
provided by third parties (e.g. electricity, phone service, water & sewer,
internet services, etc.). EIS has not formulated any contingency plans in the
event its Internal Systems are not updated prior to the Year 2000 because the
update process is substantially complete. EIS will continue to monitor the need
for contingency plans with respect to its major vendors and distributors.
Product Development
EIS' continuing research and development program is directed toward increasing
the functionality of existing products based upon currently anticipated customer
needs and the development of new products based on future anticipated
-8-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
customer needs. This program also emphasizes the development of new product
lines based on an n-tier architecture model that allows better specialization
and easier replacement of software components. These product lines are designed
to reach a larger segment of the CTI market, enable EIS to comply more readily
with country standards in support of international business and more easily
integrate with other products providing the customer a more complete solution.
EIS began development of Contact Universal Exchange ("CUE") in 1998. The new
technology is being developed simultaneously on both UNIX and Windows NT.
Initial deployment will be on UNIX with Windows NT deployment to follow. CUE
will act as a state of the art contact center technology infrastructure
platform. CUE is being developed in accordance with object-oriented techniques
and in conformity with Common Object Request Broker ("CORBA") standards. CUE is
designed to interconnect various contact center applications (switches,
predictive dialing processes, databases, fulfillment applications, workflow
management applications, and related technologies) some of which will be
provided by EIS, some by other vendors The combination of CUE as an enabling
middleware platform and various application components is intended to make
contact centers more efficient and productive, and protect their technology
investments.
During 1996, 1997 and 1998 EIS invested $14.2 million, $11.9 million, and $9.7
million, respectively, in research and development, and also capitalized
approximately $2.1 million, $1.1 million, and $1.9 million, respectively, of
software development costs. EIS believes that a significant commitment of its
financial resources and talent will be necessary to maintain and increase its
competitive position. EIS plans to continue to devote a significant portion of
its revenues to research and development, including salaries, consulting, and
other costs to develop new technology.
Customers
EIS maintains customer relationships in a variety of industries. Customers
include American Express, the American Cancer Society, APAC Teleservices, Bell
Canada, CUC International, Fingerhut, Gannett Newspapers, GE Capital, ICT Group,
JC Penney, Michigan State University, MCI, Metropolitan Life Insurance Company,
Pacific Bell Operator Services, RMH Teleservices, Sallie Mae, Sitel Corporation,
Southwestern Bell, Spiegel, Inc., Syracuse University, Telespectrum Worldwide,
Inc., Time Warner Entertainment, Turner Vision, Inc., and West Telemarketing.
No individual customer represented more than 10% of EIS' net revenues in 1996,
1997 or 1998.
Sales and Marketing
EIS' systems and services are marketed in the United States and the United
Kingdom by a direct sales force located in several regional offices in those
areas. EIS also has distribution agreements with third party distributors in
France, Germany, Sweden, Italy, Spain, Mexico and Japan. During 1996, 1997 and
1998, EIS revenues outside North America were approximately 4%, 6% and 9% of net
revenues, respectively.
EIS has established and continues to strengthen alliances with leading vendors
in the contact center market so that it can offer comprehensive solutions to
contact centers. Those relationships are worldwide and include multiple
distribution channels. EIS works with vendors of contact center application
software and offers them versions of EIS' software that operate with their
application software systems. EIS intends to expand those alliance and vendor
relationship, and work closely with leading vendors of telecommunications
switches so that EIS products may be easily integrated with those switches.
Customer Support and Service
EIS' systems are typically used in contact center applications and those systems
are often mission critical to the customer's business. In mission critical
applications, a system or component failure could suspend, or substantially
interrupt a customer's business. EIS believes that its strong commitment to
customer support and service is a significant competitive factor. Its customer
support staff seeks to resolve most service problems through telephone
consultation and remote diagnostic programs are run through a modem connected to
the customer's system. If a problem cannot be corrected by telephone
consultation or remote diagnostics, an EIS customer service engineer visits the
customer's site, generally within eight hours of identification of a problem.
Customer support is available through a toll-free number and
-9-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
through the Internet 24 hours a day, seven days a week. EIS also provides 90-day
warranties on its systems. Maintenance contracts are available for terms of up
to three years, based on monthly, quarterly, or yearly payments. EIS' service
and other revenues as a percentage of total revenues were 22.8%, 31.1%, and
44.3% in 1996, 1997 and 1998, respectively.
Competition
The market for call processing systems is highly competitive and EIS believes
that competition will intensify as other companies enter this market with CTI
products. EIS' principal competitors include Davox Corporation, Melita
International Corporation, and Mosaix, Inc. EIS may also encounter increased
competition from existing competitors and from new market entrants, including
Aspect, Lucent, Northern Telecom, and Rockwell that have historically competed
primarily in the inbound market. In addition, for sales of application software
operating in contact centers, EIS may compete with software providers and system
integrators such as Siebel Systems, Inc. and Genesys Telecommunications
Laboratories. Many of EIS' current or potential competitors have greater
financial, technical and marketing resources and there can be no assurance that
EIS will be able to continue to compete successfully with those competitors. As
EIS expands its offerings of contact center applications, it may also encounter
increased competition from third party providers of contact center applications.
To date, EIS has competed on the basis of the capabilities, price, and
performance of its systems, its applications expertise, and the quality of
customer support. As the call processing market matures and new and existing
companies compete for the same customers, price competition is likely to
intensify, and that competition could adversely affect EIS' operating results.
Regulatory Environment
Certain applications of outbound call processing systems are regulated by
federal and state law. In addition, the Federal Fair Debt Collection Practices
Act prohibits certain consumer debt collection practices, including telephone
communication at any unusual or inconvenient time or place. That act also
prohibits repeated or continuous ringing of the telephone or communications by
debt collectors with an intent to annoy, abuse or harass. The Federal Telephone
Consumer Protection Act (the "TCPA") prohibits the use of automatic dialing
equipment to call emergency telephone lines, health care and similar facility
telephone lines where a called party is charged for incoming calls, like pager
and cellular phone services. TCPA also prohibits use of automated equipment to
engage two or more lines of a multi-line business simultaneously. Among other
things, TCPA requires the Federal Communications Commission ("FCC") to initiate
a rulemaking proceeding concerning the need to protect residential telephone
subscribers' privacy rights to avoid receiving telephone solicitations they
object to. The FCC rules also require that telemarketers call consumers only
between 8 a.m. and 9 p.m., local time. In addition, certain states have laws
similar to the above described FCC prohibitions that limit access to telephone
subscribers who object to such solicitations. Although compliance with the
described laws may limit the potential use of EIS' systems in some areas, EIS'
systems may be programmed to operate in full compliance with those laws through
appropriate calling lists and campaign calling time parameters. Future
legislation may further restrict telephone solicitation and such restrictions my
have a material, adverse impact on EIS.
To minimize the likelihood that EIS' products will be subject to existing and
future laws and regulations, EIS works closely with industry organizations like
the Direct Marketing Association, the North American Telecommunication
Association and the American Telemarketing Association to educate consumers,
system customers and legislators about the significant distinction between
predictive dialing systems which promote person-to-person contacts and automated
dialing recorded message players which play recorded messages without live
telephone agents.
A number of technical elements of EIS' systems are subject to and conform with
Federal Communications Commission regulations under the Federal Communications
Act of 1934. Additional products developed by EIS may also be required to comply
with those regulations before they can be sold in the United States. To the
extent EIS markets its products internationally, it must comply with applicable
foreign laws, including certification of those products by foreign regulatory
organizations. There can be no assurance that EIS will not encounter delays or
difficulty in obtaining those certifications and approvals.
-10-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
Manufacturing and Quality Assurance
EIS' call processor switch is manufactured, assembled and tested primarily by
Kimchuk, Inc. ("Kimchuk"), an independent contractor. EIS' agreement with
Kimchuk expires in July 1999; however that agreement has an automatic one-year
renewal term, unless either party gives 90 days' notice of an intent not to
renew it. During the term of this agreement, Kimchuk has a right of first
refusal to manufacture certain EIS' products and related components, subject to
certain conditions. EIS may terminate this agreement if Kimchuk is unable to
satisfy EIS' quality assurance requirements within a specified time after notice
to Kimchuk, or Kimchuk is unable to meet EIS' demand for products as specified
in the agreement. The functions of any EIS manufacturer are conducted in
accordance with EIS specifications and under the direction of EIS' engineering
staff. EIS has used Kimchuk to produce its systems for more than six years. EIS
believes that for at least the next 12 months, Kimchuk has sufficient capacity
to meet EIS' anticipated production requirements.
Because EIS' systems are manufactured from standard industry components, it
believes that it could make arrangements with other vendors to increase its
output, or replace a current contractor. To date, adequate supplies of these
components and alternative supplies for other components that are currently
single-sourced have been available in a timely manner from a variety of vendors.
EIS has a software quality assurance program to insure that software releases
function properly and related documentation is complete. Various simulation
tools are used for testing software prior to release, and the computerized
problem tracking system is able to document reported problems and resolutions.
This tracking system permits analysis of customer problems to determine if
service announcements for software changes are required.
Intellectual Property
EIS currently owns several patents relating to certain aspects of its
technology.
EIS' U.S. patent for voice detection technology, based on a unique method of
wave form analysis expires in 2005. EIS' U.S. patent for a method of randomizing
telephone numbers also expires in 2005. EIS owns the following U.S. patents
which expire in 2006: digital voice protocol converter and port controller,
digital voice recording, reproduction and telephone network signaling using
direct storage in RAM of PCM-encoded data, regulating arrivals of calls to
customers to servers, telephone trunk interface circuit, and an alternate memory
addressing method for information storage and retrieval. EIS owns the following
U.S. patents which expire in 2007: redundancy and buffering design for a call
processor and the pacing of telephone calls for call origination management
systems. EIS owns a U.S. patent for a method for the classification of audio
signals on a telephone line that expires in 2008. EIS also owns U.S. patents for
a call pacing algorithm using call progress detection technology expires in
2010, a method for call pacing to reduce abandoned calls that expires in 2011, a
system for integrating a stand-alone inbound automatic call distributor and an
outbound predictive dialer that expires in 2012, and an advanced method for
answer machine detection that expires in 2012. EIS also owns the following U.S.
patents which expire in 2015: a system that archives both voice and data in a
contact center, a system for integrating a stand alone inbound automatic call
distributor and an outbound automatic call dialer, an outbound call pacing
method which statistically matches the number of calls dialed to the number of
available operators, a system for adding outbound dialing to inbound call
distributors, and a patent for voice detection technology.
In December 1997, EIS filed a U.S. patent application for outbound switch
pacing. EIS also has 4 pending U.S. patent applications on: a method for
motivating call center agents; voice interactive call center training using
actual screen and screen logic; real-time on-line call verification systems; and
a communication management system that manages agent responses to clients over
the Internet.
During 1998, EIS filed for five patents. The filings were made in March, August,
September and October. The applications involve methods for: Call center inbound
blending, call pacing, call center inbound/outbound balance system, the
reassignment of agents, and the optimization of agent transfers in call
blending. In addition, EIS has two other applications pending that were
submitted in 1997 as follows: call pacing and outbound switch pacing.
Because of the rapid change in technology in contact centers and since EIS
recognizes that its success depends on its ability to continue to provide
technology enhancements for current and future products, EIS does not believe
that the expiration of its patents will have any material adverse effect on its
business.
-11-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
Factors Affecting Future Results
In addition to factors described elsewhere in this report, a number of
uncertainties exist that could affect the Company's future operating results,
including, without limitation, the following:
o A variety of factors influence EIS' net sales in a particular quarter,
including general economic conditions in the call processing industry, the
timing of significant orders, shipment delays, specific feature requests by
customers, the introduction of new products, the introduction of new products
by competitors, acquisitions, production and quality problems, changes in the
cost of materials, disruption in sources of supply, seasonal patterns of
capital spending by customers and other factors, many of which are beyond
EIS' control. Since a substantial portion of EIS' expenses do not vary
relative to its sales levels, if net sales in any quarter do not meet
expectations, that could have a material adverse effect on EIS' business,
financial condition and results of operations. EIS derives a substantial
portion of its sales from products that may cost in excess of $150,000 and a
failure to close a small number of transactions could have a significant
impact on EIS' net sales and operating results in any given quarter. During
1998, EIS' results of operations have been negatively affected by slow demand
due to excess capacity of outbound telemarketing service bureaus, who
represent the largest portion of EIS' customer base.
o The market for call processing systems is based upon sophisticated
technologies and is subject to rapid technological change. Current or new
competitors may introduce new products, features or services that could
adversely affect EIS' competitive position. To date, EIS' research and
development programs have produced system features and enhancements to
address customer requirements and competitive conditions. However, EIS
believes that to remain competitive it must continue to improve its products
and related services and develop and successfully market new products and
services. The success of any new product depends on a variety of factors,
including product selection, successful and timely completion of product
development and EIS' ability to offer its products at competitive prices.
o From time to time, EIS may consider strategic acquisitions. Its ability to
succeed with those acquisition will depend on many factors, including the
successful identification and acquisition of those businesses and EIS'
ability to integrate and operate them effectively. The consideration paid for
those acquisitions, the diversion of the attention of management to integrate
the acquired business and difficulties encountered in the integration process
could have a material adverse effect on EIS' business, financial condition
and results of operations. In the past, EIS experienced difficulties with the
successful identification and integration of several acquisitions (see
"Business - Background").
o EIS' success will depend in part on its ability to obtain and maintain
intellectual property including patent protection for its products, preserve
its trade secrets and operate without infringing on the proprietary rights of
third parties. EIS attempts to protect its technology by, among other things,
investing significant resources in obtaining and maintaining patents,
copyrights and trade secrets. The call processing industry is characterized
by vigorous protection and pursuit of intellectual property rights or
positions, which have often resulted in significant and often protracted and
expensive litigation. Any assertions of intellectual property claims could
require EIS to discontinue the use of certain processes or cease the
manufacture, use and sale of infringing products, to incur significant
litigation costs and damages, and to develop non-infringing technology or to
acquire licenses to the alleged infringed technology. Furthermore, the laws
of certain foreign countries do not protect EIS' intellectual property rights
to the same extent the laws of the United States (see "Business -
Intellectual Property").
o EIS' digital switches are manufactured, assembled and tested by Kimchuk, an
independent contractor, under an agreement that has been in effect for over
six years (see "Business - Manufacturing and Quality Assurance"). Any adverse
developments affecting Kimchuk could result in delays in the production and
delivery of EIS' systems and could have an adverse impact on their quality
and operating results. Except for some integrated circuit boards provided by
Kimchuk, EIS systems are manufactured from standard industry components. A
delay or lack of supply of these components from existing sources, or an
inability to obtain alternative sources, if and when required, could have a
material adverse effect on EIS' business, financial condition and results of
operations.
-12-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
o EIS offers lease financing to customers on a limited basis and intends to
continue that practice. In the past, EIS offered leases to entrepreneurial
businesses with limited capitalization, some of which might not be considered
"credit worthy" by financial institutions. EIS has an agreement with a third
party leasing company to finance certain EIS systems which provides, among
other things, that such leases could be subject to certain recourse to EIS.
EIS may enter into additional agreements with third party leasing companies
to finance EIS systems, and those agreements may include recourse
arrangements and discounts. In addition, from time to time, EIS may sell
portions of its lease portfolio to third parties on terms that may include
recourse provisions and discounts.
o Certain uses of outbound call processing systems are regulated by federal and
state law, including the Telephone Consumer Protection Act of 1991 and the
Federal Fair Debt Collection Practices. Although compliance with these laws
may limit the potential uses of EIS' system in some respects, the systems may
be programmed to operate in full compliance with those laws through the use
of appropriate calling lists and campaign calling time parameters. There can
be no assurance, however, that future legislation, if enacted, will not
further restrict telephone solicitation, and thereby adversely affect EIS. A
number of technical elements EIS' systems are subject to, and conform with,
Federal Communications regulations under the Federal Communications Act of
1934. Future products developed by EIS may also be subject to compliance with
similar or even more restrictive regulations before they can be sold in the
United States. To the extent EIS markets its products in foreign countries,
it is required to comply with applicable foreign laws, including
certification of those products by appropriate regulatory organizations.
o The market for call processing systems continues to evolve. EIS' future
financial performance will depend, in part, on the development and continuing
growth of this market. EIS believes that any such growth will require
expansion of current applications of existing customers, development of new
markets for those systems and increased customer acceptance. A number of
factors, including the continuing development of an already generally
negative consumer perception of telephone solicitation, could adversely
impact the growth of various applications segments of this market.
o EIS' ability to develop marketable products and maintain a competitive
position in light of continuing technological developments will depend, in
large part, on its ability to attract and retain highly qualified personnel.
