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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934.
For The Fiscal Year Ended: December 31, 1996
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
455 Business Center Drive, Horsham, Pennsylvania 19044
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 682-2500
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
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par value
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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____
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 21, 1997 (based on the closing price of $4.13 as quoted
by Nasdaq National Market as of such date) was approximately $20,953,000.
As of March 21, 1997, 13,208,534 shares of the registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 15, 1997 are incorporated by reference into Part
III of this Annual Report on Form 10-K.
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TABLE OF CONTENTS
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PART I
Item 1. Business 3
Item 2. Properties 18
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security-Holders 19
PART II
Item 5. Market for Registrant's Common Equity and Related 19
Stockholder Matters
Item 6. Selected Financial Data 20
Item 7. Management's Discussion and Analysis of Financial 21
Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data 28
Item 9. Changes in and Disagreements with Accountants on 49
Accounting and Financial Disclosure
PART III
Item 10. Directors and Officers of the Registrant 50
Item 11. Executive Compensation 50
Item 12. Security Ownership of Certain Beneficial Owners and 50
Management
Item 13. Certain Relationships and Related Transactions 50
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports 51
on Form 8-K
Signature Page 54
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PART I
ITEM 1. BUSINESS.
GENERAL
Astea International Inc. ("Astea" or the "Company") develops, markets and
supports a suite of client/server and host-based applications for the customer
interaction software ("CIS") market. Companies worldwide are increasingly
automating the ways they interact with their customers, and Astea believes that
companies in almost every industry can find competitive advantages through the
use of customer interaction software. Astea is currently one of a few
application vendors offering software solutions and professional services for
automating critical aspects of field service, customer support and sales and
marketing operations. Astea's products improve access to customer information,
automate customer interaction functions and facilitate the proactive
satisfaction of customer needs. Thus, the Company believes that its principal
product offerings-DISPATCH-1, HEAT, PowerHelp and Abalon (formerly Sellplan)-
enable organizations with field service, customer support, and sales and
marketing requirements to increase their revenue opportunities and decrease
costs, while improving customer satisfaction and building customer loyalty.
Astea's software is used by approximately 2,700 companies and approximately
75,000 end users worldwide today.
The past year brought significant changes for Astea. In 1996, the Company
moved from principal reliance on its field service software to the complementary
and growing markets of software for customer support and sales and marketing,
through the Company's merger with Bendata, Inc. ("Bendata"), a Colorado-based
provider of internal help desk software, and its acquisition of Abalon AB, a
Swedish provider of sales and marketing automation software. The Company also
expanded into new international markets and increased its international sales
and distribution channels.
The Company's original product, DISPATCH-1, helps organizations with
complex and geographically dispersed field service operations automate and
manage call center operations among customers, headquarters, branch offices and
the field. Through its Bendata subsidiary, the Company also offers the HEAT
family of software applications, which provide a flexible and customizable
problem management solution for automating an organization's help desk
operations. The HEAT family of products includes a number of related products
for the help desk market. The Company's PowerHelp product is designed for
telephone-based and online external customer support operations. With
PowerHelp's multimedia capabilities, Astea's client organizations can automate,
diagnose and resolve customer support problems using graphics, video, audio,
scanned images and animation. Abalon is a client/server, object-oriented
software package for sales and marketing automation. Acquired with the Company's
purchase of Swedish-based Abalon AB, this customer management solution provides
a suite of modular applications built around a central customer database. To
implement its products, Astea also provides its clients with an array of
professional consulting services and a wide range of training and customer
support services.
Astea's products are flexible to meet clients' changing computing and
business needs, scalable to address the needs of both small, rapidly growing and
large, multinational organizations, and modular to accommodate growth within the
enterprise so that a solution can be implemented in phases and expanded as
required. The Company's products are both platform and database independent,
using popular client/server environments, multiple hardware platforms and
operating systems such as DOS, Windows, Windows NT, Unix, VMS, Open VMS and OSF.
Astea's products operate across a number of relational database management
systems including, depending on the Astea software, those from Oracle, Progress,
Sybase, Informix, Microsoft Sequel Server and Watcom, and they are deployed on
local and wide-area networks and multiple communications protocols. The Company
markets its products both domestically and internationally through
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offices in the United States and overseas, as well as through value added
resellers and system integrators.
PRODUCTS
The Company's products include DISPATCH-1, the Heat family of products,
PowerHelp and Abalon, which provided 43%, 39%, 11% and 7%, respectively, of the
Company's software license revenues in 1996.
DISPATCH-1
Introduced in 1986 as the Company's original product, DISPATCH-1
incorporates several years of industry-wide knowledge. It automates critical
field service operations and distributes customer, product and technical
information ranging from field service, depot repair and logistics to finance
and contract administration. DISPATCH-1 automates a broad range of field service
operations, allowing a client to track information relevant to customer
accounts. DISPATCH-1 has been licensed by more than 350 clients worldwide since
its introduction. In 1996, approximately 61% of the Company's total revenues
derived from license and professional service fees related to DISPATCH-1. See
"Certain Factors that May Affect Future Results-Dependence on DISPATCH-1 as
Principal Product."
DISPATCH-1 has more than 30 core operational modules, which allow call
center operations to open and track service requests, identify contractual
obligations, generate new sales opportunities, diagnose problems and analyze the
appropriate field resources required to address the problem. Spare parts
inventory needed for on-site, in-house or third-party repairs is managed from
requisition through purchasing, receiving and shipping. Repairs made to parts
and components returned from the field are tracked through the product's depot
operations capabilities. Integrated financial modules capture cost and revenue
information throughout the life of the customer interaction. Product performance
and failure information also can be captured and shared with engineering,
quality and manufacturing departments to deliver improvements in quality
control, design and production.
DISPATCH-1's remote access modules, REMOTE-1, Manager's Window and Customer
Access, address the specific processing needs of field technicians, their
managers and the client's customers. Using Astea's REMOTE-1 module, mobile field
technicians have immediate access to critical customer service information via
wireless and wireline networks, ensuring that required equipment and parts are
obtained before traveling to the customer site. Manager's Window enables field
managers to gain access to and assess a technician's progress, help troubleshoot
problems and reassign resources to address workload requirements as new customer
priorities arise. Customer Access allows an organization's customers to connect
directly to DISPATCH-1 to initiate service requests, place parts orders and
track the service provider's progress on service calls, streamlining the call
center administration process and further strengthening the client's
relationship with the customer. Astea has also developed decision support
modules to further automate and decentralize the decision-making capabilities
offered by DISPATCH-1. The Company has developed the Logistics Management Engine
("LME") module to assist inventory planners in the requisition and deployment of
spare parts inventory. LME automates the spare parts forecasting process,
enabling inventory planners to determine proper inventory levels across products
and multiple stocking locations. In October 1996, the Company added Web-enabled
capabilities to DISPATCH-1. Now DISPATCH-1 provides comprehensive functionality
over the Internet by providing links to work order management, parts order
management and depot repair.
DISPATCH-1 is available on DOS, Windows, Unix, VMS, Open and VMS operating
systems and operates with Oracle and Progress database management systems.
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HEAT Products
Astea's merger with Bendata in February 1996 augmented the Company's help
desk customer support product offerings, adding to Astea's field service and
enterprise-level help desk software. Originally introduced by Bendata in
December 1990 and as a client/server application in October 1994, HEAT for
Windows Professional, HEAT for Windows Premiere, HEATLink series and First Level
Support provide flexible, customizable solutions for automating an
organization's help desk system without the need for extensive programming. The
HEAT solution employs client/server databases to assist end-users and help desk
agents to resolve problems and answer questions, log and manage calls to the
help desk, automate alert conditions, manage workflow, improve tracking and
comprehension of trends in help desk activity, and coordinate the overall
problem resolution process.
HEAT customers can distribute and access knowledge bases of problem
resolutions via an expert problem solving tool, First Level Support. Customers
of HEAT for Windows, Professional Edition, can use the HEATLink products, which
provide help desk integration with popular third-party applications. Such
applications include HEATLink with 3270 (which provides two-way connectivity to
legacy, mainframe systems), HEATLink with Lotus Notes, and HEATLink with SYMON
(which provides electronic display of status or out-of-tolerance conditions,
including an interface to HEAT auto-ticket generation capability).
Bendata's family of HEAT products are scalable, enabling customers to
operate under a number of environments. These products are written in C++ and
adhere to open standards employing native ODBC implementation to provide
compatibility with a broad range of databases. HEAT is available on DOS,
Windows, Windows NT and Unix operating systems and operates with Microsoft,
Watcom, Sybase, Oracle and other leading relational database management systems.
PowerHelp
Introduced in March 1994, the Company's enterprise-level customer support
application, PowerHelp, is a flexible, scalable and portable solution for
automating complex, telephone-based external customer support organizations.
PowerHelp enables clients to capture, analyze, route and resolve their
customers' technical support calls. PowerHelp's core modules provide a range of
structured search and resolution techniques for quickly solving a customer's
problems. Support staff can perform keyword and hypertext searches, follow
question and answer scripts, examine problem resolution statistics, and analyze
network diagrams. PowerHelp supports a wide range of multimedia capabilities
such as graphics, scanned images, animation, audio and full-motion video, which
also facilitate the problem resolution process. Supplementary objects such as
charts, video clips, data files or pictures also may be linked via Object
Linking and Embedding. PowerHelp's remote access capabilities allow customers to
open and track support calls electronically, simplifying administration,
improving productivity and customer relations, and reducing costs. PowerHelp's
decision support capabilities provide a graphical representation of the status
of calls within the support organization. The status of customer calls can
continuously be analyzed to assess support staff productivity and performance,
and to identify and proactively manage potential trouble areas. The Company also
has developed decision support and remote access modules for PowerHelp.
In April 1996, Astea released PowerHelp version 2.2, a significant upgrade
including enhanced search capabilities and product resolution support via the
Internet and World Wide Web. In conjunction with this release, the Company
introduced the PowerHelp Web Server as an option available with version 2.2. By
using Astea's Web Server, an organization's customers can gain access to
PowerHelp independently via the Internet without the need for intervention by
help desk personnel. With a direct link to PowerHelp, customers can
electronically initiate support requests and independently research and resolve
problems. In July 1996, Astea entered into an international distribution
agreement with Nissho Iwai Corporation to develop, distribute and sell a
Japanese-language version of PowerHelp.
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PowerHelp is now available in the client/server computing environment on
Windows, Windows NT, UNIX, VMS, Open VMS, OS/2, NetWare and OSF operating
systems, and operates with Oracle, Sybase, Informix, Microsoft Sequel Server and
WATCOM relational database management systems.
Abalon
In June 1996, the Company acquired Abalon AB, a Swedish software company
that offers Abalon (formerly Sellplan), a sales and marketing automation
software package. Abalon provides a suite of integrated, modular applications
built around a central database. These applications can be used as stand-alone
departmental systems or integrated into an enterprise-wide solution. Abalon is
scalable, highly modular, object oriented, client/server-based, integrated
software that enables companies to coordinate activities ranging from marketing
programs to telemarketing and telesales, field sales activities, customer
training, customer support and billing. Abalon offers several separate modules.
Abalon Base is a central repository for the information gathered about
prospects, customers, business partners, competitors and suppliers. Abalon
Marketing provides a set of advanced tools that identify and target specific
market segments for the purpose of planning, promotions, or telemarketing.
Abalon Sales is a tool for both the individual salesperson and the sales manager
designed to reduce time spent on administrative chores. Abalon Project keeps
track of actual time and resources expended during the sales implementation
process. Abalon Tele is a system for telemarketing and telesales that is
integrated with other Abalon modules to better coordinate and execute projects
ranging from market research to sales proposals to support calls. Abalon Mobile
offers a portable sales system for the traveling professional. Abalon Intranet
and Internet Integration uses Abalon as a World Wide Web server. And Abalon
Course Booking tracks and manages training and seminar programs and Customer
Agreements for referencing and tracking customer contracts online.
Abalon is available on major operating systems such as Windows, Windows NT
and Unix, and operates with Oracle, Informix and Sybase relational database
management systems. Microsoft SQL Server and other database products are
supported via ODBC. Abalon is written in C++ and adheres to open standards.
PRODUCT PRICING
The Company's pricing of its various product offerings varies depending on
the number of concurrent users and the type and number of product modules
licensed. Typical pricing for DISPATCH-1 currently ranges from $3,500 to $5,000
per concurrent user. PowerHelp is generally priced at $2,500 per concurrent
user. HEAT products are priced from $1,200 to $3,000 per concurrent user. Abalon
is currently priced from $1,500 to $3,000 per designated user.
PROFESSIONAL SERVICES AND CUSTOMER SUPPORT SERVICES
Astea offers a range of specialized professional and customer support
services to assist its clients in using its products effectively. These services
include business process consulting, implementation planning, project
management, customization, education and training, technical support and ongoing
software maintenance. Astea believes that its professional services capabilities
allow its clients to deploy the Company's products quickly and efficiently. By
helping clients achieve a more rapid rate of return on their investment, the
Company's professional services organization also fosters a stronger partnership
between Astea and its clients. Together, professional services and customer
support comprised 54% of the Company's total revenues in 1996, compared to 45%
in 1995.
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Professional Services
As of December 31, 1996, the professional services group consisted of 283
professional services personnel headquartered in four offices in the United
States and seven offices internationally; in the United Kingdom, France, the
Netherlands, Sweden, Israel, Australia and New Zealand. Of the Company's 283
professional services personnel, 187 representatives are based in domestic
offices while the remaining 96 representatives are based overseas. The initial
professional services engagement usually lasts between six and 18 months, but is
longer for larger and more complex implementations. In the case of Astea's
largest clients, dedicated, global project teams are created to work exclusively
with these clients. In the case of smaller clients or more discrete projects,
appropriate teams are assembled from the Company's worldwide offices to perform
the required services. Astea's professional services personnel are experienced
in planning and implementing customer-oriented software systems in all of the
industries served by the Company, including telecommunications, medical
technology, office equipment, and third-party service and support organizations.
Due to the more complex nature of Astea's DISPATCH-1, PowerHelp and Abalon
offerings, customers that license these programs are more likely to purchase
professional services than are customers of HEAT products.
Astea's typical professional services engagement includes planning,
prototyping and implementation of Astea's products within the client's
organization. During the initial planning phase of the engagement, Astea's
professional services personnel work closely with representatives of the client
to prepare a detailed project plan that includes a timetable, resource
requirements, milestones, in-house training programs, on site business process
training and demonstrations of Astea's product capabilities within the client's
organization. The next, most critical phase of the Astea professional services
personnel engagement is the prototyping phase, in which Astea works closely with
representatives of the client to develop an effective utilization of Astea's
software functionality in relation to the client's specific business process
requirements. During the prototyping phase, Astea's professional services
personnel design the technology infrastructure, develop business processes and
establish the order of product deployment. The critical element of the
prototyping phase is a detailed analysis of the client's business processes and
needs. The final phase in the professional services engagement is the
implementation phase in which Astea's professional services personnel work with
the client to develop detailed data mapping, conversions, end-user interfaces,
product customizations and other technical and business processes necessary to
integrate Astea's software into the client's computing environment. Ultimately,
education plans are developed and executed to provide the client with the
process and system knowledge necessary to effectively utilize the software and
fully implement the Astea solution. Professional services, which include
education, consulting and training, are charged on an hourly or per diem basis
and are billed, usually on a monthly basis, pursuant to customer work orders.
Customer Support
The Company's customer support group provides Astea clients with telephone
and on line technical support, as well as product enhancements, updates, new
releases and corrections. Astea's customer support group is deployed to provide
support for Astea's clients in all regions of Astea's worldwide operations,
providing local client representatives with real-time support spoken in their
native languages by Astea and distributor personnel familiar with local business
customs and practices. Typically, customer support fees are established as a
fixed percentage of license fees and are invoiced to clients on an annual basis
after the conclusion of the warranty period which is usually 90 days. Astea's
customer support representatives are located in three offices in the United
States and six offices in Europe. As of December 31, 1996, the Company's
worldwide customer support group consisted of 81 representatives, 50 of whom
were located in the United States and 31 of whom were based internationally.
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CUSTOMERS
The Company estimates that it has approximately 2,700 customers,
representing more than 75,000 end-users. Astea's customers range from small,
rapidly growing companies to large, multinational corporations with
geographically dispersed operations and remote offices. The broad applicability
of the Company's products is demonstrated by the wide range of companies across
many markets and industries that use one or more of Astea's products, including
telecommunications, computers and electronics, office equipment, and third-party
service and support organizations.
In 1996 and 1994, no customer accounted for 10% or more of the Company's
revenues. In 1995, the Company had one customer that accounted for approximately
19% of revenues.
SALES AND MARKETING
Astea markets its products and services through a multi-tiered sales
structure comprised of direct sales and telesales operations, and through
relationships with value-added resellers ("VARs") and international
distributors. The Company's sales organization consisted of 92 personnel on
December 31, 1996, complemented by a coordinated marketing effort of the
Company's marketing group, which consisted of 30 personnel on December 31, 1996.
Astea's direct sales force of 83 personnel as of December 31, 1996 (which
excludes sales management, administration and support personnel), employs a
telesales process for Bendata products and a consultative sales process for
other products, working closely with prospective clients to understand and
define their customers' needs and determine how such needs can be addressed by
the Company's products. These clients typically represent the mid- to high-end
of the customer interaction software market. A prospect development organization
comprised of telemarketing representatives develops and qualifies sales leads
prior to referral to the direct sales staff. See "Certain Factors that May
Affect Future Results-Continued Dependence on Large Contracts May Result in
Lengthy Sales and Implementation Cycles." The modular structure of Astea's
software and its ongoing product development efforts provide opportunities for
incremental sales of product modules and consulting services to existing
accounts.
The Company's telesales channel targets low- to mid-market opportunities
and is the principal channel of distribution for the Bendata HEAT products. For
domestic sales, Astea's telesales operation employs several account management
teams consisting of one account representative and one account executive. The
teams are organized by region. The account representatives qualify leads
generated by marketing activities. The account executives provide telephone
demonstrations, present the Company's support and help desk products at local
seminars, conduct site visits and close qualified leads generated by the account
representatives.
The Abalon product is currently sold and marketed in Scandinavia through a
direct sales channel that is vertically focused on market segments such as
telecommunications, financial services, manufacturing, and construction
management. In Europe, the United States and Asia/Pacific, the sales and
marketing effort of Abalon AB is currently in the planning stages.
Astea's marketing department is responsible for lead generation and product
and professional services marketing, and the department provides input into the
Company's ongoing product development efforts based on client feedback and
market data. Leads developed from marketing are routed through the Company's
sales tracking systems. The Company also participates in an annual conference
organized and sponsored by ADONUS, an independent user group comprised of
Astea's DISPATCH-1 and PowerHelp clients. Conference participants attend
training sessions, workshops and presentations, and interact with other Astea
product users and Astea management and staff, providing important input for
future product direction.
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Astea's international sales increased significantly in 1996, accounting for
32% of the Company's revenues, compared to 21% of the Company's revenues in
1995. See "Certain Factors that May Affect Future Results-Risks Associated with
International Sales."
PRODUCT DEVELOPMENT
Astea's product development strategy is to provide products that are easy
to use and implement. Its products are designed to be flexible, modular and
scalable, so that they can be implemented incrementally in phases and expanded
to satisfy the evolving information requirements of Astea's clients and their
customers. Each product also is designed to be both platform and hardware
independent, using popular client/server environments, multiple hardware
platforms and operating systems.
To accomplish these goals, the Company uses widely accepted, commercially
available application development tools from Progress Software Corporation,
PowerSoft Corporation and Microsoft Corporation. These software tools provide
the Company's clients with the flexibility to deploy Astea's products across a
variety of hardware platforms, operating systems, client/server configurations
and relational database management systems.
The Company's continuing development efforts concentrate on the following
methodologies. The Company's DISPATCH-1, PowerHelp and Abalon products are
developed as modules, each of which addresses a particular function, providing
clients with the flexibility to use only applications that meet their needs. The
modular design also allows the Company to deploy its core, remote access and
decision support applications using the best technologies for each function. For
PowerHelp, Astea's clients can customize these graphical user interface-based
products with minimal technical knowledge and without programming changes to the
underlying source code. Screen layouts can be easily modified, allowing for data
fields to be renamed, moved, hidden, or designated as optional or mandatory.
System capabilities not relevant to an end user's role can be suppressed.
Customer preferences are stored in a separate database and can be tied to a
group profile, which can be easily replicated for end users with common
processing needs. The HEAT products are designed to be customizable and easy to
use, without the need for programming. Non-technical users can modify field
descriptions, add and define new fields, adjust layout design, and create new
tables.
As of December 31, 1996, the Company's product development staff consisted
of 108 employees. The Company's total expenses for product development for the
years ended December 31, 1996, 1995 and 1994 were $8.0 million, $4.2 million and
$2.7 million, respectively. These expenses represented 13%, 8% and 10% of total
revenues for 1996, 1995 and 1994, respectively. In addition, the Company
capitalized software development costs of $1,858,000, $957,000 and $788,000 in
1996, 1995 and 1994, respectively. The Company anticipates that it will continue
to commit substantial resources to product development in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7 hereof and "Certain Factors that May Affect Future
Results-Need for Development of New Products."
MANUFACTURING
The Company's software products are distributed on standard magnetic disks,
tapes and CD ROM. Included with the software products are security keys and
documentation available on CD ROM and in print. Historically, the Company has
purchased diskettes, tapes, and duplicating and printing services from outside
vendors. The Company has been able to obtain adequate supplies of all components
and materials in a timely manner from existing and alternate sources of supply.
