<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 September 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 November 11, 1997, 13,359,326 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> <C>
Facing Sheet 1
Index 2
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets (Unaudited) 3
Consolidated Statements of Income (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 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
Exhibit 10.1 Termination of Lease dated September 17, 1997 by and
between Zack B. Bergreen and Zahava Bar-Nir, as Landlords,
and Astea International Inc., as Tenant 15
Exhibit 10.2 Amendment No. 1 to Astea International Inc. 1995 Employee
Stock Purchase Plan 17
Exhibit 27 Financial Data Schedule 18
</TABLE>
2
<PAGE>
PART I. - FINANCIAL INFORMATION
- -------------------------------
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
ASTEA INTERNATIONAL INC.
-------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-------------------------------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $ 6,986,000 $ 3,334,000
Investments available for sale 4,188,000 8,994,000
Receivables, net of reserves of $1,788,000 and $1,681,000 16,838,000 24,187,000
Prepaid expenses and other 2,526,000 2,279,000
Income tax refund receivable - 1,516,000
Deferred income taxes 1,869,000 1,869,000
-------------------------------
Total current assets 32,407,000 42,179,000
Property and equipment, net 4,206,000 8,117,000
Capitalized software development costs, net 3,517,000 4,022,000
Goodwill, net 1,141,000 3,373,000
-------------------------------
Total assets $ 41,271,000 $ 57,691,000
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Line of credit $ 1,043,000 $ 1,678,000
Current portion of long-term debt 1,080,000 525,000
Accounts payable and accrued expenses 11,041,000 10,861,000
Accrued restructuring charge 1,891,000 -
Reserve for contingencies 1,501,000 215,000
Deferred revenues 8,399,000 8,140,000
-------------------------------
Total current liabilities 24,955,000 21,419,000
Deferred income taxes 1,127,000 947,000
Long-term debt 1,772,000 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,
13,355,041 shares at September 30,1997 and 13,105,905 shares
at December 31,1996 issued and outstanding 134,000 131,000
Additional paid-in capital 49,574,000 49,097,000
Deferred compensation (54,000) (160,000)
Cumulative translation adjustment (623,000) (443,000)
Accumulated deficit (35,614,000) (17,008,000)
-------------------------------
Total stockholders' equity 13,417,000 31,617,000
-------------------------------
Total liabilities and stockholders' equity $ 41,271,000 $ 57,691,000
===============================
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
ASTEA INTERNATIONAL INC.
------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------ ------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Software license fees $ 6,372,000 $ 8,164,000 $ 16,458,000 $ 19,533,000
Services and maintenance 9,045,000 9,326,000 27,310,000 24,335,000
----------------------------------------------------------
Total revenues 15,417,000 17,490,000 43,768,000 43,868,000
----------------------------------------------------------
Costs and expenses:
Cost of software license fees (Note 4) 1,093,000 1,001,000 3,299,000 2,631,000
Cost of services and maintenance 5,484,000 6,387,000 18,233,000 16,196,000
Product development 2,442,000 2,147,000 7,716,000 5,968,000
Sales and marketing 4,981,000 5,746,000 15,796,000 15,779,000
General and administrative (Notes 3 and 5) 1,488,000 2,079,000 11,957,000 7,423,000
Expenses related to pooling transaction - - - 3,416,000
Charge for purchased research and
development - - - 13,810,000
Restructuring charge (Note 2) - - 5,328,000 -
----------------------------------------------------------
Total costs and expenses 15,488,000 17,360,000 62,329,000 65,223,000
----------------------------------------------------------
Income (loss) from operations (71,000) 130,000 (18,561,000) (21,355,000)
Net interest income (expense) 18,000 113,000 (45,000) 622,000
----------------------------------------------------------
Income (loss) before income taxes (53,000) 243,000 (18,606,000) (20,733,000)
Income tax (benefit) - 156,000 - (1,613,000)
----------------------------------------------------------
Net income (loss) ($53,000) $ 87,000 ($18,606,000) ($19,120,000)
==========================================================
Net income (loss) per common equivalent
share $ (.00) $ .01 $ (1.41) $ (1.50)
==========================================================