Competition for the services of those employees is intense.
o As of December 31, 1998, EIS had net deferred tax assets totaling $3.8
million. Based upon the level of historical taxable income and projections
for future taxable income of approximately $10 million over the next 2 years,
management believes it is more likely than not that EIS will realize the
benefits of these deductible differences, net of the existing valuation
allowances at December 31, 1998. However, if EIS is unable to meet its
projections for future taxable income in the near term, the amount of the net
deferred tax asset may be partially or fully reduced.
Because of the above and other factors, EIS' past financial performance should
not be considered an indicator of its future performance.
Employees
At December 31, 1998, EIS employed 260 persons, many of whom are highly skilled.
EIS' success depends on its ability to continue to attract and retain highly
skilled employees. EIS has never had a work stoppage, and its employees are not
represented by any labor organizations. EIS considers its employee relations to
be good.
Executive Officers of EIS
The executive officers of EIS, and their age and position, are as follows:
-13-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
<TABLE>
<CAPTION>
Name Age Position
- --------------- ---------- ------------------------------------------------------------------
<S> <C> <C>
James E. McGowan 55 Chief Executive Officer, President, and Director
Frederick C. Foley 53 Chief Financial Officer, Senior Vice President, Finance, Treasurer
Edward J. Sarkisian 60 Senior Vice President, Worldwide Sales, Marketing, and Customer
Operations
Jonathan M. Wineberg 43 Senior Vice President, Engineering and Product Development
Kent M. Klineman 66 Secretary and Director
</TABLE>
James E. McGowan has been EIS' Chief Executive Officer, President and a Director
since February 1997. He was also President and Chief Operating Officer of EIS
Systems, an operating division of EIS, from April 1996 until February 1997. From
September 1993 to January 1996, he was President and Chief Executive Officer of
Deluxe Data, a provider of electronic funds transfer processing and software for
financial institutions and automated teller machine networks. From January 1993
to September 1993, he ran McGowan Associates, a consulting company which he
founded. From January 1990 to December 1992, he served as President and Chief
Executive Officer at Xerox Imaging Systems.
Frederick C. Foley has been EIS' Senior Vice President, Finance, since October
1994, Chief Financial Officer of EIS from October 1994 to January 1996 and again
since February 1997, and Treasurer from January 1994 until April 1996 and again
since February 1997. From April 1993 until October 1994, he served as Vice
President, Finance, of EIS. He served as EIS' Controller from October 1991 until
November 1993. He was elected as an executive officer of EIS in April 1993.
Edward J. Sarkisian has been EIS' Senior Vice President of Worldwide Sales,
Marketing, and Customer Operations since August 1998. His areas of
responsibility include overall company marketing, new business development,
strategic alliances, account management, international operations, and customer
support. From March 1997 to July 1998, Mr. Sarkisian was Vice President,
Customer Operations for EIS. From October 1996 to February 1997, he served as
President and Chief Operating Officer of Cybernetics. From February 1996 to
September 1996, he served as President and Chief Operating Officer of Surefind.
From October 1994 to January 1996, he served as Executive Vice President, North
American Sales for EIS. From January 1994 to September 1994, he served as Senior
Vice President, Engineering and Development for EIS. From August 1992 to
December 1993, he served as Senior Vice President, Sales Marketing for EIS.
Jonathan M. Wineberg has been EIS' Senior Vice President of Engineering and
Product Development since October 1998. His responsibilities include all areas
of product development, design, engineering, and management. From July 1997 to
September 1998, he served as Vice President of Engineering for EIS. From July
1996 to June 1997, he served as Senior Vice President of Software Development
for Cybernetics. Prior to joining Cybernetics, he served as Director of Software
Development for Supply Tech, Inc. from September 1992 to June 1996.
Kent M. Klineman has been EIS' Secretary and a Director since June 1988 and
served as Treasurer from June 1988 until December 1989. He is an attorney and
private investor and serves as a Director of a number of closely-held companies.
He is also a Director of Concord Camera Corp., a publicly held corporation.
-14-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
Item 2. Properties
EIS' executive offices are located in Herndon, Virginia. This facility has
approximately 78,000 square feet and is leased through December 31, 2002, at a
current annual base rent of $1.3 million, plus charges for proportionate real
estate taxes and operating costs. EIS also leases space in Stamford,
Connecticut, primarily for engineering activities. This facility has
approximately 37,000 square feet and is leased through December 31, 2001, at an
annual base rent of approximately $639,000, plus charges for direct costs.
During December 1997, over one-third of this office was sublet through September
1998. EIS is continuing to seek a permanent sublet arrangement or release from
its obligations on this portion of its Stamford facility.
EIS also leases space in Chantilly, Virginia. This facility has approximately
20,000 square feet and is leased through January 2003 at an annual base rent of
$229,000. During the first quarter of 1998, EIS consolidated the operation of
this facility into its Herndon, Virginia facility. During the second quarter of
1998, EIS sublet this facility for the remaining term of the lease.
EIS also leases several small, regional sales and customer support offices in
the U.S. and a facility in the United Kingdom, all under renewable leases or
occupancy arrangements for a term of one year or less. EIS believes that its
facilities are adequate for its current level of employment but expects that it
will require additional square footage to accommodate future business and
employment growth.
-15-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
Item 3. Legal Proceedings
EIS and certain current and former officers of EIS were named as defendants in
five securities lawsuits, each of which were filed during 1997 in the United
States District Court for the District of Connecticut, allegedly on behalf of
certain of the Company's shareholders. Each of those claims alleged securities
fraud based upon certain alleged misleading representations regarding the
Company's acquisition of Surefind and Cybernetics and their operations, each of
which seek damages in an unspecified amount.
These lawsuits have been consolidated and a consolidated and amended class
action complaint, In Re EIS International, Inc. Securities Litigation, was filed
in the United States District Court for the District of Connecticut on April 29,
1998. EIS and various other defendants have retained counsel, the claims are
being reviewed, and the lawsuit will be vigorously defended. On June 15, 1998,
EIS and the other defendants filed a motion to dismiss the case. That motion is
now fully briefed and awaiting possible oral argument and decision by the court,
although no assurance can be given as to when a decision will be reached. EIS is
currently not able to estimate the potential damages or costs or a range of
potential damages or costs that may arise out of this case.
During the second quarter of 1998, EIS was informed that certain of its
customers had received a patent infringement warning from Manufacturing
Administration and Management Systems, Inc. ("MAMS") alleging that technology
used by certain of EIS' customers infringed on a patent held by MAMS. MAMS filed
an infringement action against certain of EIS' customers who received the
infringement warning. Under EIS' contract with its customers, EIS is obligated
to indemnify its customers against any such claim. EIS is currently not able to
estimate the costs or a range of costs that may arise out of those
indemnification obligations. EIS believes this infringement claim to be without
merit, and will vigorously defend its patent rights. However, there can be no
assurance that EIS will prevail in this matter, in which case, there may be a
material, negative impact on EIS' results of operations. EIS has filed suit
against MAMS and one of its patent inventors requesting that the court rule that
EIS' products do not infringe upon the patent held by MAMS.
EIS is also party to various other legal actions and claims arising in the
ordinary course of its business. EIS believes it has adequate legal defenses for
each of the actions and claims and believes that their ultimate disposition will
not have a material adverse effect on the Company's consolidated financial
position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
-16-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
EIS common stock began trading on the NASDAQ National Market System under the
symbol "EISI" on July 10, 1992. The following table sets forth for the periods
indicated the high and low prices for the Common Stock as reported by NASDAQ.
<TABLE>
<CAPTION>
1997 1998
---------------- ------------------
HIGH LOW HIGH LOW
------- ------ ------- --------
<S> <C> <C> <C> <C>
First Quarter 8 5/8 4 9 3/16 5 5/8
Second Quarter 8 1/4 4 9 1/16 4 15/16
Third Quarter 10 7/8 7 3/4 5 1/2 1 3/16
Fourth Quarter 9 7/8 5 7/32 2 1/2 1 13/32
</TABLE>
As of December 31, 1998, there were approximately 320 holders of record of the
Company's Common Stock and approximately 4,500 beneficial holders of the
Company's Common Stock.
EIS has never paid cash dividends on its Common Stock. EIS currently intends to
retain any earnings for future growth and, therefore, does not anticipate paying
cash dividends on its Common Stock in the foreseeable future.
-17-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
Item 6. Selected Financial Data
Selected Consolidated Financial Data
(In Thousands, Except Per Share Data)
The following selected consolidated financial data as of and for the years ended
1994, 1995, 1996, 1997, and 1998 is derived from the Company's audited
consolidated financial statements, which, with respect to the years 1996, 1997,
and 1998, are included under Item 8. Financial Statements and Supplementary
Data. The selected consolidated financial data should be read in conjunction
with "Management's Discussion and Analysis of Results of Operations and
Financial Condition," the Consolidated Financial Statements, related notes and
other financial information included elsewhere in this report.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------
1994 1995 1996 1997 1998
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Net Revenues $ 64,872 $ 89,610 $ 95,659 $ 85,630 $ 58,742
Operating income (loss) 12,193 15,861 (37,096) 763 (4,277)
Income (loss) from continuing operations 7,602 11,357 (33,028) 1,245 (3,086)
Income (loss) from discontinued operations,
net of tax benefit (544) (2,137) (5,528) --- 238
Net income (loss) per share data:
Basic:
Continuing operations $ 0.92 $ 1.17 $ (3.09) $ 0.11 $ (0.27)
Discontinued operations (0.07) (0.22) (0.52) --- 0.02
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 0.85 $ 0.95 $ (3.61) $ 0.11 $ (0.25)
============ ============ ============ ============ ============
Diluted:
Continuing operations $ 0.86 $ 1.09 $ (3.09) $ 0.11 $ (0.27)
Discontinued operations (0.06) (0.20) (0.52) --- 0.02
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 0.80 $ 0.89 $ (3.61) $ 0.11 $ (0.25)
============ ============ ============ ============ ============
Weighted average common and
common equivalent shares:
Basic 8,241 9,707 10,681 11,353 11,547
Diluted 8,870 10,462 10,681 11,605 11,547
Balance Sheet Data
Total assets $ 64,944 $ 84,217 $ 72,861 $ 67,792 $ 57,699
</TABLE>
-18-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Cautionary Statement
In addition to historical information contained herein, this document contains
certain "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, and are subject to the safe harbors created thereby.
All statements included in this document regarding the Company's financial
position, business strategy and plans, objectives for future operations, and
industry conditions -- other than statements of historical facts -- are
forward-looking statements. While these statements reflect the Company's
reasonable assumptions, based upon management's beliefs and information
currently available to it, EIS can give no assurance that such expectations will
prove to be correct.
These statements are subject to certain risks, uncertainties, and assumptions
related to certain factors including, without limitations, competitive factors,
general economic conditions, customer relations, technological change, product
introductions and acceptance, distribution networks, changes in industry
practices, one-time events, and other factors described herein (see "Business -
Factors Affecting Future Results"). Based upon changing conditions, should any
one or more of these risks or uncertainties materialize, or should any
underlying assumptions prove incorrect, EIS may experience material fluctuations
in its future quarterly and annual operating results that may vary materially
from those described herein and that could materially and adversely affect its
business, financial condition, operating results, and stock price. EIS does not
intend to update these forward-looking statements.
Introduction
EIS International, Inc., together with its wholly owned subsidiaries (the
"Company" or "EIS"), provides integrated systems, software, and services to
businesses that use the telephone in organized campaigns to reach large target
audiences. These solutions improve the productivity and effectiveness of call
center (also known as "contact center") operations including campaign
management, staffing and technology integration. EIS is a supplier of advanced
technology for contact centers and a leading provider of such outbound and
integrated inbound/outbound technology.
On February 29, 1996, EIS merged with Surefind Information, Inc. ("Surefind") of
Pittsburgh, Pennsylvania. Surefind was a privately held corporation in the
business of storing electronic data. EIS issued 505,685 shares of EIS common
stock, $.01 par value, in exchange for all 2,826,467 shares of Surefind stock
outstanding, as well as shares subject to options and warrants. This merger was
accounted for by the pooling of interests method of accounting, and accordingly,
the Company's consolidated financial statements have been restated for all
periods prior to acquisition to include the results of operations, financial
position, and cash flows of Surefind.
On March 1, 1996, EIS acquired all the issued and outstanding capital stock of
Cybernetics Systems International Corp. ("Cybernetics"), a privately held
company located in Coral Gables, Florida, for $22.8 million consisting of $9.3
million in cash and the remainder in shares of EIS common stock. Cybernetics
specialized in computerized Workforce Management Systems for the contact center
industry which are designed to aid in staff forecasting and scheduling. The
acquisition of Cybernetics was accounted for by the purchase method of
accounting, and accordingly, the acquired assets were recorded at their fair
values, with the help of an appraiser, at the date of purchase, and the results
of operations of EIS reflect those of Cybernetics from March 1, 1996, through
June 30, 1998.
On September 1, 1996, EIS entered into an Asset Purchase Agreement with Pulse
Technologies, Inc. ("Pulse"), a Virginia corporation, relating to the purchase
of substantially all of the assets of Pulse for consideration consisting of the
assumption of certain liabilities and the payment of (i) 44,993 shares of the
Company's common stock, $.01 par value per share, having a value of
approximately $820,000; (ii) $950,000 in cash; and (iii) five-year warrants to
purchase 29,995 shares of EIS common stock at $18.23 per share. Pulse was a
professional and technical services firm specializing in telecommunications
consulting. The acquisition of Pulse was accounted for by the purchase method of
accounting, and accordingly, the acquired assets have been recorded at their
fair values, with the help of an appraiser, at the date of purchase, and the
results of operations of EIS reflect those of Pulse from September 1, 1996.
-19-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
In connection with the Cybernetics and Pulse acquisitions, EIS acquired
technology in process that had not achieved technological feasibility at the
date of acquisition and had no alternative future uses. As a result, EIS has
charged the fair value of such acquired technology in process against operations
at the time of the acquisition.
As part of the refocus on the core business of EIS, as of December 31, 1996, EIS
has discontinued the operations of Surefind (see "Discontinued Operations").
Accordingly the results of Surefind in 1995 and 1996 are shown as a loss on
discontinued operations in the consolidated statements of operations for the
respective periods.
On March 3, 1997, EIS announced a restructuring and reorganization program (the
"Restructuring"), the purpose of which was to refocus efforts on EIS' core
business and to reduce costs. Under the Restructuring, Cybernetics' Fort
Lauderdale, Florida, facility was closed and sublet, and Cybernetics began to
concentrate on the development and marketing of Workforce Manager for Windows
("WMW"). During 1997, EIS also terminated Pulse's operations and integrated
Pulse with EIS' core business. EIS also closed its corporate headquarters in
Pittsburgh, Pennsylvania, and relocated its headquarters to the Herndon
facility. Approximately 110 employees were terminated as a result of the
Restructuring. During the first quarter of 1997, in connection with the
Restructuring, EIS recorded charges of $2.9 million, including $1.1 million of
severance costs, $1.3 million of facilities leases and fixed asset disposal
costs, and $0.5 million of other costs.
Effective June 30, 1998, EIS terminated Cybernetics' operations because of
continuing losses and management's decision to focus on EIS' core business. In
connection with the termination of operations of Cybernetics, EIS recorded
restructuring charges of $543,000, comprised of $350,000 of severance payments
and $193,000 of facilities, fixed asset disposal, and other costs.
During the second half of 1998, EIS took further action to cut expenses in
response to the decline in revenue during 1998 as compared to 1997. These
actions included staffing reductions in all areas of EIS and other expense
control measures designed to significantly reduce expenses commensurate with
recent trends in revenue.