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COMPETITION
The customer interaction software market is intensely competitive and
subject to rapid change. To maintain or increase its position in the industry,
the Company will need to continually enhance its current product offerings,
introduce new products and features and expand its professional services
capabilities. The Company currently competes on the basis of the breadth of its
product features and functions, including the adaptability and scalability of
its products and their enablement with other client/server products; the ability
to deploy complex systems both locally and internationally; product quality,
ease-of-use, reliability and performance; company reputation and breadth of
professional services; integration of Astea's offerings with other enterprise
and client/server applications; price; and the availability of Astea's products
on popular operating systems, relational databases, the Internet and
communications platforms.
Competitors vary in size, scope and breadth of the products and services
offered. The Company encounters competition generally from a number of sources,
including other software companies, third-party professional services
organizations that develop custom software, and management information systems
departments of potential customers developing proprietary, custom software. The
Company's competitors include Clarify Inc. ("Clarify"), Remedy Corp. ("Remedy"),
Scopus Technology, Inc. ("Scopus"), The Vantive Corporation ("Vantive"), and a
number of smaller privately-held companies which generally focus only on
discrete areas of the customer interaction software marketplace. In the field
service marketplace, the Company competes against numerous, smaller, privately-
held companies. In the customer support and help desk marketplace, the Company
competes against a number of smaller, privately-held and publicly-held companies
as well as larger publicly-held companies with greater resources. With the
introduction of Abalon into the United States, this product faces a variety of
established competitors such as Siebel Systems, Inc., Aurum Software, Inc.,
Vantive and Scopus, as well as a number of smaller companies. See "Certain
Factors that May Affect Future Results- Competition in the Customer Interaction
Software Market Is Intense."
LICENSES AND INTELLECTUAL PROPERTY
Astea considers its software proprietary and licenses its products to its
customers generally under written license agreements. The Company also employs
an encryption system that restricts a user's access to source code to further
protect the Company's intellectual property. Because the Company's products
allow customers to customize their applications without altering the source
code, the source code for the Company's products is typically neither licensed
nor provided to customers, although the Company does license source code from
time to time and maintains certain third-party source code escrow arrangements.
The Company presently has no patents or patent applications pending. The
Company seeks to protect its products through a combination of copyright,
trademark, trade secret and fair business practice laws. The Company also
requires employees and consultants or third-parties to sign nondisclosure
agreements. Despite these precautions, it may be possible for unauthorized
parties to copy certain portions of the Company's products or reverse engineer
or obtain and use information that the Company regards as proprietary. See
"Certain Factors that May Affect Future Results-Risks of Dependence on
Proprietary Technology."
Because the software development industry is characterized by rapid
technological change, Astea believes that factors such as the technological and
creative skills of its personnel, new product developments, frequent product
enhancements, name recognition, and reliable product maintenance are more
important to establishing and maintaining a technology leadership position than
current legal protections available for its technology.
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EMPLOYEES
As of December 31, 1996, the Company, including its subsidiaries, had a
total of 594 employees worldwide, 351 of whom were based in the United States,
61 in Sweden, 47 in the United Kingdom, 34 in the Netherlands, 6 in France, 3 in
Germany, 47 in Israel, 38 in Australia and 7 in New Zealand. Of the total, 122
were employed in sales and marketing, 116 were employed in product development,
283 were employed in professional services and customer support and 73 were
employed in administration and finance. As of December 31, 1996, the Company's
Bendata subsidiary had a total of 134 employees, 100 of whom were based in the
United States and 34 of whom were based in the United Kingdom. As of December
31, 1996, the Company's Abalon AB subsidiary had a total of 61 employees, all
located in Sweden. The Company's future performance depends, in significant
part, upon the continued service of its key technical and management personnel
and its continuing ability to attract and retain highly qualified and motivated
personnel in all areas of its operations. Competition for such personnel is
intense and there can be no assurance that the Company can retain its key
managerial and technical employees or that it can attract, assimilate or retain
other highly qualified personnel in the future. See "Certain Factors that May
Affect Future Results-Competition for Employees." None of the Company's
employees is represented by a labor union. The Company has not experienced any
work stoppages and considers its relations with its employees to be good.
CORPORATE HISTORY
The Company was incorporated in Pennsylvania in 1979 under the name Applied
System Technologies, Inc., and in 1992, the Company changed its name to Astea
International Inc. Until 1986, the Company operated principally as a software
consulting firm, providing professional software consulting services on a fee
for service and project basis. In 1986, the Company developed and introduced its
DISPATCH-1 product. In November 1991, the Company's sole stockholder acquired
the outstanding stock of The DATA Group Corporation ("Data Group"), a provider
of field service software and related professional services for the mainframe
computing environment. Data Group was merged into the Company in January 1994.
In February 1995, the Company and its sole stockholder acquired the outstanding
stock of Astea Service & Distribution Systems BV ("Astea BV"), the Company's
distributor of DISPATCH-1 and related services in Europe. In May 1995, the
Company reincorporated in Delaware. In July 1995, the Company completed its
initial public offering of Common Stock. In February 1996, the Company merged
with Bendata. In June 1996, the Company acquired Abalon AB.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company does not provide forecasts of the future financial performance
of the Company. From time to time, however, information provided by the Company
or statements made by its employees may contain "forward looking" information
that involves risks and uncertainties. In particular, statements contained in
this Annual Report on Form 10-K that are not historical fact may constitute
forward looking statements and are made under the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. The Company's actual results
of operations and financial condition have varied and may in the future vary
significantly from those stated in any forward looking statements. Factors that
may cause such differences include, but are not limited to, the risks,
uncertainties and other information discussed within this Annual Report on Form
10-K, as well as the accuracy of the Company's internal estimates of revenue and
operating expense levels.
The following discussion of the Company's risk factors should be read in
conjunction with the financial statements and related notes thereto set forth
elsewhere in this report The following factors, among others, could cause actual
results to differ materially from those set forth in forward looking statements
contained or incorporated by reference in this report and presented by
management from time to time. Such factors, among
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others, may have a material adverse effect upon the Company's business, results
of operations and financial conditions:
DEPENDENCE ON DISPATCH-1 AS PRINCIPAL PRODUCT. In each of 1996, 1995 and
1994, more than 61%, 76% and 70%, respectively, of the Company's total revenues
derived from the licensing of DISPATCH-1 and the provision of professional
services in connection with the implementation, deployment and maintenance of
DISPATCH-1 installations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The Company's future success will depend
in part on its ability to reduce its reliance on revenues generated by DISPATCH-
1, by increasing licenses of the HEAT products, the Abalon products and other
offerings, and by developing new products and product enhancements to complement
its existing field service and customer support offerings. As an example of this
risk, the Company experienced a significant loss in the second quarter of 1996
due to the failure to close certain large orders for DISPATCH-1 in the period as
had been anticipated. There can be no assurance that the Company will be able to
close orders within the time frames anticipated or to sustain demand for
DISPATCH-1, thereby avoiding future losses, or to successfully develop any new
products and product enhancements in order to increase sales of other products
and reduce its reliance on licenses of DISPATCH-1 and related professional
services revenue. As a result, any factor adversely affecting DISPATCH-1
licenses or related services would likely have a material adverse effect on the
Company's business and results of operations.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS MAY bE SIGNIFICANT. The
Company's quarterly operating results have in the past varied significantly and
are likely to vary significantly in the future, depending on factors such as the
size and timing of revenue from significant orders, the recognition of revenue
from such orders, the timing of new product releases and market acceptance of
these new releases, increases or other changes in operating expenses, the level
of product and price competition, the seasonality of its business and general
economic factors. The timing and size of licenses for new orders has in the past
varied significantly from quarter to quarter. As a result of the application of
the revenue recognition rules applicable to the Company's licenses under
generally accepted accounting principles, the Company's license revenues may be
recognized in periods after those in which the respective licenses were signed.
The Company believes that the concentration of business activity in specific
quarterly periods is also affected by customers' buying patterns and budgeting
cycles, as well as general economic factors. Thus, the Company's results of
operations may vary seasonally in accordance with licensing activity or
otherwise, and will also depend upon its recognition of revenue from such
licenses from time to time. Due to the relatively fixed nature of certain of the
Company's costs throughout each quarterly period, including personnel and
facilities costs, a decline of revenues in any quarter typically results in
lower profitability or operating losses in that quarter. In addition, as a
result of the merger with Bendata and the acquisition of Abalon AB, the
difficulty of integrating several businesses-including their respective
products, services and personnel-may increase the likelihood of fluctuations in
quarterly operating results in future periods. There can be no assurance that
the Company will be profitable or avoid losses in any future period, and the
Company believes that period-to-period comparisons of its results of operations
are not necessarily meaningful and should not be relied upon as any indication
of future performance.
CONTINUED DEPENDENCE ON LARGE CONTRACTS MAY RESULT IN LENGTHY SALES AND
IMPLEMENTATION CYCLES. The sale and implementation of the Company's DISPATCH-1
product generally involve a significant commitment of resources by prospective
customers. License fees and implementation services for DISPATCH-1 may continue
to increase in size and the implementation of the Company's products may become
more complex as DISPATCH-1 is used to manage larger and more geographically
dispersed installations. As a result, the Company's sales process often is
subject to delays associated with lengthy approval processes attendant to
significant capital expenditures, definition of special customer implementation
requirements, and extensive contract negotiations with the customer. The sales
cycle associated with the license of the Company's products varies substantially
from customer to customer and typically lasts between six and nine months,
during which
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time the Company may devote significant time and resources to a prospective
customer, including costs associated with multiple site visits, product
demonstrations and feasibility studies, and the Company may experience a number
of significant delays over which the Company has no control. Because of the
longer sales cycle, the revenues anticipated from any particular project may be
postponed to future periods, even though the costs associated with the sale of
the product are fixed in current periods, resulting in timing differences
between incurrence of costs and recognition of revenue associated with a
particular project. Any significant or ongoing failure by the Company ultimately
to achieve such sales of the DISPATCH-1 product, and any significant delay in
the recognition of revenues from such sales, could have a material adverse
effect on the Company's business, operating results and financial condition. In
addition, following the initial sale, the implementation of DISPATCH-1 typically
involves several months of customer training and integration of the DISPATCH-1
product with the customer's other existing systems. A successful implementation
requires a close working relationship between the customer and members of the
Company's professional service organization, and delays frequently arise in
completing the implementation services. Occasionally, delays result from a
customer's inattention to the implementation project for reasons unrelated to
the Company's performance. Because of the special implementation requirements of
a particular customer, revenues associated with any project may not be booked in
the period in which the contract is signed, resulting in a deferral of revenue
over a longer period of time. Some of the Company's customers have adopted the
Company's software on an incremental basis. There can be no assurance that the
Company's customers will expand usage of the Company's software on an
enterprise-wide basis or implement new software products introduced by the
Company. The failure of the Company's software to perform according to customer
expectations or otherwise to be deployed on an enterprise-wide basis could have
a material adverse effect on the ability of the Company to increase revenues
from new as well as existing customers. There can be no assurance that delays in
the conclusion of customer contracts as well as the implementation process of
DISPATCH-1 for any given customer will not have a material adverse effect on the
Company's business, operating results and financial condition. Based upon all of
the foregoing, the Company believes that there can be no assurance that the
Company will be profitable or avoid losses in any future period, and the Company
believes that period-to-period comparisons of its results of operations should
not be relied upon as any indication of future performance.
RISKS OF UNCERTAIN BACKLOG. The Company's success in meeting its quarterly
revenue objectives is dependent upon obtaining orders in any given quarter for
shipment in that quarter. The Company often recognizes a large part of its
revenues toward the end of a quarter. Software revenues in any quarter are thus
substantially dependent on orders booked and shipped in that quarter. As a
result, quarterly revenue and operating results may not be predictable with any
significant degree of accuracy. If revenue levels are below expectations, the
Company's business, operating results, including net income, and financial
condition are likely to be materially and adversely affected.
COMPETITION IN THE CUSTOMER INTERACTION SOFTWARE MARKET IS INTENSE. The
customer interaction software market is intensely competitive. The Company's
competitors include Clarify, Remedy, Scopus, Vantive, and a number of smaller
privately-held companies that generally focus only on discrete areas of the
customer interaction software marketplace. In the field service marketplace, the
Company's principal competition comes from numerous small, privately-held
companies. In the external customer support market, certain competitors of the
Company are more established and benefit from greater market acceptance or name
recognition. In the internal help desk market, the Company faces significant
competition from certain well established private and public companies. Some of
the Company's publicly-held competitors, and many of the Company's potential
competitors, have greater financial, technical, marketing and distribution
resources than the Company. As a result, they may be able to respond more
quickly to new or emerging technologies and changes in customer requirements, or
to devote greater resources to the development and distribution of their
products.
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<PAGE>
Because the barriers to entry in the customer interaction software market
are relatively low, new competitors may emerge with products that are superior
to the Company's products in performance, functionality or ease-of-use, or that
achieve greater market acceptance. The Company believes that there already exist
well-established competitors for Bendata's and Abalon AB's products. Astea also
expects that competition will increase as a result of software industry
consolidations. Increased competition is likely to result in price reductions,
reduced gross margins and loss of market share, any of which could materially
harm the Company's business and results of operations. The Company's future
success will depend in large part upon its ability to attract new customers,
license additional products, and deliver product enhancements and professional
services to existing and new customers. There can be no assurance that the
Company will be able to compete successfully against current and future
competitors or that competitive pressures faced by the Company will not
adversely affect its business and results of operations.
POSSIBLE INABILITY TO INTEGRATE VARIOUS PRODUCT OFFERINGS. The Company
believes that significant market opportunities exist for a provider of fully
integrated field service, customer support and sales and marketing automation
software. One of the Company's business strategies is to integrate its various
product offerings. There can be no assurance that the Company will be able to
integrate successfully its field service, customer support and sales and
marketing applications, including the HEAT and Abalon products, or that
achieving such integration will enable the Company to improve its competitive
position in the customer interaction software market. The Company's inability to
further integrate its products could have a material adverse effect on the
Company's business and results of operations.
UNCERTAIN MARKET ACCEPTANCE. Continued acceptance of Astea's products by
existing and potential customers is critical to the success of the Company's
overall strategy of increasing its penetration of the field service and external
customer support markets and entering the sales and marketing automation market.
The Company believes that a number of factors will determine such acceptance,
including product performance, ease of adoption, migration from host-based to
client/server computing environments and interoperability with diverse hardware
platforms, network servers and databases. Any failure of the Company's products
to achieve or sustain market acceptance, or of the Company to sustain its
current position in the field service, customer support and sales and marketing
software markets, would have a material adverse effect on the Company's business
and results of operations.
POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Common Stock
has in the past been, and may continue to 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. In addition, the stock market can experience extreme
price and volume fluctuations from time to time which may bear no meaningful
relationship to performance.
RAPID TECHNOLOGICAL CHANGE. The client/server application software market
is subject to rapid technological change, frequent new product introductions and
evolving technologies and industry standards that can quickly render existing
products and services obsolete. While the Company is not aware of any emerging
products that are likely to render its existing products obsolete, there can be
no assurance that the Company's products could not suffer such obsolescence.
Because of the rapid pace of technological change in the application software
industry, the Company's current market position in field services, customer
support, sales and marketing support or other markets that it may enter could be
eroded rapidly by product advancements. The Company's application environment
relies primarily on software development tools from Progress Software
Corporation and PowerSoft Corporation, a subsidiary of Sybase, Inc. If
alternative software development tools were to be designed and generally
accepted by the marketplace, the Company could be at a competitive disadvantage
relative to companies employing such alternative developmental tools, possibly
resulting in material harm to the Company's financial condition and results of
operation.
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<PAGE>
NEED FOR DEVELOPMENT OF NEW PRODUCTS. The Company's products must keep
pace with technological developments and conform to evolving technologies and
standards, including developments within the client/server computing
environment, and must address increasingly sophisticated customer needs. Such
developments may require, from time to time, substantial capital investments by
the Company in product development and testing. The Company intends to continue
its commitment to research and development and its efforts to develop new
products and product enhancements. There can be no assurance that the Company
will have sufficient resources to make the necessary investments. Also, there
can be no assurance that the Company will not experience difficulties that could
delay or prevent the successful development, introduction and marketing of new
products and product enhancements, that new products and product enhancements
will meet the requirements of the marketplace and achieve market acceptance, or
that the Company's current or future products will conform to industry
requirements.
BURDENS OF CUSTOMIZATION. Certain of the Company's clients request
customization of the Company's software products to address unique
characteristics of their businesses or computing environments. The Company's
commitment to customization could place a burden on the Company's client support
resources or delay the delivery or installation of products which, in turn,
could materially adversely affect the Company's relationship with significant
clients or otherwise adversely affect its business and results of operations. In
addition, the Company could incur penalties or reductions in revenues for
failures to develop or timely deliver new products or product enhancements under
development agreements and other arrangements with customers.
DEPENDENCE ON GROWTH OF CLIENT/SERVER COMPUTING ENVIRONMENT. DISPATCH-1 is
designed for use by organizations employing either host-based or client/server
computing solutions, and PowerHelp, the HEAT products and the Abalon products
are designed for use by organizations employing client/server computing
solutions. The Company's business strategy assumes that the market for the
Company's products will expand as businesses migrate from host-based to
client/server computing environments. The Company's future results of operations
will depend in large part on continued growth in the number of organizations
adopting client/server computing solutions and the development of applications
for use in those environments. The Company's future financial performance also
will depend in large part on the continued reliance on third party vendors for
client/server software applications. There can be no assurance that the
client/server computing trends anticipated by the Company will occur or that the
Company will be able to respond effectively to the evolving requirements of this
market. If the client/server market fails to grow or grows more slowly than
management anticipates, the Company's business and results of operations would
be materially adversely affected.
RISK OF PRODUCT DEFECTS; FAILURE TO MEET PERFORMANCE CRITERIA. The
Company's field service and sales and marketing software is intended for use in
enterprise-wide applications that may be critical to a customer's business. As a
result, the Company's customers and potential customers typically have demanding
requirements for installation and deployment. Software products as complex as
those offered by the Company may contain errors or failures, particularly when
software must be customized for a particular licensee. Although the Company
conducts extensive product testing during product development, the Company has
at times delayed commercial release of software until problems were corrected
and, in some cases, has provided enhancements to correct errors in released
software. The Company could, in the future, lose revenues as a result of
software errors or defects. There can be no assurance that, despite testing by
the Company and by current and potential customers, errors will not be found in
software, customizations or releases after commencement of commercial shipments,
resulting in loss or delay of revenue or delay in market acceptance, diversion
of development resources or increased service and warranty costs, any of which
could have a material adverse effect upon the Company's business, operating
results and financial condition.
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RISKS ASSOCIATED WITH INTERNATIONAL SALES. Prior to 1995, the Company
derived no significant revenues from international operations. In 1996,
international sales represented approximately 32% of the Company's total
revenues. In 1995, international sales represented approximately 21% of the
Company's total revenues. In 1994, international sales represented approximately
1% of the Company's total revenues. Since 1994, the Company has established
international offices in Sweden, Australia, New Zealand, the United Kingdom,
France, Germany, and the Netherlands. With the merger with Bendata in February
1996, the Company added an office in Swindon, England presently consisting of 34
employees. With the acquisition of Abalon AB in June 1996, the Company added
offices in Bromma and Gothenburg, Sweden presently consisting of 61 employees.
The Company also has international distributors located in New Zealand, Canada,
Sweden, the Netherlands, Israel, Japan and South Africa. The Company expects
that international sales will continue to be a significant component of its
business. International sales are subject to a variety of significant risks,
including difficulties in establishing and managing international distribution
channels and in translating products into foreign languages. International
operations also may encounter difficulties in collecting accounts receivable,
staffing and managing personnel and enforcing intellectual property rights.
Other factors that can also adversely affect international operations include
fluctuations in the value of foreign currencies and currency exchange rates,
changes in import/export duties and quotas, introduction of tariff or non-tariff
barriers, potentially adverse tax consequences, possible recessionary
environments in economies outside the United States, and economic or political
changes in international markets. In addition, as the Company increases its
international sales, its total revenues may also be affected to a greater extent
by seasonal fluctuations resulting from lower sales that typically occur during
the summer months in Europe and other parts of the world.
RISKS ASSOCIATED WITH MANAGEMENT OF GROWTH. The Company has recently
experienced rapid growth and expansion, including through its merger with
Bendata and its acquisition of Abalon AB over approximately four months in 1996,
which have placed, and will continue to place, a significant strain on the
Company's management, administrative, operational and financial resources and
increased demands on its systems and controls. This growth has resulted in a
continuing increase in the level of responsibility for existing management
personnel and the need for hiring and assimilation of new management personnel.
The Company is still in the process of integrating these new personnel into its
management team. The Company anticipates that any continued growth will require
it to recruit and hire a substantial number of new employees, particularly
professional services and sales and marketing personnel, as well as development
engineers. There can be no assurance that the Company will be successful in
hiring, integrating or retaining such personnel. The Company's ability to manage
its growth will require the Company to continue to expand and improve its
operational, management and financial systems and controls. Any inability of the
Company to manage growth effectively, hire and integrate necessary personnel, as
well as integrate the sales and marketing organizations of the Company and its
Abalon AB and Bendata subsidiaries as required could have a material adverse
effect on the Company's business and results of operations.