Weighted average shares outstanding 13,269,000 13,608,000 13,215,000 12,754,000
==========================================================
Pro forma information (Note 7)
Pro forma net loss before income taxes ($3,507,000)
Pro forma income tax (1,275,000)
----------------
Pro forma net loss ($2,232,000)
================
Pro forma net loss per share $ (.18)
================
Weighted average shares outstanding 12,754,000
================
</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 Nine Months
Ended September 30,
-------------------------------
1997 1996
-------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(18,606,000) $(19,120,000)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 2,614,000 1,513,000
Goodwill write-down 2,058,000 -
Expense related to stock, stock options and debt
issued in dispute settlements 1,522,000 -
Write-off of capitalized software 453,000 -
Tax benefit from exercise of stock options - 1,742,000
Charge for purchased research and development - 13,810,000
Other 11,000 30,000
Changes in operating assets and liabilities:
Receivables 7,283,000 4,391,000
Prepaid expenses and other (251,000) (294,000)
Accrued restructuring charge 3,217,000 -
Income tax refund receivable 1,516,000 (1,800,000)
Accounts payable and accrued expenses 938,000 (1,985,000)
Deferred income taxes 180,000 (1,540,000)
Deferred revenues 237,000 (1,907,000)
-------------------------------
Net cash provided by (used in) operating activities 1,172,000 (5,160,000)
-------------------------------
Cash flows from investing activities:
Sale of investments available for sale 4,806,000 18,191,000
Purchases of property and equipment (716,000) (2,097,000)
Capitalized software development costs (600,000) (868,000)
Payment for acquired businesses, net of cash
acquired - (8,550,000)
-------------------------------
Net cash provided by investing activities 3,490,000 6,676,000
-------------------------------
Cash flows from financing activities:
Net repayments on line of credit (635,000) (487,000)
Proceeds from exercise of stock options 180,000 531,000
Repayments of long-term debt (580,000) (76,000)
S Corporation distribution - (1,979,000)
-------------------------------
Net cash used in financing activities (1,035,000) (2,011,000)
-------------------------------
Effect of exchange rate changes on cash and cash equivalents 25,000 (3,000)
-------------------------------
Net increase (decrease) in cash and cash equivalents 3,652,000 (498,000)
Cash and cash equivalents, beginning of period 3,334,000 4,021,000
-------------------------------
Cash and cash equivalents, end of period $ 6,986,000 $ 3,523,000
===============================
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
ASTEA INTERNATIONAL INC.
------------------------
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
1. BASIS OF PRESENTATION
----------------------
The consolidated financial statements as of September 30, 1997 and for the three
and nine month periods ended September 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 AND 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 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 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 September 30, 1997, accrued
restructuring charge is $1,891,000.
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 to 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 the Company's Support
Automation product, the PowerHelp product and older versions of certain Service
Automation modules which are no longer marketed by the Company.
5. RESERVE FOR CONTINGENCIES
--------------------------
Reserve for contingencies at September 30, 1997 of $1,501,000 consists of a
reserve for the possible failure to deliver a commercial release of a software
product under beta development, amounts due to a former stockholder of Bendata
in settlement of claims and other contingencies.
6
<PAGE>
6. CAPITAL LEASE TERMINATION
-------------------------
The Company had leased office facilities from its majority stockholder and his
spouse under a noncancelable capital lease which expired in 2009 and required
annual lease payments of $399,000. On September 17, 1997, the Company entered
into a lease termination agreement with the majority stockholder and his spouse.
In consideration of the lease termination, the Company agreed to pay $583,000 in
three monthly installments due October 31, 1997, November 30, 1997 and January
3, 1998. The Company recorded a net charge of $36,000 to the restructuring
accrual.
