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 September 30, 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 October
15, 1999: 10,593,869 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 September 30, 1999
(Unaudited)
PART I. FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Financial Statements: Page
----
Unaudited Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998 3
Unaudited Consolidated Statements of Operations
for the three and nine months ended September 30, 1999 and 1998 4
Unaudited Consolidated Statements of Cash Flows
for the nine months ended September 30, 1999 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 9-16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
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 18
Signatures 19
</TABLE>
2
<PAGE>
EIS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 21,674 $ 28,194
Short-term investments 6,920 -
Accounts receivable, trade, less allowances for doubtful accounts
and sales returns of $3,031 in 1999 and $3,513 in 1998 10,344 8,727
Current portion of installment and lease receivables 769 857
Inventories 3,630 3,751
Deferred income taxes 1,223 2,446
Prepaids and other current assets 1,096 922
Refundable income taxes 230 200
-------- --------
Total current assets 45,886 45,097
Capitalized software development costs, net 3,663 4,454
Property and equipment, net 4,171 5,896
Installment and lease receivables, less current portion 287 402
Deferred income taxes 1,421 1,421
Other assets 115 429
-------- --------
Total assets $ 55,543 $ 57,699
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 7,696 $ 9,487
Deferred revenue 2,593 3,058
-------- --------
Total current liabilities 10,289 12,545
Commitments and Contingencies
Stockholders' equity:
Common Stock, $.01 par value, 15,000,000
shares authorized, issued 11,759,212 shares
in 1999 and 11,734,585 shares in 1998 118 117
Additional paid-in capital 60,738 60,672
Accumulated translation adjustments (295) (287)
Retained deficit (11,831) (13,640)
Treasury stock, at cost - 1,165,343 in 1999
and 512,725 shares in 1998 (3,476) (1,708)
-------- --------
Total stockholders' equity 45,254 45,154
-------- --------
Total liabilities and stockholders' equity $ 55,543 $ 57,699
======== ========
</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 Nine Months
Ended September 30, Ended September 30,
-------------------- ---------------------
1999 1998 1999 1998
------- ------- ------- --------
<S> <C> <C> <C> <C>
Net revenues:
Product and software $ 6,675 $ 7,029 $21,901 $ 26,066
Service and other 5,603 6,321 17,698 19,603
------- ------- ------- --------
12,278 13,350 39,599 45,669
Cost of revenues:
Cost of product and software sold 3,558 3,822 10,940 11,997
Recovery of provision for contract losses - - (250) (1,636)
Cost of service and other 2,483 3,611 8,308 10,420
------- ------- ------- --------
6,041 7,433 18,998 20,781
------- ------- ------- --------
Gross margin 6,237 5,917 20,601 24,888
------- ------- ------- --------
Operating cost and expense:
Research and development cost 1,835 2,282 5,649 7,361
Selling, general, and administrative 4,065 6,040 13,002 20,098
Restructuring costs - - - 543
------- ------- ------- --------
5,900 8,322 18,651 28,002
------- ------- ------- --------
Operating income (loss) 337 (2,405) 1,950 (3,114)
Other income, net: 373 324 1,082 983
------- ------- ------- --------
Income (loss) before income taxes 710 (2,081) 3,032 (2,131)
Income tax expense (284) (4) (1,223) (16)
------- ------- ------- --------
Net income (loss) $ 426 $(2,085) $ 1,809 $ (2,147)
======= ======= ======= ========
Basic earnings (loss) per share: $ 0.04 $ (0.18) $ 0.17 $ (0.19)
Diluted earnings (loss) per share: 0.04 (0.18) 0.17 (0.19)
Weighted average common and common equivalent shares:
Basic 10,599 11,633 10,746 11,589
Diluted 10,744 11,633 10,859 11,589
</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>
Nine Months
Ended September 30,
------------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,809 $ (2,147)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Provision for doubtful accounts and
sales returns 2,477 2,789
Recovery of provision for contract losses (250) (1,636)
Depreciation and amortization 4,237 5,248
Deferred income taxes 1,223 -
Changes in assets and liabilities:
Accounts receivable, trade (4,094) (1,288)
Proceeds from sale of lease receivables - 745
Installment and lease receivables 203 651
Inventories 121 824
Prepaids and other current assets (30) 94
Accounts payable and accrued expenses (1,541) (5,387)
Deferred revenue (465) 142
Other (186) (192)
-------- --------
Net cash provided by (used in) operating activities 3,504 (157)
-------- --------
Cash flows from investing activities:
Additions to property and equipment (688) (2,271)
Purchase of short-term investments (6,920) -
Sales of short-term investments - 2,332
Capitalization of software development costs (715) (1,617)
-------- --------
Net cash used in investing activities (8,323) (1,556)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants 67 315
Purchase of treasury stock (1,768) -
-------- --------
Net cash provided by (used in) financing activities (1,701) 315
-------- --------
Net decrease in cash and cash equivalents (6,520) (1,398)
Cash and cash equivalents at beginning of period 28,194 22,525
-------- --------
Cash and cash equivalents at end of period $ 21,674 $ 21,127
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 38 $ 68
Income taxes 217 362
</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 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- and nine-month
periods ended September 30, 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 and
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.