RISKS ASSOCIATED WITH INTEGRATION OF ACQUIRED BUSINESSES. The Company
merged with Bendata in March of 1996 and acquired Abalon AB in June of 1996. The
successful integration of the Company's business with the businesses of Bendata
and Abalon AB is important for the future financial performance of the combined
company. Because Bendata's and Abalon AB's products are primarily targeted to
different segments of the customer interaction software market than those served
by the Company in the past, the process of integration may require adaptation of
the Company's operating methods and strategies. In addition, failure of the
Company to adequately integrate certain key employees of Bendata and Abalon AB
into the Company's business could have a material adverse effect on the
Company's business and results of operations.
Management may from time to time consider other acquisitions of assets or
businesses that will enable the Company to acquire complementary skills and
capabilities, offer new products, expand its customer base or obtain other
competitive advantages. There can be no assurance that the Company will be able
to successfully identify suitable acquisition candidates, obtain financing on
satisfactory terms, complete acquisitions, integrate
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acquired operations into its existing operations or expand into new markets.
Acquisitions may result in potentially dilutive issuances of equity securities,
the incurrence of debt and contingent liabilities, and amortization expense
related to intangible assets acquired, any of which could materially adversely
affect the Company's business and results of operations. Acquisitions, including
the Company's recent acquisitions of Bendata and Abalon AB, involve a number of
further potential risks, including difficulties in the assimilation of the
acquired Company's operations and products, diversion of management's resources,
uncertainties associated with operating in new markets and working with new
employees and customers, and the potential loss of the acquired company's key
employees. There can also be no assurance that future acquisitions, if any, will
not have a material adverse effect upon the Company's business and results of
operations. Once integrated, acquired operations may not achieve levels of
revenues, profitability or productivity, or otherwise perform as expected.
DEPENDENCE ON KEY PERSONNEL. The Company's growth and performance to date
has been largely dependent upon the skills and efforts of Zack B. Bergreen, its
founder, President and Chief Executive Officer, and other key officers and
employees. None of the senior management or other key employees of the Company
is subject to any employment contract. The loss of services of any of its
officers or other key personnel could have an adverse effect on the operations
of the Company. During 1996, a number of senior officers left the Company. While
none of the Company's executive officers is a party to an employment agreement,
the Company is a party to non-competition agreements with each of its executive
officers, other than Mr. Bergreen. The laws governing such agreements are in
continual flux, however, and the enforceability of such agreements in each
jurisdiction in which enforcement might be sought is uncertain. The inability of
the Company to hire talented personnel or the loss of key employees could have a
material adverse effect on the Company's business and results of operations.
COMPETITION FOR EMPLOYEES. The future success of the Company will depend
in large part on its ability to attract and retain talented and qualified
employees, including highly skilled management personnel. Competition in the
recruiting of highly-qualified personnel in the software industry is intense.
From time to time the Company has experienced difficulty in recruiting talented
and qualified employees. The Company's inability to recruit necessary personnel
could have a material adverse effect on the Company's business and results of
operations. There can be no assurance that the Company will be able to attract,
motivate and retain personnel with the skills and experience needed to
successfully manage the Company's business and operations.
CONCENTRATION OF OWNERSHIP. Zack B. Bergreen, the Company's President and
Chief Executive Officer, as of December 31, 1996, beneficially owned
approximately 52% of the outstanding Common Stock of the Company. As a result,
Mr. Bergreen exercises significant control over the Company through his ability
to influence and, under certain circumstances, control, the election of
directors and all other matters that require action by the Company's
stockholders. Under certain circumstances, Mr. Bergreen could prevent or delay a
change of control of the Company which may be favored by a significant portion
of the Company's other stockholders, or cause a change of control not favored by
the majority of the Company's other stockholders. Mr. Bergreen's ability under
certain circumstances to influence, cause or delay a change in control of the
Company also may have an adverse effect on the market price of the Company's
Common Stock.
RISKS OF DEPENDENCE ON PROPRIETARY TECHNOLOGY. The Company's success is
heavily dependent upon proprietary technology. The Company's products are
licensed to customers under signed license agreements containing, among other
terms, provisions protecting against the unauthorized use, copying and transfer
of the licensed program. In addition, the Company relies on a combination of
trade secret, copyright and trademark laws and non-disclosure agreements to
protect its proprietary rights in its products and technology. Policing
unauthorized use of the Company's software is difficult and, while the Company
is unable to determine the extent to which piracy of its software products
exists, software piracy can be expected to be a persistent problem. In addition,
the laws of some foreign countries do not protect the Company's proprietary
rights to the
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same extent as do the laws of the United States. There can be no assurance that
measures taken by the Company will be adequate to protect the Company's
proprietary technology. In addition, there can be no assurance that the
Company's competitors will not independently develop technologies that are
substantially equivalent or superior to the Company's technologies. In addition,
although the Company believes that its products and technologies do not infringe
on any existing proprietary rights of others, and although there are no pending
lawsuits against the Company regarding infringement of any existing patents or
other intellectual property rights or any notices that the Company is infringing
the intellectual property rights of others, there can be no assurance that such
infringement claims will not be asserted by third parties in the future. If any
such claims are asserted, there can be no assurance that the Company will be
able to defend such claim or obtain licenses on reasonable terms. The Company's
involvement in any patent dispute or other intellectual property dispute or
action to protect trade secrets and know-how may have a material adverse effect
on the Company's business and results of operations. Adverse determinations in
any litigation may subject the Company to significant liabilities to third
parties, require the Company to seek licenses from third parties and prevent the
company from manufacturing and selling its products. Any such situations can
have a material adverse effect on the Company's business and results of
operations.
POSSIBLE PRODUCT LIABILITY. The Company's license agreements with its
customers typically contain provisions designed to limit the Company's exposure
to potential product liability claims. It is possible, however, that the
limitation of liability provisions contained in the Company's license agreements
may not be effective under the laws of certain jurisdictions. The sale and
support of products by the Company may entail the risk of such claims, and there
can be no assurance that the Company will not be subject to such claims in the
future. A successful product liability claim brought against the Company could
have a material adverse effect on the Company's business, operating results and
financial condition.
ITEM 2. PROPERTIES.
The Company's headquarters are located in a leased facility of
approximately 33,500 square feet (expandable to approximately 51,500 square
feet) in Horsham, Pennsylvania. The Company also leases a 28,500 square foot
office facility in Chalfont, Pennsylvania, from Zack B. Bergreen, the Company's
President and Chief Executive Officer, and his wife, through December 31, 2009.
See "Certain Relationships and Related Transactions" in the definitive Proxy
Statement for the Company's 1997 Annual Meeting of Stockholders, incorporated by
reference into Item 13 hereof. The Company also leases facilities for
operational activities in Bedford, Massachusetts; Englewood, Colorado; Colorado
Springs, Colorado; Houten, the Netherlands; Bromma, Sweden; and Tel Aviv and
Tefen, Israel; and for sales and customer support activities in San Mateo and
Laguna Hills, California; Fairfax, Virginia; Swindon, England; Brisbane and
Melbourne, Australia; Auckland, New Zealand; Gothenburg, Sweden; Cedex (Paris),
France; and Cologne, Germany. The Company believes that suitable additional or
alternative office space will be available in the future on commercially
reasonable terms as needed.
ITEM 3. 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. In addition,
since the Company enters into a number of large contracts requiring the complex
installation of software products and the implementation of considerable
professional services over several quarterly periods, the Company is from time
to time engaged in discussions and deliberations with customers regarding the
adequacy and timeliness of the installation or service, product functionality
and features desired by the customer and additional work and product
requirements that were not anticipated at the commencement of the project. These
deliberations sometimes result in changes in services required, upward or
downward price adjustments, or reworking of contract terms. The Company from
time to time will reserve funds for contingencies under contract deliberations.
The Company is not a party to any
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material legal proceedings, the adverse outcome of which, in management's
opinion, would have a material adverse effect on the Company's business,
financial condition or results of operations. See Note 14 of the Notes to the
Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report, through the solicitation of
proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "ATEA." Public trading of the Common Stock commenced on July 27,
1995. Before that, there was no public market for the Company's Common Stock.
The following table sets forth the high and low closing sale prices for the
Common Stock as reported by the Nasdaq National Market for the periods
indicated:
<TABLE>
<CAPTION>
1995: High Low
---- ---
<S> <C> <C>
Third quarter (from July 27)* $22.88 $16.25
Fourth quarter 22.88 17.13
1996:
First quarter 29.50 21.00
Second quarter 29.75 23.75
Third quarter 24.25 5.00
Fourth quarter 8.38 4.88
</TABLE>
___________
* Initial public offering price of $15.00 on July 27, 1995.
As of March 21, 1997, there were approximately 75 holders of record of the
Company's Common Stock. On March 21, 1997, the last reported sale price of the
Common Stock on the Nasdaq National Market was $4.13 per share.
From its inception in 1979 to July 27, 1995, the Company elected to be
treated as an S Corporation for Federal and state income tax purposes. The
Company paid an aggregate of $8,296,000 of cash dividends and distributions in
1995 and $1,979,000 of cash dividends and distributions in 1996 to Zack B.
Bergreen, the sole stockholder of the Company prior to the initial public
offering, principally representing the amount of the Company's previously taxed
but undistributed S Corporation earnings. No such dividends or distributions
were paid to the sole stockholder of the Company in 1994. In connection with the
initial public offering of its Common Stock, the Company terminated its election
to be treated as an S Corporation on July 27, 1995. The Company does not
presently intend to declare a cash dividend on the Common Stock in the
foreseeable future and expects to retain future earnings to fund the development
and growth of its business.
19
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
Years ended December 31, 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:(1)
Revenues:
Software license fees.................. $ 28,857 $ 29,904 $ 15,532 $ 6,179 $ 5,231
Services and maintenance............... 33,851 24,062 11,815 8,414 8,892
--------------------------------------------------------------------
Total revenues.................... 62,708 53,966 27,347 14,593 14,123
--------------------------------------------------------------------
Cost and expenses:
Cost of software license fees.......... 3,982 3,880 1,807 876 721
Cost of services and maintenance....... 23,477 16,198 7,603 5,219 5,666
Product development.................... 7,989 4,178 2,677 1,584 1,370
Sales and marketing.................... 22,390 14,902 8,277 3,004 1,996
General and administrative............. 9,535 6,357 3,659 2,642 3,918
--------------------------------------------------------------------
Total costs and expenses.......... 67,373 45,515 24,023 13,325 13,671
--------------------------------------------------------------------
Income (loss) from operations
before nonrecurring items.............. (4,665) 8,451 3,324 1,268 452
Expenses related to Bendata
merger transaction(3).................. 3,416 - - - -
Purchased in process
research and development(4)............ 13,810 - - - -
--------------------------------------------------------------------
Income (loss) from operations............... (21,891) 8,451 3,324 1,268 452
Net interest expense (income)............... (571) (179) 408 231 250
--------------------------------------------------------------------
Income (loss) before income taxes........... (21,320) 8,630 2,916 1,037 202
Provision (benefit) for income taxes(2)..... (1,613) 1,883 49 16 6
--------------------------------------------------------------------
Net income (loss)........................... $ (19,707) $ 6,747 $ 2,867 $ 1,021 $ 196
====================================================================
Pro Forma Data:
Historical income (loss) before
income taxes...................... $ (21,320) $ 8,630 $ 2,916 $ 1,037
Pro forma income taxes (benefit)(2).... (2,082) 3,452 1,133 308
-----------------------------------------------------
Pro forma net income (loss)............ $ (19,238) $ 5,178 $ 1,783 729
-----------------------------------------------------
Pro forma net income per share......... $ (1.50) $ 0.45 $ 0.19 $ 0.09
=====================================================
Pro forma weighted average
shares outstanding................ 12,844 11,484 9,539 7,926
=====================================================
BALANCE SHEET DATA:(1)
Working capital............................. $ 20,760 $ 40,732 $ 2,745 $ 1,489 $ 1,496
Total assets................................ 57,691 69,370 22,481 13,350 10,491
Long-term debt, less current portion........ 3,708 2,532 2,913 2,628 2,609
Retained earnings (deficit)................. (17,008) 2,699 4,963 2,096 1,484
Total stockholders' equity.................. $ 31,617 $ 47,920 $ 6,368 $ 2,587 $ 1,871
</TABLE>
(1) In February 1996, the Company completed the merger of Bendata. This
transaction was accounted as a pooling of interests. Hence, the financial
position and results of operations of the Company and Bendata are combined
in 1996 and all prior periods are restated to give the effect to the
merger. See Note 4 of the Notes to the Consolidated Financial Statements.
In February 1995, the Company acquired Astea BV and in June 1996, the
Company acquired Abalon AB. These acquisitions were accounted for as
purchases. Hence, the results of operations after the acquisition date are
included in the statement of operations data. See Note 5 of the Notes to
the Consolidated Financial Statements.
(2) Astea has operated as a S corporation for income tax purposes since its
inception in 1979; and since their inceptions, Bendata, Inc. and Bendata UK
have operated as a S corporation and a partnership, respectively.
Therefore, the historical financial statements do not include a provision
for federal and state income taxes for such years, except for certain state
income taxes imposed at the corporate level. Pro forma net income has been
computed as if the Company had been fully subject to federal and state
income taxes based on the tax laws in effect during the respective years.
See Note 3 of the Notes to the Consolidated Financial Statements.
(3) In connection with the Bendata merger, $3,416,000 of merger expenses
($2,609,000 after-tax) were incurred and charged to expense in the first
quarter of 1996. The Bendata merger expenses consisted of bonus payments
made to Bendata non-shareholder employees, as well as legal, accounting and
investment banking fees.
(4) In connection with the acquisition of Abalon AB, the Company recorded a
one-time charge of $13,810,000 related to the fair value of in process
research and development.
20
<PAGE>
ITEM 7. 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 in this Annual Report on
Form 10-K.
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
and marketing automation functions. The Company maintains operations in the
United States, Australia, New Zealand, the Netherlands, Germany, France, the
United Kingdom, Sweden and Israel.
The Company generates revenues from two sources: software license fees for
its software products, and services and maintenance revenues from professional
services, which includes consulting, implementation, training and maintenance
related to those products.
Software license fees, which accounted for 46% of the Company's total
revenues in 1996, consist of license fees for the Company's products. Software
license fee revenues also include some fees from the sublicensing of third-party
software, consisting of relational database licenses constituting an integral
part of the Company's products. Typically, customers pay a license fee for the
software based on the number of licensed users and modules licensed. The
Company's pricing is structured so that the licensing of a greater number of
users within a customer's organization results in a decreasing per-user cost to
that customer. Thus, pricing varies both with the number of users and type and
number of modules licensed. Depending on the contract terms and conditions,
software license fees are recognized upon delivery of the product if no
significant vendor obligations remain and collection of the resulting receivable
is deemed probable. If significant vendor obligations exist at delivery or if
the product is subject to customer acceptance, revenue is deferred until no
significant obligations remain or acceptance has occurred.
The second component of the Company's revenues consists principally of
revenues derived from professional services associated with the implementation
and deployment of the Company's software products and, to a lesser extent,
maintenance fees for ongoing customer support, primarily external customer
technical support services and product enhancements. Professional services are
charged on a per diem basis and billed monthly pursuant to customer work orders.
Training services are charged on a per-attendee basis with a minimum daily
charge. Out-of-pocket expenses incurred by company personnel performing
professional services are typically reimbursed by the customer. The Company
recognizes revenue from professional services as such services are performed.
Annual maintenance fees are typically paid to the Company under agreements
entered into at the time of the initial software license. Maintenance revenue,
which is invoiced annually upon the expiration of the warranty period, is
recognized ratably over the term of the agreement, which is usually twelve
months.
The Company's 1996, 1995 and 1994 financial results include the results of
Bendata, which merged with Astea in February 1996 and was accounted for as a
pooling of interests. See Note 4 of the Notes to the Consolidated Financial
Statements. Astea's 1996 financial results include the July to December results
of
21
<PAGE>
Abalon AB, which Astea acquired in June 1996, accounted for as a purchase
transaction. See Note 5 of the Notes to the Consolidated Financial Statements.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, selected
financial data, the percentages of the Company's total revenues represented by
each line item presented and the percentage change in each line item for the
periods presented:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Years ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Software license fees 46.0 % 55.4 % 56.8 %
Services and maintenance 54.0 44.6 43.2
-------------------------------
Total revenues 100.0 100.0 100.0
-------------------------------
Costs and expenses:
Cost of software license fees 6.4 7.2 6.6
Cost of services and maintenance 37.4 30.0 27.7
Product development 12.7 7.7 9.8
Sales and marketing 35.7 27.6 30.3
General and administrative 15.2 11.8 13.4
-------------------------------
Total costs and expenses 107.4 84.3 87.8
-------------------------------
Income (loss) from operations before
non-recurring items -7.4 15.7 12.2
Expenses related to Bendata
merger transaction 5.5 - -
Purchased in process research and
development 22.0 - -
Income (loss) from operations -34.9 15.7 12.2
Net interest income (expense) 0.9 0.3 -1.5
-------------------------------
Historical income (loss) before
income taxes -34.0 16.0 10.7
Pro forma income taxes (benefit) -3.3 6.4 4.1
-------------------------------
Pro forma net income (loss) -30.7 % 9.6 % 6.6 %
-------------------------------
</TABLE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995
Revenues. Total revenues increased 16% to $62,708,000 in 1996 from
$53,966,000 in 1995. Revenues were generated from three primary product lines
within Astea: Service (DISPATCH-1), Support (HEAT and PowerHelp) and Sales
Automation (Abalon). Within these product lines, the Services product line
(DISPATCH-1) realized a slight decline in total revenues. This decline was
offset by increased Support product line revenues (HEAT and PowerHelp products)
and the addition of the Company's Sales Automation product line (Abalon), which
was acquired in 1996. Service revenues decreased 8% or $3,284,000 to $37,938,000
in 1996 from $41,222,000 in 1995. In 1996, Support revenues increased 61%, or
$7,794,000, to $20,538,000 from $12,744,000 in 1995 primarily resulting from the
HEAT product. Sales Automation revenues amounted to $4,232,000 in 1996,
resulting from the acquisition of Abalon AB in June 1996.
Software license fee revenues decreased 4%, or $1,047,000, to $28,857,000
in 1996 from $29,904,000 in 1995. Within Astea's three product lines, Service
software license revenues decreased 41%, or $8,567,000,
22
<PAGE>
to $12,515,000 in 1996 from $21,082,000 in 1995. This decrease was due primarily
to increased competition which prolonged sales cycles in the Service CIS
marketplace, which reduced the number of large volume software license
agreements in 1996. In 1995, three large volume software license agreements
which accounted for $13,000,000, or 43% of 1995 license revenues. Offsetting the
decrease in Service license revenues was a significant increase in Support
license agreements. Support software license revenues increased 63%, or
$5,585,000, to $14,407,000 in 1996 from $8,822,000 in 1995. This increase was
due primarily to new customers and reflects the expansion of the customer help
desk market and increased acceptance of the Company's HEAT and PowerHelp
products. Bendata's software license fee revenues increased significantly in
1996 as a result of increased demand for the HEAT line of products in the United
States and abroad. Sales Automation software license revenues were $1,935,000 in
the second half of 1996, subsequent to the Abalon acquisition. On an annualized
basis, this would have been approximately $3,990,000.
Services and maintenance revenues increased 41%, or $9,789,000, to
$33,851,000 in 1996 from $24,062,000 in 1995. Increases were realized in
Service, Support and Sales Automation amounting to $5,283,000, $2,209,000 and
$2,297,000, respectively. This increase in service and maintenance revenues is
attributable to the expansion of the Company's installed base and new sales of
DISPATCH-1 licenses, and the increased need for professional services associated
with the ongoing implementation and deployment of more complex software
offerings, including the three large software license agreements from 1995
mentioned above, which continued implementation throughout 1996.
In 1996, the Company had no customers which accounted for more than 10% of
total revenues. In 1995, the Company had one customer which accounted for 19% of
total revenues.
Costs of Revenues. Costs of software license fee revenues increased 3%, or
$102,000, to $3,982,000 in 1996 from $3,880,000 in 1995. As a percentage of
software license fee revenues, the costs of software license fees increased by
1% to 14% in 1996 from 13% in 1995. The increase was due to the increase in the
aggregate cost of third-party software licenses sold in conjunction with the
Company's products. Amortization of capitalized software decreased 7%, or
$57,000, to $739,000 in 1996 from $796,000 in 1995.
The costs of services and maintenance revenues increased 45%, or
$7,279,000, to $23,477,000 from $16,198,000 in 1995. This increase was
attributable to an increase in services and maintenance obligations and revenue
streams resulting from new software license sales and maintaining the growing
customer bases realized within all three product lines. Increased obligations
and personnel costs, along with a concentrated effort to increase customer
satisfaction, also contributed to the increase in services and maintenance costs
both on an absolute basis and as a percentage of service and maintenance
revenues. Costs of services and maintenance related to the Abalon acquisition
during the last six months of 1996 amounted to $1,430,000. Costs of services and
maintenance as a percentage of services and maintenance revenues increased 2% to
69% in 1996 from 67% in 1995.
Product Development. Product development expenses increased 91%, or
$3,811,000, to $7,989,000 in 1996 from $4,178,000 in 1995. This increase is a
result of the Company's commitment to bring new product offerings to the market
along with the enhancement of existing products. Product development expenses
also include the addition of Abalon AB in the second half of the year which
totaled $302,000. As a percentage of revenues, product development expenses
increased 5% to 13% in 1996 from 8% in 1995. The Company's total product
development costs, including capitalized software development costs, were
$9,847,000, or 16% of revenues in 1996 compared to $5,135,000, or 10% of
revenues in 1995, an increase of 92% or $4,712,000. The capitalized portions of
total product development costs were $1,858,000, or 19%, in 1996 compared to
$957,000, or 19%, in 1995.