7. Pro Forma Income Statement
--------------------------
Pro forma information for the nine months ended September 30, 1996 excludes from
income the one-time charge for purchased in-process research and development 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, Inc.
("Bendata") from an S corporation to a C corporation as a result of the
Company's merger with Bendata.
The pro forma income taxes for the nine months ended September 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 loss per share was calculated by dividing pro forma net loss 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.
8. NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per
Share," which supersedes APB Opinion No. 15 ("APB 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 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.
7
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF 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 June 30, 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 and
Abalon AB. Astea and Bendata merged in February 1996 in a transaction accounted
for as a pooling of interests. The Company acquired Abalon AB on June 28, 1996
in a acquisition accounted for as a purchase transaction.
Results of Operations
- ---------------------
Comparison of Three Months Ended September 30, 1997 and 1996
- ------------------------------------------------------------
Revenues
- --------
Revenues decreased $2,073,000, or 12%, to $15,417,000 for the three months ended
September 30, 1997 (third quarter of 1997) from $17,490,000 for the three months
ended September 30, 1996 (third quarter of 1996). Software license fee revenues
decreased $1,792,000, or 22%, over the same period last year. Professional
services and maintenance fees for the three months ended September 30, 1997
amounted to $9,045,000, a 3% decrease over the same quarter in 1996.
The Company's international operations contributed $5,319,000 of revenues in the
third quarter of 1997 compared to $7,449,000 in the third quarter of 1996. This
represents a 29% decrease from the same period last year and 34% of total
revenues in the third quarter 1997. The decrease is primarily attributable to a
large European contract which was recorded in the third quarter of 1996 which
accounted for 31% of the 1996 international revenues. The Company's
international operations did not record license revenue from any large contracts
in the third quarter of 1997.
Software license fee revenues decreased 22% to $6,372,000 in the third quarter
of 1997 from $8,164,000 in the third quarter of 1996. The decrease in software
license fee revenues is primarily attributable to a large European contract
relating to the Service Automation product line (DISPATCH-1) which was recorded
in the third quarter of 1996. Service Automation license fee revenues decreased
40% and accounted for substantially all of the decrease in license fee revenue
from the third quarter of 1996. In August 1997 the Company introduced
ServiceAlliance to its Service Automation product line. ServiceAlliance enables
small to medium-sized service organizations to utilize business functionality
and best practices afforded to larger organizations who use DISPATCH-1.
ServiceAlliance revenues were $250,000 for the third quarter of 1997. The
Support Automation product line (HEAT and PowerHelp) revenues had an overall
decrease of 7%; PowerHelp license fee revenues decreased 74% while HEAT software
license fee revenues increased 15%. The increase in the HEAT license fee
revenues was due primarily to new customers which reflects the expansion of the
customer help desk market and increased sales and
8
<PAGE>
marketing efforts over the third quarter of 1996. As part of the Company's
restructuring which was recorded in the first quarter of 1997, the Company has
discontinued direct sales of its PowerHelp product line in the United States,
although such sales continue indirectly. The Sales Automation product line
(Abalon) decreased 21% to $654,000 in the third quarter of 1997.
Services and maintenance revenues decreased 3% to $9,045,000 in the third
quarter of 1997 from $9,326,000 in the third quarter of 1996. HEAT contributed
services and maintenance revenues of $921,000 or 67% increase over the same
quarter in the prior year. HEAT's increase was primarily attributable to the
growth of the customer base as compared to prior periods. The Service Automation
product line (DISPATCH-1 and ServiceAlliance) services and maintenance revenues
decreased 16% to $5,614,000. The Sales Automation Product Line (Abalon) service
and maintenance revenues decreased $114,000 to $1,032,000 or 10%.
In the third quarter of 1997, the Company had no customers which accounted for
more than 10% of total revenues. In the third quarter of 1996, the Company had
one customer which accounted for 13% of total revenues.