-20-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
Results of Operations
The following table sets forth, for the periods indicated, certain financial
data as reflected in the Consolidated Statements of Operations included as an
exhibit under Item 14 - Financial Statements and Supplementary Data. The
percentages shown are calculated based upon net revenues, except that cost of
product and software sold and cost of services and other are presented as a
percentage of product and software sales and service and other revenues,
respectively.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------
1996 1997 1998
--------------------- --------------------- --------------------
$ % $ % $ %
----------- --------- ----------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Product and software sales 73,848 77.2 59,017 68.9 32,743 55.7
Service and other 21,811 22.8 26,613 31.1 25,999 44.3
----------- --------- ----------- --------- ---------- --------
Net revenues 95,659 100.0 85,630 100.0 58,742 100.0
----------- --------- ----------- --------- ---------- --------
Cost of product and software sold 31,859 43.1 20,512 34.8 14,993 45.8
Provision for (recovery of) contract losses 4,967 6.7 --- --- (1,636) ---
Cost of service and other 13,133 60.2 14,737 55.4 13,894 53.4
----------- --------- ----------- --------- ---------- --------
Gross margin 45,700 47.8 50,381 58.8 31,491 53.6
----------- --------- ----------- --------- ---------- --------
Research and development cost 14,152 14.8 11,899 13.9 9,691 16.5
Sales, general and administrative 42,341 44.3 34,842 40.7 25,534 43.5
Restructuring costs --- --- 2,877 3.4 543 0.9
Acquired technology in process 18,245 19.1 --- --- --- ---
Write-off of intangible assets 8,058 8.4 --- --- --- ---
----------- --------- ----------- --------- ---------- --------
Operating income (loss) (37,096) (38.8) 763 0.9 (4,277) (7.3)
----------- --------- ----------- --------- ---------- --------
Other income, net 1,313 1.4 1,298 1.5 1,312 2.2
----------- --------- ----------- --------- ---------- --------
Income (loss) before income tax benefit (expense) (35,783) (37.4) 2,061 2.4 (2,965) (5.0)
----------- --------- ----------- --------- ---------- --------
Income tax benefit (expense) 2,755 2.9 (816) (1.0) (121) (0.2)
----------- --------- ----------- --------- ---------- --------
Income (loss) from continuing operations (33,028) (34.5) 1,245 1.5 (3,086) (5.3)
----------- --------- ----------- --------- ---------- --------
Discontinued operations (5,528) (5.8) --- --- 238 0.4
----------- --------- ----------- --------- ---------- --------
Net income (loss) (38,556) (40.3) 1,245 1.5 (2,848) (4.8)
=========== ========= =========== ========= ========== ========
</TABLE>
Net Revenues
Net revenues of $58.7 million during 1998 decreased $26.9 million (31%) from
$85.6 million during 1997. Product and software revenues of $32.7 million during
1998 decreased $26.3 million (45%) from $59.0 million during 1997. The decrease
in product and software revenue is primarily a result of continued slow demand
due to excess capacity of outbound telemarketing service bureaus, which
represent the largest portion of EIS' customer base. Also contributing to the
decrease in product and software revenue was a lack of growth of new business in
North America. All of EIS' products have been affected by this trend. Also
contributing to the decrease in product and software revenue was the downsizing
of Cybernetics during the first six months of 1998 and its final closure on June
30, 1998. These actions, necessary to eliminate ongoing losses attributable to
Cybernetics, resulted in a $2.6 million decrease in product and software revenue
during 1998 as compared to 1997. Finally, as discussed in note 2 to the
accompanying financial statements, in October 1997, the AICPA Accounting
Standards Executive Committee issued Statement of Position 97-2, "Software
Revenue Recognition" ("SOP 97-2"). As a result of the adoption of SOP 97-2 on
January 1, 1998, product and software revenue was $389,000 lower during 1998.
EIS has taken and is continuing to take actions with respect to its domestic and
international sales, product development, and marketing activities to address
the decline in product and software revenue. However, no assurance can be given
that these actions will result in the stabilization or increase of product
revenue.
Net revenues of $85.6 million during 1997 decreased $10.1 million (10%) from
$95.7 million during 1996. Product and software sales revenue during 1997
decreased $14.8 million (20%), while service and other revenues increased $4.8
million
-21-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
(22%), as compared to 1996. The decrease in product and software sales revenue
is primarily a result of a decrease in sales of EIS' mature products, which were
not offset by an increase in sales of its newer products, and a decrease in
sales of the Company's wholly owned subsidiary, Cybernetics. Product and
software sales in 1996 were negatively affected by an increase in the Company's
allowance for sales returns ($1.3 million) and the Company's decision to take
back a call processing system relating to a customer dispute ($2.2 million).
Service and other revenues of $26.0 million during 1998 decreased $600,000 (2%)
from $26.6 million during 1997. That decline was primarily due to the downsizing
and final closure of Cybernetics as discussed above and a decline in EIS'
professional services revenues. Service and other revenues of $26.6 million
during 1997 increased $4.8 million (22%) from $21.8 million during 1996. The
increase in service and other revenues during 1997 as compared to 1996, was
primarily due to expansion of the Company's customer base covered by service
contracts and the expansion of its systems integration business.
EIS' systems and services are marketed in the United States and the United
Kingdom by a direct sales force located in several regional offices in those
areas. EIS also has distribution agreements with third-party distributors in
France, Germany, Sweden, Italy, Spain, Mexico and Japan. During 1996, 1997, and
1998, EIS revenues outside North America were approximately 4%, 6%, and 9% of
net revenues, respectively.
Cost of Revenues and Gross Margins
Cost of revenues consists of product costs, amortization of computer software
costs, installation costs, customer support costs, and professional services
costs. The overall gross margin was $45.7 million (47.8%) in 1996, $50.4 million
(58.8%) in 1997, and $31.5 million (53.6%) in 1998. Included in the total gross
margin was the recovery of provision for contract losses of $1.6 million during
1998. The recovery of provision for contract losses represents the reduction of
an accrued expense recorded during the fourth quarter of 1996. This accrual
represented management's estimate, at the time the expense was recorded, of
costs associated with the completion and installation of products and the
resolution of certain contract obligations of Cybernetics. During the first six
months of 1998, Cybernetics completed work on certain contracts and resolved
certain other contract obligations with its customers that resulted in the
recovery of the provision for contract losses.
Gross margin on product and software sales was $37.0 million (50.1%) in 1996,
$38.5 million (65.2%) in 1997, and $17.8 million (54.2%) in 1998. The decline in
product and software gross margin dollars was directly attributable to the
decline in product and software revenue. The decline in the gross margin
percentage was primarily caused by staffing and other direct costs associated
with product and software revenue during 1998 that did not decline in proportion
to the decline in product and software revenue. The gross margin percentage was
also affected by a higher volume of hardware upgrade sales at lower margins
during 1998. Additionally, during the third quarter of 1998, EIS accelerated the
amortization of certain capitalized software development costs, which were
deemed not to have any further useful life (see "Research and Development Costs"
below). The increase in gross margin on product and software sold as a
percentage of product and software sales revenue during 1997 compared to 1996 is
primarily due to four factors. First, the percentage of software sold with
hardware declined by 16% during 1997, as compared to 1996, due to an increase in
customers that purchased EIS software to be installed on existing hardware.
Second, during 1996, EIS recorded a $5.0 million provision for costs associated
with the completion and installation of products and the resolution of
Cybernetics contract obligations, a $1.7 million inventory write-down, and
increased hardware costs associated with a Cybernetics installation of $1.3
million. Third, the cost of product and software sold as a percentage of product
and software sales revenue in 1996 was negatively affected by the lower revenue
base used in the calculation as a result of the increased sales returns and
allowance in 1996 as explained above under "Net Revenues." Fourth, staffing
expenses included in the cost of product and software sold during 1997 decreased
from the staffing expenses during 1996.
Gross margin on service and other revenue was $8.7 million (39.8%) in 1996,
$11.9 million (44.6%) in 1997, and $12.1 million (46.6%) in 1998. Service and
other costs were 53.4% of service and other revenues during 1998 compared to
55.4% in 1997 and 60.2% in 1996. The decrease in costs of service and other in
1998 was primarily attributable to a $1.4 million decrease in such costs of
Cybernetics and a decrease in the cost of supplying parts under customer
maintenance contracts as a result of management's efforts to improve this
process. These decreases were partially offset by an increase in EIS customer
support and professional services staffing and other overhead costs. The
decrease in costs of service and other as a percentage of service and other
revenues during 1997 is due primarily to expenditures incurred during the 1996
-22-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
periods for building the infrastructure of the service organizations in advance
of generating additional service revenue. The improvement in 1997 also resulted
from a decline in the cost of supplying parts under customer maintenance
agreements.
The Company's gross margin can be affected by a number of factors, including
changes in sales volume, product mix, costs of product support and competitive
pressures on pricing. Consequently, there can be no assurance that EIS will
continue to sustain gross margins at previous levels.
Research and Development Costs
Research and development ("R&D") costs as a percentage of total revenues were
14.8% in 1996, 13.9% in 1997, and 16.5% in 1998. R&D costs as a percentage of
total revenues increased due to the decline in total revenues as discussed
above. R&D costs decreased $2.2 million to $9.7 million in 1998 as compared to
$11.9 million in 1997. This decrease was primarily attributable to a $1.1
million decrease in R&D costs of Cybernetics and a decrease in EIS R&D internal
and subcontract labor costs not associated with the Year 2000 Product Plan (see
disclosures regarding "Year 2000 Issues" below). The reduction in EIS R&D labor
costs was made in response to the reduction in total revenues discussed above as
part of actions taken to prevent further losses during 1998. The decrease in R&D
costs during 1998 compared to 1997 was also due to an increase in capitalized
software development costs of $800,000. That increase was due to an increase in
engineering resources and related costs during 1998 directed toward the
completion of the Centenium XL product, which was released in September 1998,
and the commencement of capitalizing software development costs associated with
Contact Universal Exchange ("CUE") in 1998. CUE will act as a state-of-the-art
technology designed to interconnect various contact center applications
(switches, predictive dialing processes, databases, fulfillment applications,
workflow management applications, and related technologies) to meet demand for a
unified contact center technology infrastructure platform.
R&D costs decreased $2.3 million to $11.9 million during 1997 from $14.2 million
during 1996. This decrease was primarily due to a decline in such costs incurred
by Cybernetics and a decline in the use of subcontract software engineers.
EIS capitalizes certain software development costs relating to the enhancement
of existing products and to the development of new products in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86 "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed."
Approximately $2.1 million, $1.1 million, and $1.9 million were capitalized
during 1996, 1997, and 1998, respectively. The decrease in capitalized software
development costs in 1997 as compared to both 1996 and 1998 was due to an
increase in R&D costs directed towards R&D activities that did not qualify for
capitalization under SFAS No. 86. Amortization of capitalized software
development costs of $0.8 million, $1.4 million, and $1.8 million in 1996, 1997,
and 1998, respectively, are included in cost of products sold. The increase in
amortization of capitalized software development costs during 1998, as compared
to 1997, was primarily a result of accelerating the amortization of certain
software development costs that were deemed not to have any further useful life.
The increase during 1997, as compared to 1996, was due to the commencement of
amortization of a major Centenium release toward the end of 1996, resulting in a
partial year of amortization expense in 1996 as compared to 1997 for this
product.
EIS has a commitment to technological innovation. It believes that additional
R&D costs will be required to maintain the Company's market position and that
these costs may increase in absolute amounts in 1999.
Sales, General and Administrative Expense
Sales, general and administrative ("SG&A") expense decreased $9.3 million to
$25.5 million during 1998 from $34.8 million during 1997. This decrease was
caused by a 50% reduction in the number of SG&A employees as of December 31,
1998 as compared to December 31, 1997, along with the downsizing and closure of
Cybernetics. The decrease is also due to a decrease in sales-related expenses,
such as commissions, sales incentives, and travel, which decreased with the
decline in product and software sales revenue as discussed above. SG&A expense
decreased $7.5 million to $34.8 million during 1997 from $42.3 million during
1996. This decrease was primarily due to the fact that during the first quarter
of 1997, in connection with the Restructuring as discussed above, EIS
consolidated several of its administrative functions and facilities and
downsized its Cybernetics and Pulse subsidiaries. Selling expenses also
decreased along with the decrease in net revenues.
-23-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
Restructuring Costs
On March 3, 1997, EIS announced a restructuring and reorganization program (the
"Restructuring"), the purpose of which was to refocus efforts on its core
systems business and to reduce costs. Under the Restructuring, EIS downsized the
operations of Cybernetics and closed and sublet its Fort Lauderdale, Florida,
facility, focusing Cybernetics' development and marketing efforts primarily on
the Workforce Manager product. EIS also terminated the separate operations of
Pulse by consolidating the business of Pulse into EIS' core business operations.
In addition, EIS closed the corporate headquarters in Pittsburgh, Pennsylvania,
and relocated its corporate headquarters to its facility in Herndon, Virginia.
Approximately 110 employees were terminated as a result of the Restructuring.
During the first quarter of 1997, in connection with the Restructuring, EIS
recorded charges of $2.9 million, including $1.1 million of severance costs,
$1.3 million of facilities leases and fixed asset disposal costs, and $500,000
of other costs.
Effective June 30, 1998, EIS terminated Cybernetics' operations because of
continuing losses and management's decision to focus on EIS' core business. In
connection with the termination of operations of Cybernetics, EIS recorded
restructuring charges of $543,000, comprised of $350,000 of severance payments
and $193,000 of facilities, fixed asset disposal, and other costs.
Acquired Technology in Progress
The acquired technology in progress costs of $18.2 million incurred in 1996
reflect the fair value of the software products under development at Cybernetics
and Pulse that had not achieved technological feasibility at the date of
acquisition, had no alternative future uses, and were, therefore, charged
against operations at the time of the acquisitions.
Write-down of Intangible Assets
In accordance with SFAS No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," management performed a
discounted cash flow analysis of Cybernetics' operations. As a result of this
analysis, management concluded that a write-down of the intangible assets of
Cybernetics from $8.1 million to zero was warranted.
Other Income, Net
Other income, net is primarily interest income resulting from the investment of
excess cash and cash equivalents, along with interest generated from EIS' lease
portfolio. Other income, net was $1.3 million in 1996, 1997 and 1998. An
increase in interest income from investment of increased average cash and cash
equivalent balances offset decreased interest income generated from EIS'
declining lease portfolio in each of 1996, 1997, and 1998.
Discontinued Operations
On February 28, 1997, the Board of Directors of EIS resolved to discontinue the
operations of Surefind. The decision to discontinue the operations of Surefind
was made after it became apparent that a significantly higher than anticipated
level of cash funding was needed to exploit Surefind's product.
Surefind incurred a net loss of approximately $3.7 million, net of a $1.6
million income tax benefit, in 1996 which is separately shown as a loss on
discontinued operations in the accompanying consolidated statements of
operations for the respective periods. In connection with the decision to
discontinue the operations of Surefind, EIS recorded a $1.8 million estimated
loss on the disposal of Surefind which includes a provision for anticipated
operating losses prior to disposal. The loss on disposal, recorded in the fourth
quarter of 1996, is shown net of a $1.1 million income tax benefit.
Income from discontinued operations recognized in 1998 is the remaining amount
of an accrual no longer necessary as a result of resolution of obligations
associated with the discontinuation of operations of Surefind.
-24-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
Income Taxes
The Company's effective income tax expense (benefit) rate was (7.7)%, 39.6%, and
4.1% for 1996, 1997, and 1998, respectively. Income tax expense of $121,000
during 1998 was incurred as a result of certain state income taxes and foreign
taxes arising from a foreign subsidiary. Also during 1998, EIS recognized a
Federal tax benefit of approximately $1.8 million that was fully offset by an
increase in EIS' income tax valuation allowance. The increase in the effective
tax rate from 1996 to 1997 is primarily attributable to the 1996 losses incurred
by EIS offset by the non-deductible charges related to the acquired technology
in process and the write-down of intangible assets in 1996. Additionally, in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109,
EIS established a valuation allowance to reduce the net deferred tax asset to a
level that, more likely than not, would be realized when necessary. The
valuation allowance was increased in 1996 by $4.0 million for the net operating
loss carryforwards of Cybernetics and Surefind that were generated prior to EIS'
ownership.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income of
approximately $10 million over the next two years, management believes it is
more likely than not that EIS will realize the benefits of these deductible
differences, net of the existing valuation allowances at December 31, 1998.
However, if EIS is unable to meet its projections for future taxable income in
the near term, the amount of the net deferred tax asset may be partially or
fully reduced.
Year 2000 Issues
Background. Many existing computer programs use only two digits to identify a
year in the date field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If not corrected,
many computer applications could fail or create erroneous results by or at the
Year 2000. The Year 2000 issue affects nearly all companies and organizations.
Impact on EIS. All EIS products will be or have been affected in some manner by
Year 2000 issues. EIS has developed and is continuing the implementation of a
plan (the "Year 2000 Product Plan") that makes necessary modifications to its
products. The current total estimated cost to update those products is expected
not to exceed $1.5 million. During 1998, EIS incurred $1,096,000 of costs
associated with the Year 2000 Product Plan. No costs were incurred prior to
1998. These costs are included in research and development in the accompanying
consolidated statements of operations. The Year 2000 Product Plan was
substantially complete by the end of February 1999.