(3) New Accounting Pronouncements
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 (loss) for the
three- and nine-month periods ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------- -----------------------
1999 1998 1999 1998
----- -------- ------- --------
<S> <C> <C> <C> <C>
Net income (loss) $ 426 $ (2,085) $ 1,809 $ (2,147)
Other comprehensive income (loss):
Foreign currency translation adjustment (55) (256) (8) (149)
----- -------- ------- --------
Comprehensive income (loss) $ 371 $ (2,341) $ 1,801 $ (2,296)
===== ======== ======= ========
</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 (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- and nine-month periods ended September 30, 1999, the
computation of diluted earnings per share include the assumed exercise of
dilutive stock options and warrants. For the three- and nine-month periods ended
September 30, 1998, the assumed exercise of stock options and warrants has not
been included in the calculation as they would be anti-dilutive.
A reconciliation of the numerators and denominators of the basic and diluted EPS
for three- and nine-month periods ended September 30, 1999 and 1998, is provided
below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------ -------------------------
1999 1998 1999 1998
------ -------- ------- --------
<S> <C> <C> <C> <C>
Numerator
- --------------------------------------------------
Net income $ 426 $ (2,085) $ 1,809 $ (2,147)
====== ======== ======= ========
Denominator
- --------------------------------------------------
Basic
Weighted average shares outstanding 10,599 11,633 10,746 11,589
Diluted
Dilutive effect of stock options and warrants 145 - 113 -
------ -------- ------- --------
10,744 11,633 10,859 11,589
====== ======== ======= ========
EPS
- --------------------------------------------------
Basic $ 0.04 $ (0.18) $ 0.17 $ (0.19)
Diluted 0.04 (0.18) 0.17 (0.19)
</TABLE>
There were 1,001,085 stock options excluded from the calculation for the three-
and nine-month periods ended September 30, 1999. These stock options were
excluded 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 have been affected in some manner by Year 2000
issues. EIS has developed and implemented a plan (the "Year 2000 Product Plan")
to make necessary modifications to its products. 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 nine months 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 continuing 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 has taken steps to notify its customers
about scheduling these upgrades. EIS no longer expects 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 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, telecommunications, and desktop applications
and systems, 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 an 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 is continuing to prepare its contingency plans that
include, among other things, manual "work-arounds" in the event of
mission-critical software and hardware failures, as well as substitution of
systems, if necessary. EIS also plans to have key technical employees available
during the first few weeks of January 2000.
(7) Recovery of Provision for Contract Losses
The recovery of provision for contract losses of $250,000 and $1.6 million for
the nine-month periods ended September 30, 1999 and 1998, 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 six months 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. Finally, during the
first six months of 1999, EIS resolved certain other remaining contract
obligations of Cybernetics that resulted in the recovery of provision for
contract losses during that period. There was no accrual remaining for these
losses as of September 30, 1999.
