<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------------------
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1997
-------------------------------
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: 0-26330
-------
ASTEA INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Delaware 23-2119058
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
455 Business Center Drive, Horsham, PA 19044
--------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 682-2500
---------------
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
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
--- ----
As of August 12, 1997, 13,268,010 shares of the registrant's Common Stock, par
value $.01 per share, were outstanding.
<PAGE>
ASTEA INTERNATIONAL INC.
FORM 10Q
QUARTERLY REPORT
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Facing Sheet 1
Index 2
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets (Unaudited) 3
Consolidated Statements of Operations (Unaudited) 4
Consolidated Statements of Cash Flows (Unaudited) 5
Notes to Unaudited Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosure About Market Risk 13
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security
Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Exhibit 27 Financial Data Schedule 17
</TABLE>
2
<PAGE>
PART I. - FINANCIAL INFORMATION
- -------------------------------
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
ASTEA INTERNATIONAL INC.
------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-----------------------------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $ 3,999,000 $ 3,334,000
Investments available for sale 6,375,000 8,994,000
Receivables, net of reserves of
$1,862,000 and $1,681,000 16,533,000 24,187,000
Prepaid expenses and other 2,119,000 2,279,000
Income tax refund receivable 1,516,000 1,516,000
Deferred income taxes 1,869,000 1,869,000
-----------------------------
Total current assets 32,411,000 42,179,000
Property and equipment, net 7,185,000 8,117,000
Capitalized software development
costs, net 3,545,000 4,022,000
Goodwill, net 1,159,000 3,373,000
-----------------------------
Total assets $ 44,300,000 $ 57,691,000
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Line of credit $ 777,000 $ 1,678,000
Current portion of long-term debt 1,027,000 525,000
Accounts payable and accrued expenses 9,739,000 10,861,000
Accrued restructuring charge 3,371,000 -
Reserve for contingencies 2,265,000 215,000
Deferred revenues 8,824,000 8,140,000
-----------------------------
Total current liabilities 26,003,000 21,419,000
Deferred income taxes 947,000 947,000
Long-term debt 4,202,000 3,708,000
Stockholders' equity:
Preferred stock, $.01 par value,
5,000,000 shares authorized,
none issued - -
Common stock, $.01 par value,
25,000,000 shares authorized,
13,249,464 shares at June 30,1997
and 13,105,905 shares
at December 31,1996 issued and
outstanding 132,000 131,000
Additional paid-in capital 49,145,000 49,097,000
Deferred compensation (65,000) (160,000)
Cumulative translation adjustment (503,000) (443,000)
Accumulated deficit (35,561,000) (17,008,000)
-----------------------------
Total stockholders' equity 13,148,000 31,617,000
-----------------------------
Total liabilities and
stockholders' equity $ 44,300,000 $ 57,691,000
=============================
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
ASTEA INTERNATIONAL INC.
------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
---------------------------- -----------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Software license fees $ 4,988,000 $ 3,881,000 $ 10,086,000 $ 11,369,000
Services and maintenance 9,568,000 7,610,000 18,265,000 15,009,000
--------------------------------------------------------------
Total revenues 14,556,000 11,491,000 28,351,000 26,378,000
--------------------------------------------------------------
Costs and expenses:
Cost of software license fees (Note 4) 874,000 856,000 2,206,000 1,630,000
Cost of services and maintenance 6,086,000 5,234,000 12,749,000 9,809,000
Product development 2,339,000 2,202,000 5,274,000 3,821,000
Sales and marketing 5,057,000 5,447,000 10,815,000 10,033,000
General and administrative
(Notes 3 and 5) 2,074,000 3,431,000 10,469,000 5,344,000
Expenses related to
pooling transaction - - - 3,416,000
Charge for purchased research and
development - 13,810,000 - 13,810,000
Restructuring charge (Note 2) - - 5,328,000 -
--------------------------------------------------------------
Total costs and expenses 16,430,000 30,980,000 46,841,000 47,863,000
--------------------------------------------------------------
Operating loss (1,874,000) (19,489,000) (18,490,000) (21,485,000)
Net interest income (expense) (15,000) 229,000 (63,000) 509,000
--------------------------------------------------------------
Loss before income tax benefit (1,889,000) (19,260,000) (18,553,000) (20,976,000)
Income tax benefit - (2,077,000) - (1,769,000)
--------------------------------------------------------------
Net loss ($1,889,000) ($17,183,000) ($18,553,000) ($19,207,000)
==============================================================
Net loss per share $ (.14) $ (1.35) $ (1.41) $ (1.52)
==============================================================
Weighted average shares
outstanding 13,234,000 12,738,000 13,179,000 12,644,000
==============================================================
Pro forma information (Note 6)
Pro forma loss before income tax
benefit ($1,889,000) ($5,450,000) ($18,553,000) ($3,750,000)
Pro forma income tax benefit - (2,077,000) - (1,431,000)
--------------------------------------------------------------
Pro forma net loss ($1,889,000) ($3,373,000) ($18,553,000) ($2,319,000)
==============================================================
Pro forma net loss per share $ (.14) $ (.26) $ (1.41) $ (.18)
==============================================================
Weighted average shares outstanding 13,234,000 12,738,000 13,179,000 12,644,000
==============================================================
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
ASTEA INTERNATIONAL INC.