23
<PAGE>
Sales and Marketing. Sales and marketing expenses increased 50%, or
$7,488,000, to $22,390,000 in 1996 from $14,902,000 in 1995. This increase
resulted from the various selling models attendant to the Company's acquired
products and increased emphasis on sales processes within the sales and
marketing organizations. Sales and marketing expenses during the second half of
1996 include $1,296,000 related to Abalon AB. Sales and marketing expense as a
percentage of revenues increased 8% to 36% in 1996 from 28% in 1995.
General and Administrative. General and administrative expenses increased
50%, or $3,178,000, to $9,535,000 in 1996 from $6,357,000 in 1995. As a
percentage of revenues, general and administrative expenses increased 3% to 15%
in 1996 compared to 12% in 1995. This increase relates to the continued effort
by the Company to support the growth of the Company by establishing the proper
infrastructure to meet the current and future needs of the Company. The Company
increased its payroll significantly, including through the Abalon AB
acquisition, from 327 employees in 1995 to 594 employees as of December 31,
1996. General and administrative expenses also includes a significant charge of
$1,400,000 made by the Company to address a customer satisfaction issue. See
Note 13 to the Notes to the Consolidated Financial Statements.
Net Interest Income. Net interest income increased 219%, or $392,000, to
$571,000 in 1996 from $179,000 in 1995. This increase was primarily due to a
full year's interest earned on the proceeds from the Company's initial public
offering in July 1995.
International Operations. Total revenue from the Company's international
operations grew by 82%, or $9,113,000, to $20,217,000 in 1996 from $11,103,000
in 1995. Growth was experienced in all segments of the Company's international
operations including the Abalon AB acquisition which accounted for $4,232,000
during the second half of 1996. During 1996, the Company made several important
strides to expand and fortify its international presence. The Abalon AB
acquisition and Bendata merger (including a UK branch) were completed, the
Company signed a distributor agreement with Nissho Iwai in Japan, and the
Company expanded existing international operations. International operations
resulted in a $3,095,000 loss for 1996; this loss was primarily attributable to
the Company's Israeli operation, which had an operating loss of $1,727,000.
Israel is primarily a research and development cost center.
Income Tax Expense (Benefit). The Company's and Bendata's status as
subchapter S corporations under the Internal Revenue Code, during 1995 for Astea
and during 1995 and January and February of 1996 for Bendata, were terminated.
As a result of these terminations, the Company is now subject to federal and
additional state income taxes (see Notes 2 and 13 of the Notes to the
Consolidated Financial Statements).
COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1994
Revenues. Total revenues increased 97%, or $26,619,000, to $53,966,000 in
1995 from $27,347,000 in 1994. Revenues were generated from two main product
lines: Service and Support. During 1995, both Service and Support product line
revenues experienced strong growth. Service product line revenues increased
115%, or $22,002,000, to $41,222,000 in 1995 from $19,220,000 in 1994. Support
product line revenues increased 57%, or $4,617,000, to $12,744,000 in 1995 from
$8,127,000 in 1994.
Software license fee revenues increased 93%, or $14,372,000, to $29,904,000
in 1995 from $15,532,000 in 1994. Service software license fees increased 110%,
or $11,063,000, to $21,082,000 in 1995 from $10,019,000 in 1994. During 1995,
Service software license fees included the signing of three large software
license agreements which totaled $13,000,000, or 43% of license sales. Support
software license fees also recognized a significant 60%, or $3,309,000,
increase. Support license fees totaled $8,822,000 in 1995 compared to $5,513,000
in 1994. This increase was in line with the expanding market for and increased
acceptance of the Company's product offerings.
24
<PAGE>
Services and maintenance revenues increased by 104%, or $12,247,000, to
$24,062,000 in 1995 from $11,815,000 in 1994. Service and Support services and
maintenance revenues increased by 119% and 50%, respectively. These increases
were in line with the increased software license fee revenues and the increased
need for professional services associated with the implementation and deployment
of the Company's software.
In 1995, the Company had one customer that accounted for 19% of total
revenues. In 1994, the Company had no customers that accounted for more than 10%
of total revenues.
Costs of Revenues. Costs of software license fee revenues increased 115%
to $3,880,000 in 1995 from $1,807,000 in 1994 due primarily to increased sales
of third-party software licenses sold in conjunction with the Company's
products. Amortization of capitalized software development costs, which
increased to $796,000 in 1995 from $636,000 in 1994, also contributed to the
increase. As a percentage of software license revenues, the costs of software
license fees increased by 1% to 13% in 1995 from 12% in 1994. This increase was
due to the mix of third-party software license products used in conjunction with
the Company's products. Costs of services and maintenance increased 113% to
$16,198,000 in 1995 from $7,603,000 in 1994. This increase was due to higher
personnel requirements necessary to support the larger base of customers, along
with the expansion in the Company's international operations, including Astea
BV. Costs of services and maintenance as a percentage of services and
maintenance revenues increased by 3% to 67% in 1995 from 64% in 1994. This
increase was primarily attributable to the expansion of the European and Pacific
Rim operations. Costs of services and maintenance attributable to the Company's
international operations, including Astea BV were $3,483,000, or 41% of the
total increase.
Product Development. Product development expenses increased 56% to
$4,178,000 in 1995 from $2,677,000 in 1994. This increase in product development
expenses resulted from the Company's plan to develop new product offerings and
enhancements to the Company's existing product lines. As a percentage of
revenues, product development expenses decreased by 2% to 8% in 1995 from 10% in
1994. The Company's total product development costs, including capitalized
software development costs, were $5,135,000, or 10% of revenues for 1995
compared to $3,465,000, or 13% of revenues for 1994, a decrease of 3%. The
capitalized portions of total product development expenses were $957,000, or
19%, in 1995 and $788,000, or 23%, in 1994.
Sales and Marketing. Sales and marketing expenses increased 80% to
$14,902,000, or 28% of revenues, in 1995 from $8,277,000, or 30% of revenues, in
1994. This increase resulted from the hiring of additional management and sales
personnel, particularly in the PowerHelp segment and expansion in the Company's
international operations. Expansion of marketing programs along with higher
commission expenses related to higher revenues accounted for the majority of the
increase in sales and marketing expenses. International sales and marketing
expenses, including Astea BV, were $2,119,000, or 32% of the increase over 1994.
General and Administrative. General and administrative expenses increased
74% to $6,357,000 in 1995 from $3,659,000 in 1994. As a percentage of revenues,
general and administrative expenses decreased by 1% to 12% in 1995 from 13% in
1994, which included a $500,000 bonus to the majority stockholder. The absolute
dollar increase in general and administrative expenses, excluding the bonus to
the majority stockholder, relates to the establishment by the Company of the
infrastructure necessary to support its growth, the costs associated with the
acquisition and integration of Astea BV in February 1995, and the expansion of
international operations.
25
<PAGE>
Net Interest Income/Expense. Net interest expense decreased 144% to
$179,000 of net interest income in 1995 from $408,000 of expense in 1994. This
decrease was primarily attributable to income earned on the proceeds from the
Company's initial public offering in July 1995.
International Operations. During 1995, the Company experienced significant
growth in its international operations. The Company's European operation
recorded operating income of $1,043,000 during 1995. Other foreign operations
had operating losses of $1,024,000 which comprised two components - Israel,
which is primarily a research and development cost center, and the Pacific Rim,
which required investment due to the start-up nature of the operation.
Income Tax Expense. In 1995, the Company terminated its status as a S
corporation and, as a result, the Company is now subject to federal and
additional state income taxes (see Notes 2 and 13 of the Notes to the
Consolidated Financial Statements).
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used in) operating activities was $(6,352,000) for
the year ended December 31, 1996 compared to $6,146,000 for the year ended
December 31, 1995. This decrease was primarily attributable to the Company's net
loss resulting from the factors described above under "Results of Operations-
Comparison of Years Ended December 31, 1996 and 1995" offset by the non-cash
charge of $13,810,000 arising from the Abalon AB acquisition.
The Company obtained $7,430,000 of cash from investing activities in fiscal
1996 compared to a use of $34,808,000 in fiscal 1995. The increase was primarily
attributable to the sale of short-term investments of $21,828,000 offset by
payments for acquired businesses of $9,710,000, purchases of property and
equipment, and capitalized software development costs of $4,688,000.
The Company utilized $1,785,000 from financing activities during the year
ended December 31, 1996 compared to cash provided of $31,572,000 in fiscal 1995.
For the year ended December 31, 1996, the funds were used to pay down the line
of credit, to pay S corporation distributions, and to make debt repayments,
partially offset by the proceeds from the exercise of stock options. For the
year ended December 31, 1995, the Company received net proceeds totaling
$42,057,000 for the issuance of common stock in its initial public offering
offset by a S corporation distribution, repayment of debt and repayment of notes
receivable from the sole stockholder and his wife. For the years ended December
31, 1996 and 1995, the Company utilized $1,979,000 and $8,641,000, respectively,
due to S corporation distributions.
The Company maintains a line of credit with a maximum borrowing
availability thereunder of $5,000,000. The line of credit bears interest at the
lending bank's prime rate (8.25% at December 31, 1996). Borrowings under the
line of credit are secured by a security interest in the Company's receivables,
contract rights, general intangibles and equipment. The outstanding balances as
of December 31, 1996 and December 31, 1995 were $500,000 and zero, respectively.
The line expires on June 30, 1997. The Company is currently negotiating to renew
the line of credit.
In connection with the merger with Bendata, the Company issued an aggregate
of 1,500,000 shares of the Company's common stock to the former stockholders of
Bendata. See Note 4 to the Consolidated Financial Statements. In connection with
the acquisition of Abalon AB, the Company issued to the former Abalon AB
stockholders 233,236 shares of the Company's common stock and a promissory note
in the principal amount of $900,000. See Note 5 of the Notes to the Consolidated
Financial Statements.
26
<PAGE>
Bendata has 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% at December 31,
1996). Availability of borrowings under the line is limited to 80% of eligible
accounts receivable, as defined. Borrowings under the revolving line of credit
are secured by a first security interest in all of Bendata's receivables,
inventory, general intangibles and equipment. The line expires on April 15,
1997. The line requires Bendata to maintain certain financial and nonfinancial
covenants, as defined. The outstanding balances as of December 31, 1996 and
December 31, 1995 were zero and $1,200,000, respectively. Bendata is currently
negotiating to renew the line of credit beyond this expiration date.
On June 28, 1996, the Company acquired the capital stock of Abalon AB.
Abalon AB has a revolving line of credit for borrowings up to 8,000,000 SEK or
$1,161,000 with a 1,000,000 SEK or $145,000 overdraft provision. As of December
31, 1996 Abalon AB's outstanding balance on the line of credit was $1,178,000.
The revolving line of credit bears interest at the bank's prime rate plus 2.4%
(6.6% at 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.
The Company expanded its corporate headquarters facilities in eastern
Pennsylvania during the third quarter of 1996. This expansion did not have a
material effect on cashflow or operating results. In connection with the new
facility, the Company has recorded a capital lease of approximately $462,000 for
computer and telephone equipment. The Company has also entered into an operating
lease of totaling $525,000 for office furniture. Both leases have a five-year
term.
The Company is currently considering and evaluating various actions to
reduce operating expenses. These actions could include reductions in staff, the
closing of several offices and the consolidation of certain operations. The
Company expects that the ultimate actions taken will result in a restructuring
charge in the first quarter of 1997. This charge will include, among other
things, severance costs, office closing costs and other consolidation costs.
At December 31, 1996, the Company had a working capital ratio of
approximately 2:1, with cash and investments available for sale of $12,328,000.
The Company may need to access additional funding during 1997 to fund operations
as products are rolled out and other strategies progress toward 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 placement.
27
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Astea International Inc.:
We have audited the accompanying consolidated balance sheets of Astea
International Inc. (a Delaware corporation) and subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Astea International
Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Philadelphia, Pa.
February 18, 1997
28
<PAGE>
ASTEA INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,334,000 $ 4,021,000
Investments available for sale 8,994,000 30,822,000
Receivables, net of reserves of $1,681,000 and $1,380,000 24,187,000 21,560,000
Prepaid expenses and other 2,279,000 1,917,000
Income tax refund receivable 1,516,000 -
Deferred income taxes 1,869,000 1,194,000
------------------------------------
Total current assets 42,179,000 59,514,000
Property and equipment, net 8,117,000 5,822,000
Capitalized software development costs, net 4,022,000 1,713,000
Goodwill, net 3,373,000 2,321,000
------------------------------------
Total assets $ 57,691,000 $ 69,370,000
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 1,678,000 $ 1,200,000
Current portion of long-term debt (including $78,000 and
$69,000 due to majority stockholder and his wife) 525,000 97,000
Accounts payable and accrued expenses 11,076,000 9,613,000
Deferred revenues 8,140,000 7,872,000
------------------------------------
Total current liabilities 21,419,000 18,782,000
Deferred income taxes 947,000 136,000
Long-term debt (including $2,410,000 and $2,487,000
due to majority stockholder and his wife) 3,708,000 2,532,000
Commitments and contingencies (Note 14)
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued - -
Common stock, $.01 par value, 25,000,000 shares
authorized 13,106,000 shares in 1996 and 12,404,000
shares in 1995 issued and outstanding 131,000 124,000
Additional paid-in capital 49,097,000 45,600,000
Deferred compensation (160,000) (388,000)
Cumulative translation adjustment (443,000) (115,000)
Retained earnings (deficit) (17,008,000) 2,699,000
------------------------------------
Total stockholders' equity 31,617,000 47,920,000
------------------------------------
Total liabilities and stockholders' equity $ 57,691,000 $ 69,370,000
====================================
</TABLE>
The accompanying notes are an integral part of these statements.
29
<PAGE>
ASTEA INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Software license fees $ 28,857,000 $ 29,904,000 $ 15,532,000
Services and maintenance 33,851,000 24,062,000 11,815,000
-----------------------------------------------------
Total revenues 62,708,000 53,966,000 27,347,000
-----------------------------------------------------
Costs and expenses:
Cost of software license fees 3,982,000 3,880,000 1,807,000
Cost of services and maintenance 23,477,000 16,198,000 7,603,000
Product development 7,989,000 4,178,000 2,677,000
Sales and marketing 22,390,000 14,902,000 8,277,000
General and administrative 9,535,000 6,357,000 3,659,000
-----------------------------------------------------
Total costs and expenses 67,373,000 45,515,000 24,023,000
Income (loss) from operations before
nonrecurring items (4,665,000) 8,451,000 3,324,000
Expenses related to Bendata
merger transaction 3,416,000 - -
Purchased in process research and
development 13,810,000 - -
-----------------------------------------------------
Income (loss) from operations (21,891,000) 8,451,000 3,324,000
Interest income 1,099,000 740,000 40,000
Interest expense (including $330,000,
$348,000, and $317,000 to the majority
stockholder and his wife) (528,000) (561,000) (448,000)
-----------------------------------------------------
Income (loss) before income taxes (21,320,000) 8,630,000 2,916,000
Provision for income taxes (benefit) (1,613,000) 1,883,000 49,000
-----------------------------------------------------
Net income (loss) $(19,707,000) $ 6,747,000 $ 2,867,000
=====================================================
Pro forma data (Note 3) (unaudited):
- ------------------------------------
Historical income (loss) before
income taxes $(21,320,000) $ 8,630,000 $ 2,916,000
Pro forma income taxes (benefit) (2,082,000) 3,452,000 1,133,000
-----------------------------------------------------
Pro forma net income (loss) $(19,238,000) $ 5,178,000 $ 1,783,000
=====================================================
Pro forma net income (loss) per share $ (1.50) $ .45 $ .19
=====================================================
Pro forma weighted average shares
outstanding 12,844,000 11,484,000 9,539,000
=====================================================
</TABLE>
The accompanying notes are an integral part of these statements.
30
<PAGE>
ASTEA INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Cumulative Retained
Preferred Common Paid-in Deferred Translation Earnings
Stock Stock Capital Compensation Adjustment (Deficit)
----- ----- ------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 $ - $ 76,000 $ 688,000 $ (273,000) $ - $ 2,096,000
Grant of stock options below fair
market value - - 432,000 (432,000) - -
Issuance of common stock in
connection with the initial
capitalization of Bendata, Inc. - 15,000 795,000 - - -
Amortization of deferred
compensation - - - 104,000 - -
Net income - - - - - 2,867,000
----------------------------------------------------------------------------------------
Balance, December 31, 1994 - 91,000 1,915,000 (601,000) - 4,963,000
Sale of common stock in
initial public offering, net of
offering costs - 32,000 42,025,000 - - -
Exercise of stock options - 1,000 144,000 - - -
Stock option tax benefits - - 1,070,000 - - -
Additional capital contribution by
Bendata, Inc. stockholders - - 46,000 - - -
Issuance of common stock by
Bendata, Inc. - - 30,000 - - -
Amortization of deferred
compensation - - - 213,000 - -
Dividend paid - - - - - (345,000)
S Corporation distribution and
combination of minority interest
in Astea BV (see Notes 1 and 17) - - 370,000 - - (8,666,000)
Cumulative translation adjustment - - - - (115,000) -
Net income - - - - - 6,747,000
----------------------------------------------------------------------------------------
Balance, December 31, 1995 - 124,000 45,600,000 (388,000) (115,000) 2,699,000
Issuance of common stock for the
purchase of Abalon AB - 2,000 4,998,000 - - -
Grant of stock options below
fair market value - - 31,000 (31,000) - -
Exercise of stock options - 5,000 544,000 - - -
Amortization of deferred
compensation - - - 162,000 - -
Cancellation of options granted - - (97,000) 97,000 - -
S Corporation distribution (see
Note 17) - - (1,979,000) - - -
Cumulative translation adjustment - - - - (328,000) -
Net loss - - - - - (19,707,000)
----------------------------------------------------------------------------------------
Balance, December 31, 1996 $ - $ 131,000 $49,097,000 $ (160,000) $ (443,000) $(17,008,000)
========================================================================================
<CAPTION>
Total
Stockholders'
Equity
------
<S> <C>
Balance, January 1, 1994 $ 2,587,000
Grant of stock options below fair
market value -
Issuance of common stock in
connection with the initial
capitalization of Bendata, Inc. $ 810,000
Amortization of deferred
compensation 104,000
Net income 2,867,000
---------------
Balance, December 31, 1994 6,368,000
Sale of common stock in
initial public offering, net of
offering costs 42,057,000
Exercise of stock options 145,000
Stock option tax benefits 1,070,000
Additional capital contribution by
Bendata, Inc. stockholders 46,000
Issuance of common stock by
Bendata, Inc. 30,000
Amortization of deferred
compensation 213,000
Dividend paid (345,000)
S Corporation distribution and
combination of minority interest
in Astea BV (see Notes 1 and 17) (8,296,000)
Cumulative translation adjustment (115,000)
Net income 6,747,000
---------------
Balance, December 31, 1995 47,920,000
Issuance of common stock for the
purchase of Abalon AB 5,000,000
Grant of stock options below
fair market value -
Exercise of stock options 549,000
Amortization of deferred
compensation 162,000
Cancellation of options granted -
S Corporation distribution (see
Note 17) (1,979,000)
Cumulative translation adjustment (328,000)
Net loss (19,707,000)
---------------
Balance, December 31, 1996 $ 31,617,000
===============
</TABLE>
The accompanying notes are an integral part of these statements
31
<PAGE>
ASTEA INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (19,707,000) $ 6,747,000 $ 2,867,000
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Charge for purchased in process research and
development 13,810,000 - -
Depreciation and amortization 3,035,000 2,159,000 1,303,000
Amortization of deferred compensation 162,000 213,000 104,000
Tax benefit from exercise of stock options - 1,070,000 -
Other (21,000) 77,000 106,000
Changes in operating assets and liabilities, net of
effect of acquired businesses:
Receivables (2,015,000) (6,288,000) (4,058,000)
Income tax refund receivable (1,516,000) - -
Prepaid expenses and other (14,000) (886,000) (255,000)
Accounts payable and accrued expenses 259,000 4,302,000 482,000
Deferred income taxes (376,000) (1,058,000) -
Deferred revenues 31,000 190,000 1,646,000
---------------------------------------------------
Net cash provided by (used in) operating activities (6,352,000) 6,146,000 2,195,000
---------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales (purchases) of short-term investments 21,828,000 (30,822,000) -
Payment for acquired businesses, net of cash
acquired (9,710,000) (1,312,000) 155,000
Purchases of property and equipment (2,830,000) (1,952,000) (1,442,000)
Capitalized software development costs (1,858,000) (957,000) (788,000)
Repayments of notes receivable from
majority stockholder and his wife - 217,000 315,000
Other - 18,000 (36,000)
---------------------------------------------------
Net cash provided by (used in) investing activities 7,430,000 (34,808,000) (1,796,000)
---------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) on line of credit (209,000) 200,000 750,000
Proceeds from issuance of common stock, net - 42,057,000 -
Proceeds from exercise of stock options 549,000 145,000 -
Decrease in amounts due to stockholder - (1,431,000) (94,000)
Net repayments of long-term debt (146,000) (804,000) (437,000)
S Corporation distribution and dividends paid to
stockholders (1,979,000) (8,641,000) -
Other - 46,000 -
---------------------------------------------------
Net cash provided by (used in) financing activities (1,785,000) 31,572,000 219,000
---------------------------------------------------
Effect of exchange rate changes on cash and cash
equivalents 20,000 (8,000) -
---------------------------------------------------
Net increase (decrease) in cash and cash equivalents (687,000) 2,902,000 618,000
Cash and cash equivalents balance, beginning of year 4,021,000 1,119,000 501,000
---------------------------------------------------
Cash and cash equivalents balance, end of year $ 3,334,000 $ 4,021,000 $ 1,119,000
===================================================
</TABLE>
The accompanying notes are an integral part of these statements.