(8) Restructuring
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 during
the second quarter of 1998, comprised of $350,000 of severance and $193,000 of
facilities, fixed asset disposal, and other costs. There was no accrual
remaining for these restructuring charges as of September 30, 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 is 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 limitation,
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 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 revenue and service and other revenues,
respectively.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------- --------------------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
$ % $ % $ % $ %
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Product and software revenue 6,675 54.4 7,029 52.7 21,901 55.3 26,066 57.1
Service and other 5,603 45.6 6,321 47.3 17,698 44.7 19,603 42.9
------ ----- ------ ----- ------ ----- ------ -----
Net revenues 12,278 100.0 13,350 100.0 39,599 100.0 45,669 100.0
------ ----- ------ ----- ------ ----- ------ -----
Cost of product and software sold 3,558 53.3 3,822 54.4 10,940 50.0 11,997 46.0
Recovery of provision for contract losses --- --- --- --- (250) --- (1,636) ---
Cost of service and other 2,483 44.3 3,611 57.1 8,308 46.9 10,420 53.2
------ ----- ------ ----- ------ ----- ------ -----
Gross margin 6,237 50.8 5,917 44.3 20,601 52.0 24,888 54.5
------ ----- ------ ----- ------ ----- ------ -----
Research and development cost 1,835 14.9 2,282 17.1 5,649 14.3 7,361 16.1
Sales, general and administrative 4,065 33.1 6,040 45.2 13,002 32.8 20,098 44.0
Restructuring costs --- --- --- --- --- --- 543 1.2
------ ----- ------ ----- ------ ----- ------ -----
Operating income (loss) 337 2.7 (2,405) (18.0) 1,950 4.9 (3,114) (6.8)
Other income, net 373 3.0 324 2.4 1,082 2.7 983 2.2
------ ----- ------ ----- ------ ----- ------ -----
Income (loss) before income tax
benefit (expense) 710 5.8 (2,081) (15.6) 3,032 7.7 (2,131) (4.7)
Income tax benefit (expense) (284) (2.3) (4) (0.0) (1,223) (3.1) (16) (0.0)
------ ----- ------ ----- ------ ----- ------ -----
Net income (loss) 426 3.5 (2,085) (15.6) 1,809 4.6 (2,147) (4.7)
------ ----- ------ ----- ------ ----- ------ -----
====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
Net Revenues
Net revenues of $12.3 million in the third quarter of 1999 decreased $1.1
million (8%) from $13.4 million in the third quarter of 1998. Net revenues of
$39.6 million in the first nine months of 1999 decreased $6.1 million (13%) from
9
<PAGE>
EIS International, Inc. and Subsidiaries
- ----------------------------------------
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
$45.7 million in the first nine months of 1998. The decline in net revenues for
each period was caused by a decline in both product and software revenue, and
service and other revenue.
Product and software revenue of $6.7 million in the third quarter of 1999
decreased $354,000 (5%) from $7.0 million in the third quarter of 1998. Product
and software revenue of $21.9 million in the first nine months of 1999 decreased
$4.2 million (16%) from $26.1 million in the first nine months of 1998. The
decrease in product and software revenue is primarily a result of slow demand
from new customers and EIS' outbound telemarketing service bureau customers
during both 1999 periods, as compared to the same periods in 1998. Outbound
telemarketing service bureaus represent the largest portion of EIS' core
business customers.
During the three- and nine-month periods ended September 30, 1999, approximately
42% and 33%, respectively, of EIS' product and software revenue was attributable
to software and hardware upgrades. Those upgrades were primarily driven by the
need for customers to upgrade their EIS systems to become Year 2000 compliant.
EIS has taken and is continuing to take actions with respect to its domestic and
international sales, product development, and marketing activities to stabilize
and increase product and software revenue, and to replace the revenue currently
being generated by Year 2000 upgrades. However, no assurance can be given that
these actions will result in the stabilization or increase of product revenue.
