<PAGE>
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 March 31, 1999
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 April 20, 1999: 10,914,360 shares.
-1-
<PAGE>
EIS INTERNATIONAL, INC. and SUBSIDIARIES
INDEX to Financial Statements Filed with Quarterly
Report of Registrant on Form 10-Q for the
Quarter Ended March 31, 1999
(Unaudited)
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements: Page
----
<S> <C>
Unaudited Consolidated Balance Sheets as of December 31, 1998
and March 31, 1999 3
Unaudited Consolidated Statements of Operations
for the three months ended March 31, 1998 and 1999 4
Unaudited Consolidated Statements of Cash Flows
for the three months ended March 31, 1998 and 1999 5
Notes to Consolidated Financial Statements
(unaudited) 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
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 17
Item 5. Other Information Not Applicable
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
-2-
<PAGE>
EIS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except per share amount)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------ ------------
Assets (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 28,194 $ 25,975
Accounts receivable, trade, less allowances for doubtful accounts
and sales returns of $3,513 in 1998 and $3,042 in 1999 8,727 11,422
Current portion of installment and lease receivables 857 845
Inventories 3,751 3,947
Current deferred income taxes 2,446 2,029
Prepaids and other current assets 922 1,112
Refundable income taxes 200 353
------------ ------------
Total current assets 45,097 45,683
Capitalized software development costs, net 4,454 4,148
Property and equipment, net 5,896 5,235
Installment and lease receivables, less current portion 402 424
Deferred income taxes 1,421 1,421
Other assets 429 300
------------ ------------
------------ ------------
Total assets $ 57,699 $ 57,211
------------ ------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 9,487 $ 8,519
Deferred revenue 3,058 3,589
------------ ------------
Total current liabilities 12,545 12,108
Commitments and Contingencies
Stockholders' equity
Common Stock, $.01 par value, 15,000,000
shares authorized, issued 11,734,585 shares
in 1998 and 1999 117 117
Additional paid-in capital 60,672 60,672
Accumulated other comprehensive deficit (287) (273)
Retained deficit (13,640) (13,017)
Treasury stock, at cost - 512,725 shares in 1998 and
820,225 in 1999 (1,708) (2,396)
------------ ------------
Total stockholders' equity 45,154 45,103
------------ ------------
Total liabilities and stockholders' equity $ 57,699 $ 57,211
------------ ------------
</TABLE>
See accompanying notes to unaudited 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
Ended March 31,
-------------------------
1998 1999
----------- ------------
<S> <C> <C>
Net revenues:
Product and software $ 11,607 $ 7,328
Service and other 6,495 6,134
----------- ------------
18,102 13,462
----------- ------------
Cost of revenues:
Cost of product and software sold 4,550 3,656
Recovery of provision for contract losses (886) (250)
Cost of service and other 3,390 2,896
----------- ------------
7,054 6,302
----------- ------------
Gross margin 11,048 7,160
----------- ------------
Operating cost and expense:
Research and development 2,553 1,947
Sales, general and adminstrative 7,147 4,506
----------- ------------
9,700 6,453
----------- ------------
Operating income 1,348 707
Other income, net 331 333
----------- ------------
Income before income tax expense 1,679 1,040
Income tax expense (660) (417)
----------- ------------
----------- ------------
Net income $ 1,019 $ 623
----------- ------------
Basic income per share: $ 0.09 $ 0.06
Diluted income per share: 0.09 0.06
Weighted average common and common equivalent shares:
Basic 11,546 10,874
Diluted 11,809 10,922
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-4-
<PAGE>
EIS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-------------------------
1998 1999
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,019 $ 623
Adjustments to reconcile net income to
net cash from operating activities:
Provision for doubtful accounts and sales returns 359 969
Recovery of provision for contract losses (886) (250)
Depreciation and amortization 1,732 1,513
Deferred income taxes 556 417
Change in assets and liabilities:
Accounts receivable, trade (4,303) (3,664)
Installment and lease receivables 306 (10)
Inventories 164 (196)
Refundable income taxes 10 (153)
Accounts payable and accrued liabilities (1,539) (718)
Deferred revenue 1,630 531
Other (93) (183)
----------- ------------
Net cash used in operations (1,045) (1,121)
Cash flows from investing activities:
Additions to property and equipment (1,038) (214)
Sale of short-term investments 2,332 --
Capitalized software development costs (467) (196)
----------- ------------
Net cash provided by (used in) investing activities 827 (410)
----------- ------------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants 8 --
Purchase of treasury stock -- (688)
----------- ------------
Net cash provided by (used in) financing activities 8 (688)
----------- ------------
Net decrease in cash and cash equivalents (210) (2,219)
Cash and cash equivalents at beginning of period 22,525 28,194
----------- ------------
----------- ------------
Cash and cash equivalents at end of period $ 22,315 $25,975
----------- ------------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 15 $ 14
Income taxes -- 173
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-5-
<PAGE>
EIS International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(1) Basis of Presentation
The unaudited consolidated financial statements 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 the
Company's Annual Report on Form 10-K for the year ended December 31, 1998. 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 the Company's financial position and
results of operations. The results of operations for the three month period
ended March 31, 1999, 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 International,
Inc. and its wholly owned subsidiaries ("EIS" or the "Company"). All significant
intercompany balances and transactions have been eliminated in consolidation.