32
<PAGE>
ASTEA INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. COMPANY BACKGROUND
Astea International Inc. (the "Company" or "Astea") develops, markets and
supports a suite of applications for the customer interaction software market.
The Company licenses its products to customers ranging from small, rapidly
growing companies to large, multinational corporations with geographically
dispersed operations. These customers represent a range of industries from
telecommunications, computers and electronics to office equipment manufacturers
and third-party service and support organizations.
In 1994, the Company and its majority stockholder formed Astea Israel Ltd.
("Astea Israel"), which was 79%-owned by the Company and 21%-owned by the
Company's majority stockholder. In February 1995, the Company acquired Astea
Service and Distribution Systems BV ("Astea BV"), which was owned in the same
percentages as Astea Israel (see Note 5). In connection with an initial public
offering discussed below, the minority interests of the majority stockholder
were contributed to the Company for no consideration.
In August 1995, the Company closed its initial public offering of common
stock (the "Offering"). The Company offered and sold 3,101,298 shares, including
underwriters' over-allotment, of common stock at a public offering price of
$15.00 per share. The net proceeds to the Company from the Offering after the
underwriting discount and payment of offering expenses were $42,057,000.
In February 1996, the Company merged with Bendata, Inc. and Bendata (UK)
Limited LLC (collectively "Bendata") (the "Merger"). The Merger has been
accounted for as a pooling of interests, and accordingly, the historical
financial statements have been restated to include Bendata (see Note 4). In June
1996, the Company acquired Bebalon AB, the sole shareholder of E.L.G. Data AB
which is the sole shareholder of Abalon AB (collectively "Abalon") in a
transaction accounted for under the purchase method of accounting (see Note 5).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated and combined financial statements include the accounts of
Astea International Inc. and its wholly owned subsidiaries and branches. The
financial statements reflect the elimination of all significant intercompany
accounts and transactions.
The accompanying 1994 financial statements are presented on a combined
basis, as the Company and the 21% minority interests in Astea Israel and Astea
BV were owned by the same stockholder (see Note 1).
33
<PAGE>
Use of Estimates
The preparation of financial statements in conformity 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Depending on contract terms and conditions, software license fees are
recognized upon delivery of the product if no significant vendor obligations
remain and collection of the resulting receivable is deemed probable. If
significant vendor obligations exist at delivery and/or the product is subject
to customer acceptance, revenue is deferred until no significant obligations
remain and/or acceptance has occurred. If the payment of the license fee is
coincident to services which are deemed to be essential to the transaction, the
license fee is deferred and recognized using contract accounting over the period
during which the services are performed. The Company's software licensing
agreements provide for customer support (typically 90 days) and, in some
instances, training. The portion of the license fee associated with customer
support is unbundled from the license fee and is recognized ratably over the
warranty period as maintenance revenue. The portion of the license fee for
training is unbundled from the license fee and is recognized as service revenue
as the services are performed.
Service revenues, which include consulting, implementation and training,
are recognized as the services are performed. Maintenance revenues are
recognized ratably over the terms of the maintenance agreements.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Investments Available for Sale
Pursuant to Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the Company
determines the appropriate classification of debt and equity securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
At December 31, 1996 and 1995, all short-term investments have been classified
as available-for-sale. Available-for-sale securities are carried at fair value,
based on quoted market prices, with unrealized gains and losses, net of tax,
reported as a separate component of stockholders' equity. At December 31, 1996
and 1995, unrealized losses and gains, respectively, were not material to the
financial statements. Realized gains and losses, computed using specific
identification, and declines in value determined to be permanent are recognized
in the statement of operations.
34
<PAGE>
Property and Equipment
Property and equipment are recorded at cost. Property and equipment
capitalized under capital leases are recorded at the present value of the
minimum lease payments due over the lease term. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives of
the related assets or the lease term, whichever is shorter. Gains and losses on
disposal are recognized in the year of the disposition. Expenditures for repairs
and maintenance are charged to expense as incurred and significant renewals and
betterments are capitalized.
Capitalized Software Development Costs
The Company capitalizes software development costs in accordance with SFAS
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed." The Company capitalizes software development costs
subsequent to the establishment of technological feasibility and until the
product is available for general release. Costs incurred prior to the
establishment of technological feasibility are charged to product development
expense. Development costs associated with product enhancements that extend the
original product's life or significantly improve the original product's
marketability are also capitalized once technological feasibility has been
established. Software development costs are amortized on a product-by-product
basis over the greater of the ratio of current revenues to total anticipated
revenues or on a straight-line basis over the estimated useful lives of the
products (four to five years), beginning with the initial release to customers.
The Company continually evaluates whether events or circumstances have occurred
that indicate that the remaining useful life of the capitalized software
development costs should be revised or that the remaining balance of such assets
may not be recoverable. The Company evaluates the recoverability of capitalized
software based on the estimated future revenues of each product. As of December
31, 1996, management believes that no revisions to the remaining useful life or
write-downs of capitalized software development costs are required.
Goodwill
Goodwill represents the excess of the purchase price for various
acquisitions accounted for as purchases over the fair value of the net assets
acquired (see Note 5) and is amortized on a straight-line basis over 10 years.
The Company evaluates the realizability of goodwill based on estimates of
undiscounted future cash flows over the remaining useful life of the net assets.
If the amount of such estimated undiscounted future cash flows is less than the
net book value of the related assets, the assets and related goodwill would be
written down to the amount of the estimated discounted cash flows. No such
write-down was required for the years ended December 31, 1996 and 1995.
Major Customers
In 1996 and 1994, the Company had no customers which accounted for more
than 10% of revenues. In 1995, the Company had one customer which accounted for
19% of revenues.
35
<PAGE>
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of short-term investments available for sale
and trade receivables. The Company does not require collateral from its
customers.
Stock Splits and Stock Dividend
In February 1994, the Company effected a split of its common stock and
declared a stock dividend to its sole stockholder, and on May 23, 1995, the
Company effected an additional 4.75-for-1 stock split in the form of a stock
dividend. All references in the accompanying financial statements to the number
of common shares and per share amounts have been retroactively restated to
reflect both stock splits and the stock dividend.
Supplemental Cash Flow Information
For the years ended December 31, 1996, 1995 and 1994, the Company paid
interest of $513,000, $582,000 and $482,000, respectively (of which $330,000,
$348,000 and $317,000 respectively, was paid to the majority stockholder and his
wife (see Note 14), federal income taxes of $998,000, $660,000 and zero,
respectively, and state income taxes of $179,000, $212,000 and $28,000,
respectively.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," the objective of which is to recognize the amount
of current and deferred income taxes payable or refundable at the date of the
financial statements as a result of all events that have been recognized in the
financial statements as measured by enacted tax laws.
Prior to the closing of the Offering, the Company had elected to be taxed
under Subchapter S of the Internal Revenue Code. As a result, the Company was
not subject to federal income taxes, and the taxable income of the Company was
included in the sole stockholder's tax return. The Company also had elected S
corporation status in certain states and, therefore, had recorded a provision
for state income taxes for those states that do not recognize or partially
recognize S corporation treatment.
Shortly before the closing of the Offering, the Company terminated its
status as a S corporation and is now subject to federal and additional state
income taxes. The Company recorded a tax benefit of $518,000 as a result of
establishing a net deferred tax asset upon its conversion to a C corporation.
Prior to the Merger (see Note 4), Bendata, Inc. had elected to be taxed
under Subchapter S of the Internal Revenue Code and in certain states and
Bendata (UK) Limited LLC ("Bendata UK") (a Colorado limited liability
corporation) was taxed under U.S. partnership income tax rules and regulations.
As a result, Bendata was not subject to federal income taxes, and the taxable
income of Bendata was included in Bendata, Inc.'s stockholders' or Bendata UK's
members' individual tax returns, respectively. In connection with the Merger,
Bendata, Inc. terminated its status as a S corporation and Bendata UK
terminated its partnership status and are now subject to federal and state
income taxes. The Company recorded tax expense of $575,000 as a result of
establishing a net deferred tax liability in connection with the Merger.
36
<PAGE>
Currency Translation
The accounts of the international subsidiaries and branch operations are
translated in accordance with SFAS No. 52, "Foreign Currency Translation," which
requires that assets and liabilities of international operations be translated
using the exchange rate in effect at the balance sheet date. The results of
operations are translated at average exchange rates during the year. The effects
of exchange rate fluctuations in translating assets and liabilities of
international operations into U.S. dollars are accumulated and reflected as a
cumulative translation adjustment in the statements of stockholders' equity.
Transaction gains and losses are included in net income. There are no material
transaction gains or losses in the accompanying financial statements for the
periods presented.
3. PRO FORMA INFORMATION (UNAUDITED)
Pro Forma Income Tax Provision
On July 26, 1995, Astea terminated its status as a S corporation and, as a
result, is now subject to federal and additional state income taxes. In
connection with the Merger, Bendata, Inc. terminated its status as a S
corporation and Bendata UK terminated its partnership status and, as a result,
are now subject to federal and state income taxes. Accordingly, for
informational purposes, the accompanying statements of income for the years
ended December 31, 1996, 1995 and 1994 include an unaudited pro forma adjustment
for the income taxes that would have been recorded if Astea and Bendata had been
C corporations, based on the tax laws in effect during the respective periods.
Pro Forma Net Income (Loss) Per Share
Pro forma net income (loss) per share was calculated by dividing pro forma
net income (loss) by the weighted average number of shares of common stock
outstanding for the period, adjusted for the dilutive effect of common stock
equivalents, which consist of stock options, using the treasury stock method.
All share and per share amounts have been adjusted retroactively to give effect
to the Bendata merger discussed in Note 4 and the stock splits and stock
dividend discussed in Note 2.
4. BENDATA MERGER
On February 27, 1996, the Company completed a merger with Bendata, Inc. and
Bendata UK, international providers of client/server software for the internal
help desk market. The Company exchanged 1,500,000 shares of its common stock for
all of the outstanding capital stock of Bendata, Inc. and membership interest in
Bendata UK in a merger accounted for as a pooling of interests. The Company's
historical financial statements have been restated to include Bendata.
In connection with the Merger, $3,416,000 of merger expenses ($2,609,000
after-tax) were incurred and charged to expense in the first quarter of 1996.
The Merger expenses consisted of bonus payments made to Bendata non-shareholder
employees, as well as legal, accounting and investment banking fees.
37
<PAGE>
A reconciliation of previously reported sales and earnings for years ended
December 31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Previously reported $ 43,016,000 $ 20,443,000
Bendata 10,950,000 6,904,000
--------------------------------
53,966,000 27,347,000
================================
Net income:
Previously reported $ 6,697,000 $ 2,447,000
Bendata 50,000 420,000
--------------------------------
$ 6,747,000 $ 2,867,000
================================
Pro forma net income (Note 3) (unaudited):
Previously reported $ 5,147,000 $ 1,538,000
Bendata 31,000 245,000
--------------------------------
$ 5,178,000 $ 1,783,000
================================
</TABLE>
5. ACQUISITIONS
Acquisition of Astea BV
On February 1, 1995, the Company and its majority stockholder acquired all
of the issued and outstanding shares of Astea BV for $1,760,000 (see Note 1).
The following assets were acquired and liabilities were assumed in
connection with the acquisition of Astea BV:
<TABLE>
<S> <C>
Accounts receivable $1,480,000
Property and equipment 120,000
Goodwill 2,628,000
Accounts payable and accrued expenses (2,818,000)
Capitalized lease obligations (98,000)
-----------
Cash paid, net of cash acquired of $448,000 $1,312,000
===========
</TABLE>
Acquisition of Abalon
On June 28, 1996, the Company acquired all of the issued and outstanding
shares of Abalon in exchange for $9,655,000 in cash, 233,236 shares of common
stock and a $900,000 note payable in equal annual installments over three years.
In connection with the acquisition, the Company recorded a one-time charge of
$13,810,000 (or $1.08 per share) related to the fair value of in process
research
38
<PAGE>
and development. The following assets were acquired, liabilities were assumed
and expense incurred in connection with the acquisition of Abalon:
<TABLE>
<S> <C>
Purchased in process research and
development $ 13,810,000
Accounts receivable 1,251,000
Prepaid expenses 338,000
Capitalized software development costs 1,190,000
Goodwill 935,000
Property and equipment 607,000
Other liabilities (1,508,000)
Accounts payable and accrued expenses (1,182,000)
Present value of notes payable to former owners (789,000)
Fair value of common stock issued (5,000,000)
-------------
Cash paid $ 9,652,000)
=============
</TABLE>
Acquisition of Professional Help Desk
In 1996, the Company acquired certain assets and liabilities of
Professional Help Desk, an Australian distributor for $58,000, forgiveness of a
Bendata UK royalty receivable of $213,000 and minimum future royalty payments
with a present value of $98,000.
The Company accounted for the acquisitions of Astea BV, Abalon and
Professional Help Desk as purchases and, accordingly, the purchase prices were
allocated based on the estimated fair value of the assets acquired and
liabilities assumed. The excess of the purchase price over the fair value of the
net assets acquired of $3,933,000 has been recorded as goodwill and is being
amortized over ten years on a straight-line basis. Goodwill is net of
accumulated amortization of $560,000 and $234,000 at December 31, 1996 and 1995,
respectively. Amortization expense for the years ended December 31, 1996, 1995
and 1994 was $326,000, $234,000 and zero, respectively.
Results of operations after the acquisition date are included in the
consolidated statement of income. The following unaudited pro forma information
has been prepared assuming that the Abalon acquisition had taken place on
January 1, 1995.The pro forma effects of the Astea BV acquisition on the 1995
results of operations and the Professional Help Desk acquisition on the 1996 and
1995 results of operations are immaterial. The pro forma information includes
the elimination of the Bendata merger costs (see Note 4) and the charge for
purchased in process research and development, and pro forma adjustments for
interest expense that would have been incurred to finance the purchase,
amortization of intangibles arising from the transaction and pro forma income
taxes for Astea and Bendata (see Note 3). The pro forma financial information is
not necessarily indicative of the operating results that would have occurred had
the transaction been effective on the assumed date, nor is it necessarily
indicative of future operating results.
<TABLE>
<CAPTION>
(UNAUDITED)
------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1996 1995
------------------------------------------------------------------
<S> <C> <C>
Revenues $66,175,000 $59,902,000
Net income (loss) $(20,421,000) $ 4,693,000
Net income (loss) per share $ (1.58) $ 0.40
</TABLE>
39
<PAGE>
6. RECEIVABLES
<TABLE>
<CAPTION>
DECEMBER 31, 1996 1995
---------------------------------------------------------------------
<S> <C> <C>
Billed receivables $ 19,801,000 $ 16,248,000
Unbilled receivables 3,180,000 4,643,000
Royalties receivable 1,187,000 618,000
Other 19,000 51,000
----------------------------
$ 24,187,000 $ 21,560,000
============================
</TABLE>
Billed receivables represent billings for the Company's products and
services to end users, while royalties receivable represent billings to the
Company's value added resellers. Both balances are shown net of reserves for
estimated uncollectible amounts. Unbilled receivables represent contractual
amounts due within one year under software licenses which are not yet billable.
7. INVESTMENTS AVAILABLE FOR SALE
<TABLE>
<CAPTION>
DECEMBER 31, 1996 1995
-----------------------------------------------------------------------
<S> <C> <C>
Auction market preferred stock $ 3,325,000 $ 10,625,000
Municipal securities 4,700,000 14,661,000
Commercial paper - 5,536,000
Corporate bonds 969,000 -
---------------------------
$ 8,994,000 $ 30,822,000
===========================
</TABLE>
All investments available for sale have maturities of less than twelve
months from the respective balance sheet date. Losses on sales of securities for
the year ended December 31, 1996 were $59,000 and have been included in interest
expense in the accompanying consolidated statement of income. No gains or losses
on transactions were recorded in fiscal years 1995 or 1994 as all sales occurred
at par value upon maturity of the securities.
8. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
USEFUL LIFE/ DECEMBER 31,
------------------------
LEASETERM 1996 1995
--------- ----- ----
<S> <C> <C> <C>
Building under capital lease 16 $ 2,462,000 $ 2,462,000
Computers and related equipment 3 6,544,000 3,835,000
Furniture and fixtures 10 1,386,000 905,000
Equipment under capital leases 3-5 1,097,000 244,000
Leasehold improvements 15 810,000 716,000
Computers and related office
equipment 7 706,000 590,000
Other 5 47,000 63,000
-------------------------
13,052,000 8,815,000
Less: Accumulated depreciation (4,935,000) (2,993,000)
-------------------------
$ 8,117,000 $ 5,822,000
=========================
</TABLE>
40
<PAGE>
Depreciation expense for the years ended December 31, 1996, 1995 and 1994
was $1,970,000, $1,129,000 and $667,000, respectively. Accumulated amortization
under capital leases at December 31, 1996 and 1995 was $754,000 and $496,000,
respectively.
Equipment under capital leases includes telephone systems, computers and
related equipment. Title to the property is owned by the financing companies.
The net book value of equipment securing these leases is $804,000 and $55,000 at
December 31, 1996 and 1995, respectively.
9. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
<TABLE>
<CAPTION>
DECEMBER 31, 1996 1995
---------------------------------------------------------------------------
<S> <C> <C>
Capitalized software development costs $ 6,280,000 $ 3,232,000
Less: Accumulated amortization (2,258,000) (1,519,000)
------------------------------
$ 4,022,000 $ 1,713,000
==============================
</TABLE>
The Company has capitalized software development costs for the years ended
December 31, 1996, 1995 and 1994 of $1,858,000, $957,000 and $788,000,
respectively. Amortization of software development costs for the years ended
December 31, 1996, 1995 and 1994 was $739,000, $796,000 and $636,000,
respectively.
10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31, 1996 1995
---------------------------------------------------------------------------
<S> <C> <C>
Accounts payable $ 5,570,000 $ 3,808,000
Accrued compensation and related benefits 3,385,000 2,169,000
Accrued income taxes payable 38,000 1,119,000
Other accrued liabilities 2,083,000 2,517,000
------------------------------
$ 11,076,000 $ 9,613,000
==============================
</TABLE>
11. LINES OF CREDIT
The Company has three credit agreements with various banks: a $5,000,000
line of credit with interest at the bank's prime rate (8.25% at December 31,
1996), a revolving line of credit for borrowings up to $1,750,000 with interest
at the bank's prime rate plus .75% (9% at December 31, 1996), and a revolving
line of credit (with a Swedish bank) for borrowings up to $1,161,000 translated
at the December 31, 1996 exchange rate, with interest at the bank's prime rate
plus 2.4% (6.6% at December 31, 1996). Borrowings under the agreements are
secured by a first security interest on substantially all of the Company's
assets and require the Company to maintain certain financial and nonfinancial
covenants, as defined.
The $5,000,000 line of credit expires on June 30, 1997. Availability of
borrowings under the $1,750,000 line is limited to 80% of eligible accounts
receivable, as defined, and expires on April 15, 1997. Availability of borrowing
under the Swedish line expires on December 31, 1997. At December 31, 1996, the
Swedish facility included an overdraft provision of $145,000 which expired on
January 31, 1997
During 1996, the highest outstanding balance, the average outstanding
balance and the weighted average interest rate on the lines was $1,678,000,
$401,000 and 8.8%, respectively.
41
<PAGE>
12. LONG-TERM DEBT
<TABLE>
<CAPTION>
December 31, 1996 1995
----------------------------------------------------------------------------
<S> <C> <C>
Capitalized lease obligations (see Note 14) $ 3,346,000 $ 2,629,000
Notes payable to former owners of acquired
companies (see Note 5) 887,000 -
---------------------------
4,233,000 2,629,000
Less: Current portion (25,000) (97,000)
---------------------------
$ 3,708,000 $ 2,532,000
===========================
</TABLE>
Minimum principal repayments of long term debt as of December 31, 1996,
excluding capitalized lease obligations (see Note 14), are $285,000 in 1997,
$361,000 in 1998 and $241,000 in 1999.
13. INCOME TAXES
In July 1995 (see Note 2), Astea terminated its status as a S corporation
and as of that date, has been subject to federal and state income taxes.
The provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1996 1995
--------------------------------------------------------------------------------
<S> <C> <C>
Current
Federal $ (2,837,000) $ 2,118,000
State 27,000 525,000
Foreign 140,000 -
----------------------------------
(2,670,000) 2,643,000
Deferred
Federal 80,000 (185,000)
State - (57,000)
Foreign (728,000) -
----------------------------------
(648,000) (242,000)
Reinstatement of deferred income tax assets 575,000 (518,000)
----------------------------------
(2,743,000) 1,883,000
----------------------------------
Valuation allowance 1,130,000 -
----------------------------------
$ (1,613,000) $ 1,883,000
==================================
</TABLE>
The tax provision for December 31, 1994 of $49,000, represents state income
taxes for states which did not recognize S corporation status.