------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
--------------------------------
1997 1996
--------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (18,553,000) $ (19,207,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,853,000 1,254,000
Goodwill write-down 2,058,000 -
Write-off of fixed assets 485,000 -
Write-off of capitalized software 453,000 -
Tax benefit from exercise of stock options - 1,742,000
Charge for purchases research and development - 13,810,000
Other 11,000 30,000
Changes in operating assets and liabilities
Receivables 7,588,000 2,674,000
Prepaid expenses and other 155,000 63,000
Restructuring charge, net 3,371,000 -
Prepaid income taxes - (1,917,000)
Accounts payable and accrued expenses 1,788,000 (921,000)
Deferred income taxes - (1,540,000)
Deferred revenues 664,000 (952,000)
--------------------------------
Net cash used in operating activities (127,000) (4,964,000)
--------------------------------
Cash flows from investing activities:
Sale of short-term investments, net 2,619,000 14,216,000
Purchases of property and equipment (607,000) (1,452,000)
Capitalized software development costs (400,000) (475,000)
Payment for acquired businesses, net of cash acquired - (8,550,000)
--------------------------------
Net cash provided by investing activities 1,612,000 3,739,000
--------------------------------
Cash flows from financing activities:
Net repayments on line of credit (901,000) (550,000)
Proceeds from exercise of stock options 110,000 525,000
Repayments of long-term debt (64,000) (49,000)
S Corporation distribution - (200,000)
--------------------------------
Net cash used in financing activities (855,000) (274,000)
--------------------------------
Effect of exchange rate changes on ash and cash equivalents 35,000 (10,000)
--------------------------------
Net increase (decrease) in cash and cash equivalents 665,000 (1,509,000)
Cash and cash equivalents balance, beginning of period 3,334,000 4,021,000
--------------------------------
Cash and cash equivalents balance, end of period $ 3,999,000 $ 2,512,000
================================
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
ASTEA INTERNATIONAL INC.
------------------------
NOTES TO UNAUDITED FINANCIAL STATEMENTS
---------------------------------------
1. BASIS OF PRESENTATION
----------------------
The consolidated financial statement at June 30, 1997 and for the three and six
month periods ended June 30, 1997 and 1996 of Astea International Inc. and
subsidiaries (the "Company") are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial position and
operating results for the interim periods. The consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto, together with Management's Discussion and Analysis
of Financial Condition and Results of Operations, contained herein and in the
Company's 1996 Annual Report on Form 10-K which is hereby incorporated by
reference in this report on Form 10-Q.
2. RESTRUCTURING CHARGE & ACCRUED RESTRUCTURING CHARGE
---------------------------------------------------
During the first quarter of 1997, the Company recorded a restructuring charge of
$5,328,000 for actions aimed at reducing costs primarily in its Service
Automation product line and enhancing the Company's strategy by increasing the
focus on the Support Automation and Sales Automation product lines. These costs
included accruals for severance cost of $1,925,000, office closing costs and
unutilized lease expense of $2,928,000 and other consolidation costs of
$475,000.