(3) New Pronouncements
In March 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 is effective for
fiscal years beginning after December 15, 1998. The adoption of SOP 98-1 did not
have an impact on the Company's financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for all quarters of all
fiscal years beginning after June 15, 1999. EIS believes that SFAS No. 133 will
not have an impact on its financial statements.
In December 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position 98-9, "Modifications of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions" ("SOP 98-9"). SOP 98-9 is
effective for all transactions entered into in fiscal years beginning after
March 15, 1999. The adoption of SOP 98-9 is not expected to have a material
impact on the Company's financial statements.
(4) Comprehensive Income
The schedule below reflects consolidated comprehensive income for the periods
ended March 31, 1998 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
----------------------------
1998 1999
-------------- -------------
<S> <C> <C>
Net income $ 1,019 $ 623
Other comprehensive income:
Foreign currency translation adjustment 124 14
-------------- -------------
Comprehensive income $ 1,143 $ 637
-------------- -------------
</TABLE>
EIS has not recognized a tax effect relating to the accumulated foreign currency
translation deficit since EIS is not expected to realize any tax benefit in the
foreseeable future.
-6-
<PAGE>
EIS International, Inc. and Subsidiaries
(5) Earnings Per Share
Earnings per share is determined by dividing net income by the weighted average
number of shares of common stock outstanding during the period. For the three
months ended March 31, 1998 and 1999, the computation of diluted earnings per
share includes the assumed exercise of dilutive stock options and warrants.
A reconciliation of the numerators and denominators of the basic and diluted EPS
for the quarters ended March 31, 1998 and 1999, is provided below (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
FOR THE QUARTERS
ENDED MARCH 31,
-------------------------
1998 1999
------------ ------------
<S> <C> <C>
Numerator
- -----------------------------------------------
Net income $ 1,019 $ 623
------------ ------------
DENOMINATOR
- -----------------------------------------------
BASIC
Weighted average shares outstanding 11,546 10,874
DILUTED
Dilutive effect of stock options and warrants 263 48
------------ ------------
------------ ------------
11,809 10,922
------------ ------------
EPS
- -----------------------------------------------
Basic $ 0.09 $ 0.06
Diluted 0.09 0.06
</TABLE>
There were 1,171,466 and 1,134,160 stock options excluded from the calculation
for the quarters ended March 31, 1998 and 1999, respectively, since the exercise
price of such stock options was above the average fair market value of EIS'
stock during each respective period.
(6) 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 $1.1 million
of costs associated with the Year 2000 Product Plan. No costs were incurred
prior to 1998. The Year 2000 Product Plan was substantially complete by the
end of February 1999. There were no significant additional costs incurred
during the first quarter of 1999.
EIS has announced that its Call Processing System(TM), EIS Gateway(TM),
Outbound Call Manager (on certain hardware platforms), SmartAgent
Manager(TM), System 7000, and Centenium(R) products are Year 2000 compliant.
The current Year 2000 compliant release of EIS' Centenium software also
incorporates other new features, and EIS is in the process of assisting
customers with upgrade, training, installation and support efforts associated
with this new release. 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.
-7-
<PAGE>
EIS International, Inc. and Subsidiaries
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, whose failure 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.
