-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J/Qta9JOFFiNC6evhObjCGFtXtQFQ7uOuxcciyJQ2X4c8XN2rqjm7NZdGpdQWiUF EP9MmxUrs7angH7Wy10Fww== 0000950146-99-000609.txt : 19990330 0000950146-99-000609.hdr.sgml : 19990330 ACCESSION NUMBER: 0000950146-99-000609 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EIS INTERNATIONAL INC /DE/ CENTRAL INDEX KEY: 0000032251 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 061017599 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20329 FILM NUMBER: 99575101 BUSINESS ADDRESS: STREET 1: 555 HERNDON PARKWAY CITY: HERNDON STATE: VA ZIP: 22070 BUSINESS PHONE: 2033514800 FORMER COMPANY: FORMER CONFORMED NAME: ELECTRONIC INFORMATION SYSTEMS INC DATE OF NAME CHANGE: 19940218 10-K 1 EIS INTERNATIONAL, INC. FORM 10-K 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. 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. 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- EIS International, Inc. and Subsidiaries - ------------------------------------------------------
Name Age Position - --------------- ---------- ------------------------------------------------------------------ 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
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- 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- 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- 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.
1997 1998 ---------------- ------------------ HIGH LOW HIGH LOW ------- ------ ------- -------- 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
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- 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.
Years Ended December 31, ------------------------------------------------------------------ 1994 1995 1996 1997 1998 ------------ ------------ ------------ ------------ ------------ 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
-18- 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- 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- 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.
Years Ended December 31, ---------------------------------------------------------------- 1996 1997 1998 --------------------- --------------------- -------------------- $ % $ % $ % ----------- --------- ----------- --------- ---------- -------- 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) =========== ========= =========== ========= ========== ========
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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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. 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
-32- 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- EIS INTERNATIONAL, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Dollars in thousands, except per share amount)
December 31, --------------------------- 1997 1998 ------------ ------------ 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 ============ ============
See accompanying notes to consolidated financial statements. -34- EIS INTERNATIONAL, INC. AND SUBSIDIARIES Consolidated Statements of Operations (In thousands, except per share amounts)
Years Ended December 31, --------------------------------------- 1996 1997 1998 ----------- ------------ ------------ 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
See accompanying notes to consolidated financial statements. -35- EIS INTERNATIONAL, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Dollars in thousands)
Common Stock Additional Accumulated Retained Total ----------------------- Paid-in Other Compre- Earnings Treasury Stockholders' Shares Amount Capital hensive Deficit (Deficit) Stock Equity ------------- --------- ----------- --------------- ---------- --------- ------------- 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 ============= ========= =========== =========== =========== ========= ============
See accompanying notes to consolidated financial statements. -36- EIS INTERNATIONAL, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands)
Years Ended December 31, ------------------------------------ 1996 1997 1998 ----------- ----------- ----------- 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
See accompanying notes to consolidated financial statements. -37- 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- 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- 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):
For the Year Ended December 31, -------------------------------------- 1996 1997 1998 ------------ ------------ ------------ 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)
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- 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- 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.
1996 ----------- Net revenues $ 97,168 Net income (loss) (22,202) Diluted earnings (loss) per share (2.08)
-42- 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):
1997 1998 ---------- --------- 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 ========== =========
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):
1997 1998 ----------- ---------- 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 =========== ==========
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- 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):
1997 1998 ---------- --------- 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 ========== =========
(7) Income Taxes Income tax expense (benefit) from continuing operations consists of the following (in thousands):
Years Ended December 31, ---------------------------------- 1996 1997 1998 ---------- ---------- ---------- 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 ========== ========= ==========
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:
Years Ended December 31, -------------------------- 1996 1997 1998 ------- ------ ------ 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% ====== ====== ======
-44- 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):
December 31, ----------------------- 1997 1998 ----------- ---------- 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 =========== ==========
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- 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:
ISO'S Non-ISO'S -------------------------------- -------------------------------- Number of Weighted-Average Number of Weighted-Average Shares Exercise Price Shares Exercise Price ------------- ----------------- ------------ ------------------ 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 ============= ================ =========== ===============
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- 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:
Price Expiration Number Per Share Dates ----------- ----------------- ------------- 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 =========== ================= =============
The following table summarizes information about EIS' ISO, non-ISO, and non-employee director stock option plans:
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 - --------------- --------------- ---------------------- ----------------------- ------------- ---------------------- $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
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- 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):
1996 1997 1998 ----------- ----------- ----------- 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)
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:
Number of Price Per Expiration Shares Share Dates ------------ ------------- ------------- 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 ============ ============= =============
-48- 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):
Year Amount - ----- --------- 1999 $2,323 2000 2,279 2001 2,153 2002 243 2003 20 --------- $7,018 =========
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- 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- 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- 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):
Item Amount - ----------------------------------------------------- -------- 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 ========
-52- EIS International, Inc. and Subsidiaries - ------------------------------------------------------ SCHEDULE II Valuation and Qualifying Accounts Years Ended December 31, 1996, 1997, and 1998 (In thousands)
Additions ---------------------- Balance at Charged to Charged to Balance at Beginning Costs and Other End Classification of Year Expenses Accounts Deductions (a) of Year - ----------------------------------- ----------- ---------- ---------- -------------- ---------- 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
- ------------------------- (a) Represents amounts written-off. (b) Amounts charged to sales returns & allowances (reduction of revenue). -53- EX-10.33 2 LOAN DOCUMENT MODIFICATION AGREEMENT 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; -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)." -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. -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. -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.] -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 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.
Reporting Covenant Required Complies - ------------------ -------- -------- 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
Financial Covenant Required Actual Compliance - ------------------ -------- ------ ---------- 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
*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 Schedule A Qualifications and Supplements to Disclosure None EX-21 3 SUBSIDIARIES OF THE REGISTRANT EIS International, Inc. and Subsidiaries - ------------------------------------------------------ EXHIBIT 21 Subsidiaries of the Registrant
STATE OR OTHER JURISDICTION OF SUBSIDIARIES INCORPORATION 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
EX-23.1 4 CONSENTS OF EXPERTS AND COUNSEL 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 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 1 28,194 0 12,240 3,513 3,751 45,097 17,287 11,391 57,699 12,545 0 0 0 117 0 57,699 58,742 58,742 27,251 62,476 543 0 0 (2,965) (121) (3,086) 238 0 0 (2,848) (0.25) (0.25)
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