42
<PAGE>
The approximate income tax effect of each type of temporary difference is
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,19961995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current deferred income tax assets (liabilities):
Revenue recognition $ 582,000 $ 237,000
Accruals and reserves not currently
deductible for tax 1,431,000 919,000
Cash basis of accounting (239,000) -
Benefit of operating loss carryforward 95,000 38,000
------------------------------------
1,869,000 1,194,000
Non-current deferred income tax assets (liabilities):
Benefit of operating loss carryforward 1,527,000 152,000
Deferred compensation 142,000 222,000
Capitalized lease obligations 194,000 160,000
Capitalized software development costs (1,437,000) (624,000)
Depreciation methods (4,000) (46,000)
Cash basis of accounting (239,000) -
Valuation reserve (1,130,000) -
------------------------------------
(947,000) (136,000)
------------------------------------
Net deferred income tax asset $ 922,000 $ 1,058,000
====================================
</TABLE>
Due to the uncertainty of the ultimate realization of certain net operating
losses, the Company has provided a valuation reserve for the deferred tax assets
as of December 31,1996. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near-term if estimates of future
taxable income are reduced.
The reconciliation of the statutory federal income tax rate to the
Company's effective income tax rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1996 1995
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Federal statutory tax rate (34.0)% 34.0%
Nondeductible Abalon acquisition and Bendata merger expenses 24.1 -
Reinstatement of deferred taxes upon conversion to C
corporation status 2.7 6.0
State income taxes, net of federal tax benefit 0.1 3.9
Net operating losses from foreign subsidiaries not benefitted 1.0 2.2
Income not subject to corporate taxes due to S corporation status (0.5) (16.7)
Valuation reserve 5.3 -
Nondeductible expenses (0.4) 1.0
Other (5.9) 3.4
-------------------------------------
(7.6)% 21.8%
=====================================
</TABLE>
43
<PAGE>
At December 31, 1996, the Company had a net operating loss carryforward for
United States federal income tax purposes of approximately $11,053,000. Included
in the aggregate net operating loss carryforward is $9,207,000 of tax deductions
related to equity transactions, the benefit of which will be credited to
stockholders' equity, if and when realized after the other tax deductions in the
carryforwards have been realized. The net operating loss carryforward begins to
expire in 1997.
14. COMMITMENTS AND CONTINGENCIES
The Company leases facilities and equipment under noncancelable operating
and capital leases, including a lease for certain office facilities from its
majority stockholder and his wife which expires in 2009 and requires monthly
lease payments of $33,250. Payments of $399,000 for the years ended December 31,
1996, 1995 and 1994 were made by the Company under this lease. In connection
with this lease, the Company has guaranteed the payment of a note payable to the
Pennsylvania Industrial Development Authority from the Company's majority
stockholder and his wife related to the corporate headquarters facility. The
balance of this note payable at December 31, 1996 and 1995 was $214,000 and
$230,000, respectively. In management's opinion, the terms of this related party
lease are at least as favorable to the Company as could be obtained from an
unaffiliated third party.
Rent expense under all operating leases for the years ended December 31,
1996, 1995 and 1994 was $1,974,000, $1,028,000 and $371,000, respectively.
Future minimum lease payments under the Company's leases as of December 31,
1996 are as follows:
<TABLE>
<CAPTION>
Capital Leases
------------------------------------
Operating Leases Related Party Other
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1997 $ 2,318,000 $ 399,000 $ 250,000
1998 2,058,000 399,000 206,000
1999 1,591,000 399,000 198,000
2000 1,412,000 399,000 198,000
2001 1,260,000 399,000 227,000
Thereafter 1,422,000 3,192,000 -
----------------------------------------------------------
Total minimum lease payments $ 10,061,000 $ 5,187,000 $ 1,079,000
==========================================================
Less: Amount representing interest
(related party lease at an 11.2%
effective interest rate) (2,699,000) (221,000)
------------------------------------
Present value of future minimum lease payments 2,488,000 858,000
Less: Current portion (78,000) (162,000)
------------------------------------
$ 2,410,000 $ 696,000
====================================
</TABLE>
During 1996, the Company charged to expense approximately $1,400,000 in
connection with a dispute with a customer regarding the implementation of the
Company's software products. At this time, the final resolution of this dispute
has not been determined; however, management believes that the ultimate
settlement of this dispute will not have a material adverse effect on the
Company's financial position or results of operations.
In 1995, the Company entered into a beta software development agreement
with a customer. The Company was required to deliver various versions of beta
releases of this software product throughout 1996 and is required to deliver a
commercial release version of this software product prior
44
<PAGE>
to September 30, 1997. In 1996, the Company accrued $272,000 of penalties
related to the late deliveries of the beta versions of the software product. The
Company could incur an additional penalty of $1,600,000 if the scheduled
delivery of the commercial release of the software product is not made in
accordance with the agreement. Management believes that given the current facts
and circumstances, no additional penalty will be incurred.
The Company is from time to time involved in certain legal actions and
customer disputes arising in the ordinary course of business. In the Company's
opinion, the outcome of such actions will not have a material adverse effect on
the Company's financial position or results of operations.
15. PROFIT SHARING PLAN
The Company maintains a voluntary profit sharing plan, including a Section
401(k) feature, covering all qualified and eligible employees. Company
contributions to the plan are determined at the discretion of the Board of
Directors. For the years ended December 31, 1996, 1995 and 1994, profit sharing
contributions by the Company were zero, $201,000 and $149,000, respectively.
16. EQUITY PLANS
Stock Option Plans
The Company has adopted Stock Option Plans (the "Plans") under which
incentive and non-qualified stock options may be granted to its employees,
officers, directors and others. Generally, incentive stock options are granted
at fair value, become exercisable over a four-year period, and are subject to
the employee's continued employment. Non-qualified options are granted at
exercise prices determined by the Board of Directors and vest over varying
periods. A summary of the status of the Company's stock options as of December
31, 1996, 1995 and 1994 and changes during the years then ended is as follows:
<TABLE>
<CAPTION>
SHARES
AVAILABLE NUMBER WEIGHTED AVERAGE
FOR GRANT OF SHARES EXERCISE PRICE
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1, 1994 151,000 699,000 $ .91
Authorized 1,500,000 - -
Granted at market (575,000) 575,000 1.92
Granted below market (233,000) 233,000 .21
Cancelled 1,000 (1,000) 1.92
---------------------------------
Balance, December 31, 1994 844,000 1,506,000 1.18
Authorized 200,000 - -
Granted at market (463,000) 463,000 17.25
Cancelled 51,000 (51,000) 5.15
Exercised - (203,000) .86
---------------------------------
Balance, December 31, 1995 632,000 1,715,000 5.75
Granted at market (893,000) 893,000 15.26
Granted below market (80,000) 80,000 24.77
Granted outside Plan at market - 184,000 6.04
Cancelled 529,000 (529,000) 14.06
Cancelled outside Plan - 15,000 6.50
Exercised - (469,000) 1.17
---------------------------------
Balance, December 31, 1996 188,000 1,859,000 $ 4.93
=================================
</TABLE>
45
<PAGE>
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- ----------------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ .21 - $ 1.92 714,000 6.73 $ 1.00 418,000 $ 0.63
5.25 - 7.75 1,053,000 8.54 6.71 150,000 7.01
15.00 - 17.25 92,000 8.53 15.06 21,000 15.27
---------- ---------
.21 - $ 17.25 1,859,000 7.84 $ 4.93 589,000 $ 2.77
========== =========
</TABLE>
In July 1996, the Company repriced all outstanding non-officer employee
options to $7.75, the fair market value on the new grant date. In October 1996,
the Company repriced certain outstanding officer options to the current fair
market value of $5.50. Options granted to directors under the 1995 Director Plan
were not repriced.
The Company accounts for options and the employee stock purchase plan under
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," under which deferred compensation expense has been recorded for
options granted with exercise prices below fair value. The deferred compensation
is charged to expense ratably over the vesting period. Had compensation cost for
the stock Company's options and employee stock purchase plan been determined
consistent with SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company's pro forma net income (loss) and earnings (loss) per share would have
been approximately $(24,266,000) or $(1.89) per share and $3,986,000 or $.35 per
share for the years ended December 31, 1996 and 1995, respectively.
The weighted average fair value of those options granted during the years
ended December 31, 1996 and 1995 was estimated as $7.31 and $12.10,
respectively. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions: risk-free interest rate of 6.48% and 5.98% for 1996 and
1995 grants, respectively, and an expected life of six years, volatility of 85%
and a dividend yield of zero for both 1996 and 1995 grants.
The weighted average fair value of the employee purchase rights granted in
1996 was $9.52. For 1996, the fair value of the purchase rights was estimated
using the Black-Scholes model with the following weighted average assumptions:
risk-free interest rate of 5.46%, an expected life of six months, volatility of
85% and a dividend yield of zero.
Because the SFAS No.123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
Employee Stock Purchase Plan
In May 1995, the Company authorized an employee stock purchase plan which
allows full-time employees with one year of service the opportunity to purchase
shares of the Company's common stock through payroll deductions at the end of
bi-annual purchase periods. The purchase price is the lower of 85% of the
average market price on the first or last day of the purchase periods. An
employee
46
<PAGE>
may purchase up to a maximum of 500 shares or 10% of the employee's base salary,
whichever is less, provided that the employee's ownership of the Company's stock
is less than 5% as defined in the plan. During 1996 and 1995, no shares were
purchased under the plan. At December 31, 1996, there were 250,000 shares
available for future purchases, exclusive of stock subscriptions receivable
outstanding of $70,000. On January 2, 1997, 11,586 shares were purchased at
$5.00 per share.
17. RELATED PARTY TRANSACTIONS
From its inception in 1979 through the Offering, the Company had been owned
by one individual. In January 1995, a distribution of $370,000 was made to the
majority stockholder which was used by the majority stockholder for the payment
of his 21% interest in Astea BV (see Notes 1 and 5). As a result of the
termination of the Company's S corporation status, distributions totaling
$1,979,000 and $8,296,000 have been paid to the majority stockholder in 1996 and
1995, respectively, which represented taxed but undistributed S corporation
earnings.
The majority stockholder of Bendata, Inc. received a note payable of
$1,500,000 in exchange for the contribution of certain assets. The note was
payable upon demand at an interest rate of 7%. The note was repaid in full as of
December 31, 1995. Total payments during 1995 were $1,181,000 including
principal of $1,139,000 and interest of $42,000. Total payments during 1994 were
$450,000, including principal of $360,000 and interest of $90,000. During 1995,
Bendata, Inc. made distributions of $345,000 to stockholders.
In 1996, 1995 and 1994, the Company paid premiums on behalf of the majority
stockholder and his wife of $70,000 and $75,000 and $75,000, respectively under
split dollar life insurance policies.
47
<PAGE>
18. GEOGRAPHIC SEGMENT DATA
The Company operates in one business segment. The following table presents
information about the Company's operations by geographic area:
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Software license fees
United States
Domestic $ 17,515,000 $ 23,546,000 $ 12,425,000
Export 1,575,000 814,000 2,990,000
Transfers between
geographic areas 1,917,000 2,227,000 -
-------------------------------------------------------
21,007,000 26,587,000 15,415,000
Europe - domestic 6,321,000 5,158,000 -
Other foreign
Domestic 3,446,000 386,000 118,000
Transfers between
geographic areas 1,127,000 552,000 -
Eliminations (3,044,000) (2,779,000) -
-------------------------------------------------------
28,857,000 29,904,000 15,532,000
-------------------------------------------------------
Services and maintenance
United States
Domestic 22,453,000 17,454,000 9,515,000
Export 948,000 1,049,000 2,025,000
-------------------------------------------------------
22,401,000 18,503,000 11,540,000
-------------------------------------------------------
Europe 5,895,000 4,326,000 -
Other foreign 4,555,000 1,233,000 274,000
-------------------------------------------------------
33,851,000 24,062,000 11,815,000
-------------------------------------------------------
$ 62,708,000 $ 53,966,000 $ 27,347,000
=======================================================
Operating income (loss)
United States $ (18,796,000) $ 8,432,000 $ 3,880,000
Europe (939,000) 1,043,000 (181,000)
Other foreign(1) (2,156,000) (1,024,000) (375,000)
-------------------------------------------------------
$ (21,891,000) $ 8,451,000 $ 3,324,000
=======================================================
Identifiable assets
United States $ 100,123,000 $ 110,718,000 $ 22,196,000
Europe 7,450,000 8,371,000 -
Other foreign 7,951,000 1,469,000 285,000
Eliminations (57,833,000) (51,188,000) -
-------------------------------------------------------
$ 57,691,000 $ 69,370,000 $ 22,481,000
=======================================================
</TABLE>
(1) Included in operating losses from other foreign locations were $1,727,000,
$600,000 and $356,000 for the years 1996, 1995 and 1994, respectively,
related to Astea Israel, which is primarily a development cost center. The
Company conducts its primary development activities within its United States
operations.
48
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information concerning the directors of the Company is incorporated herein
by reference to the information contained under the heading "Election of
Directors" in the registrant's definitive Proxy Statement for the Company's 1997
Annual Meeting of Stockholders to be held on May 15, 1997, which will be filed
with the Securities and Exchange Commission not later than April 30, 1997 (the
"Definitive Proxy Statement").
Certain information concerning directors and executive officers of the
registrant required by this item is incorporated herein by reference to the
information contained under the heading "Occupations of Directors and Executive
Officers" in the registrant's Definitive proxy Statement.
The information concerning the compliance with Section 16(a) of the
Securities Exchange Act of 1934 required by this item is incorporated herein by
reference to the Definitive Proxy Statement under the heading "Section 16
Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION.
Information concerning executive compensation required by this item is
incorporated herein by reference to the information contained under the heading
"Compensation and Other Information Concerning Directors and Officers" in the
Definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information concerning security ownership of certain beneficial owners and
management required by this item is incorporated herein by reference to the
information contained under the heading "Management and Principal Holders of
Voting Securities" in the Definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information concerning certain relationships and related transactions
required by this item is incorporated herein by reference to the information
contained under the heading "Certain Relationships and Related Transactions" in
the Definitive Proxy Statement. See also Note 17 of the Notes to the
Consolidated Financial Statements of the Company appearing elsewhere in this
Annual Report on Form 10-K.
49
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1)(A) Consolidated Financial Statements.
i) Consolidated Balance Sheets at December 31, 1996 and 1995
ii) Consolidated Statements of Income for the years ended
December 31, 1996, 1995 and 1994
iii) Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994
iv) Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994
v) Notes to the Consolidated Financial Statements
(a)(1)(B) Report of Independent Public Accountants.
(a)(2) Schedules.
a) Schedule II - Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the
information required to be set forth therein is not
applicable or is shown in the accompanying Financial
Statements or notes thereto.
(a)(3) List of Exhibits.
The following exhibits are filed as part of and incorporated by reference
into this Annual Report on Form 10-K:
EXHIBIT NO. DESCRIPTION
2.1 Agreement and Plan of Merger among the Company, Bendata,
Inc., Bendata (UK) Limited LLC, BDI Acquisition Corp., Ronald
J. Muns, Randall W. Casto, and David Russell, dated as of
February 26, 1996 (Incorporated herein by reference to
Exhibit 7.01 to the Company's Report on Form 8-K, filed on
March 1, 1996).
2.2 Share Purchase Agreement, dated as of June 20, 1996, among
the Company, Per Edstrom, Orjan Grinndal and Henrik Lindberg
(Incorporated herein by reference to Exhibit 7.01 to the
Company's Report on Form 8-K, filed on July 12, 1996).
3(i).1 Certificate of Incorporation of the Company (Incorporated
herein by reference to
50
<PAGE>
Exhibit 3.1 to the Company's Registration Statement on Form
S-1, as amended (File No. 33-92778)).
3(ii).1 By-Laws of the Company (Incorporated herein by reference to
Exhibit 3.2 to the Company's Registration Statement on Form
S-1, as amended (File No. 33-92778)).
4.1 Specimen certificate representing the Common Stock
(Incorporated herein by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-1, as amended
(File No. 33-92778)).
10.1 1994 Amended Stock Option Plan (Incorporated herein by
reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-1, as amended (File No. 33-92778)).
10.2 Form of Non-Qualified Stock Option Agreement under the 1994
Amended Stock Option Plan (Incorporated herein by reference
to Exhibit 10.2 to the Company's Registration Statement on
Form S-1, as amended (File No. 33-92778)).
10.3 Form of Incentive Stock Option Agreement under the 1994
Amended Stock Option Plan (Incorporated herein by reference
to Exhibit 10.3 to the Company's Registration Statement on
Form S-1, as amended (File No. 33-92778)).
10.4 1991 Amended Non-Qualified Stock Option Plan (Incorporated
herein by reference to Exhibit 10.4 to the Company's
Registration Statement on Form S-1, as amended (File No. 33-
92778)).
10.5 Form of Non-Qualified Stock Option Agreement under the 1991
Amended Non-Qualified Stock Option Plan (Incorporated herein
by reference to Exhibit 10.5 to the Company's Registration
Statement on Form S-1, as amended (File No. 33-92778)).
10.6 1995 Employee Stock Purchase Plan (Incorporated herein by
reference to Exhibit 10.6 to the Company's Registration
Statement on Form S-1, as amended (File No. 33-92778)).
10.7 1995 Employee Stock Purchase Plan Enrollment/Authorization
Form (Incorporated herein by reference to Exhibit 4.7 to the
Company's Registration Statement on Form S-8, filed on
September 19, 1995 (File No. 33-97064)).
10.8 1995 Non-Employee Director Stock Option Plan (Incorporated
herein by reference to Exhibit 10.7 to the Company's
Registration Statement on Form S-1, as amended (File No. 33-
92778)).
10.9 Form of Non-Qualified Stock Option Agreement under the 1995
Non-Employee Director Stock Option Plan (Incorporated herein
by reference to Exhibit 4.5 to the Company's Registration
Statement on Form S-8, filed on September 19, 1995 (File No.
33-97064)).
10.10* 1997 Stock Option Plan.
10.11* Form of Non-Qualified Stock Option Agreement under the 1997
Stock Option Plan.
10.12* Form of Incentive Stock Option Agreement under the 1997 Stock
Option Plan.
10.13 Amended and Restated Lease Agreement dated January 1, 1994,
among Zack B. Bergreen, Zahava Bar-Nir, and the Company
(Incorporated herein by reference to Exhibit 10.11 to the
Company's Registration Statement on Form S-1, as amended
(File No. 33-92778)).
10.14 Guaranty, dated as of January 24, 1994, among Zack B.
Bergreen, Zahava Bar-Nir, and Continental Bank, predecessor
of Midlantic Bank, N.A. (Incorporated herein by reference to
Exhibit 10.12 to the Company's Registration Statement on
Form S-1, as amended (File No. 33-92778)).
10.15 Promissory Note, dated as of November 24, 1994, payable by
Zack B. Bergreen to the Company in the amount of $108,978.54
(Incorporated herein by reference to Exhibit 10.13 to the
Company's Registration Statement on Form S-1, as amended
(File No. 33-92778)).
10.16 Promissory Note, dated as of October 25, 1994, payable by
Zack B. Bergreen to the
51
<PAGE>
Company in the amount of $108,836.88 (Incorporated herein by
reference to Exhibit 10.14 to the Company's Registration
Statement on Form S-1, as amended (File No. 33-92778)).
10.17* Agreement of Lease, dated July 12, 1996, between the Company
and C/N Horsham Towne Limited Partnership.
10.18 Consulting Agreement, dated as of July 16, 1993, between the
Company and Reuben Wasserman Inc. (Incorporated herein by
reference to Exhibit 10.15 to the Company's Registration
Statement on Form S-1, as amended (File No. 33-92778)).
10.19 Amended and Restated Loan and Security Agreement, dated April
24, 1995, between the Company and Midlantic Bank, N.A., as
amended by letter agreement dated May 22, 1995 (Incorporated
herein by reference to Exhibit 10.20 to the Company's
Registration Statement on Form S-1, as amended (File No. 33-
92778)).
10.20 Employment and Noncompetition Agreement dated February 27,
1996 by and among Ronald J. Muns and the Company
(Incorporated herein by reference to Exhibit 7.03 to the
Company's Report on Form 8-K, filed on March 1, 1996).
10.21 Escrow Agreement among the Company, Bendata, Inc., Bendata
(UK) Limited, LLC, Midlantic Bank, Ronald J. Muns, Randall W.
Casto, and David Russell dated as of February 27, 1996
(Incorporated herein by reference to Exhibit 7.04 to the
Company's Report on Form 8-K, filed on March 1, 1996).
10.22 Registration Rights Agreement among the Company, Ronald J.
Muns, Randall W. Casto and David Russell dated as of February
27, 1996 (Incorporated herein by reference to Exhibit 7.05 to
the Company's Report on Form 8-K, filed on March 1, 1996
10.23 Escrow Agreement, dated as of June 28, 1996, among the
Company, Abalon AB, Midlantic Bank, N.A., Per Edstrom, Orjan
Grinndal, Henrik Lindberg, and Per Edstrom, as representative
(Incorporated herein by reference to Exhibit 7.02 to the
Company's Report on Form 8-K, filed on July 12, 1996).
10.24 Registration Rights Agreement, dated as of June 28, 1996,
among the Company, Per Edstrom, Orjan Grinndal and Henrik
Lindberg (Incorporated herein by reference to Exhibit 7.03 to
the Company's Report on Form 8-K, filed on July 12, 1996
10.25 Amendment Agreement, dated as of November 26, 1996, among the
Company, Per Edstrom, Orjan Grinndal and Henrik Lindberg
(Incorporated herein by reference to Exhibit 7.01 to the
Company's Report on Form 8-K, filed on November 27, 1996).
11.1* Computation of Pro Forma Net Income (Loss) Per Common Share.
16.1 Letter re change in Certifying Accountant (Incorporated
herein by reference to Exhibit 16.1 to the Company's
Registration Statement on Form S-1, as amended (File No. 33-
92778)).
21.1* Subsidiaries of the Registrant.