(7) Recovery of Provision for Contract Losses
The recovery of provision for contract losses of $886,000 and $250,000 included
in the accompanying unaudited consolidated statement of operations for the three
months ended March 31, 1998 and 1999, respectively, 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 Systems International
Corp. ("Cybernetics"). During the first quarter of 1998, Cybernetics completed
work on certain contracts and resolved other contract obligations with certain
of its customers that resulted in the recovery of the provision for contract
losses during that period. During the first quarter of 1999, Cybernetics
resolved certain other remaining contract obligations that resulted in the
recovery of the provision for contract losses during that period. There was no
accrual remaining for these losses as of March 31, 1999.
-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 the Company's financial
position, business strategy and plans, objectives for future operations,
technical developments, Year 2000 compliance, 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 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" both in the Company's Annual Report on Form 10-K for the year ending
December 31, 1998 and in this Quarterly Report on Form 10-Q. 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 March 31,
------------------------------------------
1998 1999
-------------------- --------------------
$ % $ %
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Product and software sales 11,607 64.1 7,328 54.4
Service and other 6,495 35.9 6,134 45.6
---------- -------- ---------- --------
Net revenues 18,102 100.0 13,462 100.0
---------- -------- ---------- --------
Cost of product and software sold 4,550 39.2 3,656 49.9
Recovery of provision for contract losses (886) --- (250) ---
Cost of service and other 3,390 52.2 2,896 47.2
---------- -------- ---------- --------
Gross margin 11,048 61.0 7,160 53.2
---------- -------- ---------- --------
Research and development cost 2,553 14.1 1,947 14.5
Sales, general and administrative 7,147 39.5 4,506 33.5
---------- -------- ---------- --------
Operating income 1,348 7.4 707 5.3
Other income, net 331 1.8 333 2.5
---------- -------- ---------- --------
Income before income tax expense 1,679 9.3 1,040 7.7
Income tax expense (660) (3.6) (417) (3.1)
---------- -------- ---------- --------
---------- -------- ---------- --------
Net income 1,019 5.6 623 4.6
---------- -------- ---------- --------
</TABLE>
-9-
<PAGE>
EIS International, Inc. and Subsidiaries
Net Revenues
Net revenues of $13.5 million in the first quarter ended March 31, 1999,
decreased $4.6 million (25%) from $18.1 million in the first quarter ended March
31, 1998. Product and software sales revenues of $7.3 million in the first
quarter ended March 31, 1999, decreased $4.3 million (37%) from $11.6 million of
such revenue in the first quarter ended March 31, 1998. 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 reduced demand. Also
contributing to the decrease in product and software revenue was the closure of
Cybernetics on June 30, 1998. This action, necessary to eliminate ongoing
operating losses attributable to Cybernetics, resulted in a $119,000 decrease in
product and software revenue during the first quarter of 1999 as compared to the
first quarter of 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. During the first quarter of 1999,
product and software revenue of $7.3 million increased $600,000 (9%) over
product and software revenue of $6.7 million during the fourth quarter of 1998.
However, no assurance can be given that these actions will continue to result in
the stabilization or increase of product and software revenue.
Service and other revenue of $6.1 million in the first quarter ended March 31,
1999 decreased $400,000 (6%) from $6.5 million in the same period in 1998. The
decrease in service and other revenues was primarily due to the closure of
Cybernetics, as discussed above, which resulted in a decrease of $305,000 in
service and other revenues during the first quarter of 1999 as compared to the
first quarter of 1998.
Cost of Revenues and Gross Margins
Total gross margin was $7.2 million (53.2%) in the first quarter of 1999,
compared to $11.0 million (61.0%) in the first quarter of 1998. The gross
margin as a percentage of net revenues includes a recovery of provision for
contract losses of $886,000 and $250,000 in the first quarters of 1998 and
1999, respectively. This recovery 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
quarter of 1998, Cybernetics completed work on certain contracts and resolved
other contract obligations with certain of its customers that resulted in the
recovery of the provision for contract losses during that period. During the
first quarter of 1999, Cybernetics resolved certain other remaining contract
obligations that resulted in the recovery of the provision for contract
losses during that period. There was no accrual remaining for these losses as
of March 31, 1999.