It is currently anticipated that accrual will be utilized by the end of calendar
1997, except for amounts related to longer term real and personal property
leases and severance commitments. As of June 30, 1997, accrued restructuring
charge is $3,371,000, consisting of $1,146,000 accrual for severance costs,
$1,998,000 office closing costs and unutilized lease expense and other
consolidation costs of $227,000.
3. GOODWILL IMPAIRMENT
-------------------
As a result of the restructuring, during the first quarter of 1997, the Company
recognized a goodwill impairment charge of $2,058,000 included in general and
administrative expense related to the 1995 acquisition of Astea Service and
Distribution Systems, BV ("Astea BV"). This charge is due to the closings of
the France and Germany locations, and the scale down of operations in Holland.
4. CAPITALIZED SOFTWARE WRITE-OFF
------------------------------
Included in cost of software license fees in the first quarter of 1997 is a
write-off of $453,000 of capitalized software related to Support Automation
product, PowerHelp and older versions of certain Service Automation modules
which will no longer be marketed.
5. RESERVE FOR CONTINGENCIES
-------------------------
Reserve for Contingencies at June 30, 1997 consists of a reserve for the
possible failure to deliver a commercial release of a software product under
beta development of $1,293,000, expenses related to the settlement of claims by
a former stockholder of Bendata, Inc. of $457,000 and $515,000 of other
contingencies. The claim by a former stockholder of Bendata, which was resolved
on June 30, 1997 also includes the payment of $844,000 payable quarterly plus
interest over five years. This note is included in long term debt.
6
<PAGE>
6. PRO FORMA INFORMATION
---------------------
Pro Forma Income Statement
- --------------------------
Pro forma information for 1996 excludes from income the one-time charge for
purchase of in-process research and development costs of $13,810,000, merger
expenses of $3,416,000 ($2,609,000 after-tax) and the one-time income tax charge
of $575,000 due to the conversion of Bendata from an S corporation to a C
corporation as a result of the merger.
The pro forma income taxes for the six months ended June 30, 1996 were
calculated as if Bendata were a C corporation for the period using the criteria
established under Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes."
Pro Forma Net Loss Per Share
- ----------------------------
Pro forma net income per share was calculated by dividing pro forma net income
by the weighted average number of shares of common stock outstanding, including
the 1,500,000 shares of common stock issued in the Bendata merger for the
respective periods.
7. NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings per
Share," which supersedes APB Opinion No. 15, "Earnings per Share," was issued in
February 1997. SFAS 128 requires dual presentation of basic and diluted
earnings per share (EPS) for complex capital structures on the face of the
income statement. Basic EPS is computed by dividing income by the weighted
average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution from the exercise or conversion of securities
into common stock, such as stock options. SFAS 128 is required to be adopted
for year-end 1997; earlier application is not permitted. The Company does not
expect the basic or diluted EPS measured under SFAS 128 to be materially
different than the primary or fully-diluted EPS measured under APB No. 15.
Statement of Financial Accounting Standards No. 129, "Disclosure of Information
about Capital Structure," was issued in February 1997. The Company does not
expect it to result in any substantive change in its disclosure.
8. LINE OF CREDIT
--------------
On June 30, 1997 the Company renewed its line of credit until June 1, 1998. The
line, which has a maximum borrowing availability of $2,000,000, bears interest
at the bank's prime lending rate (8.5% at June 30, 1997), and is fully secured
by the Company's assets. There was no outstanding balance on the line as of
June 30, 1997.
7
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -------------------------------------------------------------------------
RESULTS OPERATIONS
------------------
Overview
- --------
This document contains various forward-looking statements and information that
are based on management's beliefs as well as assumptions made by and information
currently available to management. Such statements are subject to various risks
and uncertainties which could cause actual results to vary materially from those
contained in such forward-looking statements. Should one or more of these risks
or uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated, expected
or projected. Certain of these as well as other risks and uncertainties are
described in more detail herein and in the Company's Annual Report on Form 10-K
for 1996 and Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.
The Company develops, licenses, implements and supports a suite of customer
interaction software applications for client/server and host-based computing
environments that permit organizations of various sizes across a wide range of
industries to automate and integrate field service, customer support and sales
automation functions. The Company maintains operations in the United States,
Australia, New Zealand, the Netherlands, the United Kingdom, Sweden and Israel.