23.1* Consent of Arthur Andersen LLP.
24.1* Powers of Attorney (See the Signature Page).
27.1* Financial Data Schedule.
___________________
* Filed herewith
52
<PAGE>
(b) Reports on Form 8-K.
The Company filed current reports on Form 8-K, or amendments to current
reports on Form 8-K/A, on the following dates during the fiscal quarter ended
December 31, 1996:
Date Filed Description
---------- -----------
September 11, 1996 8-K/A containing pro forma financial statements
relating to acquisition of Bebalon AB and its
subsidiaries (Abalon)
November 26, 1996 Optional 8-K disclosing Amendment Agreement
among the Company and the former shareholders if
Bebalon AB
December 16, 1996 8-K/A (Amendment No. 2) containing pro forma
financial statements relating to acquisition of
Bebalon AB and its subsidiaries
December 20, 1996 8-K/A (Amendment No. 3) containing pro forma
financial statements relating to acquisition of
Bebalon AB and its subsidiaries
(c) Exhibits.
The Company hereby files as part of this Annual Report on Form 10-K
exhibits listed in Item 14(a)(3) set forth above.
53
<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 26th day of March,
1997.
ASTEA INTERNATIONAL INC.
By: /s/ Zack B. Bergreen
-------------------------
Zack B. Bergreen
Chairman, President and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Zack B. Bergreen and Leonard W. von Vital,
jointly and severally, his attorney-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Report on Form 10-K and to file same, with exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorney-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Zack B. Bergreen Chairman, President March 26, 1997
- ----------------------------- and Chief Executive Officer
Zack B. Bergreen (Principal Executive Officer)
/s/ Leonard W. von Vital Vice President and Chief March 26, 1997
- ----------------------------- Financial Officer
Leonard W. von Vital (Principal Financial and
Accounting Officer)
/s/ Bruce R. Rusch Director March 26, 1997
- -----------------------------
Bruce R. Rusch
/s/ Joseph J. Kroger Director March 26, 1997
- -----------------------------
Joseph J. Kroger
54
<PAGE>
SCHEDULE II
ASTEA INTERNATIONAL INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING OTHER END OF
CLASSIFICATION OF PERIOD ADDITIONS (1) DEDUCTIONS (2) INCREASES (3) INCREASES (4) PERIOD
- -------------- --------- ------------- -------------- ------------ ------------- ------
<S> <C> <C> <C> <C> <C> <C>
For the Year Ended
December 31, 1994
Reserve for estimated
uncollected amounts $ 802,000 $ 742,000 $ (622,000) $ 102,000 $ - $ 1,024,000
For the Year Ended
December 31, 1995
Reserve for estimated
uncollected amounts $ 1,024,000 $ 1,140,000 $ (784,000) $ - $ - $ 1,380,000
For the Year Ended
December 31, 1996
Reserve for estimated
uncollected amounts $ 138,000 $ 264,000 $ (520,000) $ 534,000 $ 23,000 $ 1,681,000
</TABLE>
(1) Amounts represent charges to expense and reductions to revenue.
(2) Amounts represent the write-off of receivables against established
reserves.
(3) Amounts represent recoveries of previously written-off receivables and
amounts reclassed from deferred revenue.
(4) Amount represents the acquisition of Abalon.
S-3
<PAGE>
Exhibit 10.10
ASTEA INTERNATIONAL INC.
1997 STOCK OPTION PLAN
----------------------
1. PURPOSE. This 1997 Stock Option Plan (the "Plan") is intended to
-------
provide incentives: (a) to the officers and other employees of Astea
International Inc. (the "Company"), its parent (if any) and any present or
future subsidiaries of the Company (collectively, "Related Corporations") by
providing them with opportunities to purchase stock in the Company pursuant to
options granted hereunder which qualify as "incentive stock options" ("ISO" or
"ISOs") under Section 422(b) of the Internal Revenue Code of 1986, as amended
(the "Code"); (b) to directors, officers, employees and consultants of the
Company and Related Corporations by providing them with opportunities to
purchase stock in the Company pursuant to options granted hereunder which do not
qualify as ISOs ("Non-Qualified Option" or "Non-Qualified Options"); (c) to
directors, officers, employees and consultants of the Company and Related
Corporations by providing them with awards of stock in the Company ("Awards");
and (d) to directors, officers, employees and consultants of the Company and
Related Corporations by providing them with opportunities to make direct
purchases of stock in the Company ("Purchases"). Both ISOs and Non-Qualified
Options are referred to hereafter individually as an "Option" and collectively
as "Options". Options, Awards and authorizations to make Purchases are referred
to hereafter collectively as "Stock Rights." As used herein, the terms "parent"
and "subsidiary" mean "parent corporation" and "subsidiary corporation",
respectively, as those terms are defined in Section 424 of the Code.
2. ADMINISTRATION OF THE PLAN.
---------------------------
A. BOARD OR COMMITTEE ADMINISTRATION. The Plan shall be administered
---------------------------------
by the Board of Directors of the Company (the "Board") or, subject to
paragraph 2(D) (relating to compliance with Section 162(m) of the Code), by a
committee appointed by the Board (the "Committee"). Hereinafter, all
references in this Plan to the "Committee" shall mean the Board if no
Committee has been appointed. Subject to ratification of the grant or
authorization of each Stock Right by the Board (if so required by applicable
state law), and subject to the terms of the Plan, the Committee shall have
the authority to (i) determine the employees of the Company and Related
Corporations (from among the class of employees eligible under paragraph 3 to
receive ISOs) to whom ISOs may be granted, and to determine (from among the
class of individuals and entities eligible under paragraph 3 to receive Non-
Qualified Options and Awards and to make Purchases) to whom Non-Qualified
Options, Awards and authorizations to make Purchases may be granted; (ii)
determine the time or times at which Options or Awards may be granted or
Purchases made; (iii) determine the exercise price per share subject to each
Option, which
<PAGE>
-2-
price shall not be less than the minimum price specified in paragraph 6, and
the purchase price of shares subject to each Purchase; (iv) determine whether
each Option granted shall be an ISO or a Non-Qualified Option; (v) determine
(subject to paragraph 7) the time or times when each Option shall become
exercisable and the duration of the exercise period; (vi) extend the period
during which outstanding Options may be exercised; (vii) determine whether
restrictions such as repurchase options are to be imposed on shares subject
to Options, Awards and Purchases and the nature of such restrictions, if any,
and (viii) interpret the Plan and prescribe and rescind rules and regulations
relating to it. If the Committee determines to issue a Non-Qualified Option,
it shall take whatever actions it deems necessary, under Section 422 of the
Code and the regulations promulgated thereunder, to ensure that such Option
is not treated as an ISO. The interpretation and construction by the
Committee of any provisions of the Plan or of any Stock Right granted under
it shall be final unless otherwise determined by the Board. The Committee may
from time to time adopt such rules and regulations for carrying out the Plan
as it may deem best. No member of the Board or the Committee shall be liable
for any action or determination made in good faith with respect to the Plan
or any Stock Right granted under it.
B. COMMITTEE ACTION. The Committee may select one of its members as
----------------
its chairman, and shall hold meetings at such time and places as it may
determine. Acts by a majority of the Committee, or acts reduced to or
approved in writing by a majority of the members of the Committee, shall be
the valid acts of the Committee. All references in this Plan to the
Committee shall mean the Board if no Committee has been appointed. From time
to time the Board may increase the size of the Committee and appoint
additional members thereof, remove members (with or without cause) and
appoint new members in substitution therefor, fill vacancies however caused,
or remove all members of the Committee and thereafter directly administer the
Plan.
C. GRANT OF STOCK RIGHTS TO BOARD MEMBERS. Stock Rights may be
--------------------------------------
granted to members of the Board. All grants of Stock Rights to members of the
Board shall in all other respects be made in accordance with the provisions
of this Plan applicable to other eligible persons. Members of the Board who
either (i) are eligible for Stock Rights pursuant to the Plan or (ii) have
been granted Stock Rights may vote on any matters affecting the
administration of the Plan or the grant of any Stock Rights pursuant to the
Plan, except that no such member shall act upon the granting to himself of
Stock Rights, but any such member may be counted in determining the existence
of a quorum at any meeting of the Board during which action is taken with
respect to the granting to him of Stock Rights.
D. PERFORMANCE-BASED COMPENSATION. The Board, in its discretion, may
------------------------------
take such action as may be necessary to ensure that Stock Rights granted
under the Plan qualify as "qualified performance-based compensation" within
the meaning of Section 162(m) of the Code and applicable regulations
promulgated thereunder ("Performance-Based Compensation"). Such action may
include, in the Board's discretion some or all of the following (i) if the
Board determines that Stock Rights granted under the Plan generally shall
constitute Performance-Based Compensation, the Plan shall be administered, to
the extent required for such Stock Rights to constitute Performance-Based
Compensation by a Committee consisting solely of two or more "outside
directors" (as defined in applicable regulations promulgated under Section
162(m) of the Code) (ii) if any Non-Qualified Options with an exercise price
less than the fair market value per share of Common Stock are granted under
the Plan and the Board determines that such Options should constitute
Performance-Based Compensation such options shall be made exercisable only
upon the attainment of a pre-established objective performance goal
established by the Committee and such grant shall be submitted for and shall
be contingent upon shareholder approval and (iii) Stock Rights granted under
the Plan may be subject to such other terms and conditions as are necessary
for compensation recognized in connection with the exercise or disposition of
such Stock Rights or the disposition of Common Stock acquired pursuant to
such Stock Right to constitute Performance-Based Compensation.
3. ELIGIBLE EMPLOYEES AND OTHERS. ISOs may be granted only to employees
-----------------------------
of the Company or any Related Corporation. Non-Qualified Options, Awards and
authorizations to make Purchases may be granted to any director (whether or not
an employee), officer, employee or consultant of the Company or any Related
Corporation. The Committee may take into consideration a recipient's individual
circumstances in determining whether to grant an ISO, a Non-Qualified Option or
an authorization to make a Purchase. Granting of any Stock Right to any
individual or entity shall neither entitle that individual or entity to, nor
disqualify him from,
<PAGE>
-3-
participation in any other grant of Stock Rights. Any person who owns more than
fifteen percent (15%) of the outstanding shares of the Common Stock of the
Company and who is not an employee of the Company or any person who owns more
than fifteen percent (15%) of the outstanding shares of the Common Stock of the
Company and who is also an officer of the Company, shall be ineligible to
participate in this Plan.
4. STOCK. The stock subject to Options, Awards and Purchases shall be
-----
authorized but unissued shares of Common Stock of the Company, par value $.01
per share (the "Common Stock"), or shares of Common Stock reacquired by the
Company in any manner. The aggregate number of shares which may be issued
pursuant to the Plan is 500,000 shares, subject to adjustment as provided in
paragraph 14. If any Option granted under the Plan shall expire or terminate
for any reason without having been exercised in full or shall cease for any
reason to be exercisable in whole or in part, the shares subject to such Options
shall again be available for grants of Stock Rights under the Plan.
The following provision shall be effective only on and after the date of
the initial public offering of shares of Common Stock of the Company pursuant to
the Securities Act of 1933. No employee of the Company or any Related
Corporation may be granted, during the term of the Plan, Options to acquire, in
the aggregate, more than 150,000 shares of Common Stock under the Plan. If any
Option granted under the Plan shall expire or terminate for any reason without
having been exercised in full or shall cease for any reason to be exercisable in
whole or in part or shall be repurchased by the Company, the shares subject to
such Option shall be included in the determination of the aggregate number of
shares of Common Stock deemed to have been granted to such employee under the
Plan.
5. GRANTING OF STOCK RIGHTS. Stock Rights may be granted under the Plan
------------------------
at any time on or after February 19, 1997 and prior to February 19, 2007. The
date of grant of a Stock Right under the Plan will be the date specified by the
Committee at the time it grants the Stock Right; provided, however, that such
date shall not be prior to the date on which the Committee acts to approve the
grant.
6. MINIMUM OPTION PRICE; ISO LIMITATIONS.
-------------------------------------
A. PRICE FOR NON-QUALIFIED OPTIONS, AWARDS, AND PURCHASES. Subject to
------------------------------------------------------
paragraph 2(D) (relating to compliance with Section 162(A) of the code), the
exercise price per share specified in the agreement relating to each Non-
Qualified Option granted and the purchase price per share of stock granted in
any Award or authorized as a Purchase under the Plan may be less than the fair
market value of the Common Stock of the Company on the date of grant; provided
that in no event shall such exercise price or such purchase price be less than
the minimum legal consideration required therefor under the laws of any
jurisdiction in which the Company or its successors in interest may be
organized.
<PAGE>
-4-
B. PRICE FOR ISOS. The exercise price per share specified in the
--------------
agreement relating to each ISO granted under the Plan shall not be less than
the fair market value per share of Common Stock on the date of such grant. In
the case of an ISO to be granted to an employee owning stock possessing more
than ten percent (10%) of the total combined voting power of all classes of
stock of the Company or any Related Corporation, the price per share
specified in the agreement relating to such ISO shall not be less than one
hundred ten percent (110%) of the fair market value per share of Common Stock
on the date of grant. For purposes of determining stock ownership under this
paragraph, the rules of Section 424(d) of the Code shall apply.
C. $100,000 ANNUAL LIMITATION ON ISO VESTING. Each eligible employee
-----------------------------------------
may be granted ISOs only to the extent that, in the aggregate under this Plan
and all incentive stock option plans of the Company and any Related
Corporation, ISOs do not become exercisable for the first time by such
employee during any calendar year in a manner which would entitle the
employee to purchase more than $100,000 in fair market value (determined at
the time the ISOs were granted) of Common Stock in that year. Any options
granted to an employee in excess of such amount will be granted as Non-
Qualified Options.
D. DETERMINATION OF FAIR MARKET VALUE. If, at the time an Option is
----------------------------------
granted under the Plan, the Company's Common Stock is publicly traded, "fair
market value" shall be determined as of the date of grant or, if the prices
or quotes discussed in this sentence are unavailable for such date, the last
business day for which such prices or quotes are available prior to the date
such Option is granted and shall mean (i) the average (on that date) of the
high and low prices of the Common Stock on the principal national securities
exchange on which the Common Stock is traded, if the Common Stock is then
traded on a national securities exchange; or (ii) the last reported sale
price (on that date) of the Common Stock on the Nasdaq National Market, if
the Common Stock is not then traded on a national securities exchange; or
(iii) the average of the closing bid and asked prices last quoted (on that
date) by an established quotation service for over-the-counter securities, if
the Common Stock is not reported on the Nasdaq National Market. However, if
the Common Stock is not publicly traded at the time an Option is granted
under the Plan, "fair market value" shall be deemed to be the fair value of
the Common Stock as determined by the Committee after taking into
consideration all factors which it deems appropriate, including, without
limitation, recent sale and offer prices of the Common Stock in private
transactions negotiated at arm's length.
7. OPTION DURATION. Subject to earlier termination as provided in
---------------
paragraphs 9 and 10 or in the agreement relating to such Option, each Option
shall expire on the date specified by the Committee, but not more than (i) ten
years from the date of grant in the case of Options generally, and
<PAGE>
-5-
(ii) five years from the date of grant in the case of ISOs granted to an
employee owning stock possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or any Related
Corporation, as determined under paragraph 6(B). Subject to earlier termination
as provided in paragraphs 9 and 10, the term of each ISO shall be the term set
forth in the original instrument granting such ISO, except with respect to any
part of such ISO that is converted into a Non-Qualified Option pursuant to
paragraph 16.
8. EXERCISE OF OPTION. Subject to the provisions of paragraphs 9 through
------------------
13, each Option granted under the Plan shall be exercisable as follows:
A. FULL VESTING OR PARTIAL VESTING. The Option shall either be fully
-------------------------------
exercisable on the date of grant or shall become exercisable thereafter in
such installments as the Committee may specify.
B. FULL VESTING OF INSTALLMENTS. Once an installment becomes
----------------------------
exercisable it shall remain exercisable until expiration or termination of
the Option, unless otherwise specified by the Committee or as otherwise
provided in this Plan.
C. PARTIAL EXERCISE. Each Option or installment may be exercised at
----------------
any time or from time to time, in whole or in part, for up to the total
number of shares with respect to which it is then exercisable.
D. ACCELERATION OF VESTING. The Committee shall have the right to
-----------------------
accelerate the date of exercise of any installment of any Option; provided
that the Committee shall not accelerate the exercise date of any installment
of any Option granted to any employee as an ISO (and not previously converted
into a Non-Qualified Option pursuant to paragraph 16) if such acceleration
would violate the annual vesting limitation contained in Section 422(d) of
the Code, as described in paragraph 6(C).
9. TERMINATION. If an ISO Optionee ceases to be employed by the Company
-----------
and all Related Corporations other than by reason of death or disability as
defined in paragraph 10, no further installments of his ISOs shall become
exercisable, and his ISOs shall terminate on the earlier of (a) three months
after the date of termination of his employment, or (b) their specified
expiration dates, except to the extent that such ISOs (or unexercised
installments thereof) have been converted into Non-Qualified Options pursuant to
paragraph 17. Employment shall be considered as continuing uninterrupted during
any bona fide leave of absence (such as those attributable to illness, military
obligations or governmental service) provided that the period of such leave does
not exceed ninety (90) days or, if longer, any period during which such
Optionee's right to reemployment is guaranteed by statute or by contract. A bona
fide leave of absence with the written approval of the Committee shall not be
considered an interruption of employment under the Plan, provided that such
written approval contractually obligates the Company or any Related Corporation
to continue the employment of the Optionee after the approved period of absence.
ISOs granted under the Plan shall not be affected by any change of employment
within or among the Company and Related Corporations, so long as the Optionee
continues to be an employee of the Company or any Related Corporation. Nothing
in
<PAGE>
-6-
the Plan shall be deemed to give any grantee of any Stock Right the right to
be retained in employment or other service by the Company or any Related
Corporation for any period of time.
10. DEATH; DISABILITY.
-----------------
A. DEATH. If an ISO Optionee ceases to be employed by the Company and
-----
all Related Corporations by reason of his or her death, any ISO owned by such
Optionee may be exercised, to the extent of the number of shares with respect
to which he or she could have exercised it on the date of his or her death,
by the estate, personal representative or beneficiary who has acquired the
ISO by will or by the laws of descent and distribution, at any time prior to
the earlier of (i) the specified expiration date of the ISO or (ii) 180 days
from the date of the Optionee's death.
B. DISABILITY. If an ISO Optionee ceases to be employed by the
----------
Company and all Related Corporations by reason of his or her disability, such
Optionee shall have the right to exercise any ISO held by him or her on the
date of termination of employment, to the extent of the number of shares with
respect to which he or she could have exercised it on that date, until the
earlier of (i) the specified expiration date of the ISO or (ii) 180 days from
the date of the termination of the Optionee's employment. For the purposes
of the Plan, the term "disability" shall mean "permanent and total
disability" as defined in Section 22(e)(3) of the Code or successor statute.
11. [Intentionally Omitted].
12. ASSIGNABILITY. Except to the extent permitted by Rule 16b-3, no
-------------
Option shall be assignable or transferable by the grantee except (a) to members
of Optionee's immediate family or (b) by will or by the laws of descent and
distribution or (c) in case of Non-Qualified Options only, pursuant to a valid
domestic relations order, and during the lifetime of the grantee each Option
shall be exercisable only by him.
13. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by
-------------------------------
instruments (which need not be identical) in such forms as the Committee may
from time to time approve. Such instruments shall conform to the terms and
conditions set forth in paragraphs 6 through 12 hereof and may contain such
other provisions as the Committee deems advisable which are not inconsistent
with the Plan, including restrictions applicable to shares of Common Stock
issuable upon exercise of Options. In granting any Non-Qualified Option, the
Committee may specify that such Non-Qualified Option shall be subject to the
restrictions set forth herein with respect to ISOs, or to such other termination
and cancellation provisions as the Committee may determine. The Committee may
from time to time confer authority and responsibility on one or more of its own
members and/or one or more officers of the Company to execute and deliver such
instruments. The proper officers of the Company are authorized and directed to
take any and all action necessary or advisable from time to time to carry out
the terms of such instruments.
14. ADJUSTMENTS. Upon the occurrence of any of the following events, an
-----------
Optionee's rights with respect to Options granted to him hereunder shall be
adjusted as hereinafter provided,
<PAGE>
-7-
unless otherwise specifically provided in the written agreement between the
Optionee and the Company relating to such Option:
A. STOCK DIVIDENDS AND STOCK SPLITS. If the shares of Common Stock
--------------------------------
shall be subdivided or combined into a greater or smaller number of shares or
if the Company shall issue any shares of Common Stock as a stock dividend on
its outstanding Common Stock, the number of shares of Common Stock
deliverable upon the exercise of Options shall be appropriately increased or
decreased proportionately, and appropriate adjustments shall be made in the
purchase price per share to reflect such subdivision, combination or stock
dividend.
B. CONSOLIDATIONS OR MERGERS. If the Company is to be consolidated
-------------------------
with or acquired by another entity in a merger, sale of all or substantially
all of the Company's assets or otherwise (an "Acquisition"), the Committee or
the board of directors of any entity assuming the obligations of the Company
hereunder (the "Successor Board"), shall, as to outstanding Options, take one
or more of the following actions: (i) make appropriate provision for the
continuation of such Options by substituting on an equitable basis for the
shares then subject to such Options the consideration payable with respect to
the outstanding shares of Common Stock in connection with the Acquisition; or
(ii) make appropriate provision for the continuation of such Options by
substituting on an equitable basis for the shares then subject to such
Options any equity securities of the successor corporation; or (iii) upon
written notice to the Optionees, provide that all Options must be exercised,
to the extent then exercisable, within a specified number of days of the date
of such notice, at the end of which period the Options shall terminate; or
(iv) terminate all Options in exchange for a cash payment equal to the excess
of the fair market value of the shares subject to such Options (to the extent
then exercisable) over the exercise price thereof; or (v) accelerate the date
of exercise of such Options or of any installment of any such Options; or
(vi) terminate all Options in exchange for the right to participate in any
stock option or other employee benefit plan of any successor corporation.