Gross margin on product and software sales was $3.7 million (50.1%) in the first
quarter of 1999, compared to $7.1 million (60.8%) in the first quarter of 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 a higher volume of hardware
upgrade sales at lower margins during the first quarter of 1999 as compared to
the same 1998 period. These upgrades are being sold to customers in connection
with EIS' Year 2000 Product Plan to provide Year 2000 upgrades (see "Year 2000
Issues" below). The gross margin percentage was also affected by an increase of
$156,000 in amortization of capitalized software development costs to $502,000
(7% of product and software sales) during the first quarter of 1999 as compared
to $346,000 (3% of product and software sales) during the same 1998 period. The
increase during the first quarter of 1999, as compared to the first quarter of
1998, was due to the commencement of amortization of a major Centenium release
toward the end of 1998, resulting in a full quarter of amortization expense in
the first quarter of 1999 for this release.
Gross margin on service and other revenue was $3.2 million (52.8%) in the first
quarter of 1999, compared to $3.1 million (47.8%) in the first quarter of 1998.
The improvement in the gross margin percentage on service and other revenue was
primarily due to staffing reductions implemented during the second half of 1998
(see "Sales, General and Administrative Expenses" below for additional
comments). In addition, the cost of supplying parts under EIS customer
maintenance agreements decreased as a result of management's efforts to improve
this operation.
-10-
<PAGE>
EIS International, Inc. and Subsidiaries
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 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 net revenues were
14.5% in the first quarter of 1999 as compared to 14.1% of net revenues in the
first quarter of 1998. R&D costs decreased $700,000 to $1.9 million in the first
quarter of 1999 from $2.6 million in the same period in 1998. This decrease was
primarily due to a 30% reduction in the number of R&D employees during the first
quarter of 1999 as compared to the same 1998 period (see "Sales, General and
Administrative Expenses" below for additional comments), and the closure of
Cybernetics as discussed above. These decreases were partially offset by a
decrease of $271,000 in capitalized software development costs to $196,000
during the first quarter of 1999 from $467,000 during the same 1998 period. The
decrease in capitalized software development costs during the first quarter of
1999 as compared to the same 1998 period was due to a shift in R&D resources
directed towards R&D activities that did not qualify for capitalization under
Statement of Financial Accounting Standards No. 86 "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed."
EIS is committed to technological innovation. It believes that additional
research and development costs will be required to maintain its market position
and that these costs may increase in absolute amounts during the remainder of
1999 and thereafter.
Sales, General and Administrative Expense
Sales, general and administrative expense decreased $2.6 million to $4.5 million
in the first quarter of 1999 from $7.1 million in the first quarter of 1998.
This decrease was primarily due to a 50% reduction in the number of sales
employees during the first quarter of 1999 as compared to the same 1998 period,
as well as staffing reductions in marketing and administration. During the
second half of 1998, EIS took action to cut expenses in response to the decline
in revenue during 1998. These actions included staffing reductions in all areas
of EIS and other expense control measures designed to significantly reduce
expenses commensurate with revenue trends during 1998 and continuing into 1999.
Other Income, Net
Other income, net is comprised primarily of interest income from the investment
of excess cash and cash equivalents, along with interest generated from EIS'
portfolio of leases. Other income, net was virtually unchanged at $333,000 and
$331,000 in the first quarters of 1999 and 1998, respectively.
Income Taxes
The Company's effective income tax expense rate was 40.0% during the first
quarter of 1999 and 39.3% in the first quarter of 1998. The increase in the
effective tax rate was attributable to several items that impact the overall
effective tax rate, including levels of income and loss and the related
statutory tax rates domestically and internationally, in addition to the extent
of permanent differences, such as a 50% disallowance of certain meals and
entertainment expenses.
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 $1.1 million of costs
associated with the Year 2000 Product Plan. No costs were
-11-
<PAGE>
EIS International, Inc. and Subsidiaries
incurred prior to 1998. The Year 2000 Product Plan was substantially complete by
the end of February 1999. There were no significant additional costs incurred
during the first quarter of 1999.
EIS has announced that its Call Processing System(TM), EIS Gateway(TM),
Outbound Call Manager (on certain hardware platforms), SmartAgent
Manager(TM), System 7000, and Centenium(R) products are Year 2000 compliant.
The current Year 2000 compliant release of EIS' Centenium software also
incorporates other new features, and EIS is in the process of assisting
customers with upgrade, training, installation and support efforts associated
with this new release. 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, whose failure 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.
New Pronouncements
In March 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 is effective for
fiscal years beginning after December 15, 1998. The adoption of SOP 98-1 did not
have an impact on the Company's financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for all quarters of all
fiscal years beginning after June 15, 1999. EIS believes that SFAS No. 133 will
not have an impact on its financial statements.