The Company's 1997 and 1996 financial results include the results of Bendata,
which merged with Astea in February 1996 and was accounted for as a pooling of
interests. Astea acquired Abalon AB on June 28, 1996 and therefore, there are
no results of operations reflected in the Statement of Operations for 1996, due
to the timing of the acquisition. Abalon's results of operations are included
in the 1997 financial statements.
Results of Operations
- ---------------------
Comparison of Three Months Ended June 30, 1997 and 1996
- -------------------------------------------------------
Revenues
- --------
Revenues increased $3,065,000, or 27%, to $14,556,000 for the three months ended
June 30, 1997 (second quarter 1997) from $11,491,000 for the three months ended
June 30, 1996 (second quarter 1996). Software license fee revenues increased
$1,107,000, or 29%, over the same period last year. Professional services and
maintenance fees for the three months ended June 30, 1997 amounted to
$9,568,000, or an 26% increase over the same quarter in 1996.
The Company's international operations contributed $4,628,000 of revenues in the
second quarter of 1997 compared to $2,926,000 in the second quarter of 1996.
This represents a 58% increase over the same period last year and 32% of total
revenues in the second quarter 1997. The increase is primarily attributable to
the Company's acquisition of Abalon AB, which had total revenues of $1,898,000
for the three months ended June 30, 1997.
Software license fee revenues increased 29% to $4,988,000 in the second quarter
of 1997 from $3,881,000 in the second quarter of 1996. The Service Automation
product line (DISPATCH-1) revenues increased 99% over the second quarter of
1996. DISPATCH-1 orders for the second quarter 1996 were uncharacteristically
low due to several orders not closing as anticipated. In August 1997 the
Company introduced ServiceAlliance(TM). This Service Automation product enables
small to medium-sized service organizations to utilize business functionality
and best practices afforded to larger organizations who use DISPATCH-1. The
Support Automation product line (HEAT and PowerHelp) revenues had an overall
decrease of 9%; PowerHelp license fee revenues decreased 70% while HEAT
software license fee revenues increased 22%. The increase in the HEAT product
line was due primarily to new customers which reflects the expansion of the
customer help desk market and increased sales and marketing efforts over the
second quarter of 1996. As part of the Company's restructuring, recorded in the
first quarter of 1997, the Company will begin de-emphasizing sales of its
PowerHelp product line in favor of its HEAT
8
<PAGE>
product line. The Sales Automation product line (ABALON), which was acquired on
June 28, 1996, had $847,000 of software license fee revenues in the second
quarter of 1997.
Services and maintenance revenues increased 26% to $9,568,000 in the second
quarter of 1997 from $7,610,000 in the second quarter of 1996. HEAT
contributed services and maintenance revenues of $2,268,000 or 71% over the same
quarter in the prior year. These increases are primarily attributable to the
growth of HEAT's customer base as compared to prior periods. Abalon had
$1,293,000 in service and maintenance revenues in the second quarter of 1997.
The Service Automation product line (DISPATCH-1) services and maintenance
revenues decreased 4% to $5,664,000.
In the second quarters of 1997 and 1996, the Company had no customers which
accounted for more than 10% of total revenues.
Costs of Revenues
- -----------------
Cost of software license fees increased 2% to $874,000 in the second quarter of
1997 from $856,000 in the second quarter of 1996. The software licenses gross
margin percentage was 82% in the second quarter of 1997 compared to 78% in the
second quarter of 1996. The increase in gross margin was primarily attributable
to higher margins on the Sales Automation product line which was acquired on
June 28, 1996.
Cost of services and maintenance increased 16% to $6,086,000 in the second
quarter of 1997 from $5,234,000 in the second quarter of 1996. The services and
maintenance gross margin percentage was 36% in the second quarter of 1997
compared to 31% in the second quarter of 1996. This increase in services and
maintenance gross margin was primarily in the Service Automation product line
due to the Company's restructuring program which commenced in the first quarter
of 1997.
Product Development
- -------------------
Product development expense increased 6% to $2,339,000 in the second quarter of
1997 from $2,202,000 in the second quarter of 1996. Product development as a
percentage of revenues decreased to 16% in the second quarter of 1997 from 19%
in the second quarter of 1996. This decrease as a percentage of revenue was the
result of sales growth and containment of costs as part of the restructuring
plan. The Company's major development efforts in the second quarter 1997 were
working towards the integration of the Company's three product lines, of which
two products, Abalon and HEAT, were acquired during 1996, the Company's new
Service Automation product, ServiceAlliance, announced in August 1997. The
Company will continue to invest in product development which is necessary to
maintain a competitive position in the customer interaction software market.
