UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[Mark One]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to
Commission file number 0-20329
EIS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware No. 06-1017599
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification Number)
555 Herndon Parkway
Herndon, VA 20170
(703) 478-9808
(Registrant's telephone number, including area code)
-----------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock: Common Stock, par value $.01 per share, outstanding as of July 23,
1998: 11,734,585 shares.
<PAGE>
EIS INTERNATIONAL, INC. and SUBSIDIARIES
INDEX to Financial Statements Filed with Quarterly Report of
Registrant on Form 10-Q for the Quarter Ended June 30, 1998
(Unaudited)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
<TABLE>
Page
----
<S> <C>
Unaudited Consolidated Balance Sheets as of December 31, 1997
and June 30, 1998 3
Unaudited Consolidated Statements of Operations
for the three and six months ended June 30, 1997 and 1998 4
Unaudited Consolidated Statements of Cash Flows
for the six months ended June 30, 1997 and 1998 5
Notes to Consolidated Financial Statements (unaudited) 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities Not Applicable
Item 3. Defaults Upon Senior Securities Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders Not Applicable
Item 5. Other Information Not Applicable
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
2
<PAGE>
EIS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
December 31 June 30,
1997 1998
----------- --------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 22,525 $ 24,016
Short-term investments 2,332 --
Accounts receivable, trade, less allowances for doubtful accounts
and sales returns of $4,546 in 1997 and $3,470 in 1998 13,979 12,323
Current portion of installment and lease receivables 1,674 1,469
Inventories 5,160 4,598
Deferred income taxes 3,448 3,448
Refundable income taxes 611 690
Prepaids and other current assets 857 1,029
-------- --------
Total current assets 50,586 47,573
Capitalized software development costs, net 4,372 4,680
Property and equipment, net 7,842 7,175
Installment and lease receivables, less current portion 1,254 409
Deferred income taxes 2,206 2,206
Other assets 1,532 1,115
-------- --------
Total assets $ 67,792 $ 63,158
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 15,508 $ 9,991
Deferred revenue 2,983 3,611
Net liability of discontinued operations 598 602
-------- --------
Total current liabilities 19,089 14,204
Other liabilities 253 180
-------- --------
Total liabilities 19,342 14,384
Commitments and Contingencies
Stockholders' equity:
Common Stock, $.01 par value, 15,000,000
shares authorized, issued 11,641,393 shares
in 1997 and 11,727,085 shares in 1998 116 117
Additional paid-in capital 60,357 60,635
Accumulated translation adjustments (326) (219)
Retained deficit (10,792) (10,854)
Treasury stock, at cost - 101,225 shares in 1997
and 1998 (905) (905)
-------- --------
Total stockholders' equity 48,450 48,774
-------- --------
Total liabilities and stockholders' equity $ 67,792 $ 63,158
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
EIS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------------ ------------------------
1997 1998 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues:
Product and software $ 16,385 $ 7,430 $ 30,298 $ 19,037
Service and other 6,728 6,787 13,038 13,282
-------- -------- -------- --------
23,113 14,217 43,336 32,319
Cost of revenues:
Cost of product and software sold 5,888 3,625 11,494 8,175
Recovery of provision for contract losses -- (750) -- (1,636)
Cost of service and other 3,966 3,419 8,152 6,809
-------- -------- -------- --------
9,854 6,294 19,646 13,348
-------- -------- -------- --------
Gross margin 13,259 7,923 23,690 18,971
-------- -------- -------- --------
Operating cost and expense:
Research and development cost 3,156 2,526 6,402 5,079
Selling, general, and administrative 8,240 6,911 18,441 14,058
Restructuring costs -- 543 2,877 543
-------- -------- -------- --------
11,396 9,980 27,720 19,680
-------- -------- -------- --------
Operating income (loss) 1,863 (2,057) (4,030) (709)
Other income, net: 324 328 532 659
-------- -------- -------- --------
Income (loss) before income taxes 2,187 (1,729) (3,498) (50)
Income tax benefit (expense) (828) 648 1,335 (12)
-------- -------- -------- --------
Net income (loss) $ 1,359 $ (1,081) $ (2,163) $ (62)
======== ======== ======== ========
Basic earnings (loss) per share: $ 0.12 $ (0.09) $ (0.19) $ (0.01)
Diluted earnings (loss) per share: 0.12 (0.09) (0.19) (0.01)
Weighted average common and common equivalent shares:
Basic 11,224 11,590 11,179 11,568
Diluted 11,500 11,590 11,179 11,568
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