Costs of Revenues
- -----------------
Cost of software license fees increased 9% to $1,093,000 in the third quarter of
1997 from $1,001,000 in the third quarter of 1996. The software licenses gross
margin percentage was 83% in the third quarter of 1997 compared to 88% in the
third quarter of 1996. The decrease in gross margin was primarily attributable
to decreased license revenues and a comparable amount of capitalized software
amortization expense.
Cost of services and maintenance decreased 14% to $5,484,000 in the third
quarter of 1997 from $6,387,000 in the third quarter of 1996. The services and
maintenance gross margin percentage was 39% in the third quarter of 1997
compared to 32% in the third 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 14% to $2,442,000 in the third quarter of
1997 from $2,147,000 in the third quarter of 1996. Product development as a
percentage of revenues increased to 16% in the third quarter of 1997 from 12% in
the third quarter of 1996. This increase is a result of the Company's major
development efforts in the third quarter of 1997 which included efforts to
integrate the Company's three product lines, of which two products, Abalon and
HEAT, were acquired during 1996, and the development of the Company's new
Service Automation product, ServiceAlliance, which was 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 13% to $4,981,000 in the third quarter of
1997 from $5,746,000 in the third quarter of 1996. This decrease was primarily
attributable to lower commission expense as a result of the decrease in license
revenue. As a percentage of revenues, sales and marketing expenses decreased to
32% from 33% in the third quarter of 1996.
General and Administrative
- --------------------------
General and administrative expenses decreased 28% to $1,488,000 in the third
quarter of 1997 from $2,079,000 in the third quarter of 1996. The decrease was
attributable to the Company's restructuring and cost containment efforts and a
reduction in amortization expense as the goodwill related to the 1995
acquisition of Astea BV was written off in the first quarter of 1997.
9
<PAGE>
Net Interest Income (Expense)
- -----------------------------
Net interest income decreased 84% to $18,000 of interest income in the third
quarter of 1997 from $113,000 of interest income in the third 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 Nine Months Ended September 30, 1997 and 1996
- -----------------------------------------------------------
Revenues
- --------
Total revenues remained approximately constant at $43,768,000 for the nine
months ended September 30, 1997 and $43,868,000 for the nine months ended
September 30, 1996. The Company's international operations contributed
$13,707,000 in the first nine months of 1997 compared to $14,150,000 for the
first nine months of 1996. This represents a 3% decrease from the same period
last year and represents 31% of total revenues for the first nine months of
1997. Total revenues from the HEAT product of the Support Automation product
line for the nine months ended September 30, 1997 were $14,534,000, compared to
$10,745,000 for the nine months ended September 30, 1996, increasing 35% over
the prior period.
Software license fee revenues decreased 16% to $16,458,000 in the first nine
months of 1997 from $19,533,000 in the first nine months of 1996. The decrease
in software license fees primarily resulted from a $4,249,000 decrease in
Service Automation product line (DISPATCH-1) revenues. License revenues
decreased from $1,859,000 to $693,000 as its Support Automation product,
PowerHelp, is being de-emphasized. Decreases in DISPATCH-1 and PowerHelp
licenses were offset by increasing sales of HEAT, which rose by 19% to
$8,121,000, over the same period last year. In addition, the Abalon AB
acquisition on June 28, 1996 accounted for $1,466,000 of increases in license
revenues. Only results after the Abalon AB acquisition date are included in the
financial statements. In August 1997, the Company added ServiceAlliance to its
Service Automation product line. For the first nine months of 1997, the Company
recorded ServiceAlliance license revenues of $250,000.