Service and other revenue of $5.6 million in the third quarter of 1999 decreased
$718,000 (11%) from $6.3 million in the third quarter of 1998. Service and other
revenue of $17.7 million in the first nine months of 1999 decreased $1.9 million
(10%) from $19.6 million in the first nine months of 1998. Service and other
revenues decreased primarily due to a decline in revenue generated from
maintenance service contracts and an increase in EIS' service returns and
allowances, which reduce gross revenue in arriving at net revenue. EIS believes
the decline in maintenance service revenue is partially due to cost cutting
measures by customers operating in a highly competitive teleservices
environment, along with alternative purchasing decisions customers are making as
a result of the need to become Year 2000 compliant. The increase in EIS' service
returns and allowances was primarily due to charges recorded during the first
nine months of 1999 associated with the resolution of certain maintenance
service contract disputes with certain customers.
Gross Margin and Cost of Revenues
Total gross margin was $6.2 million (51.0%) in the third quarter of 1999,
compared to $5.9 million (44.3%) in the third quarter of 1998, and $20.6 million
(52.0%) for the first nine months of 1999, compared to $24.9 million (54.5%) for
the first nine months of 1998. Included in the total gross margin during the
nine-month periods ended September 30, 1999 and 1998 was the recovery of
provision for contract losses of $250,000 and $1.6 million, respectively. 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 nine
months 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 nine months of 1999, EIS resolved certain other remaining contract
obligations of Cybernetics that resulted in the recovery of the provision for
contract losses during that period. There was no accrual remaining for these
losses as of September 30, 1999.
Gross margin on product and software sales was $3.1 million (46.7%) in the third
quarter of 1999, compared to $3.2 million (45.6%) in the third quarter of 1998.
The gross margin dollars and gross margin as a percentage of revenue were
relatively constant when comparing the third quarter of 1999 to the same 1998
period. During the 1999 period, decreased staffing and related costs associated
with assembly, shipping, and installation of EIS product and software were
offset by increases in product material costs. Direct product material costs
were five percentage points higher during the third quarter of 1999 as compared
to the same 1998 period. The percentage increase in direct product material
costs was affected by ongoing hardware upgrade sales at lower margins. 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). Amortization
of software development costs of $502,000 during the third quarter of 1999
decreased by
10
<PAGE>
EIS International, Inc. and Subsidiaries
- ----------------------------------------
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
$102,000 as compared to $604,000 during the same 1998 period. The amortization
during the 1998 period was higher due to the final quarter of amortization of an
earlier major release of EIS' Centenium product.
Gross margin on product and software sales was $11.0 million (50.0%) in the
first nine months of 1999, compared to $14.1 million (54.0%) in the first nine
months 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 during the first nine months of 1999 was
primarily caused by a five-percentage point increase in direct product costs as
discussed above, and an increase in amortization of software development costs.
These costs were only partially offset by decreased staffing and related costs
associated with assembly, shipping, and installation of EIS product and
software. Amortization of software development costs of $1.5 million during the
first nine months of 1999, increased by $210,000 as compared to the $1.3 million
incurred during the same period in 1998. This increase was due to the
commencement of amortization of a major Centenium release toward the end of
1998, resulting in a full nine months of amortization expense during the first
nine months of 1999 related to this release.
Gross margin on service and other revenue was $3.1 million (55.7%) in the third
quarter of 1999, compared to $2.7 million (42.9%) in the third quarter of 1998,
and $9.4 million (53.1%) in the first nine months of 1999, compared to $9.2
million (46.8%) in the first nine months of 1998. The improvement in the gross
margin dollars and gross margin percentage on service and other revenue was
primarily due to cost savings from staffing reductions implemented during the
second half of 1998 (see "Selling, General and Administrative" below). In
addition, the cost of supplying parts under EIS customer maintenance agreements
continued to decrease as a result of management's 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.