EIS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
----------------------
1997 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,163) $ (62)
Adjustments to reconcile net loss
to net cash used in operating activities:
Provision for doubtful accounts and
sales returns 1,907 1,391
Recovery of provision for contract losses -- (1,636)
Depreciation and amortization 4,251 3,379
Deferred income taxes (1,458) --
Changes in assets and liabilities:
Accounts receivable, trade 3,309 265
Proceeds from sale of lease receivables -- 745
Installment and lease receivables 579 305
Inventories 243 562
Prepaids and other current assets (347) (79)
Accounts payable and accrued expenses (5,123) (3,881)
Deferred revenue 1,253 628
Other (300) (86)
-------- --------
Net cash provided by continuing operations 2,151 1,531
Cash used in discontinuing operations (1,699) 4
-------- --------
Net cash provided by operating activities 452 1,535
-------- --------
Cash flows from investing activities:
Additions to property and equipment (2,208) (1,655)
Sales of short-term investments 2,371 2,332
Purchases of short-term investments (2,043) --
Capitalization of software development costs (769) (1,000)
-------- --------
Net cash used in investing activities (2,649) (323)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options 829 279
-------- --------
Net cash provided by financing activities 829 279
-------- --------
Net increase (decrease) in cash and cash equivalents (1,368) 1,491
Cash and cash equivalents at beginning of period 11,099 22,525
-------- --------
Cash and cash equivalents at end of period $ 9,731 $ 24,016
-------- --------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 77 $ 51
Income taxes 155 281
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
EIS International, Inc. and Subsidiaries
- -----------------------------------------
Notes to Consolidated Financial Statements (unaudited)
(1) Basis of Presentation
The unaudited consolidated financial statements of EIS International, Inc. and
its wholly owned subsidiaries (collectively, "EIS") presented herein have been
prepared in accordance with the instructions to Form 10-Q and do not include all
of the information and note disclosures necessary to conform with annual
reporting requirements. The statements should be read in conjunction with the
audited consolidated financial statements and notes thereto included in EIS'
Annual Report on Form 10-K for the year ended December 31, 1997. In the opinion
of management, the accompanying consolidated financial statements include all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of EIS' financial position and results of operations. The
results of operations for the three and six month periods ended June 30, 1998
may not be indicative of the results for the full year.
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.
(2) Basis of Consolidation
The consolidated financial statements include the accounts of EIS. All
significant intercompany balances and transactions have been eliminated in
consolidation.
(3) New Accounting Pronouncements
In February 1997, FASB issued SFAS No. 129, "Disclosure of Information about
Capital Structure" which is effective for the year ending December 31, 1998.
SFAS No. 129 continues the previous requirements to disclose certain information
about an entity's capital structure found in Accounting Principles Board ("APB")
Opinions No. 10, "Omnibus Opinion-1966," and No. 15, "Earnings per Share," and
FASB SFAS No. 47, "Disclosure of Long-Term Obligations." EIS has been subject to
the requirements of those standards and, as a result, the adoption of SFAS No.
129 effective January 1, 1998 did not have a material impact on its financial
statements.
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.
The schedule below reflects consolidated comprehensive income (loss) for the
three and six month periods ended June 30, 1997 and 1998:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
--------------------------- ---------------------------
1997 1998 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) $ 1,359 $ (1,081) $ (2,163) $ (62)
Other comprehensive income (loss):
Foreign currency translation adjustment (124) (17) 17 107
-------- -------- --------- --------
Comprehensive income (loss) $ 1,235 $ (1,098) $ (2,146) $ 45
-------- -------- --------- --------
</TABLE>
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. EIS does not believe that
the adoption of SFAS No. 131 will have a material impact on its financial
statements.
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
6
<PAGE>
EIS International, Inc. and Subsidiaries
- -----------------------------------------
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 were lower by $288,000 and
$746,000, respectively, for the three and six months ended June 30, 1998.