On July 30, 1998, EIS announced that a Year 2000-compliant release of its Call
Processing System ("CPS") software was complete and available for sale. CPS is
EIS' most widely used and sold software. EIS has also announced that its EIS
Gateway, Outbound Call Manager (on certain hardware platforms), SmartAgent
Manager, System 7000, and Centenium products are Year 2000 compliant. EIS has
begun and is planning to continue to provide updated software to its customers
under EIS maintenance contracts, and to charge fees for on-site visits and
certain other services, if necessary, to upgrade EIS' customers' software.
Although EIS has substantially completed the Year 2000 Product Plan changes in
all of its products, upgrading all customers' systems that require such upgrades
prior to the Year 2000 cannot be assured since a substantial part of the upgrade
process will be dependent on EIS' customers. EIS expects to continue to
supplement its internal resources with subcontract labor to install Year 2000
upgrades on customer systems.
EIS has substantially completed the process of reviewing and estimating the cost
of updating its internal software and hardware information technology ("IT")
systems and non-IT systems (collectively, "Internal Systems") to be Year 2000
compliant. EIS has determined that its mission-critical Internal Systems,
including its financial systems, customer support, network, and desktop
applications, are Year 2000 compliant. Although EIS could incur additional costs
in this regard, EIS believes that those costs will not have a material effect on
its operations and financial condition. No material costs have been incurred to
date with respect to updating EIS' Internal Systems for Year 2000 compliance.
EIS has continued to investigate but has not identified any major vendor or
distributor the failure of which to be Year 2000 compliant could cause any
adverse impact on EIS. The most reasonably likely worst case scenario would
include: (1) corruption of data contained in the Company's internal information
systems, (2) hardware failure, and (3) the failure of infrastructure services
provided by third parties (e.g. electricity, phone service, water and sewer,
internet services, etc.).
-25-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
EIS has not formulated any contingency plans in the event that its Internal
Systems are not updated prior to the Year 2000 because the update process is
substantially complete. EIS will continue to monitor the need for contingency
plans with respect to its major vendors and distributors.
Liquidity and Capital Resources
EIS' working capital increased to $32.6 million at December 31, 1998, from $31.2
million at December 31, 1997. Cash, cash equivalents, and short-term investment
balances increased $3.3 million to $28.2 million at December 31, 1998, from
$24.9 million at December 31, 1997. The increase in cash, cash equivalents, and
short-term investments primarily resulted from the $7.6 million of net cash
provided by operating activities in 1998, as reflected in the accompanying
consolidated statements of cash flows. Net cash of $2.2 million used in
investing activities during 1998 primarily related to additions to property and
equipment of $2.6 million for normal purchases and upgrades of internal computer
hardware and software. Net cash from financing activities of $258,000 includes
$745,000 from the sale of a portion of EIS' lease portfolio as further discussed
below, and $803,000 in cash used to buy back 411,500 shares into treasury. On
October 1, 1998, EIS announced that its Board of Directors authorized the
repurchase of up to two million of the Company's common shares in the open
market. During January 1999, EIS continued this program, purchasing 307,500
additional shares for $687,000.
Cash, cash equivalents, and short-term investment balances increased $10.1
million to $24.9 million at December 31, 1997, from $14.8 million at December
31, 1996. The increase in cash, cash equivalents, and short-term investments
primarily resulted from the $14.6 million of net cash provided by operating
activities in 1997, as reflected in the accompanying consolidated statements of
cash flows. Net cash of $4.6 million used in investing activities during 1997
primarily related to additions to property and equipment of $4.8 million for
leasehold improvements incurred during the consolidation of facilities, and
ongoing upgrades of internal computer hardware and software.
During 1996, cash and cash equivalents were used for the purchase of businesses
net of cash acquired of $7.0 million, additions to property and equipment of
$5.0 million, discontinued operations of $5.2 million, purchases of short-term
investments of $3.7 million, and expenditures of $2.1 million of software
development costs capitalized in accordance with SFAS No.86. Offsetting these
uses of cash were cash provided in 1996 by the net sale of $6.0 million of a
portion of the Company's lease portfolio as discussed further below, proceeds of
$5.3 million from the exercise of warrants and stock options, and net cash
provided by continuing operations of $2.1 million.
EIS believes that its collection practices and terms of sale are consistent with
practices in its industry. EIS generally receives a deposit upon order, a
further payment upon installation, and a final payment on the sale generally
within 60 to 120 days after shipment. EIS has, from time to time, offered
extended payment terms and lease financing to its customers, and it intends to
continue these practices under limited circumstances.
On March 29, 1996, a wholly owned subsidiary of EIS entered into a Purchase
Agreement whereby a portion of its lease portfolio was sold to a financial
institution for $5.2 million in cash. In July 1996 an additional portion of the
Company's lease portfolio was sold under this agreement for $0.8 million in
cash. In May 1998, EIS sold an additional portion of its lease portfolio to
another financial institution for $0.7 million in cash. All leases sold under
these agreements are subject to certain recourse provisions, and EIS is a
guarantor to the Purchase Agreement. EIS has also entered into an agreement with
another leasing company under which the leasing company will provide favorable
lease financing for EIS customers, and in exchange, EIS is subject to certain
limited recourse provisions for certain leases. EIS provides for potential
losses on recourse in its allowance for doubtful accounts and sales returns. At
December 31, 1998, approximately $7.0 million of leases subject to recourse are
outstanding.
On September 2, 1998, EIS entered into a Loan Document Modification Agreement
(the "New Loan Agreement"), which amended the terms and conditions under the
previous line of credit. Under the New Loan Agreement, EIS may borrow up to $7
million, subject to certain borrowing base limitations, and amounts outstanding
accrue interest at the bank's prime rate plus .50%. The New Loan Agreement is
secured by substantially all assets of EIS and expires on September 8, 1999.
There were no amounts outstanding under the New Loan Agreement as of December
31, 1998, and EIS was in compliance with all applicable covenants. Prior to the
New Loan Agreement, EIS had a secured line of credit of $7 million with the same
commercial bank under a commitment that expired in September 1998.
-26-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
EIS expects that its current cash balances and short-term investments, together
with cash anticipated to be provided by operating activities, and amounts
available under the New Loan Agreement, will be sufficient to fund its working
capital requirements (including research and development and Year
2000-compliance costs) for the foreseeable future. However, the Company's
ability to achieve that result will be affected by the amount of cash generated
from operations and the pace that its available resources are utilized.
Accordingly, EIS may in the future be required to seek additional sources of
financing, including borrowing and/or the sale of equity. If additional funds
are raised by issuing equity, further dilution to shareholders may result. No
assurance can be given that any such additional sources of financing will be
available on acceptable terms, or at all.
EIS is party to various legal actions and claims arising in the ordinary course
of its business. At this time, in the opinion of management, there are no
pending claims, the outcome of which are expected to result in a material
adverse effect on the consolidated financial position or results of operations
of EIS, except for the shareholder lawsuit discussed above under Item 3 - "Legal
Proceedings". EIS is currently not able to estimate the costs or a range of
costs that may arise out of such shareholder lawsuit.
EIS has, from time to time, received notices of potential intellectual property
infringement claims against it and is a defendant in one such case. See Item 3 -
"Legal Proceedings." Based on the knowledge and the facts and, in certain cases,
opinions of outside counsel, management believes the resolution of the existing
claims will not have a material adverse effect on the consolidated financial
position or results of operations of EIS.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
EIS does not believe that there is any material market risk exposure with
respect to derivative or other financial instruments that would require
disclosure under this item.
Item 8. Financial Statements and Supplementary Data
The financial statements required by this Item are included in the financial
statements and schedules included herein under Item 14 and are incorporated
herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
-27-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
PART III
Item 10. Directors and Executive Officers of the Registrant
The information under the caption "Election of Directors" of EIS' proxy
statement relating to its 1998 Annual Meeting of Stockholders and the
information under the caption "Security Ownership of Certain Beneficial Holders
and Management" in such proxy statement is incorporated herein by reference.
Item 11. Executive Compensation
The information under the caption "Executive Compensation" of EIS' proxy
statement relating to its 1998 Annual Meeting of Stockholders and the
information under the caption "Certain Transactions" of such proxy statement is
incorporated herein by reference. The information in Part 1 under the caption
"Executive Officers of the Company" is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Holders and Management
The information under the caption "Security Ownership of Certain Beneficial
Holders and Management" of EIS' proxy statement relating to its 1998 Annual
Meeting of Stockholders is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information under the caption "Certain Transactions" of EIS' proxy statement
relating to its 1998 Annual Meeting of Stockholders is incorporated herein by
reference.
-28-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements, Financial Schedules, and Exhibits
1. EIS International, Inc. Consolidated Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1997 and 1998
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1997, and 1998
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1996, 1997, and 1998
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997, and 1998
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
3. Exhibits required by Item 601 of Regulation S-K:
3.1 Restated Certificate of Incorporation of EIS (incorporated by
reference to EIS' Exhibit 4.1 to the Company's Registration Statement
on Form S-3 (No. 33-79814) filed with the Securities and Exchange
Commission on June 3, 1994 (the "1994 Registration")).
3.2 By-Laws of EIS as amended (incorporated by reference to Exhibit 3.2
to EIS' Annual Report on Form 10-K for the year ended December 31,
1993 (the "1993 Form 10-K")).
4.1 Specimen Common Stock Certificate of EIS (incorporated by reference
to Exhibit C to EIS' Registration Statement on Form 8-A dated June
22, 1992).
4.2 Warrant No. WC-1 dated January 1, 1993 issued by EIS to Equilease
Corporation (incorporated by reference to Exhibit 4.6 to EIS' Annual
Report on Form 10-K for the year ended December 31, 1992 (the "1992
Form 10-K")).
4.3 Warrant No. WC-2 dated September 30, 1993 issued by EIS to Applied
Telecommunications Technologies, I, N.V. (incorporated by reference
to Exhibit 4.7 to the 1993 Form 10-K).
4.4 Rights Agreement dated as of May 16, 1997, between the Registrant and
BankBoston, NA, as Rights Agent, which includes as Exhibit A the Form
of Certificate of Designations, as Exhibit B, the Form of Rights
Certificate, and as Exhibit C, the Summary of Rights to Purchase
Preferred Stock (incorporated by reference to Exhibit 1 of EIS'
Registration Statement on Form 8A dated May 28, 1997).
*10.1 (a) Form of Stock Option Agreement (incorporated by reference to
Exhibit 10.2 to the Registration Statement on Form S-1 of the
Registrant, file No. 33-47665 as filed with the commission on May 11,
1992 (the "1992 Registration")).
*10.1 (b) Amended and Restated Stock Option Plan of EIS (incorporated by
reference to EIS' Exhibit A to EIS' definitive proxy statement filed
in connection with its 1995 Annual Meeting of Stockholders).
*10.1 (c) 1993 Employee Stock Purchase Plan of EIS (incorporated by
reference to Exhibit B to EIS' definitive proxy statement filed in
connection with its 1994 Annual Meeting of Stockholders).
*10.1 (d) 1993 Stock Option Plan for Non-Employee Directors of EIS
(incorporated by reference to Exhibit B to EIS' definitive proxy
statement filed in connection with its 1994 Annual Meeting of
Stockholders).
*10.3 401(K) Plan of EIS (incorporated by reference to Exhibit 10.3 to the
1992 Registration).
-29-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
*10.4 Section 125 Plan of EIS (incorporated by reference to Exhibit 10.4 to
the 1992 Registration).
10.5 Lease Agreement dated November 27, 1990 between Mendik Real Estate
Limited Partnership and EIS (incorporated by reference to Exhibit
10.5 to the 1992 Registration).
10.7 Manufacturing Agreement dated July 17, 1990 between Kimchuk, Inc. and
EIS (incorporated by reference to Exhibit 10.7 to the 1992
Registration).
10.8 Working Capital Line of Credit Commitment Letter dated October 31,
1990 between Silicon Valley Bank and EIS (incorporated by reference
to Exhibit 10.8 to the 1992 Registration).
10.9 Pledge Agreement dated as of November 1, 1990 between Silicon Valley
Bank and EIS (incorporated by reference to Exhibit 10.9 to the 1992
Registration).
10.10 Security Agreement dated November 1, 1990 between Silicon Valley Bank
and EIS (incorporated by reference to Exhibit 10.10 to the 1992
Registration).
10.11 Security Agreement dated as of November 1, 1990 between Silicon
Valley Bank and EIS Leasing Corp. (incorporated by reference to
Exhibit 10.11 to the 1992 Registration).
10.12 Guaranty dated November 1, 1990 by EIS Leasing Corp. in favor of
Silicon Valley Bank (incorporated by reference to Exhibit 10.12 to
the 1992 Registration).
10.13 (a) Amendment to Silicon Valley Bank agreements dated February 22,
1991 (incorporated by reference to Exhibit 10.13 to the 1992
Registration).
10.13 (b) Amendment to Silicon Valley Bank agreements dated March 14, 1991
(incorporated by reference to Exhibit 10.14 to the 1992
Registration).
10.13 (c) Amendment to Silicon Valley Bank agreements dated August 10, 1991
(incorporated by reference to Exhibit 10.15 to the 1992
Registration).
10.13 (d) Amendment to Silicon Valley Bank agreements dated January 6, 1992
(incorporated by reference to Exhibit 10.13(d) to the 1992
Registration).
10.13 (e) Amendment to Silicon Valley Bank agreements dated April 14, 1993
(incorporated by reference to Exhibit 10.13(e) to the 1993 Form
10-K).
10.13 (f) Joinder and Assumption Agreement dated October 28, 1994 between
Silicon Valley Bank, EIS International Services Corp. and EIS
(incorporated by reference to Exhibit 10.13(f) to EIS' Annual Report
on Form 10-K for the year ended December 31, 1994 (the "1994 Form
10-K").
10.13 (g) Amended and Restated Promissory Note dated October 28, 1994
between Silicon Valley Bank, EIS International Services Corp. and EIS
(incorporated by reference to Exhibit 10.13(g) to the 1994 Form
10-K).
10.13 (h) Security Agreement dated October 28, 1994 between Silicon Valley
Bank and EIS International Services Corp. (incorporated by reference
to Exhibit 10.13(h) to the 1994 Form 10-K).
10.17 Agreement dated June 7, 1991 between American Telephone & Telegraph
Company (AT&T) and EIS (incorporated by reference to Exhibit 10.24 to
the 1992 Registration).
10.18 (a) Amendment to AT&T Agreement, dated October 15, 1991 (incorporated
by reference to Exhibit 10.25 to the 1992 Registration).
-30-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
10.18 (b) Amendment to AT&T Agreement, dated March 15, 1991 (incorporated
by reference to Exhibit 10.26 to the 1992 Registration).
10.20 Lease Participation Agreement dated as of September 30, 1993 between
EIS Leasing Corp. and Applied Telecommunications Inc. for
participation in a finance equipment lease between EIS Leasing Corp.
and RMH Sales & Marketing Consulting, Inc. dated as of November 19,
1992 (incorporated by reference to Exhibit 10.25 to the 1993
Registration).
10.21 Lease Participation Agreement dated as of September 30, 1993 between
EIS Leasing Corp. and Applied Telecommunications Inc. for
participation in a finance equipment lease between EIS Leasing Corp.
and New Boston Services Group dated as of March 1, 1993 (incorporated
by reference to Exhibit 10.26 to the 1993 Registration).
10.23 Form of Warrant to Purchase Shares of Class B Common Stock of ITC
(incorporated by reference to Exhibit 99.4 to the 1993 Registration).
10.24 Lease Agreement dated January 23, 1992 between Provident Mutual Life
Insurance Company and ITC (incorporated by reference to Exhibit 99.5
to the 1993 Registration).
10.25 ITC 1989 Stock Option Plan, together with form of stock option
agreement (incorporated by reference to Exhibit 99.6 to the 1993
Registration).
10.31 Loan Document Modification Agreement No. 3; dated as of December 27,
1995) between EIS and Silicon Valley Bank (incorporated by reference
to Exhibit 10.31 of the 1995 Registration).
10.32 Loan Document Modification Agreement No. 5; dated as of September 3,
1997, between EIS and Silicon Valley Bank (incorporated by reference
to Exhibit 10.32 of Form 10-Q for the quarterly period ended
September 30, 1997).
10.33 Loan Document Modification Agreement No. 6; dated as of September 2,
1998, between EIS and Silicon Valley Bank.
21. Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP.