Research and Development Cost
Research and development costs were $1.8 million in the third quarter of 1999
compared to $2.3 million in the third quarter of 1998, and $5.6 million in the
first nine months of 1999 compared to $7.4 million in the first nine months of
1998. The decrease during the three and nine-months ended September 30, 1999,
compared to the same periods in 1998 was primarily due to a decline in salary
and related costs resulting from a decrease of approximately 25% in the number
of research and development employees as of September 30, 1999, as compared to
September 30, 1998 (see "Selling, General and Administrative" below), and the
closure of Cybernetics (see "Restructuring Costs" below). These decreases were
partially offset by a decrease in capitalized software development costs of
$382,000 to $235,000 during the third quarter of 1999 from $617,000 during the
same 1998 period, and a decrease of $902,000 to $715,000 during the first nine
months of 1999, compared to $1.6 million during the same 1998 period. The
decrease in capitalized software development costs during the first three and
nine months of 1999 as compared to the same period in 1998 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, 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
1999 and thereafter.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expense of $4.1 million during the
third quarter of 1999 declined $1.9 million from $6.0 million during the third
quarter of 1998. SG&A expenses of $13.0 million in the first nine months of 1999
declined $7.1 million from $20.1 million in the first nine months of 1998. These
decreases were primarily due to a 26% reduction in the number of SG&A employees
and related costs as of September 30, 1999 as compared to September 30, 1998.
During the second half of 1998, EIS took action to cut expenses in response to
the decline in
11
<PAGE>
EIS International, Inc. and Subsidiaries
- ----------------------------------------
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
revenue during 1998. These actions included staffing reductions in all areas of
EIS operations and other expense control measures designed to reduce expenses
significantly commensurate with revenue trends during 1998 and continuing into
1999.
Restructuring 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 during
the second quarter of 1998, comprised of $350,000 of severance and $193,000 of
facilities, fixed asset disposal, and other costs. There was no accrual
remaining for these restructuring charges as of September 30, 1999.
Interest and Other Income, Net
Interest and other income of $373,000 during the third quarter of 1999 increased
$49,000 from $324,000 during the third quarter of 1998. Interest and other
income of $1.1 million during the first nine months of 1999 increased $99,000
from $983,000 during the first nine months of 1998. These increases in interest
and other income were primarily due to higher average cash and cash equivalent
balances in the first nine months of 1999 as compared to the same period in
1998.
Income Taxes
The Company's effective income tax rate was approximately 40% for the three- and
nine-month periods ended September 30, 1999. Although EIS incurred a pre-tax
loss of $2.1 million during the three- and nine-month periods ended September
30, 1998, a tax expense of $4,000 and $16,000, respectively, was recorded for
foreign taxes arising from certain foreign subsidiaries which were not offset by
benefits recorded domestically. Since the tax benefit of $811,000 recorded
during the third quarter of 1998, using a 39% effective tax rate, was fully
offset by an increase in the valuation allowance on EIS' deferred tax assets,
EIS did not recognize a tax benefit from the losses incurred during the nine
months ended September 30, 1998. As disclosed in Note 7 to EIS' consolidated
financial statements included in its Annual Report on Form 10-K dated December
31, 1998, EIS had established a $7.5 million valuation allowance on its deferred
tax assets. Based on projections for future taxable income, management believes
that the valuation allowance of $7.5 million remains adequate at September 30,
1999. However, this allowance may be increased or decreased depending upon
management's projections for future taxable income or loss, and such increase or
decrease 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 have been affected in some manner by Year 2000
issues. EIS has developed and implemented a plan (the "Year 2000 Product Plan")
to make necessary modifications to its products. 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 nine months 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
12
<PAGE>
EIS International, Inc. and Subsidiaries
- ----------------------------------------
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
release. EIS has begun and is continuing 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 has taken steps to notify its
customers about scheduling these upgrades. EIS no longer expects 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 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, telecommunications, and desktop applications
and systems, 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 an 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 is continuing to prepare its contingency plans that
include, among other things, manual "work-arounds" in the event of
mission-critical software and hardware failures, as well as substitution of
systems, if necessary. EIS also plans to have key technical employees available
during the first few weeks of January 2000.
New Pronouncements
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 was $35.6 million and $32.6 million at September 30, 1999
and December 31, 1998, respectively. Cash, cash equivalents, and short-term
investments were $28.6 million and $28.2 million as of September 30, 1999 and
December 31, 1998, respectively.