(4) Earnings (Loss) Per Share
Earnings (loss) per share is determined by dividing earnings (loss) by the
weighted average number of shares of EIS common stock outstanding during the
period. For the three months ended June 30, 1997, the computation of diluted
earnings per share include the assumed exercise of dilutive stock options and
warrants. For the six months ended June 30, 1997, and the three and six month
periods ended June 30, 1998, the assumed exercise of stock options and warrants
has not been included in the calculation as they would be anti-dilutive.
(5) 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 affected in some manner by Year 2000
issues. EIS has developed and is in the initial phases of the implementation of
a plan ("the Year 2000 Product Plan") that makes necessary modifications to its
products. The current estimated cost to update those products is approximately
$2.0 million. EIS expects to continue to supplement its internal resources with
subcontract labor to complete the Year 2000 Product Plan. EIS will seek to
manage its research and develop costs and Year 2000 Product Plan costs, so that
EIS' total research and development costs are not materially different from the
range of research and development costs incurred during 1996 and 1997, but there
can be no assurance it will be able to do so. In addition to incurring research
and development costs, EIS may incur additional costs in other areas of its
operation, including program management and installation services. EIS is
planning to provide updated software to customers under EIS maintenance
contracts, and to charge fees for on-site visits, when necessary, and for
certain other services to upgrade EIS' customers' software. EIS products
affected by the Year 2000 issue will not be saleable during or after Year 2000,
unless the Year 2000 Product Plan is completed before that date. Failure to
successfully implement the Year 2000 Product Plan could have a material adverse
impact on EIS' operations and financial condition. EIS expects to be successful
in completing the Year 2000 Product Plan changes in all of its products;
however, upgrading all customers' products that require such upgrades prior to
Year 2000 cannot be assured since a substantial part of the upgrade process will
be dependent on the customers. Additionally, the estimated research and
development costs discussed above could change materially as development of the
Year 2000 Product Plan proceeds. During the three and six months ended June 30,
1998, EIS incurred $157,000 and $281,000, respectively, of costs associated with
the Year 2000 Product Plan. These costs are included in research and development
in the accompanying consolidated statements of operations. On July 30, 1998, EIS
announced that a Year 2000 compliant release of its Call Processing System
("CPS") software is complete and available for sale. CPS is EIS' most widely
used and sold software. EIS is currently planning to release Year 2000 compliant
versions of its other software products by the end of 1998.
EIS is in the process of estimating the cost of updating its internal software
and hardware systems to be Year 2000 compliant. Although that process may
involve additional costs, EIS believes that those costs will not have a material
adverse affect on its operations and financial condition. If that update is not
completed in a timely manner, or if EIS' costs exceed the current estimates, the
cost of Year 2000 compliance for EIS' internal computer software and hardware
systems could have a material adverse impact on its operations and financial
condition. EIS also intends to determine the extent of any adverse impact
resulting from failures by its major vendors and distributors to be Year 2000
compliant. However, EIS is currently unable to estimate any such potential
adverse impact, although
7
<PAGE>
EIS International, Inc. and Subsidiaries
- -----------------------------------------
such adverse impact could be material to EIS' results of operations and
financial condition. No material costs have been incurred to date with respect
to updating EIS' internal software and hardware systems for Year 2000
compliance.
(6) Restructuring
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 Systems International Corp. ("Cybernetics"), a
wholly-owned EIS subsidiary, 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 Technologies, Inc. ("Pulse"), its Chantilly, Virginia based integration
services business, by integrating 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. 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 $500,000 of other costs.
Effective June 30, 1998, EIS closed Cybernetics because of continuing losses and
management's decision to focus on EIS' core business. In connection with the
closure of Cybernetics, EIS recorded restructuring charges of $543,000,
comprised of $350,000 of severance and $193,000 of facilities, fixed asset
disposal, and other costs.
(7) Recovery of Provision for Contract Losses
The recovery of provision for contract losses represents the reduction of an
accrued expense recorded during the fourth quarter of 1996. This accrual
represented an 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 made significant
progress towards the resolution of certain other contract obligations that
resulted in the recovery of the provision for contract losses.