Total services and maintenance revenues increased 12% to $27,310,000 in the
first nine months of 1997 from $24,335,000 in the first nine months of 1996. The
increase in services and maintenance revenues primarily resulted from increased
Support Automation product line revenues (HEAT) from Bendata and Sales
Automation (Abalon) from Abalon AB which was acquired on June 28, 1997. This was
offset by decreased Service Automation product line (DISPATCH-1) revenues which
have been decreasing due to reduced demand. In the first nine months of 1997
compared to the first nine months of 1996, Service Automation service and
maintenance revenues decreased by $1,514,000 or 8%, Support Automation service
and maintenance revenues increased by $2,556,000 or 59% and Sales Automation
service and maintenance revenues increased by $1,934,000.
In the first nine 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 25% to $3,299,000 in the first nine
months of 1997 from $2,631,000 in the first nine months of 1996. The software
licenses gross margin percentage was 80% in the nine months ended September 30,
1997 compared to 87% in the nine months ended September 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 relating
to products and versions which will no longer be marketed in conjunction with
the Company's restructuring of its product lines.
Costs of services and maintenance increased 13% to $18,233,000 in the first nine
months of 1997 from $16,196,000 in the first nine months of 1996. The services
and maintenance gross margin percentage was flat at 33% in the nine months ended
September 30, 1997 and the nine months ended September 30, 1996.
10
<PAGE>
Product Development
- -------------------
Product development expense increased 29% to $7,716,000 in the first nine months
of 1997 from $5,968,000 in the first nine months of 1996. Product development
as a percentage of revenue increased to 18% in the first nine months of 1997
compared to 14% in the first nine months 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.
Sales and Marketing
- -------------------
Sales and marketing expenses remained flat in the first nine months of 1997
compared to the first nine months of 1996. As a percentage of revenues, sales
and marketing expenses remained the same at 36%. Sales and marketing expenses
increased slightly due to the Company's acquisition of Abalon AB in June of 1996
and the increased sales and marketing costs related to the HEAT product line
offset by reduced commissions in the Service Automation product line.
General and Administrative
- --------------------------
General and administrative expenses increased 61% to $11,957,000 in the first
nine months of 1997 compared to $7,423,000 in the first nine months of 1996. As
a percentage of revenues, general and administrative expenses increased to 27%
in the first nine months of 1997 compared to 17% in the first nine months of
1996. Included in the first nine months of 1997 general and administrative
expenses are non-recurring charges of $5,131,000. These charges include
$2,058,000 for the write-off of Astea BV goodwill and $3,073,000 of contingency
reserves for the possible failure to deliver a commercial release of a software
product under a beta development, payment of cash and stock options related to
the settlement of claims by a former stockholder of Bendata and other
contingencies. Excluding these charges, general and administrative expenses
would have decreased $597,000 due to the restructuring and other cost
containment measures offset by nine months of Abalon AB versus only three months
of expenses in 1996.
Restructuring Charge
- ---------------------
During the first quarter of 1997, the Company recorded a restructuring charge of
$5,328,000 for actions aimed at reducing primarily 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 September 30, 1997, accrued restructuring charge is $1,891,000.
Net Interest Income (Expense)
- -----------------------------
Net interest income (expense) decreased 107% to a $45,000 net expense in the
first nine months of 1997 from net interest income of $622,000 in the first nine
months 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.
Liquidity and Capital Resources
- -------------------------------
Net cash provided by (used in) operating activities was $1,172,000 for the nine
months ended September 30, 1997 compared to ($5,160,000) for the nine months
ended September 30, 1996. This increase was primarily attributable to the
Company's non-cash goodwill write down, expense related to stock, stock options
and debt issued in dispute settlements, restructuring charge, increased
collection of accounts receivable, timing of income tax payments and refunds, as
well as increases in accounts payable and accrued expenses, deferred income
taxes, depreciation and amortization, and deferred revenues. These increases
were offset by the non-cash charge of $13,810,000 recorded in 1996 arising from
the Abalon AB acquisition and the 1996 tax benefit from the exercise of stock
options.
The Company provided $3,490,000 of cash from investing activities in the first
nine months of 1997 compared to $6,676,000 in the first nine months of 1996.