As reflected in the accompanying consolidated statements of cash flows,
operating activities generated $3.5 million in cash in the first nine months of
1999 compared to using $157,000 in cash during the first nine months of 1998.
This increase was the result of several factors. The increase was partly due to
the improvement in EIS' results of operations for the first nine months of 1999,
during which EIS generated net income of $1.8 million compared to a $2.1 million
loss during the same period of 1998. Additionally, the decline in cash used for
accounts payable and accrued expenses during the first nine months of 1999 was
$1.5 million, or $3.8 million less than the $5.4 million decrease during the
same period of 1998. This change was primarily due to the fact that expense
levels coming into 1998 were higher, resulting in a higher level of accounts
payable, trade payments in 1998. Offsetting these items was an increase in
accounts receivable, trade of $4.1 million during the first nine months of 1999
as compared to an increase of $1.3 million during the same period of 1998. This
increase was due to higher accounts receivable, trade levels as of September 30,
1999 as compared to December 31, 1998, due to an exceptionally low accounts
receivable days-sales-outstanding ("DSO") of 60 days as of December 31, 1998 as
compared to a more normal DSO of 76 days as of September 30, 1999. This was
primarily caused by the timing of cash receipts from customers at the end of
each respective period.
Net cash used in investing activities was $8.3 million in the first nine months
of 1999 compared to $1.5 million in the first nine months of 1998. Cash used to
purchase short-term investments was $6.9 million during the first nine months
13
<PAGE>
EIS International, Inc. and Subsidiaries
- ----------------------------------------
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
of 1999 compared with sales of short-term investments of $2.3 million during the
same 1998 period. This change was the result of EIS investing its cash and cash
equivalents in longer-term investments during the first nine months of 1999 as
compared to moving towards more liquid investments during the same 1998 period.
Cash used to invest in the purchase of property and equipment was $688,000 for
the first nine months of 1999 and $2.3 million for the first nine months of
1998. This decrease is directly attributable to the decreased need for property
and equipment as a result of the staff reductions discussed under "Selling,
General and Administrative" above. The capitalization of software development
costs decreased to $715,000 from $1.6 million for the same period in 1998. This
decrease is discussed above under "Research and Development Cost."
Net cash used in financing activities was $1.7 million in the first nine months
of 1999 compared to net cash provided by financing activities of $315,000 in the
first nine months of 1998. During the first nine months of 1999, EIS used $1.8
million to buy back 652,618 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. During the period from
October 1, 1998, through September 30, 1999, EIS has repurchased a total of
1,064,118 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 "Loan Agreement"), which amended the terms and conditions under the
previous line of credit. Under that Loan Agreement, EIS could 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 Loan Agreement was
secured by substantially all assets of EIS and expired on September 8, 1999. EIS
has a commitment letter from its bank to renew the Loan Agreement and is
currently negotiating terms of the renewal. There were no amounts outstanding
under the Loan Agreement as of September 30, 1999. Prior to the 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 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:
14
<PAGE>
EIS International, Inc. and Subsidiaries
- ----------------------------------------
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
o A variety of factors influence EIS' net sales in a particular quarter,
including general economic conditions in the call processing industry, the
timing of significant orders, shipment delays, specific feature requests by
customers, the introduction of new products, the introduction of new
products by competitors, acquisitions, production and quality problems,
changes in the cost of materials, disruption in sources of supply, seasonal
patterns of capital spending by customers and other factors, many of which
are beyond EIS' control. Because 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.
o The market for call processing systems is based upon sophisticated
technologies and is subject to rapid technological change. Current or new
competitors may introduce new products, features or services that could
adversely affect EIS' competitive position. To date, EIS' research and
development programs have produced system features and enhancements to
address customer requirements and competitive conditions. However, EIS
believes that to remain competitive it must continue to improve its
products and related services and develop and successfully market new
products and services. The success of any new product depends on a variety
of factors, including product selection, successful and timely completion
of product development and EIS' ability to offer its products at
competitive prices.
o From time to time, EIS may consider strategic acquisitions. Its ability to
succeed with those acquisitions 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.
o EIS' success will depend in part on its ability to obtain and maintain
intellectual property rights including patent protection for its products,
as well as its ability to 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
often have resulted in significant, 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 as do the laws of the United States.
o EIS' digital switches are manufactured, assembled and tested by Kimchuk, an
independent contractor, under an agreement that has been in effect for more
than 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.