Sales and Marketing
- -------------------
Sales and marketing expense decreased 7% to $5,057,000 in the second quarter of
1997 from $5,447,000 in the second quarter of 1996. As a percentage of
revenues, sales and marketing expenses decreased to 35% from 47% in the second
quarter of 1996. As part of the Company's restructuring and cost containment
program, sales and marketing expenses for the Service Automation product line
decreased by $1,862,000. The Support Automation product line sales and
marketing expenses increased by $776,000 and the Sales Automation product line
increased by $696,000.
General and Administrative
- --------------------------
General and administrative expenses decreased 40% to $2,074,000 in the second
quarter of 1997 from $3,431,000 in the second quarter of 1996. When removing
non-recurring reserves recorded in the second quarter 1996 and the additional
general and administrative expenses from the acquisition of Abalon, general and
administrative expenses were reduced by $546,000. The decrease was attributable
to the Company's restructuring and cost containment efforts.
9
<PAGE>
Net Interest Income/(Expense)
- -----------------------------
Net interest income decreased 107% to $15,000 of interest expense in the second
quarter of 1997 from $229,000 of interest income in the second quarter of 1996.
This decrease was primarily attributable to the cash used in the 1996
acquisitions of Bendata and Abalon AB and the operating cash requirements of the
Company, which reduced its investments.
Comparison of Six Months Ended June 30, 1997 and 1996
- -----------------------------------------------------
Revenues
- --------
Total revenues increased $1,973,000, or 7%, to $28,351,000 for the six months
ended June 30, 1997 from $26,378,000 for the six months ended June 30, 1996.
This overall increase was comprised of a decrease in software license fees of
$1,238,000 or 11% on a comparative six month basis versus an increase in
professional services and maintenance of $3,256,000 or 22% over the same
comparative period. The Company's international operations contributed
$8,389,000 in the first six months of 1997 compared to $5,289,000 for the first
six months of 1996. This represents a 59% increase over the same period last
year and is 30% of total revenues in the period. Abalon, which was acquired on
June 28, 1996 accounted for most of the increase in international sales. Total
revenues from the HEAT product of the Support Automation product line for the
six months ended June 30, 1997 were $9,489,000, compared to $6,946,000 for the
six months ended June 30, 1996, increasing 37% over the prior period and
accounting for 33% of the total revenues in the first six months of 1997.
Software license fee revenues decreased 11% to $10,086,000 in the first six
months of 1997 from $11,369,000 in the first six months of 1996. The decrease
in software license fees primarily resulted from a $2,600,000 decrease in
Service Automation product line (DISPATCH-1) revenues which have been
experiencing a softening in sales. The Company experienced decreased license
revenues, of $1,200,000 to $480,000, from its Support Automation product,
PowerHelp, which is being de-emphasized. Decreases in DISPATCH-1 and PowerHelp
licenses were offset by increasing sales of HEAT, which rose by 22% to
$5,300,000, over the same period last year. In addition, the Abalon AB
acquisition on June 28, 1996 accounted for $1,600,000 of increases in license
revenues. Only results after the Abalon AB acquisition date are included in the
financial statements. In August 1997 the Company announced ServiceAlliance.
This Service Automation product enables small to medium-sized service
organizations to utilize business functionality and best practices previously
ownly afforded to larger organizations that use DISPATCH-1.
Total services and maintenance revenues increased 22% to $18,265,000 in the
first six months of 1997 from $15,009,000 in the first six months of 1996. The
increase in service and maintenance revenues primarily resulted from increased
Support Automation product line revenues (PowerHelp and HEAT) and Sales
Automation (ABALON) which was acquired on June 28, 1997. This was offset by
decreased Service Automation product line (DISPATCH-1) revenues which has been
decreasing due to reduced demand. The first six months of 1997 compared to the
first six months of 1996 percent Service Automation service and maintenance
revenues decreased by $485,000 or 3%, Support Automation service and maintenance
revenues increased by $1,668,000 or 58% and Sales Automation service and
maintenance revenues were $1,294,000.