27 Financial Data Schedule.
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this form pursuant to Items 14(a) and (c) of this Report.
(b) Current Reports on Form 8K.
EIS did not file any Current Reports on Form 8-K during the fourth quarter
of 1998.
-31-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
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.
Dated: March 19, 1999 EIS INTERNATIONAL, INC.
By: /s/ James E. McGowan
-------------------------------
James E. McGowan
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934 this report
had been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C>
Principal Executive Officer:
/s/ James E. McGowan March 19, 1999
- -------------------------------------
President, Director and Chief
Executive Officer
Principal Financial and Accounting Officer:
/s/ Frederick C. Foley March 19, 1999
- -------------------------------------
Frederick C. Foley
Senior Vice President, Finance,
Chief Financial Officer and Treasurer
Directors:
/s/ Robert J. Cresci March 19, 1999
- -------------------------------------
Robert J. Cresci
/s/ Robert M. Jesurum March 19, 1999
- -------------------------------------
Robert M. Jesurum
/s/ Kent M. Klineman March 19, 1999
- -------------------------------------
Kent M. Klineman
/s/ Charles W. McCall March 19, 1999
- -------------------------------------
Charles W. McCall
</TABLE>
-32-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
EIS International, Inc.:
We have audited the accompanying consolidated balance sheets of EIS
International, Inc. and subsidiaries as of December 31, 1997 and 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1998. In
connection with our audits of the consolidated financial statements, we also
have audited the accompanying financial statement Schedule II - Valuation and
Qualifying Accounts, for each of the years in the three-year period ended
December 31, 1998. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule 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 EIS International,
Inc. and subsidiaries as of December 31, 1997 and 1998, 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. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG LLP
McLean, Virginia
January 27, 1999
-33-
<PAGE>
EIS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except per share amount)
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1998
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 22,525 $28,194
Short-term investments 2,332 ---
Accounts receivable, trade, less allowances for doubtful accounts
and sales returns of $4,546 in 1997 and $3,513 in 1998 13,979 8,727
Current portion of installment and lease receivables 1,674 857
Inventories 5,160 3,751
Current deferred income taxes 3,448 2,446
Refundable income taxes 611 200
Prepaids and other current assets 857 922
------------ ------------
Total current assets 50,586 45,097
Capitalized software development costs, net 4,372 4,454
Property and equipment, net 7,842 5,896
Installment and lease receivables, less current portion 1,254 402
Deferred income taxes 2,206 1,421
Other assets 1,532 429
------------ ------------
Total assets $ 67,792 $57,699
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 16,359 $ 9,487
Deferred revenue 2,983 3,058
------------ ------------
Total current liabilities 19,342 12,545
Commitments and Contingencies (notes 4, 9, 10)
Stockholders' equity
Common Stock, $.01 par value, 15,000,000
shares authorized, issued 11,641,393 shares
in 1997 and 11,734,585 shares in 1998 116 117
Additional paid-in capital 60,357 60,672
Accumulated other comprehensive deficit (326) (287)
Retained deficit (10,792) (13,640)
Treasury stock, at cost - 101,225 shares
in 1997 and 512,725 in 1998 (905) (1,708)
------------ ------------
Total stockholders' equity 48,450 45,154
------------ ------------
Total liabilities and stockholders' equity $ 67,792 $57,699
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-34-
<PAGE>
EIS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1996 1997 1998
----------- ------------ ------------
<S> <C> <C> <C>
Net revenues:
Product and software $ 73,848 $59,017 $32,743
Service and other 21,811 26,613 25,999
----------- ------------ ------------
95,659 85,630 58,742
----------- ------------ ------------
Cost of revenues:
Cost of product and software sold 31,859 20,512 14,993
Provision for contract losses 4,967 --- (1,636)
Cost of service and other 13,133 14,737 13,894
----------- ------------ ------------
49,959 35,249 27,251
----------- ------------ ------------
Gross margin 45,700 50,381 31,491
----------- ------------ ------------
Operating cost and expense:
Research and development 14,152 11,899 9,691
Sales, general and administrative 42,341 34,842 25,534
Restructuring --- 2,877 543
Acquired technology in process 18,245 --- ---
Write-off of intangible assets 8,058 --- ---
----------- ------------ ------------
82,796 49,618 35,768
----------- ------------ ------------
Operating income (loss) (37,096) 763 (4,277)
Other income, net 1,313 1,298 1,312
----------- ------------ ------------
Income (loss) before income tax benefit (expense) (35,783) 2,061 (2,965)
Income tax benefit (expense) 2,755 (816) (121)
----------- ------------ ------------
Income (loss) from continuing operations (33,028) 1,245 (3,086)
Discontinued operations:
Income (loss) on discontinued operations, net of tax benefit (3,701) --- ---
Loss on disposal of discontinued operations, net of tax benefit (1,827) --- 238
----------- ------------ ------------
Net income (loss) (38,556) 1,245 (2,848)
Other comprehensive income (loss):
Foreign currency translation gain (loss) (175) (130) 39
----------- ------------ ------------
Comprehensive income (loss) $(38,731) $ 1,115 $(2,809)
----------- ------------ ------------
Basic net income (loss) per share:
Continuing operations $ (3.09) $ 0.11 $ (0.27)
Discontinued operations (0.52) --- 0.02
----------- ------------ ------------
Basic net income (loss) per share $ (3.61) $ 0.11 $ (0.25)
=========== ============ ============
Diluted net income (loss) per share:
Continuing operations $ (3.09) $ 0.11 $ (0.27)
Discontinued operations (0.52) --- 0.02
----------- ------------ ------------
Diluted net income (loss) per share $ (3.61) $ 0.11 $ (0.25)
=========== ============ ============
Weighted average common and common equivalent shares:
Basic 10,681 11,353 11,547
Diluted 10,681 11,605 11,547
</TABLE>
See accompanying notes to consolidated financial statements.
-35-
<PAGE>
EIS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(Dollars in thousands)
<TABLE>
<CAPTION>
Common Stock Additional Accumulated Retained Total
----------------------- Paid-in Other Compre- Earnings Treasury Stockholders'
Shares Amount Capital hensive Deficit (Deficit) Stock Equity
------------- --------- ----------- --------------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1995 9,935,778 $ 99 $36,020 $ (21) $ 26,519 $ (519) $ 62,098
Sales under Employee
Stock Purchase Plan 33,784 1 425 --- --- --- 426
Stock options exercised 571,307 5 4,581 --- --- --- 4,586
Exercise of stock warrants 92,730 1 322 --- --- --- 323
Purchase of treasury stock --- --- --- --- --- (386) (386)
Issuance of common stock
in connection with
Cybernetics acquisition 494,660 5 13,476 --- --- --- 13,481
Issuance of common stock
in connection with
Pulse acquisition 44,993 1 820 --- --- --- 821
Tax benefits of stock
options exercised --- --- 2,624 --- --- --- 2,624
Foreign currency translation
adjustments --- --- --- (175) --- --- (175)
Net loss --- --- --- --- (38,556) --- (38,556)
------------- --------- ----------- ----------- ----------- --------- ------------
Balances, December 31, 1996 11,173,252 112 58,268 (196) (12,037) (905) 45,242
Sales under Employee
Stock Purchase Plan 17,152 --- 96 --- --- --- 96
Stock options exercised 450,989 4 1,362 --- --- --- 1,366
Tax benefit from stock
options exercised --- --- 631 --- --- --- 631
Foreign currency translation
adjustments --- --- --- (130) --- --- (130)
Net income --- --- --- --- 1,245 --- 1,245
------------- --------- ----------- ----------- ----------- --------- ------------
Balances, December 31, 1997 11,641,393 116 60,357 (326) (10,792) (905) 48,450
Sales under Employee
Stock Purchase Plan 40,668 1 231 --- --- --- 232
Stock options exercised 23,509 --- 43 --- --- --- 43
Exercise of stock warrants 29,015 --- 41 --- --- --- 41
Purchase of treasury stock --- --- --- --- --- (803) (803)
Foreign currency translation
adjustments --- --- --- 39 --- --- 39
Net loss --- --- --- --- (2,848) --- (2,848)
------------- --------- ----------- ----------- ----------- --------- ------------
Balances, December 31, 1998 11,734,585 $117 $60,672 $(287) $(13,640) $(1,708) $ 45,154
============= ========= =========== =========== =========== ========= ============
</TABLE>
See accompanying notes to consolidated financial statements.
-36-
<PAGE>
EIS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) from continuing operations $(33,028) $ 1,245 $(2,848)
Adjustments to reconcile net income (loss) from continuing
operations to net cash from operating activities:
Provision for doubtful accounts and sales returns 8,281 3,010 3,259
Write-off of acquired technology in process 18,245 --- ---
Write-off of intangible assets 8,058 --- ---
Provision for (recovery of) contract losses 2,722 --- (1,636)
Depreciation and amortization 5,694 6,999 6,918
Deferred income taxes (5,732) 1,155 1,787
Change in assets and liabilities:
Accounts receivable, trade 1,569 4,345 1,993
Installment and lease receivables (677) 1,549 924
Inventories (51) 2,572 1,409
Refundable income taxes (2,450) 1,839 411
Accounts payable and accrued liabilities (1,249) (3,386) (5,236)
Deferred revenue (1,292) (2,700) 75
Other 1,995 115 543
----------- ----------- -----------
Net cash provided by continuing operations 2,085 16,743 7,599
Cash used in discontinued operations (5,249) (2,140) ---
----------- ----------- -----------
Net cash provided by (used in) operating activities (3,164) 14,603 7,599
----------- ----------- -----------
Cash flows from investing activities:
Additions to property and equipment (5,013) (4,829) (2,640)
Purchase of short-term investments (3,660) (3,170) ---
Sale of short-term investments --- 4,498 2,332
Increase in capitalized software costs (2,119) (1,138) (1,880)
Purchase of businesses, net of cash acquired (6,963) --- ---
----------- ----------- -----------
Net cash used in investing activities (17,755) (4,639) (2,188)
----------- ----------- -----------
Cash flows from financing activities:
Sales of lease portfolio 6,000 --- 745
Proceeds from exercise of stock options and warrants 5,335 1,462 316
Purchase of treasury stock (386) --- (803)
----------- ----------- -----------
Net cash provided by financing activities 10,949 1,462 258
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (9,970) 11,426 5,669
Cash and cash equivalents at beginning of period 21,069 11,099 22,525
----------- ----------- -----------
Cash and cash equivalents at end of period $ 11,099 $22,525 $28,194
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 32 $ 36 $ 71
Income taxes 584 167 367
</TABLE>
See accompanying notes to consolidated financial statements.
-37-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
Notes to Consolidated Financial Statements
(1) The Company
EIS International, Inc., together with its wholly owned subsidiaries (the
"Company" or "EIS"), provides integrated systems, software, and services to
businesses that use the telephone in organized campaigns to reach large target
audiences. These solutions improve the productivity and effectiveness of call
center (also known as "contact center") operations including campaign
management, staffing, and technology integration. EIS is a supplier of advanced
contact center technology and a leading provider of outbound and integrated
inbound/outbound contact center technologies.
(2) Summary of Significant Accounting Policies
Basis of Consolidation
The consolidated financial statements include the accounts of EIS International,
Inc. and its wholly owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments consisting mainly of commercial
paper placed with a financial institution with original maturities of three
months or less at the date of acquisition.
Short-Term Investments
EIS may invest cash in excess of current operating requirements primarily in
corporate debt obligations and U.S. government securities. Such investments
generally have original maturities of less than one year and yield interest at
prevailing interest rates at the time of acquisition.
Under Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," EIS classifies its
investments as available-for-sale and carries its investments at fair value. Any
unrealized holding appreciation or depreciation is credited or charged to a
separate component of stockholders' equity until realized. At December 31, 1997,
the fair value of short-term investments approximated cost.
Inventories
Inventories consist primarily of system components and peripheral equipment
(finished goods) and are stated at lower of cost or market. Cost is applied on a
first-in, first-out ("FIFO") basis. Market is determined based on estimated net
realizable value.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation of property and equipment is computed on the straight-line method
over the estimated useful lives of the related assets, ranging from three to
five years. Amortization of leasehold improvements is provided over the
estimated useful life of the improvements or the life of the lease, whichever is
less.
Capitalized Software Development Costs
The costs for the development of new software products and substantial
enhancements to existing software products are expensed as incurred until
technological feasibility has been established, at which time any additional
costs are capitalized in accordance with SFAS No. 86, "Accounting for the Costs
of Computer Software to Be Sold, Leased or Otherwise Marketed." Amortization of
capitalized software development costs, included in cost of product and software
sold, begins when the products are available for general release to customers,
and is computed on a product-by-product basis as the greater of: (a) the ratio
of current gross revenues for a product to the total of current and anticipated
future
-38-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
gross revenues for the product, or (b) the straight-line method over a period
not to exceed three years. Amortization expense was $816,000, $1,384,000, and
$1,798,000 in 1996, 1997, and 1998. Accumulated amortization at December 31,
1997 and 1998, was $5,906,000 and $7,704,000, respectively.
Research and Development
Expenditures for research, development, and engineering of products and
manufacturing processes are expensed as incurred.
Revenue Recognition
In October 1997, the AICPA Accounting Standards Executive Committee issued
Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), which
supercedes Statement of Position 91-1 "Software Revenue Recognition." SOP 97-2
focuses on when and in what amounts revenue should be recognized for licensing,
selling, leasing, or otherwise marketing computer software, and is effective for
transactions entered into in fiscal years beginning after December 15, 1997. As
a result of the adoption of SOP 97-2 on January 1, 1998, product and software
revenue was $389,000 lower during 1998.
In accordance with SOP 97-2, revenue is recognized on system sales and software
licenses when the products are shipped, there is an executed license agreement,
the price is fixed, and collection of the resulting receivable is deemed
probable. Due to EIS' changing experience with respect to the Company's more
technologically advanced Centenium product line, effective October 1996, revenue
related to Centenium sales is recognized upon customer acceptance after
installation.
Revenue from long-term professional services contracts is recognized on the
percentage-of-completion method with progress to completion based on achievement
of contract milestones. Revisions in profit estimates are reflected in the year
in which the facts, which require the revision, become known, and any estimated
losses and other future costs are accrued in full.
Revenues from the sale of systems under installment contracts and from
sales-type leases are recognized at the time of sale or at the inception of the
lease, respectively. Revenues from equipment under operating leases are
recognized over the lease term. Revenues related to maintenance contracts are
recognized over the term of the maintenance contract.
Cost of product sold includes material cost, software and hardware installation,
customer-training costs, amortization of capitalized software costs and warranty
expense. Cost of services and other includes maintenance costs, consisting
primarily of post-contract support costs.
Foreign Currency Translation
Operations of the Company's foreign subsidiaries are measured using the local
currency as the functional currency. Assets and liabilities of the foreign
subsidiaries are translated into U.S. dollars at the exchange rates in effect as
of the balance sheet date, and results of operations are translated using
average rates in effect for the periods presented. The resulting gains and
losses are included as an adjustment to stockholders' equity.
Concentration of Credit Risk
EIS sells its products primarily to customers in the United States and to a
lesser extent overseas. Credit evaluations are done on all new customers and
periodically evaluated for existing customers. EIS generally requires a
percentage of the sales value of a product in cash prior to shipment. EIS
establishes an allowance for doubtful accounts based upon factors surrounding
the credit risk of specific customers, historical trends, general economic
conditions and other information. Consequently, an adverse change in those
factors could affect the Company's estimate of its bad debts.
There were no individual customers who represented greater than 10% of net
revenues in 1996, 1997, or 1998. Three customers represented the majority of the
short-term and long-term lease receivables as of December 31, 1997 and 1998. No
individual customer represented more than 5% of gross trade accounts receivable
at December 31, 1997 and 1998.
-39-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. A
valuation allowance is provided to reduce the deferred tax assets to a level
which, more likely than not, will be realized. The net deferred asset reflects
management's estimate of the amount that will be realized (see note 7).
Earnings (Loss) Per Share
Earnings (loss) per share is determined by dividing earnings (loss) by the
weighted average number of shares of common stock outstanding during the period.
For the year ended December 31, 1997, the computation of diluted earnings per
share include the assumed exercise of dilutive stock options and warrants
computed using the treasury stock method. For the years ended December 31, 1996
and 1998, the assumed exercise of stock options and warrants has not been
included in the calculation as they would be anti-dilutive in the loss per
share. There were no significant options to purchase common stock that were not
included in the 1997 EPS calculation.