15
<PAGE>
EIS International, Inc. and Subsidiaries
- ----------------------------------------
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
o EIS offers lease financing to customers on a limited basis and intends to
continue that practice. In the past, EIS offered leases to entrepreneurial
businesses with limited capitalization, some of which might not be
considered "credit worthy" by financial institutions. EIS has an agreement
with a third-party leasing company to finance certain EIS systems which
provides, among other things, that such leases could be subject to certain
recourse to EIS. EIS may enter into additional agreements with third-party
leasing companies to finance EIS systems, and those agreements may include
recourse arrangements and discounts. In addition, from time to time, EIS
may sell portions of its lease portfolio to third parties on terms that may
include recourse provisions and discounts.
o Certain uses of outbound call processing systems are regulated by federal
and state law, including the Telephone Consumer Protection Act of 1991 and
the Federal Fair Debt Collection Practices Act. Although compliance with
these laws may limit the potential uses of EIS' systems 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 of EIS' systems are
subject to, and conform with, Federal Communications regulations under the
Federal Communications Act of 1934. Future products developed by EIS also
may be subject to compliance with similar or even more restrictive
regulations before they can be sold in the United States. To the extent
that EIS markets its products in foreign countries, it is required to
comply with applicable foreign laws, including certification of those
products by appropriate regulatory organizations.
o The market for call processing systems continues to evolve. EIS' future
financial performance will depend, in part, on the development and
continuing growth of this market. EIS believes that any such growth will
require expansion of current applications of existing customers,
development of new markets for those systems and increased customer
acceptance. A number of factors, including the continuing development of an
already generally negative consumer perception of telephone solicitation,
could adversely impact the growth of various applications segments of this
market.
o EIS' ability to develop marketable products and maintain a competitive
position in light of continuing technological developments will depend, in
large part, on its ability to attract and retain highly qualified
personnel. Competition for the services of those employees is intense.
o As of September 30, 1999, EIS had net deferred tax assets totaling $2.6
million. As disclosed in Note 7 to EIS' consolidated financial statements
included in its Annual Report on Form 10-K dated December 31, 1998, EIS had
established a $7.5 million valuation allowance on its deferred tax assets.
Based on projections for future taxable income, management believes that
the valuation allowance of $7.5 million remains adequate at September 30,
1999. However, this allowance may be increased or decreased depending upon
management's projections for future taxable income or loss, and such
increase or decrease could be material to EIS' financial condition and
results of operations.
Because of these 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 it has any material market risk exposure with respect
to derivative or other financial instruments that would require disclosure under
this item.
16
<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 acquisitions of Surefind and Cybernetics and their operations, each of
which seek damages in an unspecified amount. These lawsuits were 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. On June 15, 1998, EIS and the
other defendants filed a motion to dismiss the case. In a ruling on defendant's
Motion to Dismiss (the "Ruling"), dated October 20, 1999, the Court granted the
motion to dismiss, holding that the plaintiffs had failed to allege with
sufficient particularity the falsity of the individual statements at issue. The
Ruling is without prejudice to plaintiff amending their complaint within 30 days
provided the pleading is consistent with the Ruling and that plaintiffs allege
with specificity the violations of Section 10(b) and Rule 10b-5 allegedly
committed by the defendants. If the plaintiffs file an amended complaint, EIS
may renew its Motion to Dismiss and will continue to vigorously defend the
lawsuit. EIS currently is not able to estimate the costs or a range of costs
that may arise out of this case, if amended, and if efforts to defend the
amended complaint are not successful.