8
<PAGE>
EIS International, Inc. and Subsidiaries
- -----------------------------------------
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 EIS' financial position,
business strategy and plans, objectives for future operations, technical
developments, Year 2000 compliance, industry conditions -- other than statements
of historical facts -- are forward-looking statements. While these statements
reflect EIS' reasonable assumptions, based upon management's beliefs and
information currently available to it, EIS can give no assurance that such
expectations will prove correct.
These forward-looking 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 development, product introductions and acceptance,
distribution networks, changes in industry practices, one-time events and other
factors described herein and under the heading "Factors Affecting Future
Results" in EIS' Annual Report on Form 10-K for the year ending December 31,
1997. 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.
Results of Operations
The following table sets forth, for the periods indicated, certain financial
data as reflected in the Consolidated Statements of Operations included herein.
The percentages shown are calculated based upon net revenues, except that cost
of product and software sold and cost of services and other are presented as a
percentage of product and software sales and service and other revenues,
respectively.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------------------------------------------
1997 1998 1997 1998
--------------- ----------------- --------------- ----------------
$ % $ % $ % $ %
------ ------ ------ ----- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Product and software revenue 16,385 70.9 7,430 52.3 30,298 69.9 19,037 58.9
Service and other 6,728 29.1 6,787 47.7 13,038 30.1 13,282 41.1
------ ----- ------ ----- ------ ----- ------ -----
Net revenues 23,113 100.0 14,217 100.0 43,336 100.0 32,319 100.0
------ ----- ------ ----- ------ ----- ------ -----
Cost of product and software sold 5,888 35.9 3,625 48.8 11,494 37.9 8,175 42.9
Recovery of provision for contract
losses --- --- (750) --- --- --- (1,636) ---
Cost of service and other 3,966 58.9 3,419 50.4 8,152 62.5 6,809 51.3
------ ----- ------ ----- ------ ----- ------ -----
Gross margin 13,259 57.4 7,923 55.7 23,690 54.7 18,971 58.7
------ ----- ------ ----- ------ ----- ------ -----
Research and development cost 3,156 13.7 2,526 17.8 6,402 14.8 5,079 15.7
Sales, general and administrative 8,240 35.7 6,911 48.6 18,441 42.6 14,058 43.5
Restructuring costs --- --- 543 3.8 2,877 6.6 543 1.7
------ ----- ------ ----- ------ ----- ------ -----
Operating income (loss) 1,863 8.1 (2,057) (14.5) (4,030) (9.3) (709) (2.2)
Other income, net 324 1.4 328 2.3 532 1.2 659 2.0
------ ----- ------ ----- ------ ----- ------ -----
Income (loss) before income tax
benefit (expense) 2,187 9.5 (1,729) (12.2) (3,498) (8.1) (50) (0.2)
Income tax benefit (expense) (828) (3.6) 648 4.6 1,335 3.1 (12) (0.0)
------ ----- ------ ----- ------ ----- ------ -----
Net income (loss) 1,359 5.9 (1,081) (7.6) (2,163) (5.0) (62) (0.2)
===== === ====== ==== ====== ==== === ====
</TABLE>
Net Revenues
Net revenues of $14.2 million in the second quarter of 1998 decreased 38% from
$23.1 million in the second quarter of 1997. Product and software revenues of
$7.4 million in the second quarter of 1998 decreased $9 million (55%) from $16.4
million in the second quarter of 1997. Net revenues of $32.3 million in the
first six months of 1998 decreased $11.0 million (25%) from $43.3 million in the
first six months of 1997. Product and software revenues of $19.0 million in the
first six month of 1998 decreased $11.3 million (37%) from $30.3 million in the
first six months of 1997.
9
<PAGE>
EIS International, Inc. and Subsidiaries
- -----------------------------------------
The decrease in product and software revenue is primarily a result of continued
slow demand from outbound telemarketing service bureaus, the largest portion of
EIS' core business customers which were not offset by sales to new and other
existinFg customers. Also, as discussed in note 3 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 were lower by $288,000 and $746,000, respectively, for the three and six
months ended June 30, 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.