The decrease was primarily attributable to the sale of investments
11
<PAGE>
available for sale in the first nine months of 1996 which proceeds were used for
Bendata and Abalon AB acquisition expenses, as well operating expenditures.
The Company used $1,035,000 for financing activities during the nine months
ended September 30, 1997 compared to $2,011,000 in the first nine months of
1996. This decrease is due to the 1996 S Corporation distribution, offset by
lower proceeds from the exercise of stock options and higher repayments on the
line of credit and long-term debt.
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 September 30 1997 and 8.25% at December 31, 1996). Borrowings under the
line of credit are fully secured by the Company's investments. The outstanding
balances as of September 30, 1997 and December 31, 1996 were $0 and $500,000,
respectively. The Company has been in default, from time to time, of certain
loan covenants to which the bank has waived these events. The line expires on
June 1, 1998.
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 September 30, 1997 and
December 31, 1996, Abalon AB's borrowing on it's revolving line of credit was
$1,043,000 and $1,178,000, respectively. The revolving line of credit bears
interest at the bank's prime rate plus 2.4% (6.6% at September 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, general intangibles
and equipment. The line expires on December 31, 1997.
At September 30, 1997, the Company had cash and investments available for sale
of $11,174,000. 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 immediate growth strategies either through currently
available cash, cash generated from future operations, sale of assets 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.
* The Company's future success will depend in part on its ability to increase
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, sales automation and customer support offerings.
* The customer interaction software market is intensely competitive.
* International sales for the Company's products and services, and the
Company's expenses related to these sales, continue to be a substantial
component of the Company's operations. 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.
12
<PAGE>
* 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.
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 and Use of Proceeds
- ------------------------------------------------------
There have been no changes in securities during the quarter ended September 30,
1997.
As of September 30, 1997, the Company has used $39,071,000 of the $42,057,000
net proceeds from its initial public offering of common stock. The use of
proceeds includes $9,952,000 for the acquisition of Abalon AB, $3,416,000 for
expenses incurred in connection with the merger with Bendata, Inc., $7,779,000
of S Corporation distributions paid to the majority stockholder, $5,498,000 for
purchases and installation of property and equipment, $4,188,000 of temporary
investments, $1,230,000 for repayment of indebtedness and $7,008,000 of working
capital for product development activities and general operations.
Item 3. Defaults Upon Senior Securities
- --------------------------------------------
There have been no defaults by the Company on any Senior Securities during the
quarter ended September 30, 1997.
Item 4. Submission of Matters to a Vote of Security Holders
- ----------------------------------------------------------------
No matters were submitted to a vote of the Company's stockholders during the
third quarter of the fiscal year covered by this report through the solicitation
of proxies or otherwise.
Item 5. Other Information
- ------------------------------
None.
Item 6. Exhibits and Reports on Form 8-K
- ---------------------------------------------
(A) Exhibits
(10.1) Termination of Lease Agreement dated September 17, 1997 by and
between Zack B. Bergreen and Zahava Bar-Nir, as Landlords and
Astea International Inc., as Tenant.
(10.2) Amendment No. 1 to Astea International Inc. 1995 Employee Stock
Purchase Plan
(27) Financial Data Schedule
(B) Reports on Form 8-K
None
13
<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
November, 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)
14
<PAGE>
Exhibit 10.1
TERMINATION OF LEASE
--------------------
THIS TERMINATION OF LEASE AGREEMENT made this 17th day of September,
1997 by and between ZACK B. BERGREEN and ZAHAVA BAR-NIR, of 100 Highpoint Drive,
Chalfont, Pennsylvania ("Landlord") and ASTEA INTERNATIONAL, INC., 455 Business
Center Drive, Horsham, Pennsylvania ("Tenant").
W I T N E S S E T H
WHEREAS, effective January 1, 1994, Landlord and Tenant entered into
that certain Amended and Restated Lease Agreement (the "Lease") under the terms
of which Landlord leased to Tenant Units 101, 102 and 103 located at Highpoint
Condominium No. 1, New Britain Township, Bucks County, Pennsylvania (the
"Premises").