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' contracts 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 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. On July 14, 1998, EIS filed a declaratory
judgment action, EIS International, Inc. v. Manufacturing Administration and
Management Systems, Inc. et al. in the United States District Court for the
Eastern District of New York, against MAMS and one of its patent inventors
requesting the court rule that EIS' products do not infringe upon the patent
held by MAMS. On May 25, 1999, MAMS filed a counterclaim against EIS alleging
EIS' products infringe the MAMS patent. EIS believes MAMS' 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 is
currently not able to estimate the costs or a range of costs that may arise out
of MAMS' patent infringement claim.
During the first six months of 1999, EIS was informed that certain of its
customers had received a patent infringement warning from Q.Sys International,
Inc. ("Q.Sys") alleging that technology used by certain of EIS' customers
infringed on a patent held by Q.Sys. Under EIS' contract with its customers EIS
is obligated to indemnify its customers against any such claims. On April 21,
1999, EIS filed a declaratory judgment action, EIS International, Inc. v. Q.Sys
International, Inc. in the United States District Court for the Eastern District
of Virginia, against Q.Sys requesting the court rule that EIS' products do not
infringe upon the patent held by Q.Sys and that the Q.Sys patent is invalid and
unenforceable. On June 25, 1999, Q.Sys filed a counterclaim against EIS claiming
certain EIS products directly or contributorily infringe the Q.Sys patent. On
August 26, 1999, the parties agreed to a confidential settlement of the
litigation. Since August 26, a dispute has arisen as to the proper
interpretation of the settlement agreement. This dispute, which is the subject
of cross-motions now pending before the court, is expected to be resolved by
December 16, 1999. In any event, this dispute as to interpretation of the
settlement agreement, in the opinion of EIS, is not material.
On July 8, 1999, EIS filed a lawsuit against eShare Technologies, Inc.
("eShare") in the Fairfax County Circuit Court (In Chancery) (the "Court")
alleging that eShare breached a Reseller Agreement between the two parties by,
among other things, failing to honor EIS' right of first refusal on any
agreement with certain EIS competitors, including Melita International
("Melita"). On July 15, 1999, the Court entered a Preliminary Injunction
enjoining eShare from consummating its proposed merger with Melita prior to
August 16, 1999 in order to allow EIS to
17
<PAGE>
EIS International, Inc. and Subsidiaries
- ----------------------------------------
Item 1. Legal Proceedings (continued)
exercise its right of first refusal. That injunction was extended through August
23, 1999, at which time EIS exercised its right of first refusal. eShare filed
an answer, moved to dismiss the complaint, refused to honor EIS' right of first
refusal, and, on September 1, 1999, merged with Melita. On October 29, 1999, the
Court denied eShare's motion to dismiss. EIS has filed a motion to amend its
complaint to add Melita as a party, and to seek additional relief, including
divestiture.
On September 8, 1999, EIS filed a separate lawsuit in the Fairfax County Circuit
Court (At Law) against Melita and eShare seeking in excess of $100 million in
money damages (1) against eShare, for breach of agreement to honor first right
of refusal and breach of agreement to preserve and protect confidential
information; (2) against Melita, for tortuous interference with EIS' contract
expectancy; and (3) against eShare and Melita, for misappropriation of trade
secrets, conspiracy to injure EIS' business, common law conspiracy, and
imposition of constructive trust. Melita and eShare have filed an answer and a
counterclaim seeking damages in excess of $100 million. EIS believes Melita's
and eShare's counterclaims to be without merit and will vigorously defend its
rights in this case. Additionally, EIS intends to vigorously pursue its lawsuit
against both Melita and eShare. However, there can be no assurance that EIS will
prevail in this matter. EIS is currently not able to estimate the financial
outcome or a range of any financial outcome that 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. 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.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
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.
18
<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: November 12, 1999 By: /s/ James E. McGowan
----------------- -------------------------------------
James E. McGowan
President and Chief Executive Officer
Date: November 12, 1999 By: /s/ Frederick C. Foley
----------------- -------------------------------------
Frederick C. Foley
Senior Vice President, Finance,
Chief Financial Officer and Treasurer
19
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
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<COMMON> 118
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<TOTAL-LIABILITY-AND-EQUITY> 55,543
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