-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DsZFAxARMaLi/p/LTKqaom4Rf2dpuBS84T9QuuJ834uUt06V68AxTFuAXOS+oOZO 24HlQq/ZM6cVxDCKBXXRkA== 0000950146-99-001736.txt : 19991115 0000950146-99-001736.hdr.sgml : 19991115 ACCESSION NUMBER: 0000950146-99-001736 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EIS INTERNATIONAL INC /DE/ CENTRAL INDEX KEY: 0000032251 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 061017599 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20329 FILM NUMBER: 99749750 BUSINESS ADDRESS: STREET 1: 555 HERNDON PARKWAY CITY: HERNDON STATE: VA ZIP: 20170 BUSINESS PHONE: 7033266400 FORMER COMPANY: FORMER CONFORMED NAME: ELECTRONIC INFORMATION SYSTEMS INC DATE OF NAME CHANGE: 19940218 10-Q 1 FORM 10-Q 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. 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 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
2 EIS INTERNATIONAL, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Dollars in Thousands, Except Per Share Amounts)
September 30, December 31, 1999 1998 ------------- ------------ (Unaudited) 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 ======== ========
See accompanying notes to consolidated financial statements. 3 EIS INTERNATIONAL, INC. AND SUBSIDIARIES Consolidated Statements of Operations (In Thousands, Except Per Share Amounts) (Unaudited)
Three Months Nine Months Ended September 30, Ended September 30, -------------------- --------------------- 1999 1998 1999 1998 ------- ------- ------- -------- 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
See accompanying notes to consolidated financial statements. 4 EIS INTERNATIONAL, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Dollars in Thousands) (Unaudited)
Nine Months Ended September 30, ------------------------------ 1999 1998 -------- -------- 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
See accompanying notes to consolidated financial statements. 5 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:
Three Months Nine Months Ended September 30, Ended September 30, --------------------- ----------------------- 1999 1998 1999 1998 ----- -------- ------- -------- 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) ===== ======== ======= ========
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 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):
Three Months Nine Months Ended September 30, Ended September 30, ------------------------ ------------------------- 1999 1998 1999 1998 ------ -------- ------- -------- 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)
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 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 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.
Three Months Ended September 30, Nine Months Ended September 30, ------------------------------------- -------------------------------------- 1999 1998 1999 1998 ---------------- ---------------- ---------------- ---------------- $ % $ % $ % $ % ------ ----- ------ ----- ------ ----- ------ ----- 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) ------ ----- ------ ----- ------ ----- ------ ----- ====== ===== ====== ===== ====== ===== ====== =====
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 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 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 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 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 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 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 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 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 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 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 EX-27 2 FDS --
5 1,000 U.S. DOLLLARS 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 1 21,674 6,920 13,375 3,031 3,630 45,886 17,970 13,799 55,543 10,289 0 0 0 118 0 55,543 39,599 39,599 18,998 37,649 0 0 0 3,032 1,223 1,809 0 0 0 1,809 0.17 0.17
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