Service and other revenues of $6.8 million in the second quarter of 1998
increased $59,000 (1%) from $6.7 million in the second quarter of 1997. Service
and other revenues of $13.3 million in the first six months of 1998 increased
$244,000 (2%) from $13.0 million in the first six months of 1997. Service and
other revenues increased primarily due to expansion of EIS' customer base that
is covered by service contracts, offset by a decline in EIS' professional
services business.
Gross Margin and Cost of Revenues
Total gross margin was $7.9 million (55.7%) in the second quarter of 1998,
compared to $13.3 million (57.4%) in the second quarter of 1997, and $19.0
million (58.7%) for the first six months of 1998, compared to $23.7 million
(54.7%) for the first six months of 1997. Included in the total gross margin was
the recovery of provision for contract losses of $750,000 in the second quarter
of 1998, and $1.6 million in the first six months of 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 an
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 made significant progress towards the
resolution of certain other contract obligations that resulted in the recovery
of the provision for contract losses.
Gross margin on product and software sales was $3.8 million (51.2%) in the
second quarter of 1998, compared to $10.5 million (64.1%) in the second quarter
of 1997, and $10.9 million (57.1%) in the first six months of 1998, compared to
$18.8 million (62.1%) in the first six months of 1997. 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 certain staffing and other direct costs associated with
product and software revenue which did not decline proportionately with 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.
Additionally, as discussed above, the reduction in revenue as a result of the
adoption of SOP 97-2 contributed to the decrease in gross margin on product and
software revenue.
Gross margin on service and other revenue was $3.4 million (49.6%) in the second
quarter of 1998, compared to $2.8 million (41.1%) in the first quarter of 1997,
and $6.5 million (48.7%) in the first six months of 1998, compared to $4.9
million (37.5%) in the first six months of 1997. The improvement in gross margin
on service and other revenue was primarily due to expense control measures
implemented during the latter part of the first quarter of 1997 as a result of
the Restructuring (see below). In addition, the cost of supplying parts under
EIS's customer maintenance agreements decreased as a result of management's
ongoing efforts to improve this operation.
EIS' gross margin can be affected by a number of factors, including changes in
sales volume, product mix, hardware requirements of each sale, costs of product
support, and competitive pricing pressures. Consequently, there can be no
assurance that EIS will continue to sustain gross margins at previous levels.
10
<PAGE>
EIS International, Inc. and Subsidiaries
- ----------------------------------------
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Research and Development Cost
Research and development costs were $2.5 million in the second quarter of 1998
compared to $3.2 million in the second quarter of 1997, and $5.1 million in the
first six months of 1998 compared to $6.4 million in the first six months of
1997. The decrease during the three and six months ended June 30, 1998 compared
to the same periods in 1997, was primarily due to a decline in labor costs of
approximately $219,000 and $472,000, respectively (see "Year 2000 Issues" for
additional information regarding the use of subcontract resources), an increase
in capitalized software development costs of $128,000 and $231,000,
respectively, and reduced research and development costs incurred by
Cybernetics.
The decrease in labor, as well as the increase in capitalized software
development costs, was attributable to the decline in resources required for
updates to generally available software and increased focus on software under
development for release later this year and in early 1999.
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 $533,000 and $405,000 were capitalized in the second quarters of
1998 and 1997, respectively, and $1,000,000 and $769,000 were capitalized in the
first six months of 1998 and 1997, respectively. Amortization of capitalized
software development costs of $346,000 is included in cost of products sold in
the second quarters of 1998 and 1997 and $692,000 in the first six months of
1998 and 1997.
EIS is committed to technological innovation and it believes that additional
research and development costs will be required to maintain its market position
and that those costs may increase in absolute amounts during the remainder of
1998 and thereafter.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expense of $6.9 million during the
second quarter of 1998 declined $1.3 million from $8.2 million in the second
quarter of 1997. SG&A expenses of $14.1 million in the first six months of 1998
declined $4.4 million from $18.4 million in the first six months of 1997. The
decrease in the second quarter was primarily due to a decrease in the number of
employees and the related decreases in costs for salaries and other overhead
support costs. Additionally, during the first quarter of 1997, in connection
with the Restructuring (see below), EIS downsized its Cybernetics and Pulse
Technologies, Inc. ("Pulse") subsidiaries and consolidated several of its
administrative functions and facilities.