In the first six months of 1997 and 1996, the Company had no customers which
accounted for greater than 10% of total revenues.
Costs of Revenues
- -----------------
Costs of software license fees increased 35% to $2,206,000 in the first six
months of 1997 from $1,630,000 in the first six months of 1996. The software
licenses gross margin percentage was 78% in the six months ended June 30, 1997
compared to 86% in the six months ended June 30, 1996. This decrease in gross
margin was primarily due to higher capitalized software amortization and the
write-off of capitalized software in the first quarter of 1997 in conjunction
with the Company's restructuring of its product lines for old versions which
will no longer be marketed.
10
<PAGE>
Costs of services and maintenance increased 30% to $12,749,000 in the first six
months of 1997 from $9,809,000 in the first six months of 1996. The services
and maintenance gross margin percentage was 30% in the six months ended June 30,
1997 compared to 35% in the six months ended June 30, 1996. This decrease in
services and maintenance gross margin was primarily due to increased personnel
costs, more demanding obligations under consulting and maintenance agreements
arising during prior periods, as well as the Company's ongoing effort to address
customer satisfaction issues.
Product Development
- -------------------
Product development expense increased 38% to $5,274,000 in the first six months
of 1997 from $3,821,000 in the first six months of 1996. Product development as
a percentage of revenue increased to 19% in the first half of 1997 compared to
15% in the first half of 1996. This increase as a percentage of revenue is due
to a planned effort on the part of the Company to place greater emphasis on
product development expenditures. The Company expects that product development
expenses will continue to grow as an absolute dollar amount in the future as new
and existing products are developed and enhanced.
Sales and Marketing
- -------------------
Sales and marketing expenses increased 8% to $10,815,000 in the first six months
of 1997 from $10,033,000 in the first six months of 1996. As a percentage of
revenues, sales and marketing expenses remained the same at 38%. The increase
in absolute dollars was primarily attributable to the Company's acquisition of
Abalon AB in June of 1996.
General and Administrative
- --------------------------
General and administrative expenses increased 96% to $10,469,000 in the first
six months of 1997 compared to $5,344,000 in the first six months of 1996. As a
percentage of revenues, general and administrative expenses increased to 37% in
the first six months of 1997 compared to 20% in the first six months of 1996.
Included in the first half of 1997 general and administrative expenses are non-
recurring charges of $5,131,000. These charges include a $2,058,000 write-off
of Astea BV goodwill, a reserve for the possible failure to deliver a commercial
release of a software product under beta development of $1,293,000, the payment
of cash and stock options related to the settlement of claims by a former
stockholder of Bendata of $1,321,000. In addition, there was a $555,000 increase
in the reserve for bad debts. Without these charges, general and administrative
expenses would have decreased $561,000 or 10% due to the restructuring and other
cost containment measures.
Restructuring Charge
- ---------------------
During the first quarter of 1997, the Company recorded a restructuring charge of
$5,328,000 for actions aimed at reducing costs in its Service Automation product
line and enhancing the Company's performance by increasing the focus on the
Support Automation and Sales Automation product lines. These costs included
accruals for severance costs of $1,925,000, office closing costs and unutilized
lease space of $2,928,000 and other consolidation costs of $475,000. As of June
30, 1997, accrued restructuring charge is $3,371,000, consisting of $1,146,000
accrual for severance costs, $1,998,000 office closing costs and unutilized
lease expense and other consolidation costs of $227,000.
Net Interest Income
- ------------------------
Net interest income decreased 112% to $63,000 net expense in the first six
months of 1997 from net interest income of $509,000 in the first six months of
1996. This decrease was primarily attributable to the cash used in the 1996
acquisitions of Bendata and Abalon and the operating cash requirements of the
Company, which reduced its investments.
11
<PAGE>
Liquidity and Capital Resources
- --------------------------------
Net cash used in operating activities was $127,000 for the six months ended June
30, 1997 compared to $4,964,000 for the six months ended June 30, 1996. This
decrease was primarily attributable to the Company's collection of accounts
receivable partially offset by an increase in deferred revenues.