A reconciliation of the numerators and denominators of the basic and diluted EPS
for the years ended December 31, 1996, 1997, and 1998, is provided below (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Numerator
- ----------------------------------------------
Income (loss) from continuing operations $(33,028) $ 1,245 $(3,086)
============ ============ ============
Denominator
- ----------------------------------------------
Basic
Weighted average shares outstanding 10,681 11,353 11,547
Diluted
Dilutive effect of stock options and warrants --- 252 ---
------------ ------------ ------------
10,681 11,605 11,547
============ ============ ============
EPS
- ----------------------------------------------
Basic $ (3.09) $ 0.11 $ (0.27)
Diluted (3.09) 0.11 (0.27)
</TABLE>
Fair Value of Financial Instruments
SFAS No. 107, "Disclosure About Fair Value of Financial Instruments," defines
the fair value of a financial instrument as the amount at which the instrument
could be exchanged in a current transaction between willing parties. Cash and
cash equivalents, accounts receivable, installment and lease receivables, and
accounts payable, reported in the consolidated balance sheets, equal or
approximate fair values.
Use of Estimates
The preparation of financial statements in accordance 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.
-40-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
EIS adopted the provisions of SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," on January 1,
1996. This Statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Adoption of this
Statement did not have a material impact on the Company's consolidated financial
position or results of operations. However, during the fourth quarter of 1996,
in accordance with the Statement, EIS recorded a charge of $8.1 million to
reflect the impairment of certain intangible assets (see note 11).
Stock Option Plans
EIS accounts for its stock option plans and employee stock purchase plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees", and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, EIS adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 allows entities to continue to apply the provisions
of APB Opinion No. 25 and provide pro forma net income (loss) and pro forma
earnings (loss) per share disclosures for employee stock option grants made in
1995 and future years as if the fair-value-based method defined in SFAS No. 123
had been applied (see note 8).
New Accounting Pronouncements
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income," which
is effective for the year ending December 31, 1998. SFAS No. 130 establishes
standards for the reporting and display of comprehensive income and its
components in the financial statements. EIS adopted SFAS No. 130 effective as of
January 1, 1998.
In June 1997, FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which is effective for the year ending
December 31, 1998. SFAS No. 131 requires companies to present certain
information about operating segments and related information, including
geographic and major customer data, in its annual financial statements and in
condensed financial statements for interim periods. The adoption of SFAS No. 131
had no impact on the Company's financial statements.
Reclassifications
Certain amounts in the 1997 financial statements have been reclassified to
conform to the 1998 presentation.
(3) Business Combinations
On February 29, 1996, EIS merged with Surefind Information, Inc. ("Surefind") of
Pittsburgh, Pennsylvania. Surefind was a privately held corporation in the
business of storing electronic data. EIS issued 505,685 shares of EIS common
stock, $.01 par value, in exchange for all 2,826,467 shares of Surefind stock
outstanding and subject to options and warrants. EIS agreed to assume all
outstanding Surefind options and warrants, which represent the right to purchase
43,892 shares of EIS common stock. This merger was accounted for by the pooling
of interests method of accounting and, accordingly, the Company's consolidated
financial statements have been restated for all periods prior to acquisition to
include the results of operations, financial position, and cash flows of
Surefind. On February 28, 1997, the Board of Directors of EIS resolved to
discontinue the operations of Surefind. Accordingly, the results of Surefind in
1996 are shown as a loss on discontinued operations in the consolidated
statements of operations.
Income from discontinued operations recognized in 1998 is the remaining amount
of an accrual no longer necessary as a result of resolution of obligations
associated with the discontinuation of operations of Surefind.
On March 1, 1996, EIS acquired all the issued and outstanding capital stock of
Cybernetics Systems International Corp. ("Cybernetics"), a privately held
company located in Coral Gables, Florida, for $22.8 million consisting of $9.3
million
-41-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
in cash, 494,660 shares of EIS common stock, and 321,270 of options and warrants
to acquire EIS common stock. Cybernetics specialized in computerized Workforce
Management Systems for the contact center industry, which are designed to aid in
staff forecasting and scheduling. The acquisition of Cybernetics was accounted
for by the purchase method of accounting, and accordingly, the acquired assets
and liabilities have been recorded at their fair values, with the help of an
appraiser, at the date of purchase, and the results of operations of EIS reflect
those of Cybernetics from March 1, 1996. In addition, EIS recorded a $16.9
million charge for acquired technology in process. Intangible assets of
approximately $9.8 million were recorded as a result of this transaction, which
were subsequently written-off (see notes 11 and 12).
On September 1, 1996, EIS entered into an Asset Purchase Agreement with Pulse
Technologies, Inc. ("Pulse"), a Virginia corporation, relating to the purchase
of substantially all of the assets of Pulse for consideration consisting of the
assumption of certain liabilities and the payment of (i) 44,993 shares of the
Company's common stock, $.01 par value per share, having a value of
approximately $820,000; (ii) $950,000 in cash; and (iii) five-year warrants to
purchase 29,995 shares of EIS common stock at $18.23 per share. Pulse was a
professional and technical service firm specializing in telecommunications
consulting. The acquisition of Pulse was accounted for by the purchase method of
accounting, and accordingly, the acquired assets have been recorded at their
fair values, with the help of an appraiser, at the date of the purchase, and the
results of operations of EIS reflect those of Pulse from September 1, 1996. EIS
recorded a $1.3 million charge for acquired technology in process.
The Cybernetics and Pulse acquisitions resulted in cash outflow of $10.1 million
offset by cash acquired of $3.1 million.
The following unaudited pro-forma financial information shows the results of
operations for 1996 (in thousands, except per share data) as though the
acquisition of Cybernetics and Pulse had occurred as of January 1, 1996. In
addition to combining the historical results of operations of the companies, the
pro-forma calculations include: the amortization of the intangible assets
acquired; and the adjustment to income taxes to reflect the effective income tax
rate assumed for EIS on a combined basis for each pro-forma period presented and
excludes the write-off of the acquired technology in process of $18.2 million,
as such charge is non-recurring and unusual and relates directly to the
acquisitions.
<TABLE>
<CAPTION>
1996
-----------
<S> <C>
Net revenues $ 97,168
Net income (loss) (22,202)
Diluted earnings (loss) per share (2.08)
</TABLE>
-42-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
(4) Installment and Lease Receivables
The present value of future installment and lease receivables payments to be
received as of December 31, 1997 and 1998, are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
---------- ---------
<S> <C> <C>
1998 $2,048 $ ---
1999 1,133 977
2000 220 287
2001 36 167
---------- ---------
3,437 1,431
Less amounts representing interest at
rates up to 20.0% 509 172
---------- ---------
Present value of receivables 2,928 1,259
Less current portion 1,674 857
---------- ---------
$1,254 $ 402
========== =========
</TABLE>
On March 29, 1996, a wholly owned subsidiary of EIS entered into a Purchase
Agreement whereby a portion of its lease portfolio was sold to a financial
institution for $5.2 million in cash. In July 1996, an additional portion of the
Company's lease portfolio was sold under this agreement for $0.8 million in
cash. In May 1998, EIS sold an additional portion of its lease portfolio to
another financial institution for $0.7 million in cash. All leases sold under
these agreements are subject to certain recourse provisions and EIS is a
guarantor to the Purchase Agreement. EIS has also entered into an agreement with
another leasing company under which the leasing company will provide favorable
lease financing for EIS customers, and in exchange, EIS is subject to certain
limited recourse provisions for certain leases. EIS provides for potential
losses on recourse in its allowance for doubtful accounts and sales returns. At
December 31, 1998, approximately $7.0 million of leases subject to recourse are
outstanding.
(5) Property and Equipment
Property and equipment consists of the following at December 31, 1997 and 1998
(in thousands):
<TABLE>
<CAPTION>
1997 1998
----------- ----------
<S> <C> <C>
Furniture and fixtures $ 1,845 $ 1,842
Machinery and equipment 17,532 12,938
Leasehold improvements 2,738 2,507
----------- ----------
22,115 17,287
Less accumulated depreciation
and amortization (14,273) (11,391)
----------- ----------
$ 7,842 $ 5,896
=========== ==========
</TABLE>
Depreciation and amortization of property and equipment amounted to $4,343,000,
$4,724,000, and $4,446,000 in 1996, 1997, and 1998, respectively.
-43-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
(6) Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consists of the following at December
31, 1997 and 1998 (in thousands):
<TABLE>
<CAPTION>
1997 1998
---------- ---------
<S> <C> <C>
Accounts payable, trade $ 5,529 $2,998
Accrued compensation and benefits 2,566 1,114
Loss provision on uncompleted contracts 1,920 250
Customer deposits 1,393 1,335
Other accrued liabilities 4,951 3,790
---------- ---------
$16,359 $9,487
========== =========
</TABLE>
(7) Income Taxes
Income tax expense (benefit) from continuing operations consists of the
following (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal $ 2,605 $ (288) $(1,766)
State 372 (51) 100
---------- --------- ----------
2,977 (339) (1,666)
Deferred:
Federal (5,015) 1,028 1,787
State (717) 127 ---
---------- --------- ----------
(5,732) 1,155 1,787
---------- --------- ----------
Total $(2,755) $ 816 $ 121
========== ========= ==========
</TABLE>
The effective income tax expense (benefit) rate attributable to income (loss)
from continuing operations for the years ended December 31, 1996, 1997, and 1998
differed from the Federal corporate statutory rate due to the following:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1996 1997 1998
------- ------ ------
<S> <C> <C> <C>
Federal corporate statutory rate (35)% 34% (34)%
State income taxes, net of Federal benefit (1) 2 2
Acquired technology in process 18 --- ---
Write-down of intangible assets 8 --- ---
Research and development tax credits --- --- ---
Increase (decrease) in valuation allowance 3 8 33
Other, net (1) (4) 3
------ ------ ------
(8)% 40% 4%
====== ====== ======
</TABLE>
-44-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below (in
thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1998
----------- ----------
<S> <C> <C>
Deferred Tax Assets
Net operating loss and tax credit carryforwards $ 7,620 $ 9,961
Accounts receivable, principally due to allowances
for doubtful accounts and sales returns 1,889 1,382
Inventories, principally due to reserves for obsolescence 838 1,064
Discontinued operations 526 ---
Property and equipment, principally due to
differences in depreciation methods 498 562
Other 195 200
----------- ----------
Total gross deferred tax assets 11,566 13,169
Less: valuation allowance (4,181) (7,538)
----------- ----------
Total deferred tax assets 7,385 5,631
Deferred Tax Liability
Capitalized software development costs (1,731) (1,764)
----------- ----------
Net deferred tax assets 5,654 3,867
Less: current deferred tax assets 3,448 2,446
----------- ----------
Non-current deferred tax assets $ 2,206 $ 1,421
=========== ==========
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income of
approximately $10 million over the next two years, management believes it is
more likely than not that EIS will realize the benefits of these deductible
differences, net of the existing valuation allowances at December 31, 1998.
However, if EIS is unable to meet its projections for future taxable income in
the near term, the amount of the net deferred tax asset may be partially or
fully reduced.
At December 31, 1998, EIS has net operating loss carryforwards of $23.4 million
available to reduce future Federal and state taxes that expire in the years 2004
through 2018. The use of approximately $6 million of these carryforwards is
restricted to the future taxable income of the EIS parent company, excluding
wholly owned subsidiaries.
(8) Stockholders' Equity
(a) Merger and Acquisition
On February 29, 1996, EIS issued 505,685 shares of its common stock in
connection with its merger with Surefind and reserved an additional 43,892
shares for issuance upon exercise of outstanding stock options and stock
warrants of Surefind. On March 1, 1996, EIS issued 494,660 shares of its common
stock in connection with its acquisition of Cybernetics and reserved an
additional 321,270 shares for issuance upon exercise of outstanding stock
options and stock warrants of Cybernetics. On September 1, 1996, EIS issued
44,993 shares of its common stock and warrants to acquire 29,995 shares of its
common stock in connection with its purchase of Pulse.
-45-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
(b) Stock Options
Incentive and Non-Incentive Stock Options
EIS has various stock option plans (the "Plans"), under which incentive stock
options ("ISO's") and non-incentive stock options ("Non-ISO's") may be granted.
Pursuant to the Plans, 3,133,371 shares of common stock may be granted and the
same number of shares has been reserved for such issuance. That amount includes
500,000 options made available for grant under the 1998 Stock Incentive Plan
approved by EIS shareholders on April 28, 1998. The Board of Directors has the
authority to determine the number, terms and type of stock options to be
granted. The exercise price of all options granted under the Plans cannot be
less than the fair market value at the date of grant.
Generally, options granted under the Plans vest 25% beginning one year from date
of grant and 25% on each anniversary of the grant date thereafter. Additionally,
options expire not later than 10 years from date of grant (five years if the
optionee is a principal shareholder).
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
ISO'S Non-ISO'S
-------------------------------- --------------------------------
Number of Weighted-Average Number of Weighted-Average
Shares Exercise Price Shares Exercise Price
------------- ----------------- ------------ ------------------
<S> <C> <C> <C> <C>
Outstanding,
December 31, 1995 852,886 $ 9.81 629,458 $ 6.74
Granted 514,498 12.77 479,279 9.96
Exercised (318,637) 7.39 (192,670) 7.75
Forfeited (278,901) 15.29 (180,855) 15.05
------------- ---------------- ----------- ---------------
Outstanding,
December 31, 1996 769,846 11.16 735,212 6.53
Granted 577,279 5.67 181,634 5.55
Exercised (60,962) 7.25 (390,027) 2.38
Forfeited (667,158) 11.41 (305,852) 11.99
------------- ---------------- ----------- ---------------
Outstanding,
December 31, 1997 619,005 6.12 220,967 5.51
Granted 482,314 4.93 25,486 6.45
Exercised (8,506) 5.00 (15,000) 0.40
Forfeited (384,872) 6.28 (29,748) 8.20
------------- ---------------- ----------- ---------------
Outstanding,
December 31, 1998 707,941 $ 5.34 201,705 $ 5.48
============= ================ =========== ===============
</TABLE>
Non-Employee Director Stock Option Plan
On February 23, 1993, the Board of Directors approved a stock option plan for
non-employee directors, which provided for the granting of 6,250 options to
purchase the Company's common stock for each non-employee director annually,
based on a fixed formula. EIS had reserved 200,000 shares for issuance under
this plan. On December 21, 1993, the Board of Directors approved an amendment to
the plan, which was approved by shareholders at the April 27, 1994, Annual
Meeting, that increased the options available under the plan to 260,000 and
provided for additional grants as follows. An aggregate of 30,000 options under
the plan are available for each non-employee director, of which (i) 26,000
options would be immediately granted to each such director at the fair market
value on December 21, 1993, with vesting of 6,500 options on each of February
23, 1994, February 23, 1995, February 23, 1996, and February 23, 1997, provided
that each such person is a director on such dates; and (ii) 1,000 options under
the plan would be granted to each non-employee director on February 23, 1994,
February 23, 1995, February 23, 1996, and February 23, 1997, at the fair market
value on the grant date provided that each such person is a director on such
dates.
-46-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
On April 28, 1998, EIS shareholders approved amendments to the non-employee
director stock option plan to increase the number of options available for grant
by 50,000 and to provide for discretionary grants.
The following is a summary of the non-employee directors stock option plan
transactions:
<TABLE>
<CAPTION>
Price Expiration
Number Per Share Dates
----------- ----------------- -------------
<S> <C> <C> <C>
Outstanding,
December 31, 1995 115,750 $ 8.63 - 14.56 2/03 - 2/05
Granted 4,000 16.88 2/06
Exercised --- --- ---
Cancelled --- --- ---
----------- ----------------- -------------
Outstanding,
December 31, 1996 119,750 8.63 - 16.88 2/03 - 2/06
Granted 204,500 5.00 - 5.9375 2/07 - 4/07
Exercised --- --- ---
Cancelled (106,750) 9.25 - 16.875 ---
----------- ----------------- -------------
Outstanding,
December 31, 1997 217,500 5.00 - 12.375 12/03 - 4/07
Granted --- --- ---
Exercised --- --- ---
Cancelled --- --- ---
----------- ----------------- -------------
Outstanding,
December 31, 1998 217,500 $5.00 - 12.375 12/03 - 4/07
=========== ================= =============
</TABLE>
The following table summarizes information about EIS' ISO, non-ISO, and
non-employee director stock option plans:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------------- ------------------------------------
Number Weighted-Average Number
Range Outstanding Remaining Weighted-Average Exercisable Weighted-Average
of Prices at 12/31/98 Contractual Life Exercise Price at 12/31/98 Exercise Price
- --------------- --------------- ---------------------- ----------------------- ------------- ----------------------
<S> <C> <C> <C> <C> <C>
$0.96 - 1.37 261 0.8 $ 1.15 261 $ 1.15
1.88 - 2.62 92,291 9.6 1.97 2,291 2.62
3.27 - 4.25 136,408 9.5 4.13 1,008 4.04
5.00 - 7.31 801,738 8.4 5.41 180,276 5.15
7.81 - 10.38 68,448 5.8 8.72 49,698 8.89
12.38 - 12.38 28,000 4.1 12.38 28,000 12.38
- --------------- --------------- ---------------------- ----------------------- ------------- ----------------------
$0.96 - 12.38 1,127,146 8.3 $ 5.34 261,534 $ 6.61
</TABLE>
The number of ISO, non-ISO, and non-employee director options exercisable at
December 31, 1997, was 134,009 with a weighted-average exercise price of $7.94.