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 Systems International Corp. ("Cybernetics"), a
wholly-owned EIS subsidiary, 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 Technologies, Inc. ("Pulse"), its Chantilly, Virginia based integration
services business, by integrating 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. 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 $500,000 of other costs.
11
<PAGE>
EIS International, Inc. and Subsidiaries
- -----------------------------------------
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Effective June 30, 1998, EIS closed Cybernetics because of continuing losses and
management's decision to focus on EIS' core business. In connection with the
closure of Cybernetics, EIS recorded restructuring charges of $543,000,
comprised of $350,000 of severance and $193,000 of facilities, fixed asset
disposal, and other costs.
Interest and Other Income, Net
Interest and other income of $328,000 remained consistent during the second
quarter of 1998 as compared to $324,000 in the second quarter of 1997. Interest
and other income of $659,000 increased $127,000 during the first six months of
1998 compared to the same period in 1997 primarily due to higher average cash
and cash equivalent balances in the first six months of 1998 as compared to the
same period in 1997.
Income Taxes
The Company's effective income tax rate was 38% for the second quarters of 1998
and 1997, and during the first six months of 1997. Although EIS incurred a
pre-tax loss of $62,000 during the first six months of 1998, a tax expense of
$12,000 was recorded for foreign taxes arising from certain foreign
subsidiaries, which were not offset by benefits recorded domestically.
As disclosed in Note 7 to EIS' consolidated financial statements included in its
Annual Report on Form 10-K dated December 31, 1997, EIS had established a $4.2
million valuation allowance on its deferred tax assets. Based on projections
for future taxable income, management believes that the valuation allowance of
$4.2 million remains adequate at June 30, 1998. However, if EIS incurs losses in
future periods, or if management's projections for future taxable income change,
the deferred tax asset valuation allowance may be increased and such increase
could be material to EIS' financial condition and results of operations.
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 affected in some manner by Year 2000
issues. EIS has developed and is in the initial phases of the implementation of
a plan ("the Year 2000 Product Plan") that makes necessary modifications to its
products. The current estimated cost to update those products is approximately
$2.0 million. EIS expects to continue to supplement its internal resources with
subcontract labor to complete the Year 2000 Product Plan. EIS will seek to
manage its research and develop costs and Year 2000 Product Plan costs, so that
EIS' total research and development costs are not materially different from the
range of research and development costs incurred during 1996 and 1997, but there
can be no assurance it will be able to do so. In addition to incurring research
and development costs, EIS may incur additional costs in other areas of its
operation, including program management and installation services. EIS is
planning to provide updated software to customers under EIS maintenance
contracts, and to charge fees for on-site visits, when necessary, and for
certain other services to upgrade EIS' customers' software. EIS products
affected by the Year 2000 issue will not be saleable during or after Year 2000,
unless the Year 2000 Product Plan is completed before that date. Failure to
successfully implement the Year 2000 Product Plan could have a material adverse
impact on EIS' operations and financial condition. EIS expects to be successful
in completing the Year 2000 Product Plan changes in all of its products;
however, upgrading all customers' products that require such upgrades prior to
Year 2000 cannot be assured since a substantial part of the upgrade process will
be dependent on the customers. Additionally, the estimated research and
development costs discussed above could change materially as development of the
Year 2000 Product Plan proceeds. During the three and six months ended June 30,
1998, EIS incurred $157,000 and $281,000, respectively, of costs associated with
the Year 2000 Product Plan. These costs are included in research and development
in the accompanying consolidated statements of operations. On July 30, 1998, EIS
announced that a Year 2000 compliant release of its Call Processing System
("CPS") software is complete and available for sale. CPS is EIS' most widely
used and sold software. EIS is currently planning to release Year 2000 compliant
versions of its other software products by the end of 1998.