WHEREAS, Landlord and Tenant desire to terminate and cancel the Lease
prior to the expiration of the Term pursuant to the terms of this Lease
Termination Agreement (the "Agreement").
NOW, THEREFORE, for and in consideration of mutual agreements herein
contained, and for other good and valuable consideration by each of the parties
hereto to the other in hand paid, the receipt and sufficiency of which is hereby
acknowledged, and intending to be legally bound hereby, Landlord and Tenant
agree as follows:
1. The Lease shall terminate as of 11:59 p.m. on September 17th, 1997
(the "Termination Date"), as if the Lease had expired in accordance with its
terms, and all parties who are now or whoever have been obligated thereunder
shall have no further rights or obligations thereunder except as set forth in
this Agreement.
2. In consideration of the foregoing termination, Tenant shall pay
Landlord 3 equal payments of $155,595 each on October 31, 1997, November 30,
1997, and January 2, 1998. In addition, Tenant has previously paid on behalf of
Landlord $115,830 in consideration of the foregoing termination.
3. This Agreement may be executed in one or more counterparts. Each
such counterpart shall be deemed to be an original but all such counterparts
together shall constitute one and the same instrument.
4. This Agreement shall extend to and bind the heirs, executors,
administrators, successors and assigns of the respective parties hereto.
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have caused this Agreement to be
executed as of the day and year first above written.
LANDLORD:
/s/ Zack B. Bergreen
--------------------
/s/ Zahava Bar-Nir
------------------
TENANT:
/s/ Robert G. Schwartz, Jr.
---------------------------
Secretary,
Astea International, Inc.
<PAGE>
Exhibit 10.2
AMENDMENT NO. 1
TO
ASTEA INTERNATIONAL INC.
1995 EMPLOYEE STOCK PURCHASE PLAN
Effective as of September 15, 1997
By resolution of the Board of Directors of Astea International Inc.
dated September 15, 1997, the Astea International Inc. 1995 Employee Stock
Purchase Plan has been amended to delete the words " ..., in either event
rounded up to avoid fractions of a dollar other than 1/4, 1/2 and 3/4 ..." from
the fourth (4th) sentence of the second (2nd) paragraph of Article 5 thereof.
/s/ Robert G. Schwartz, Jr.
---------------------------
Secretary,
Astea International Inc.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> SEP-30-1997 SEP-30-1996
<CASH> 6,986,000 3,334,000
<SECURITIES> 4,188,000 8,994,000
<RECEIVABLES> 18,626,000 25,868,000
<ALLOWANCES> 1,862,000 1,681,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 32,407,000 42,179,000
<PP&E> 8,461,000 13,052,000
<DEPRECIATION> 4,255,000 4,935,000
<TOTAL-ASSETS> 41,271,000 57,691,000
<CURRENT-LIABILITIES> 24,955,000 21,419,000
<BONDS> 0 0
0 0
0 0
<COMMON> 134,000 131,000
<OTHER-SE> 13,960,000 32,089,000
<TOTAL-LIABILITY-AND-EQUITY> 41,271,000 57,691,000
<SALES> 16,458,000 19,533,000
<TOTAL-REVENUES> 43,768,000 43,868,000
<CGS> 3,299,000 2,631,000
<TOTAL-COSTS> 21,532,000 18,827,000
<OTHER-EXPENSES> 39,822,000 44,790,000
<LOSS-PROVISION> 975,000 1,606,000
<INTEREST-EXPENSE> 45,000 (622,000)
<INCOME-PRETAX> (18,606,000) (20,733,000)
<INCOME-TAX> 0 (1,613,000)
<INCOME-CONTINUING> (18,606,000) (19,120,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (18,606,000) (19,120,000)
<EPS-PRIMARY> (1.41) (1.50)
<EPS-DILUTED> 0 0
</TABLE>