Disclosure of Additional Stock Option Information
EIS applies APB Opinion No. 25 in accounting for its ISO, non-ISO, and
non-employee director stock options plans and, accordingly, no compensation cost
has been recognized for its stock options in the accompanying consolidated
financial statements. Had EIS determined compensation cost based on the fair
value at the grant date for its stock
-47-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
options under SFAS No. 123, the Company's net income (loss) would have been
reduced (increased) to the pro forma amounts indicated below (in thousands,
except per share data):
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net income (loss) as reported $(38,556) $1,245 $(2,848)
Pro forma (42,561) 702 (4,096)
Net income (loss) per share as reported - Basic (3.61) 0.11 (0.25)
Net income (loss) per share as reported - Diluted (3.61) 0.11 (0.25)
Pro forma - Basic (3.98) 0.06 (0.35)
Pro forma - Diluted (3.98) 0.06 (0.35)
</TABLE>
Pro forma amounts reflect only options granted in 1995 and years thereafter.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income (loss) amounts
presented above because compensation cost is reflected over the options' vesting
period of four years and compensation cost for options granted prior to January
1, 1995, is not considered.
The fair value of the ISO, non-ISO, and non-employee stock options granted in
1996, 1997, and 1998 is estimated at grant date using the option pricing model
with the following weighted average assumptions for 1998: expected dividend
yield 0.0%, average risk-free interest rate of 5.3%, expected volatility of
61.3%, and expected life of five years; for 1997: expected dividend yield 0.0%,
average risk-free interest rate of 5.8%, expected volatility of 59.1%, and
expected life of five years; and for 1996: expected dividend yield of 0.0%,
average risk-free interest rate of 6.4%, expected volatility of 47.4%, and an
expected life of seven years. The weighted average grant date fair values of
options granted in 1996, 1997, and 1998 was $11.80, $3.86, and $2.87,
respectively.
(c) Warrants
In connection with services performed by various other parties and the business
combinations (see note 3), EIS has granted warrants to purchase common stock as
follows:
<TABLE>
<CAPTION>
Number of Price Per Expiration
Shares Share Dates
------------ ------------- -------------
<S> <C> <C> <C>
Outstanding,
December 31, 1995 100,511 $6.55-11.50 10/96 - 7/99
Granted 155,552 1.35-18.23 12/96 - 5/05
Exercised (92,730) 1.35-18.00 12/96 - 3/00
Cancelled (9,758) 7.94 10/96
------------ ------------- -------------
Outstanding,
December 31, 1996 153,575 1.35-18.23 2/98 - 5/05
Granted --- --- ---
Exercised --- --- ---
Cancelled --- --- ---
------------ ------------- -------------
Outstanding,
December 31, 1997 153,575 1.35-18.23 2/98 - 5/05
Granted --- --- ---
Exercised (29,015) 1.35 - 1.41 12/98 - 5/05
Cancelled (739) 1.41 12/98
------------ ------------- -------------
Outstanding,
December 31, 1998 123,821 $1.35-18.23 8/01 - 5/05
============ ============= =============
</TABLE>
-48-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
(d) Employee Stock Purchase Plan
On February 23, 1993, the Board of Directors approved an employee stock purchase
plan, which provides for the purchase of up to 300,000 shares of common stock by
employees of EIS. During 1996, 1997, and 1998, 33,784, 17,152, and 40,668 shares
were issued under this plan. Employees purchase shares under the plan at a price
equal to 85% of either the fair market value when the employee entered the plan
during each plan year, or the fair market value at the end of each plan year,
whichever is lower. Compensation expense, under SFAS 123, associated with the
issuance of the shares under this plan was not material in 1996, 1997 or 1998.
As of December 31, 1998, there are 139,805 remaining shares available to
purchase under this plan.
(e) Employee Savings Program
EIS maintains an Employee Savings Plan that qualifies as a cash or deferred
salary arrangement under Section 401(k) of the Internal Revenue Code. Under the
Plan, participating U.S. employees may defer up to 20% of their pre-tax
compensation, but not more than Internal Revenue Service limitations. EIS, at
the discretion of the Board of Directors, may match the employee contributions.
Current and prior EIS discretionary matches have been equal to 25% of each
employee's elective deferral up to 5% of compensation, not to exceed $2,000 per
individual. Such employer contributions vest equally over a four-year period.
EIS recorded a $264,000, $204,000, and $116,000 expense for 1996, 1997, and
1998.
(9) Commitments and Contingencies
Lease Obligations
EIS leases office facilities and equipment under noncancellable operating lease
arrangements that expire at various dates. The future minimum annual payments
for all noncancellable leases at December 31, 1998, follow (in thousands):
<TABLE>
<CAPTION>
Year Amount
- ----- ---------
<S> <C>
1999 $2,323
2000 2,279
2001 2,153
2002 243
2003 20
---------
$7,018
=========
</TABLE>
Rent expense on operating leases totaled $2,350,000 in 1996, $2,718,000 in 1997
and $1,973,000 in 1998.
Year 2000 Issues
Background. Many existing computer programs use only two digits to identify a
year in the date field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If not corrected,
many computer applications could fail or create erroneous results by or at the
Year 2000. The Year 2000 issue affects nearly all companies and organizations.
Impact on EIS. All EIS products will be or have been affected in some manner by
Year 2000 issues. EIS has developed and is continuing the implementation of a
plan (the "Year 2000 Product Plan") that makes necessary modifications to its
products. The current total estimated cost to update those products is expected
not to exceed $1.5 million. During 1998, EIS incurred $1,096,000 of costs
associated with the Year 2000 Product Plan. No costs were incurred prior to
1998. These costs are included in research and development in the accompanying
consolidated statements of operations. The Year 2000 Product Plan was
substantially complete by the end of February 1999.
On July 30, 1998, EIS announced that a Year 2000-compliant release of its Call
Processing System ("CPS") software was complete and available for sale. CPS is
EIS' most widely used and sold software. EIS has also announced that its EIS
Gateway, Outbound Call Manager (on certain hardware platforms), SmartAgent
Manager, System 7000, and
-49-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
Centenium products are Year 2000 compliant. EIS has begun and is planning to
continue to provide updated software to its customers under EIS maintenance
contracts, and to charge fees for on-site visits and certain other services, if
necessary, to upgrade EIS' customers' software. Although EIS has substantially
completed the Year 2000 Product Plan changes in all of its products, upgrading
all customers' systems that require such upgrades prior to the Year 2000 cannot
be assured since a substantial part of the upgrade process will be dependent on
EIS' customers. EIS expects to continue to supplement its internal resources
with subcontract labor to install Year 2000 upgrades on customer systems.
EIS has substantially completed the process of reviewing and estimating the cost
of updating its internal software and hardware information technology ("IT")
systems and non-IT systems (collectively, "Internal Systems") to be Year 2000
compliant. EIS has determined that its mission-critical Internal Systems,
including its financial systems, customer support, network, and desktop
applications, are Year 2000 compliant. Although EIS could incur additional costs
in this regard, EIS believes that those costs will not have a material effect on
its operations and financial condition. No material costs have been incurred to
date with respect to updating EIS' Internal Systems for Year 2000 compliance.
EIS has continued to investigate but has not identified any major vendor or
distributor the failure of which to be Year 2000 compliant could cause any
adverse impact on EIS. The most reasonably likely worst case scenario would
include: (1) corruption of data contained in the Company's internal information
systems, (2) hardware failure, and (3) the failure of infrastructure services
provided by third parties (e.g. electricity, phone service, water and sewer,
internet services, etc.). EIS has not formulated any contingency plans in the
event that its Internal Systems are not updated prior to the Year 2000 because
the update process is substantially complete. EIS will continue to monitor the
need for contingency plans with respect to its major vendors and distributors.
Line of Credit
On September 2, 1998, EIS entered into a Loan Document Modification Agreement
(the "New Loan Agreement") which amended the terms and conditions under the
previous line of credit. Under the New Loan Agreement, EIS may borrow up to $7
million, subject to certain borrowing base limitations, and amounts outstanding
accrue interest at the bank's prime rate plus .50%. The New Loan Agreement is
secured by substantially all assets of EIS and expires on September 8, 1999.
There were no amounts outstanding under the New Loan Agreement as of December
31, 1998, and EIS was in compliance with all applicable covenants. Prior to the
New Loan Agreement, EIS had a secured line of credit of $7 million with the same
commercial bank under a commitment that expired in September 1998.
(10) Litigation
EIS and certain current and former officers of EIS were named as defendants in
five securities lawsuits, each of which were filed during 1997 in the United
States District Court for the District of Connecticut, allegedly on behalf of
certain of the Company's shareholders. Each of those claims alleged securities
fraud based upon certain alleged misleading representations regarding the
Company's acquisition of Surefind and Cybernetics and their operations, each of
which seek damages in an unspecified amount.
These lawsuits have been consolidated and a consolidated and amended class
action complaint, In Re EIS International, Inc. Securities Litigation, was filed
in the United States District Court for the District of Connecticut on April 29,
1998. EIS and various other defendants have retained counsel, the claims are
being reviewed, and the lawsuit will be vigorously defended. On June 15, 1998,
EIS and the other defendants filed a motion to dismiss the case. That motion is
now fully briefed and awaiting possible oral argument and decision by the court,
although no assurance can be given as to when a decision will be reached. EIS is
currently not able to estimate the potential damages or costs or a range of
potential damages or costs that may arise out of this case.
During the second quarter of 1998, EIS was informed that certain of its
customers had received a patent infringement warning from Manufacturing
Administration and Management Systems, Inc. ("MAMS") alleging that technology
used by certain of EIS' customers infringed on a patent held by MAMS. MAMS filed
an infringement action against certain of EIS' customers who received the
infringement warning. Under EIS' contract with its customers, EIS is obligated
to indemnify its customers against any such claim. EIS is currently not able to
estimate the costs or a range of costs that may arise out of those
indemnification obligations. EIS believes this infringement claim to be without
merit, and will vigorously defend its patent rights. However, there can be no
assurance that EIS will prevail in this matter, in which
-50-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
case, there may be a material, negative impact on EIS' results of operations.
EIS has filed suit against MAMS and one of its patent inventors requesting that
the court rule that EIS' products do not infringe upon the patent held by MAMS.
EIS is also party to various other legal actions and claims arising in the
ordinary course of its business. EIS believes it has adequate legal defenses for
each of the actions and claims and believes that their ultimate disposition will
not have a material adverse effect on the Company's consolidated financial
position or results of operations.
(11) Write-Down of Intangible Assets
In accordance with SFAS No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," management performed a
discounted cash flow analysis of Cybernetics' operations. Management concluded
that this analysis warranted a write-down of the intangible assets of
Cybernetics of approximately $8.1 million to zero. This write-down is included
in the consolidated statement of operations for the year ended December 31,
1996.
(12) Discontinued Operations and Restructuring
On February 28, 1997, the Board of Directors of EIS resolved to discontinue the
operations of Surefind. The decision to discontinue the operations of Surefind
was made after it became apparent that a significantly higher than anticipated
level of cash funding was needed to exploit Surefind's product.
Surefind incurred a net loss of approximately $3.7 million, net of a $1.6
million income tax benefit, in 1996, which is separately shown as a loss on
discontinued operations in the accompanying consolidated statements of
operations for the respective periods. In connection with the decision to
discontinue the operations of Surefind, EIS recorded a $1.8 million estimated
loss on the disposal of Surefind, which includes a provision for anticipated
operating losses prior to disposal. The loss on disposal, recorded in the fourth
quarter of 1996, is shown net of a $1.1 million income tax benefit.
Costs associated with completing the discontinuation of Surefind of $2.1 million
and $0.5 million during 1997 and 1998, respectively, were charged against the
loss provision accrued during 1996. Income from discontinued operations
recognized in 1998 is the remaining amount of an accrual no longer necessary as
a result of resolution of obligations associated with the discontinuation of
operations of Surefind.
On March 3, 1997, EIS announced a restructuring and reorganization program (the
"Restructuring"), the purpose of which was to refocus the Company's efforts on
its core systems business and to reduce costs. In connection with the
Restructuring, EIS downsized the operations of Cybernetics, closed and sublet
its Fort Lauderdale, Florida, facility, focusing Cybernetics' development and
marketing efforts primarily on its Workforce Manager product. In addition, EIS
terminated the separate operations of Pulse, its Chantilly, Virginia-based
integration services business, by consolidating the business of Pulse into the
operations of the Company's core business. Furthermore, EIS closed its corporate
headquarters in Pittsburgh, Pennsylvania, and relocated the corporate
headquarters to its facility in Herndon. A total of approximately 110 employees
were terminated as a result of the Restructuring. During the first quarter of
1997, in connection with the Restructuring, EIS recorded charges of $2.9
million, including $1.1 million of severance costs, $1.3 million of facilities
leases and fixed asset disposal costs, and $0.5 million of other costs. As of
December 31, 1997, there was a remaining Restructuring accrual of approximately
$651,000 included in accounts payable and accrued expenses in the accompanying
consolidated balance sheet. Costs associated with completing the Restructuring
of $146,000 during 1998 were charged against the Restructuring accrual. As of
December 31, 1998, the remaining Restructuring accrual of $505,000 represents
future lease related costs.
Effective June 30, 1998, EIS terminated Cybernetics' operations because of
continuing losses and management's decision to focus on EIS' core business. In
connection with the termination of operations of Cybernetics, EIS recorded
restructuring charges of $543,000, comprised of $350,000 of severance payments
and $193,000 of facilities, fixed asset disposal, and other costs. There were no
material accrued restructuring charges remaining as of December 31, 1998,
relating to the termination of Cybernetics' operations.
-51-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
(13) Related Parties
During 1997, the President of EIS entered into a $100,000 loan agreement with
Company. Under the agreement, interest accrues at the rate of 6% and quarterly
amounts are forgiven and included as compensation to the President over the
three-year term of the loan. If the President terminates prior to the end of the
three-year term, the balance due at such time is to be repaid in full. As of
December 31, 1997 and 1998, there was $74,584 and $41,875, respectively,
outstanding under the loan.
EIS incurred expenses of $60,000, $80,000, and $83,000 during 1996, 1997, and
1998, respectively, in connection with legal and consulting services provided by
a member of the Board of Directors.
(14) Fourth Quarter Charges - 1996
During the fourth quarter 1996, EIS recorded the following charges, which are
included in the accompanying 1996 consolidated statement of operations (in
millions):
<TABLE>
<CAPTION>
Item Amount
- ----------------------------------------------------- --------
<S> <C>
Continuing Operations:
Provision for doubtful accounts and sales returns $ 2.9
Provision for losses on uncompleted contracts 5.0
Write-down of intangible assets 8.1
--------
Total charges to continuing operations 16.0
Discontinued Operations:
Loss on disposal of Surefind, net of tax benefits 1.8
--------
Total charges to operations $17.8
========
</TABLE>
-52-
<PAGE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
SCHEDULE II
Valuation and Qualifying Accounts
Years Ended December 31, 1996, 1997, and 1998
(In thousands)
<TABLE>
<CAPTION>
Additions
----------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End
Classification of Year Expenses Accounts Deductions (a) of Year
- ----------------------------------- ----------- ---------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C>
1996
Allowances for doubtful accounts
and sales returns $2,665 $4,781 $3,500 (b) $(4,829) $6,117
Allowances for inventory obsolescence 750 2,862 --- (1,695) 1,917
1997
Allowances for doubtful accounts
and sales returns 6,117 837 2,173 (b) (4,581) 4,546
Allowances for inventory obsolescence 1,917 --- --- (222) 1,695
1998
Allowances for doubtful accounts
and sales returns 4,546 1,180 2,079 (b) (4,292) 3,513
Allowances for inventory obsolescence 1,695 133 --- --- 1,828
</TABLE>
- -------------------------
(a) Represents amounts written-off.