EIS is in the process of estimating the cost of updating its internal software
and hardware systems to be Year 2000 compliant. Although that process may
involve additional costs, EIS believes that those costs will not have a material
adverse affect on its operations and financial condition. If that update is not
completed in a timely manner, or if EIS' costs exceed the current estimates, the
cost of Year 2000 compliance for EIS' internal computer software
12
<PAGE>
EIS International, Inc. and Subsidiaries
- -----------------------------------------
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
and hardware systems could have a material adverse impact on its operations and
financial condition. EIS also intends to determine the extent of any adverse
impact resulting from failures by its major vendors and distributors to be Year
2000 compliant. However, EIS is currently unable to estimate any such potential
adverse impact, although such adverse impact could be material to EIS' results
of operations and financial condition. No material costs have been incurred to
date with respect to updating EIS' internal software and hardware systems for
Year 2000 compliance.
Liquidity and Capital Resources
EIS' working capital was $31.5 and $33.4 million at December 31, 1997 and June
30, 1998, respectively. Cash and cash equivalents and short-term investment
balances were $24.9 and $24.0 million at December 31, 1997 and June 30, 1998,
respectively.
As reflected in the accompanying consolidated statements of cash flows,
operating activities generated $452,000 in cash in the first six months of 1997
compared to $1.5 million in the first six months of 1998. This increase was the
results of several factors. Cash used in discontinued operations in the first
six months of 1997 was $1.7 million as compared to $4,000 of cash received in
the first six months of 1998. Additionally, during the second quarter of 1998,
EIS sold a portion of its lease portfolio resulting in $745,000 of cash
proceeds. Those changes were offset by a larger decrease in accounts receivable,
trade of $3.3 million during the first six months of 1997, compared to a
decrease of $265,000 during the first six months of 1998. Collections of
accounts receivable, trade were higher during the first six months of 1997
because the accounts receivable, trade balance was $21.3 million at December 31,
1996 as compared to $14.0 million at December 31, 1997. EIS used more cash
during the first six months of 1997 relating to the decrease in accounts payable
of $5.1 million, compared to the decrease in accounts payable of $3.9 million
during the first six months of 1998. The decrease in cash used for accounts
payable was attributable to the decrease in product and operating expenses
during the first six months of 1998.
Cash and cash equivalents used to invest in the purchase of property and
equipment was $2.2 million for the first six months of 1997 and $1.7 million for
the first six months of 1998. Net sales and purchases of investments during the
first six months of 1997 generated $328,000 of cash compared to $2.3 million
during the first six months of 1998. This change was because EIS reinvested its
short-term investments in more liquid cash equivalents during the first six
months of 1998. The capitalization of software development costs increased from
$769,000 during the first six months of 1997 to $1.0 million for the same period
in 1998. The increase in capitalized software development costs was attributable
to increased focus on software under development for release later this year and
in early 1999. Proceeds from the exercise of stock options decreased from
$829,000 during the first six months of 1997 to $279,000 during the same period
in 1998.
On September 3, 1997, EIS entered into a Loan Document Modification Agreement
(the "Modified Loan Agreement") which amended an existing line of credit. Under
the Modified 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 .75%. The Modified Loan Agreement is secured by
substantially all of the assets of EIS and expires on September 2, 1998. There
were no amounts outstanding under the Modified Loan Agreement as of June 30,
1998. Prior to the Modified Loan Agreement, EIS had an unsecured line of credit
of $12.5 million with the same commercial bank under a commitment that expired
in January 1997.
During the second quarter of 1998, EIS was informed that certain of its
customers had received a patent infringement notice from a company alleging that
EIS' technology infringed on that company's patent. 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. Although EIS is not aware of any
formal legal proceedings in relation to these matters, EIS believes this
infringement claim to be without merit, and will vigorously defend its patent
rights. EIS has demanded that the company making these allegations immediately
cease the notification of EIS customers.
13
<PAGE>
EIS International, Inc. and Subsidiaries
- -----------------------------------------
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
EIS is a party to various legal actions and claims arising in the ordinary
course of its business. At this date, 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 below under Part II Item 1
- - "Legal Proceedings". EIS is currently not able to estimate the costs or a
range of costs which may arise out of such shareholder lawsuit.
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 Modified 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, EIS' ability to achieve
those results will be affected by the amount of cash generated from operations
and the pace that available resources are utilized. Accordingly, EIS may in the
future be required to seek additional sources of financing, including borrowing
and/or sales 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.