The Company provided $1,612,000 of cash from investing activities in the first
six months of 1997 compared to $3,739,000 in the first six months of 1996. The
decrease was primarily attributable to the sale of short-term investments in the
first half of 1996 which proceeds were used for Bendata and Abalon acquisition
expenses as well operating expenditures.
The Company used $855,000 for financing activities during the six months ended
June 30, 1997 compared to $274,000 in the first six months of 1996. These funds
were used to pay down the line of credit and long-term debt, offset by proceeds
from the exercise of stock options.
The Company maintains a line of credit with a maximum borrowing availability of
$2,000,000. The line of credit bears interest at the lending bank's prime rate
(8.5% at June 30 1997 and 8.25% at December 31, 1996). Borrowings under the
line of credit are fully secured by the Company's assets. The outstanding
balances as of June 30, 1997 and December 31, 1996 were $0 and $500,000,
respectively. The Company had been in default, from time to time, of certain
loan covenants to which the bank has waived these events. The line was renewed
on June 30, 1997 and expires on June 1, 1998.
As of June 30, 1997, Bendata had a revolving line of credit with a bank for
borrowings up to $1,750,000, with interest at the bank's prime rate plus .75%
(9.25% at June 30, 1997 and 9.0% at December 31, 1996). Availability of
borrowings under the line was limited to 80% of eligible accounts receivable, as
defined. Borrowings under the revolving line of credit were secured by a first
security interest in all of Bendata's receivables, inventory, general
intangibles and equipment. The line expired on July 15, 1997. The Company is
currently negotiating to renew the line of credit. The line required Bendata to
maintain certain financial and non-financial covenants, as defined. The
outstanding balances were zero as of June 30, 1997 and December 31, 1996.
On June 28, 1996, the Company acquired the capital stock of Abalon AB. Abalon AB
has a revolving line of credit for up to 8,000,000 SEK or $1,161,000 with a
1,000,000 SEK or $145,000 overdraft provision. As of June 30, 1997 and
December 31, 1996, Abalon's borrowing on it's revolving line of credit was
$777,000 and $1,178,000, respectively. The revolving line of credit bears
interest at the bank's prime rate plus 2.4% (6.6% at June 30 1997 and December
31, 1996). Borrowings under the revolving line of credit are secured by a first
security interest in all of Abalon AB's receivables, inventory, general
intangibles and equipment. The line expires on December 31, 1997.
At June 30, 1997, the Company had cash and investments available for sale of
$10,374,000. The Company may need access to additional funding during the next
year to fund operations as products are rolled out and other strategies progress
towards realization. The Company believes sufficient cash resources exist to
support its long term growth strategies either through currently available cash,
cash generated from future operations, or the ability of the Company to obtain
additional financing through private and or public debt or equity placements.
Variability of Quarterly Results and Potential Risks Inherent in the Business
- -----------------------------------------------------------------------------
The Company's operations are subject to a number of risks, which are described
in more detail in the Company's prior SEC filings. Risks which are peculiar to
the Company on a quarterly basis, and which may vary from quarter to quarter,
include but are not limited to the following:
. The Company's quarterly operating results have in the past varied and may
in the future vary significantly depending on factors such as the size, timing
and recognition of revenue from significant orders, the timing of new product
releases and product enhancements, and market acceptance of these new releases
and enhancements, increases in operating expenses, and seasonality of its
business.
12
<PAGE>
. The customer interaction software market is intensely competitive.
. The Company's future success will depend in part on its ability to reduce its
reliance on revenues generated by DISPATCH-1 and increasing licenses of
ServiceAlliance, HEAT and Abalon products and other new product offerings, and
developing new products and product enhancements to complement its existing
field service and customer support offerings.
. International sales for the Company's products and services, and the
Company's expenses related to these sales, have increased substantially.
International sales are subject to a variety of risks, including difficulties
in establishing and managing international operations and in translating
products into foreign languages. Acquisitions, including the Company's recent
acquisitions of Bendata and Abalon AB, involve a number of potential risks,
including difficulties in the assimilation of the acquired company's products,
operations and key personnel.
. The market price of the common stock could be subject to significant
fluctuations in response to, and may be adversely affected by, variations in
quarterly operating results, changes in earnings estimates by analysts,
developments in the software industry, adverse earnings or other financial
announcements of the Company's customers and general stock market conditions
as well as other factors.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- ------------------------------------------------------------------
Not Applicable.