(b) Amounts charged to sales returns & allowances (reduction of revenue).
-53-
LOAN DOCUMENT MODIFICATION AGREEMENT
(No. 6; dated as of September 2, 1998)
LOAN DOCUMENT MODIFICATION AGREEMENT (this "Agreement"), dated as of
September 2, 1998, by and among EIS INTERNATIONAL, INC., a Delaware corporation
with its principal place of business at 555 Herndon Parkway, Herndon, Virginia
20170 ("EIS"), EIS INTERNATIONAL SERVICES CORP., a Virginia corporation with its
principal place of business at 555 Herndon Parkway, Herndon, Virginia 20170
("ISC" and together with EIS, the "Borrowers"), and SILICON VALLEY BANK, a
California-chartered bank with its principal place of business at 3003 Tasman
Drive, Santa Clara, California 95054 and with a loan production office located
at One Central Plaza, 11300 Rockville Pike, Suite 1205, Rockville, Maryland
20852, doing business under the name "Silicon Valley East" (the "Bank").
1. Reference to Existing Loan Documents.
Reference is hereby made to that certain Amended and Restated Commitment
Letter (the "Commitment Letter"), dated as of May 19, 1994, between EIS and the
Bank, as amended by a Joinder and Assumption Agreement ("Amendment No. 1"),
dated as of October 28, 1994, among EIS, ISC and the Bank, as further amended by
a Loan Modification Agreement ("Amendment No. 2"), dated as of October 4, 1995,
among EIS, ISC and the Bank, and as further amended by a Loan Document
Modification Agreement ("Amendment No. 3"), dated as of December 27, 1995, among
EIS, ISC and the Bank, a Loan Document Modification Agreement ("Amendment No.
4"), dated as of April 15, 1996, among EIS, ISC and the Bank and a Loan
Document Modification Agreement ("Amendment No. 5"), dated as of September 3,
1997, among EIS, ISC and the Bank. The Commitment Letter, together with the
schedules and exhibits attached thereto, as amended by Amendment No. 1,
Amendment No. 2, Amendment No. 3, Amendment No. 4 and Amendment No. 5 is herein
after referred to as the "Credit Agreement." Reference is also hereby made to
the Loan Documents referred to in the Credit Agreement, including without
limitation that certain Fourth Amended and Restated Promissory Note of the
Borrowers, dated September 3, 1997, as amended and restated of even date
herewith, in the principal amount of $7,000,000 (the "Note") and that certain
Amended and Restated Security Agreement, dated as of September 3, 1997, by and
between EIS and the Bank and that certain Amended and Restated Security
Agreement, dated as of September 3, 1997, by and between ISC and the Bank
(collectively, the "Security Agreements"). Unless otherwise defined herein,
capitalized terms used in this Agreement shall have the same respective meanings
herein as are set forth in the Credit Agreement.
2. Effective Date.
This Agreement shall be deemed effective as of September 2, 1998 (the
"Effective Date"), provided that the Bank shall have received the following on
or before October 23, 1998 and provided further, however, that in no event
shall this Agreement become effective until signed by an officer of the Bank in
California:
a. two copies of this Agreement, duly executed by each of the
Borrowers;
<PAGE>
-2-
b. a fifth amended and restated promissory note in the principal
amount of $7,000,000 payable to the order of the Bank in the form enclosed
herewith (the "Amended Note"), duly executed by each of the Borrowers;
c. a certificate of the secretary or assistant secretary of each of
the Borrowers, attesting to the continuing validity of the certificate of
incorporation and by-laws of each of the Borrowers, the incumbency and
signatures of any officers executing this Agreement and the Loan Documents and
the approval by the Board of Directors of each of the Borrowers of this
Agreement and the Amended Note; and
By the signature of their respective authorized officers below, each
Borrower is hereby representing that, except as modified in Schedule A attached
hereto, the representations of such Borrower set forth in the Loan Documents
(including those contained in the Credit Agreement, as amended by this
Agreement) are true and correct as of the Effective Date as if made on and as of
such date. The Borrowers jointly and severally agree to pay on or before the
Effective Date a nonrefundable facility fee in connection herewith in the
aggregate amount of $17,500. In order to effectuate the foregoing, EIS confirms
its authorization as to the debiting of its account with the Bank in such amount
in order to pay the Bank the facility fee for the period up to and including the
extended Expiry Date. Finally, each Borrower agrees that, as of the Effective
Date, it has no defenses against its obligations to pay any amounts and perform
any of its obligations under the Credit Agreement and the other Loan Documents.
3. Description of Change in Terms.
As of the Effective Date, the Credit Agreement is modified in the
following respects:
a. Section 2 of the Credit Agreement is hereby amended by deleting the
date "September 2, 1998" from the first line thereof and replacing it with the
date "September 2, 1999."
b. The first sentence of Section 3 of the Credit Agreement is hereby
deleted in its entirety and replaced with the following sentence:
"Advances under the Commitment shall bear interest at a fluctuating rate
per annum equal to the Bank's Prime Rate (as defined below) plus one-half
of one percent (0.50%)."
c. The first sentence of Section 4 of the Credit Agreement is hereby
deleted in its entirety and replaced with following:
"The Borrowers jointly and severally agree to pay to the Bank a facility
fee for the period from September 2, 1998 through the Expiry Date in the
amount of Seventeen Thousand Five Hundred Dollars ($17,500)."
<PAGE>
-3-
d. Subsection 4(a) of Schedule II to the Credit Agreement is hereby deleted
in its entirety and replaced with the following:
"(a) within forty-five (45) days after the end of each quarter
(including the last quarter of the fiscal year), the unaudited
consolidated balance sheet and income statement of the Borrowers and their
Subsidiaries on a consolidated basis as at the end of, and for, such
quarter, accompanied by a certificate of the vice president of finance or
chief financial officer of each of the Borrowers, which certificate shall
state that said consolidated financial statements fairly present the
consolidated financial condition and results of operations of the
Borrowers and their Subsidiaries in accordance with GAAP (except for the
absence of footnotes) consistently applied, as at the end of, and for,
such quarter (subject to normal year-end audit adjustments);"
e. Subsection 4(c) of Schedule II to the Credit Agreement is hereby
deleted in its entirety and replaced with the following:
"(c) at the time of the delivery of the quarterly and yearly financial
statements required by Paragraphs 4(a) and 4(b), a Compliance Certificate
of the chief financial officer of each of the Borrowers in the form
attached to this Schedule II as Exhibit A;"
f. Subsection 4(g) of Schedule II to the Credit Agreement is hereby
deleted in its entirety and replaced with the following:
"(g) only when borrowing, within thirty (30) days after the end of
each fiscal month of the Borrowers, (i) a list of the accounts receivable
aging for the Borrowers and their Subsidiaries on a consolidated basis as
of the end of such month in such form as is reasonably acceptable to the
Bank, all in reasonable detail and (ii) a Borrowing Base Certificate
signed by the chief financial officer of each of the Borrowers in the form
attached to this Schedule II as Exhibit B. The Bank will require audits no
more than once during each fiscal year of the Borrowers; provided,
however, that the Borrowers shall not receive any further advances under
the Commitment unless and until an agent of the Bank has conducted and the
Bank has received an audit of the Borrowers' accounts receivable, with the
costs thereof to be borne by the Borrowers;"
g. Sections 23 and 24 of Schedule II to the Credit Agreement are
hereby deleted in their entirety and replaced with the following:
"23. Quick Ratio. The Borrowers will not permit the Quick Ratio to
be less than 1.75 to 1 at the end of any fiscal quarter.
<PAGE>
-4-
24. Minimum Tangible Net Worth. The Borrowers will not permit
Tangible Net Worth at the end of the fiscal quarter ending September
30, 1998 to be less than Thirty-One Million Dollars ($31,000,000); and
will not permit Tangible Net Worth at the end of each subsequent
fiscal quarter to be less than an amount equal to the minimum Tangible
Net Worth for the previous fiscal quarter, as determined in accordance
with the terms hereof, plus 50% of Net Income (and not taking into
account any Net Loss) for the previous quarter."
h. Schedule II to the Credit Agreement is hereby further amended by
restating in its entirety Exhibit A thereto in the form of Exhibit A hereto.
i. The definition of "Tangible Net Worth" set forth in Schedule III to
the Credit Agreement is hereby deleted in its entirety and replaced with the
following:
"`Tangible Net Worth' means at any time, the consolidated
stockholders' equity of EIS International, Inc. and its Subsidiaries
at such time determined in accordance with GAAP (including all then
outstanding Preferred Stock), plus all then outstanding Subordinated
Debt, less all assets that are reflected on the consolidated balance
sheet of EIS International, Inc. and its Subsidiaries at such time
that would be treated as intangibles under GAAP (including, but not
limited to, goodwill, capitalized software and excess purchase
costs)."
4. Continuing Validity.
Upon the effectiveness hereof, each reference in each Loan Document to
"the Credit Agreement," "thereunder," "thereof," "therein," or words of like
import referring to the Credit Agreement, shall mean and be a reference to the
Credit Agreement, as amended hereby. Except as specifically set forth above, the
Credit Agreement shall remain in full force and effect and is hereby ratified
and confirmed. Except as set forth in Section 3 above and in the fifth amended
and restated Note, each of the other Loan Documents is in full force and effect
and is hereby ratified and confirmed. The amendments set forth above (i) do not
constitute a waiver or modification of any term, condition or covenant of the
Credit Agreement or any other Loan Document, other than as expressly set forth
herein, and (ii) shall not prejudice any rights which the Bank may now or
thereafter have under or in connection with the Credit Agreement, as modified
hereby, or the other Loan Documents and shall not obligate the Bank to assent to
any further modifications.
5. Miscellaneous.
a. This Agreement may be signed in one or more counterparts each of
which taken together shall constitute one and the same document.
<PAGE>
-5-
b. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS.
c. EACH OF THE BORROWERS ACCEPTS FOR ITSELF AND IN CONNECTION WITH
ITS PROPERTIES, UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF ANY STATE OR
FEDERAL COURT OF COMPETENT JURISDICTION IN THE COMMONWEALTH OF MASSACHUSETTS IN
ANY ACTION, SUIT, OR PROCEEDING OF ANY KIND AGAINST IT WHICH ARISES OUT OF OR BY
REASON OF THIS LOAN MODIFICATION AGREEMENT; PROVIDED, HOWEVER, THAT IF FOR ANY
REASON THE BANK CANNOT AVAIL ITSELF OF THE COURTS OF THE COMMONWEALTH OF
MASSACHUSETTS, THEN VENUE SHALL LIE IN SANTA CLARA COUNTY, CALIFORNIA.
d. The Borrowers jointly and severally agree to promptly pay on demand
all costs and expenses of the Bank in connection with the preparation,
reproduction, execution and delivery of this letter amendment and the other
instruments and documents to be delivered hereunder, including the reasonable
fees and out-of-pocket expenses of Sullivan & Worcester LLP, special counsel for
the Bank with respect thereto.
e. EIS shall pay no more than $5,000 in fees of Sullivan & Worcester
LLP, special counsel to the Bank, within 10 business days of the final execution
of this Agreement.
[Remainder of page intentionally left blank.]
<PAGE>
-6-
IN WITNESS WHEREOF, the Bank and the Borrowers have caused this Agreement
to be signed under seal by their respective duly authorized officers as of the
date set forth above.
SILICON VALLEY EAST, a Division
of Silicon Valley Bank, as the Bank
By: ___________________________
Peter McDonald
Vice President
SILICON VALLEY BANK, as the Bank
By: ___________________________
Name:
Title:
(signed in Santa Clara, CA)
EIS INTERNATIONAL, INC.
By: /s/ Frederick C. Foley
----------------------------
Frederick C. Foley
Chief Financial Officer and Treasurer
EIS INTERNATIONAL SERVICES CORP.
By: /s/ Frederick C. Foley
-----------------------------
Frederick C. Foley
Senior Vice President-Finance and Treasurer
<PAGE>
EXHIBIT A
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM: EIS INTERNATIONAL, INC. and EIS INTERNATIONAL SERVICES CORP.
The undersigned authorized officers of EIS International, Inc. and EIS
International Services Corp. hereby certifies that in accordance with the terms
and conditions of the Credit Agreement, as amended, between Borrower and Bank
(the "Agreement"), (i) each Borrower is in complete compliance for the period
ending _________________ with all required covenants except as noted below and
(ii) all representations and warranties of each Borrower stated in the Agreement
are true and correct in all material respects as of the date hereof. Attached
herewith are the required documents supporting the above certification. Each
Officer further certifies that these are prepared in accordance with Generally
Accepted Accounting Principles (GAAP) and are consistently applied from one
period to the next except as explained in an accompanying letter or footnotes.
The Officer expressly acknowledges that no borrowings may be requested by a
Borrower at any time or date of determination that such Borrower is not in
compliance with any of the terms of the Agreement, and that such compliance is
determined not just at the date this certificate is delivered.
Please indicate compliance status by circling Yes/No under "Complies"
column.
<TABLE>
<CAPTION>
Reporting Covenant Required Complies
- ------------------ -------- --------
<S> <C> <C> <C>
Quarterly financial statements Quarterly within 45 days Yes No
Annual (CPA Audited) FYE within 90 days Yes No
A/R Agings When borrowing, within
30 days of month end Yes No
A/R Audit Initial and Annual Yes No
</TABLE>
<TABLE>
<CAPTION>
Financial Covenant Required Actual Compliance
- ------------------ -------- ------ ----------
<S> <C> <C> <C> <C>
Maintain on a Quarterly Basis:
Minimum Quick Ratio 1.75:1.0 ____:1.0 Yes No
Minimum Tangible Net Worth $31,000,000* $________ Yes No
Maximum Debt/Tangible Net Worth 0.75:1.0 ____:1.0 Yes No
</TABLE>
*increasing by 50% of Net Income for the previous quarter.
Comments Regarding Exceptions: See Attached.
Sincerely,
EIS INTERNATIONAL, INC. EIS INTERNATIONAL SERVICES CORP.
______________________________ _______________________________
SIGNATURE SIGNATURE
TITLE TITLE
DATE DATE
<PAGE>
Schedule A
Qualifications and Supplements to Disclosure
None
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
EXHIBIT 21
Subsidiaries of the Registrant
<TABLE>
<CAPTION>
STATE OR OTHER JURISDICTION OF
SUBSIDIARIES INCORPORATION
<S> <C>
EIS Leasing Corporation Delaware
EIS Leasing of Delaware, Inc. Delaware
EIS International Services Corp. Virginia
Electronic Information Systems Limited United Kingdom
EIS Limited United Kingdom
Electronic Information Systems International, Inc. Delaware
EIS Foreign Sales Corporation U.S. Virgin Islands (St. Thomas)
EIS Italia, Sr. L Italy
Surefind Information, Inc. Delaware
Cybernetics Systems International Corp. Delaware
</TABLE>
EIS International, Inc. and Subsidiaries
- ------------------------------------------------------
EXHIBIT 23.1
Accountant's Consent
The Board of Directors
EIS International, Inc.:
We consent to incorporation by reference in the registration statements of EIS
International, Inc. on Form S-8 (No. 33-59754, 33-72392, and 333-2998) and Form
S-3 (Nos. 333-3350 and 333-5823) of our report dated January 27, 1998, with
respect to the consolidated balance sheets of EIS International, Inc. and
subsidiaries as of December 31, 1997 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows and related
schedule for each of the years in the three-year period ended December 31, 1998,
which report appears in the December 31, 1998, annual report on Form 10-K of EIS
International, Inc.
/s/ KPMG LLP
McLean, Virginia
March 22, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 28,194
<SECURITIES> 0
<RECEIVABLES> 12,240
<ALLOWANCES> 3,513
<INVENTORY> 3,751
<CURRENT-ASSETS> 45,097
<PP&E> 17,287
<DEPRECIATION> 11,391
<TOTAL-ASSETS> 57,699
<CURRENT-LIABILITIES> 12,545
<BONDS> 0
0
0
<COMMON> 117
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 57,699
<SALES> 58,742
<TOTAL-REVENUES> 58,742
<CGS> 27,251
<TOTAL-COSTS> 62,476
<OTHER-EXPENSES> 543
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,965)
<INCOME-TAX> (121)
<INCOME-CONTINUING> (3,086)
<DISCONTINUED> 238
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,848)
<EPS-PRIMARY> (0.25)
<EPS-DILUTED> (0.25)
</TABLE>