In December 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position 98-9, "Modifications of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions" ("SOP 98-9"). SOP 98-9 is
effective for all transactions entered into in fiscal years beginning after
March 15, 1999. The adoption of SOP 98-9 is not expected to have a material
impact on the Company's financial statements.
Liquidity and Capital Resources
EIS' working capital increased to $33.6 million at March 31, 1999 from $32.6
million at December 31, 1998. Cash and cash equivalents balances decreased $2.2
million to $26.0 million at March 31, 1999 from $28.2 million at December 31,
1998. The decrease in cash and cash equivalents primarily resulted from the $3.6
million increase in accounts receivable as reflected in the accompanying
consolidated statements of cash flows. The increase in accounts receivable was
primarily attributable to billings for annual maintenance contracts during the
first quarter of 1999 that tend to have a longer collection cycle, in addition
to the timing of payments by certain other customers. Net cash of $410,000 used
in investing activities during the first quarter of 1999 was incurred for
ongoing purchases of computer and other property and equipment and capitalized
software development costs. Net cash used in financing activities of $688,000
-12-
<PAGE>
EIS International, Inc. and Subsidiaries
resulted from cash used to buy back 307,500 shares of EIS common stock into
treasury. On October 1, 1998, EIS announced that its Board of Directors
authorized the repurchase of up to two million shares of the Company's common
stock in the open market subject to certain share price and other guidelines.
Since October 1, 1998, EIS has repurchased a total of 719,000 shares into
treasury and plans to continue this program subject to the guidelines discussed
above.
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 March 31,
1999, 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.
EIS expects that its current cash and cash equivalents balances, 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 any remaining Year
2000-compliance costs) for the foreseeable future. However, EIS' ability to
achieve that result will be affected by the amount of cash generated from
operations and the pace at which 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 under Part II Item 1 - "Legal
Proceedings." EIS currently is 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 Part II
Item 1 - "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.
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:
- - 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.
- - 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,
-13-
<PAGE>
EIS International, Inc. and Subsidiaries
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.
- - 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.
- - 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.
- - 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. 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.
- - 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.
- - 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.
- - 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
-14-
<PAGE>
EIS International, Inc. and Subsidiaries
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.
- - 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.
- - As of March 31, 1999, EIS had net deferred tax assets totaling $3.5
million. Based upon the level of historical taxable income and
projections for future taxable income 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 March 31, 1999. 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.
Item 3. 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.
-15-
<PAGE>
EIS International, Inc. and Subsidiaries
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
EIS and certain current and former officers of EIS were named as defendants in
five securities lawsuits, each of which was 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, oral arguments have been presented, and a decision by the
court is pending, although no assurance can be given as to when a decision will
be reached. EIS currently is 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 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
-16-
<PAGE>
EIS International, Inc. and Subsidiaries
Item 4. Submission of Matters to a Vote of Security Holders.
The Company's Annual Meeting of Stockholders was held on May 5, 1999. The
results of voting at this meeting are provided below:
<TABLE>
<CAPTION>
BROKER
ELECTION OF DIRECTORS FOR WITHHELD NON-VOTES
- -------------------------------------------------- ------------- -------------- -------------
<S> <C> <C> <C>
Robert M. Jesurum 9,813,642 230,471 --
Charles W. McCall 9,813,642 230,471 --
John F. Burton 9,813,642 230,471 --
Peter B. Foreman 9,813,642 230,471 --
</TABLE>
<TABLE>
<CAPTION>
ITEM FOR AGAINST ABSTAIN NON-VOTES
- -------------------------------------------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Approval of Amendments to the EIS 1993 Stock
Option Plan for Non-Employee Directors 8,872,789 1,105,791 15,891 49,642
Ratification of Independent Accountants 9,901,818 129,065 13,230 --
</TABLE>
The following directors continue to serve their respective terms: Kent M.
Klineman, James E. McGowan, and Robert J. Cresci.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None.
-17-
<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: May 14, 1999 By: /s/ James E. McGowan
-----------------------------------
James E. McGowan
President and Chief Executive Officer
Date: May 14, 1999 By: /s/ Frederick C. Foley
-----------------------------------
Frederick C. Foley
Senior Vice President, Finance,
Chief Financial Officer and Treasurer
-18-
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