14
<PAGE>
EIS International, Inc. and Subsidiaries
- -----------------------------------------
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company and certain individuals indicated below were named as defendants in
the following lawsuits, each of which were filed on the date indicated in the
United States District Court for the District of Connecticut, allegedly on
behalf of certain of the Company's shareholders. Each of these claims allege
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.
1. Warburgh v. EIS International, Inc., Joseph J. Porfeli, Edward J.
Sarkisian and Kent M. Klineman, filed April 29, 1997.
2. Wallace v. EIS International, Inc., Joseph J. Porfeli, Edward J. Sarkisian,
Harry Peisach, and Kent M. Klineman, filed May 21, 1997.
3. Augenbaum v. EIS International, Inc., Joseph Porfeli, Edward J.
Sarkisian, Kent M. Klineman, Robert Jesurum and Herbert Balzuweit,
filed May 23, 1997.
4. Romano, et. al, v. EIS International, Inc., Joseph J. Porfeli, Edward J.
Sarkisian, and Kent M. Klineman, filed June 4, 1997.
5. Dechter v. EIS International, Inc., Joseph J. Porfeli, Edward J. Sarkisian,
Kent M. Klineman and Harry Peisach, filed June 17, 1997.
These lawsuits have been consolidated and a consolidated and amended class
action complaint was filed on April 29, 1998. The Company 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. On July 30, 1998, the plaintiffs filed an
opposition to EIS' motion to dismiss the suit. Upon completion of EIS' reply to
the plaintiffs' opposition, the judge presiding over the case will make a
decision regarding the motion to dismiss the case, although no assurance can be
given as to when a decision will be reached. The Company is currently not able
to estimate the potential damages or costs or a range of potential damages or
costs which may arise out of this case.
EIS is also party to various other legal actions and claims arising in the
ordinary course of its business. The Company 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 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
15
<PAGE>
EIS International, Inc. and Subsidiaries
- -----------------------------------------
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 11 - Statement Re Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None.
16
<PAGE>
EIS International, Inc. and Subsidiaries
- -----------------------------------------
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EIS INTERNATIONAL, INC.
Date: August 14, 1998 By: /s/ James E. McGowan
------------------------- --------------------
James E. McGowan
President and Chief Executive Officer
Date: August 14, 1998 By: /s/ Frederick C. Foley
------------------------- ------------------------
Frederick C. Foley
Senior Vice President, Finance,
Chief Financial Officer and Treasurer
EIS International, Inc. and Subsidiaries
Exhibit 11
Statement Re Computation of Per Share Earnings
(In thousands, except for per share amounts)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------------- ---------------------
1997 1998 1997 1998
------- -------- -------- ------
<S> <C> <C> <C> <C>
Net income (loss) $ 1,359 $ (1,081) $ (2,163) $ (62)
------- -------- -------- -------
Weighted average number of common shares outstanding - Basic: 11,224 11,590 11,179 11,568
Dilutive effect of stock options and warrants 276 --- --- ---
------- -------- -------- -------
Weighted average number of common shares outstanding - Diluted: 11,500 11,590 11,179 11,568
------- -------- -------- -------
Basic income (loss) per share: $ 0.12 $ (0.09) $ (0.19) $ (0.01)
Diluted income (loss) per share: 0.12 (0.09) (0.19) (0.01)
</TABLE>
Note: For the three months ended June 30, 1998 and the first six months of
1997 and 1998, the assumed exercise of stock options and warrants has not
been included in the calculation as they would be anti-dilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 24,016
<SECURITIES> 0
<RECEIVABLES> 15,793
<ALLOWANCES> 3,470
<INVENTORY> 4,598
<CURRENT-ASSETS> 47,573
<PP&E> 7,175
<DEPRECIATION> 10,631
<TOTAL-ASSETS> 63,158
<CURRENT-LIABILITIES> 14,204
<BONDS> 0
0
0
<COMMON> 117
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 63,158
<SALES> 32,319
<TOTAL-REVENUES> 32,319
<CGS> 13,348
<TOTAL-COSTS> 32,485
<OTHER-EXPENSES> 543
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (50)
<INCOME-TAX> 12
<INCOME-CONTINUING> (62)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (62)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