13
<PAGE>
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
- ---------------------------
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. The Company is
not involved in any legal proceedings which would, in management's opinion, have
a material adverse effect on the Company's business or results of operations.
Item 2. Changes in Securities
- -------------------------------
There have been no changes in securities during the quarter ended June 30, 1997.
Item 3. Defaults Upon Senior Securities
- -----------------------------------------
There have been no defaults by the Company on any Senior Securities during the
quarter ended June 30, 1997.
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
At the Annual Meeting of Stockholders held on May 15, 1997, pursuant to the
Notice of Annual Meeting of Stockholders dated April 15, 1997, the following
actions were taken:
1. The proposal to elect the following nominees as directors, to hold office
until the 1998 Annual Meeting of Stockholders and until their successors are
elected and qualified, was approved:
<TABLE>
<CAPTION>
Nominee Votes For Votes Withheld Abstained
------- ---------- -------------- ---------
<S> <C> <C> <C>
Zack B. Bergreen 10,983,299 279,079 0
Joseph J. Kroger 11,058,752 203,626 0
Bruce R. Rusch 11,058,875 203,503 0
</TABLE>
2. The proposal to approve the Company's 1997 Stock Option Plan was approved
(10,049,343 shares in favor; 778,531 shares against; and 20,528 shares
abstaining).
3. The proposal to appoint Arthur Andersen LLP as independent auditors for the
Company for the fiscal year ending December 31, 1997 was approved (11,220,678
shares in favor; 24,230 shares against; and 17,470 shares abstaining).
No other matters were submitted to a vote of the Company's stockholders during
the second quarter of the fiscal year covered by this report through the
solicitation of proxies or otherwise.
Item 5. Other Information
- ---------------------------
At a special meeting on June 3, 1997, the Company's Board of Directors voted
unanimously to increase the size of the Board of Directors from three (3)
members to four (4) members, and the Board subsequently elected Henry H. Greer
to fill the resulting vacancy.
14
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
- ------------------------------------------
(A) Exhibits
(10) Agreement dated as of June 30, 1997 between the Company and Ronald J.
Muns (incorporated by reference to Exhibit No. 1 to Schedule 13-D/A
dated July 7, 1997, by Ronald J. Muns, as reporting person, with
respect to the Company, as issuer)
(27) Financial Data Schedule
(B) Reports on Form 8-K
None
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized this 14th day of
August, 1997.
ASTEA INTERNATIONAL INC.
By: /s/ Zack B. Bergreen
--------------------
Zack B. Bergreen
Chairman, President and
Chief Executive Officer
By: /s/ John G. Phillips
--------------------
John G. Phillips
Vice President and Chief Financial Officer
(Principal Financial and Chief
Accounting Officer)
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> JUN-30-1997 JUN-30-1996
<CASH> 3,999,000 3,334,000
<SECURITIES> 6,375,000 8,994,000
<RECEIVABLES> 18,395,000 25,868,000
<ALLOWANCES> 1,862,000 1,681,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 32,411,000 42,179,000
<PP&E> 12,932,000 13,052,000
<DEPRECIATION> 5,747,000 4,935,000
<TOTAL-ASSETS> 44,300,000 57,691,000
<CURRENT-LIABILITIES> 26,003,000 21,419,000
<BONDS> 0 0
0 0
0 0
<COMMON> 132,000 131,000
<OTHER-SE> 13,584,000 32,089,000
<TOTAL-LIABILITY-AND-EQUITY> 44,300,000 57,691,000
<SALES> 10,086,000 11,369,000
<TOTAL-REVENUES> 28,351,000 26,378,000
<CGS> 2,206,000 1,630,000
<TOTAL-COSTS> 14,955,000 11,439,000
<OTHER-EXPENSES> 30,992,000 35,214,000
<LOSS-PROVISION> 894,000 1,210,000
<INTEREST-EXPENSE> 63,000 (509,000)
<INCOME-PRETAX> (18,553,000) (20,976,000)
<INCOME-TAX> 0 (1,769,000)
<INCOME-CONTINUING> (18,553,000) (19,207,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (18,553,000) (19,207,000)
<EPS-PRIMARY> (1.41) (1.52)
<EPS-DILUTED> 0 0
</TABLE>