C. RECAPITALIZATION OR REORGANIZATION. In the event of a
----------------------------------
recapitalization or reorganization of the Company (other than a transaction
described in subparagraph B above) pursuant to which securities of the
Company or of another corporation are issued with respect to the outstanding
shares of Common Stock, an Optionee upon exercising an Option shall be
entitled to receive for the purchase price paid upon such exercise the
securities he would have received if he had exercised his Option prior to
such recapitalization or reorganization.
D. MODIFICATION OF ISOS. Notwithstanding the foregoing, any adjustments
--------------------
made pursuant to subparagraphs A, B or C with respect to ISOs shall be made
only after the Committee, after consulting with counsel for the Company,
determines whether such adjustments would constitute a "modification" of such
ISOs (as that term is defined in Section 424 of the Code) or would cause any
adverse tax consequences for the holders of such ISOs. If the Committee
determines that such adjustments made with respect to ISOs would constitute a
modification of such ISOs or would cause adverse tax consequences to the
holders, it may refrain from making such adjustments.
<PAGE>
-8-
E. DISSOLUTION OR LIQUIDATION. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, each Option will terminate
immediately prior to the consummation of such proposed action or at such
other time and subject to such other conditions as shall be determined by the
Committee.
F. ISSUANCES OF SECURITIES. Except as expressly provided herein, no
-----------------------
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or
price of shares subject to Options. No adjustments shall be made for
dividends paid in cash or in property other than securities of the Company.
G. FRACTIONAL SHARES. No fractional shares shall be issued under the
-----------------
Plan and the Optionee shall receive from the Company cash in lieu of such
fractional shares.
H. ADJUSTMENTS. Upon the happening of any of the foregoing events
-----------
described in subparagraphs A, B or C above, the class and aggregate number of
shares set forth in paragraph 4 hereof that are subject to Stock Rights which
previously have been or subsequently may be granted under the Plan shall also
be appropriately adjusted to reflect the events described in such
subparagraphs. The Committee or the Successor Board shall determine the
specific adjustments to be made under this paragraph 14 and, subject to
paragraph 2, its determination shall be conclusive.
If any person or entity owning restricted Common Stock obtained by exercise of a
Stock Right made hereunder receives shares or securities or cash in connection
with a corporate transaction described in subparagraphs A, B or C above as a
result of owning such restricted Common Stock, such shares or securities or cash
shall be subject to all of the conditions and restrictions applicable to the
restricted Common Stock with respect to which such shares or securities or cash
were issued, unless otherwise determined by the Committee or the Successor
Board.
15. MEANS OF EXERCISING STOCK RIGHTS. A Stock Right (or any part or
--------------------------------
installment thereof) shall be exercised by giving written notice to the Company
at its principal office address. Such notice shall identify the Stock Right
being exercised and specify the number of shares as to which such Stock Right is
being exercised, accompanied by full payment of the purchase price therefor
either (a) in United States dollars in cash or by check, or (b) at the
discretion of the Committee, through delivery of shares of Common Stock having a
fair market value equal as of the date of the exercise to the cash exercise
price of the Stock Right, or (c) at the discretion of the Committee, by delivery
of the grantee's personal recourse note bearing interest payable not less
frequently than annually at no less than 100% of the lowest applicable Federal
rate, as defined in Section 1274(d) of the Code, or (d) at the discretion of the
Committee and consistent with applicable law, through the delivery of an
assignment to the Company of a sufficient amount of the proceeds from the sale
of the Common Stock acquired upon exercise of the Option and an authorization to
the broker or selling agent to pay that amount to the Company, which sale shall
be at the participant's direction at the time of exercise, or (e) at the
discretion of the Committee, by any combination of (a), (b), (c) and (d) above.
If the Committee exercises its discretion to
<PAGE>
-9-
permit payment of the exercise price of an ISO by means of the methods set forth
in clauses (b), (c), (d) or (e) of the preceding sentence, such discretion shall
be exercised in writing at the time of the grant of the ISO in question. The
holder of a Stock Right shall not have the rights of a shareholder with respect
to the shares covered by his Stock Right until the date of issuance of a stock
certificate to him for such shares. Except as expressly provided above in
paragraph 14 with respect to changes in capitalization and stock dividends, no
adjustment shall be made for dividends or similar rights for which the record
date is before the date such stock certificate is issued.
16. TERM AND AMENDMENT OF PLAN. This Plan was adopted by the Board as of
--------------------------
February 19, 1997, subject (with respect to the validation of ISOs granted under
the Plan) to approval of the Plan by the stockholders of the Company at the next
Meeting of Stockholders or, in lieu thereof, by written consent. If the approval
of stockholders is not obtained by February 19, 1998, any grants of ISOs under
the Plan made prior to that date will be automatically converted into grants of
Non-Qualified Options. The Plan shall expire at the end of the day on February
18, 2007 (except as to Options outstanding on that date). Subject to the
provisions of paragraph 5 above, Stock Rights may be granted under the Plan
prior to the date of stockholder approval of the Plan. The Board may terminate
or amend the Plan in any respect at any time, except that, without the approval
of the stockholders obtained within 12 months before or after the Board adopts a
resolution authorizing any of the following actions: (a) the total number of
shares that may be issued under the Plan may not be increased (except by
adjustment pursuant to paragraph 14); (b) the provisions of paragraph 3
regarding eligibility for grants of ISOs may not be modified; (c) the provisions
of paragraph 6(B) regarding the exercise price at which shares may be offered
pursuant to ISOs may not be modified (except by adjustment pursuant to paragraph
14); and (d) the expiration date of the Plan may not be extended. Except as
otherwise provided in this paragraph 16, in no event may action of the Board or
stockholders alter or impair the rights of a grantee, without his consent, under
any Stock Right previously granted to him.
17. CONVERSION OF ISOS INTO NON-QUALIFIED OPTIONS; TERMINATION OF ISOS.
------------------------------------------------------------------
Subject to paragraph 14(d), without the prior written consent of the holder of
an ISO, the Committee shall not alter the terms of such ISO (including the means
of exercising such ISO) if such alteration would constitute a modification
(within the meaning of Section 424(b)(3) of the Code). The Committee, at the
written request or with the written consent of any Optionee, may in its
discretion take such actions as may be necessary to convert such Optionee's ISOs
(or any installments or portions of installments thereof) that have not been
exercised on the date of conversion into Non-Qualified Options at any time prior
to the expiration of such ISOs, regardless of whether the Optionee is an
employee of the Company or a Related Corporation at the time of such conversion.
Such actions may include, but shall not be limited to, extending the exercise
period or reducing the exercise price of the appropriate installments of such
ISOs. At the time of such conversion, the Committee (with the consent of the
Optionee) may impose such conditions on the exercise of the resulting Non-
Qualified Options as the Committee in its discretion may determine, provided
that such conditions shall not be inconsistent with this Plan. Nothing in the
Plan shall be deemed to give any Optionee the right to have such Optionee's ISOs
<PAGE>
-10-
converted into Non-Qualified Options, and no such conversion shall occur until
and unless the Committee takes appropriate action. Upon the taking of any such
action, the Company shall issue separate certificates to the optionee with
respect to the Options that are Non-Qualified Options and Options that are ISOs.
18. APPLICATION OF FUNDS. The proceeds received by the Company from the
--------------------
sale of shares pursuant to Options granted and Purchases authorized under the
Plan shall be used for general corporate purposes.
19. GOVERNMENTAL REGULATION. The Company's obligation to sell and deliver
-----------------------
shares of the Common Stock under this Plan is subject to the approval of any
governmental authority required in connection with the authorization, issuance
or sale of such shares.
20. WITHHOLDING OF ADDITIONAL INCOME TAXES. Upon the exercise of a Non-
--------------------------------------
Qualified Option, the grant of an Award, the making of a Purchase of Common
Stock for less than its fair market value, the making of a Disqualifying
Disposition (as defined in paragraph 21), the making of a distribution or other
payment with respect to such stock or securities, or the vesting or transfer of
restricted Common Stock acquired on the exercise of a Stock Right hereunder, the
Company may withhold income and/or employment taxes in respect of amounts that
constitute compensation includible in gross income, or otherwise treated by law
as wages for withholding for income or employment tax purposes. The Committee
in its discretion may condition (i) the exercise of an Option, (ii) the grant of
an Award, (iii) the making of a Purchase of Common Stock for less than its fair
market value, or (iv) the vesting or transferability of restricted Common Stock
acquired by exercising a Stock Right, on the grantee's making satisfactory
arrangement for such withholding. Such arrangement may include payment by the
grantee in cash or by check of the amount of the withholding taxes or, at the
discretion of the Company, by the grantee's delivery of previously held shares
of Common Stock or the withholding from the shares of Common Stock otherwise
deliverable upon exercise of Option shares having an aggregate fair market value
equal to the amount of such withholding taxes. The use of any method of payment
other than by cash or check in some cases may require or cause additional
withholding obligations.
21. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION. By accepting an ISO
----------------------------------------------
granted under the Plan, each ISO Optionee thereby agrees to notify the Company
in writing immediately after such Optionee makes a Disqualifying Disposition (as
described in Sections 421, 422, and 424 of the Code and regulations thereunder)
of any stock acquired pursuant to the exercise of ISOs granted under the Plan.
Generally, a Disqualifying Disposition is any disposition (including any sale)
of such Common Stock occurring on or before the later of the date (a) two years
after the date the employee was granted the ISO, or (b) one year after the date
the employee acquired Common Stock by exercising the ISO.
22. NO EXERCISE OF OPTION IF ENGAGEMENT OR EMPLOYMENT TERMINATED FOR
----------------------------------------------------------------
CAUSE. If the employment of the Optionee is terminated for "Cause," this option
shall terminate on the date of such termination and this option shall thereupon
not be exercisable to any extent whatsoever. "Cause" is conduct, as determined
by the Board of Directors, involving one or more of the following: (i) gross
misconduct by the Employee which is materially injurious to the Company; or (ii)
the commission of an act of embezzlement, fraud or deliberate disregard of the
rules or policies of the Company which results in material economic loss, damage
or injury to the
<PAGE>
-11-
Company; or (iii) the unauthorized disclosure of any trade secret or
confidential information of the Company or any third party who has a business
relationship with the Company or the violation of any noncompetition covenant or
assignment of inventions obligation with the Company; or (iv) the commission of
an act which induces any customer or prospective customer of the Company to
break a contract with the Company or to decline to do business with the Company;
or (v) the conviction of the Employee of a felony involving any financial
impropriety or which would materially interfere with the Employee's ability to
perform his or her services or otherwise be injurious to the Company; or (vi)
the failure of the Employee to perform in a material respect his or her
employment obligations without proper cause. In making such determination, the
Board of Directors shall act fairly and in utmost good faith. For the purposes
of this Section 22, termination of employment shall be deemed to occur when the
Employee receives notice that his employment is terminated.
23. ACCELERATION AND VESTING OF OPTION FOR BUSINESS COMBINATIONS. Upon
------------------------------------------------------------
any merger, consolidation, sale of all (or substantially all) of the assets of
the Company, or other business combination involving the sale or transfer of all
(or substantially all) of the capital stock or assets of the Company in which
the Company is not the surviving entity, or, if it is the surviving entity, does
not survive as an operating going concern in substantially the same line of
business (an "Acquisition"), then the remaining unvested portions of any Option
outstanding to any Optionee shall, immediately prior to the consummation of any
of the foregoing events, become vested and immediately exercisable by the
Optionee according to the following formula and dependent upon the length of the
Optionee's continuous months of employment or engagement by the Company prior to
the consummation of the Acquisition, provided, however, that this Section shall
-----------------
not apply to any reincorporation of the Company in a different State pursuant to
a migratory merger:
For an ISO Optionee:
(i) If the Optionee has been employed by the Company for 36 months or
more, then the remaining unvested portion of any Option held by such Optionee
shall become fully vested and exercisable.
(ii) If the Optionee has been employed by the Company for more than 30
but less than 36 months, then 80% of the remaining unvested portion of any
Option held by such Optionee shall become fully vested and exercisable.
(iii) If the Optionee has been employed by the Company for more than 24
but less than 30 months, then 50% of the remaining unvested portion of any
Option held by such Optionee shall become fully vested and exercisable.
(iv) If the Optionee has been employed by the Company for more than 18
but less than 24 months, then 40% of the remaining unvested portion of any
Option held by such Optionee shall become fully vested and exercisable.
<PAGE>
-12-
(v) If the Optionee has been employed by the Company for more than 12
but less than 18 months, then 30% of the remaining unvested portion of any
Option held by such Optionee shall become fully vested and exercisable.
(vi) If the Optionee has been employed by the Company for more than 6 but
less than 12 months, then 20% of the remaining unvested portion of any Option
held by such Optionee shall become fully vested and exercisable.
(vii) If the Optionee has been employed by the Company for more than 1 but
less than 6 months, then 10% of the remaining unvested portion of any Option
held by such Optionee shall become fully vested and exercisable.
For a Non-Qualified Option Optionee, the remaining unvested portion of any
Option held by such Optionee shall become fully vested and exercisable.
24. GOVERNING LAW; CONSTRUCTION. The validity and construction of the
---------------------------
Plan and the instruments evidencing Stock Rights shall be governed by the laws
of the State of Delaware or the laws of any jurisdiction in which the Company or
its successors in interest may be organized. In construing this Plan, the
singular shall include the plural and the masculine gender shall include the
feminine and neuter, unless the context otherwise requires.
<PAGE>
Exhibit 10.11
ASTEA INTERNATIONAL INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
------------------------------------
UNDER 1997 STOCK OPTION PLAN
----------------------------
ASTEA INTERNATIONAL INC., a Delaware corporation (the "Company"), hereby
grants this_____day of_____, 199__ (the "Grant Date"), to________ (the
"Optionee"), an option to purchase a maximum of___________shares (the "Option
Shares") of Common Stock, $.01 par value (the "Common Stock"), at the price of
$_____ per share, on the following terms and conditions:
1. GRANT UNDER 1997 STOCK OPTION PLAN. This option (the "Option") is
----------------------------------
granted pursuant to and is governed by the Company's 1997 Stock Option Plan (the
"Plan") and, unless the context otherwise requires, terms used herein shall have
the same meaning as in the Plan. Determinations made in connection with this
Option pursuant to the Plan shall be governed by the Plan as it exists on this
date.
2. GRANT AS NON-QUALIFIED OPTION; OTHER OPTIONS. This Option is intended
--------------------------------------------
to be a Non-Qualified Option (rather than an incentive stock option), and the
Board of Directors intends to take appropriate action, if necessary, to achieve
this result. This Option is in addition to any other options heretofore or
hereafter granted to the Optionee by the Company, but a duplicate original of
this instrument shall not affect the grant of another option.
3. EXTENT OF OPTION IF BUSINESS RELATIONSHIP CONTINUES. If the Optionee
---------------------------------------------------
has continued to serve the Company (or any affiliated corporation) in the
capacity of an employee, officer, director, agent, advisor, or consultant,
including services as a member of the Board of Advisors of the Company (such
service is described herein as maintaining or being involved in a "Business
Relationship" with the Company), on the following dates, this Option may be
exercised for the number of Option Shares set opposite the applicable date:
Prior to the first anniversary of the - 0% of the total Option
Grant Date Shares
One year but less than two years - an additional 25% of the
from the Grant Date total Option Shares
Two years but less than three years - an additional 25% of the
from the Grant Date total Option Shares
<PAGE>
-2-
Three years but less than four years - an additional 25% of the
from the Grant Date total Option Shares
Four years from the Grant Date - an additional 25% of the
total Option Shares
The foregoing rights are cumulative and, while the Optionee continues to
maintain a Business Relationship with the Company, may be exercised up to and
including the date which is ten years from the date this Option is granted. All
of the foregoing rights are subject to Sections 4, 5 and 17, as appropriate, if
the Optionee ceases to maintain a Business Relationship with the Company, or
dies, becomes disabled or undergoes dissolution while involved in a Business
Relationship with the Company.
4. TERMINATION OF BUSINESS RELATIONSHIP. Subject to Section 17, if the
------------------------------------
Optionee ceases to maintain a Business Relationship with the Company (or any
affiliated corporation), other than by reason of death or disability as defined
in Section 5, no further installments of this Option shall become exercisable
and this Option shall terminate 90 days after the date the Business Relationship
ceases, but in no event later than the scheduled expiration date. In such a
case, the Optionee's only rights to exercise options hereunder shall be those
which are properly exercisable before the termination of this Option, and the
Optionee may exercise this Option for the number of Option Shares which have
vested and become exercisable prior to the date of termination.
5. DEATH; DISABILITY. If the Optionee is a natural person who dies while
-----------------
involved in a Business Relationship with the Company (or any affiliated
corporation), this Option may be exercised, to the extent of the number of
Option Shares with respect to which the Optionee could have exercised it on the
date of his or her death, by his or her estate, personal representative or
beneficiary or family member to whom this Option has been gifted pursuant to
Section 10, at any time within 180 days after the date of death, but not later
than the scheduled expiration date. If the Optionee is a natural person whose
Business Relationship with the Company is terminated by reason of his or her
disability (as defined in the Plan), this Option may be exercised, to the extent
of the number of Option Shares with respect to which the Optionee could have
exercised it on the date the Business Relationship was terminated, at any time
within 180 days after the date of such termination, but not later than the
scheduled expiration date. At the expiration of such 180-day period or the
scheduled expiration date, whichever is the earlier, this Option shall terminate
and the only rights hereunder shall be those as to which the Option was properly
exercised before such termination.
6. PARTIAL EXERCISE. Exercise of this Option up to the extent above
----------------
stated may be made in part at any time and from time to time within the above
limits, except that this Option may not be exercised for a fraction of a share
unless such exercise is with respect to the final installment of Option Shares
subject to this Option and a fractional share (or cash in lieu thereof) must be
issued to permit the Optionee to exercise completely such final installment.
Any fractional share with respect to which an
<PAGE>
-3-
installment of this Option cannot be exercised because of the limitation
contained in the preceding sentence shall remain subject to this Option and
shall be available for later purchase by the Optionee in accordance with the
terms hereof.
7. PAYMENT OF PRICE. The Option price is payable in United States
----------------
dollars only and must be paid:
(a) in cash or by personal check, or any combination of the
foregoing, equal in amount to the Option price; or
(b) in the discretion of the Board of Directors, in cash, by
personal check, by delivery of shares of the Company's Common Stock or Preferred
Stock having a fair market value (as determined by the Board of Directors) equal
as of the date of exercise to the Option price, by delivery of a personal
recourse promissory note, through the delivery of an assignment to the Company
of a sufficient amount of the proceeds from the sale of the Common Stock
acquired upon exercise of the Option and an authorization to the broker or
selling agent to pay that amount to the Company, which sale shall be at the
Optionee's direction at the time of exercise, or by any combination of the
foregoing, equal in amount to the Option price.
If the Optionee delivers shares of Common Stock or Preferred Stock held by
the Optionee (the "Old Stock") to the Company in full or partial payment of the
option price, and the Old Stock so delivered is subject to restrictions or
limitations imposed by agreement between the Optionee and the Company, the
Common Stock or Preferred Stock received by the Optionee on the exercise of this
Option shall be subject to all restrictions and limitations applicable to the
Old Stock to the extent that the Optionee paid for such Common Stock or
Preferred Stock by delivery of Old Stock, in addition to any restrictions or
limitations imposed by this Agreement.
8. AGREEMENT TO PURCHASE FOR INVESTMENT. By acceptance of this Option,
------------------------------------
the Optionee agrees that a purchase of Option Shares under this Option will not
be made with a view to their distribution, as that term is used in the
Securities Act of 1933, as amended (the "Securities Act"), unless in the opinion
of counsel to the Company such distribution is in compliance with or exempt from
the registration and prospectus requirements of the Securities Act and
applicable state securities laws, and the Optionee agrees to sign a certificate
to such effect at the time of exercising this Option and agrees that the
certificate for the Option Shares so purchased may be inscribed with a legend to
ensure compliance with the Securities Act and applicable state securities laws.
THIS SECTION SHALL NOT APPLY IN THE EVENT THE SHARES OF COMMON STOCK ISSUABLE
UPON EXERCISE OF THIS OPTION HAVE BEEN REGISTERED ON A REGISTRATION STATEMENT ON
FORM S-8 WHICH IS EFFECTIVE AND CURRENT UNDER THE SECURITIES ACT.
9. METHOD OF EXERCISING OPTION. Subject to the terms and conditions of
---------------------------
this Agreement, this Option may be exercised by written notice to the Vice
President and General Counsel of the Company, at its Bedford, Massachusetts
office, or to such transfer
<PAGE>
-4-
agent as the Company shall designate. Such notice shall state the election to
exercise this Option and the number of Option Shares in respect of which it is
being exercised and shall be signed by the person or persons so exercising this
Option. Such notice shall be accompanied by payment of the full purchase price
of such Option Shares, and the Company or its transfer agent shall deliver a
certificate or certificates representing such Option Shares as soon as
practicable after the notice shall be received. The certificate or certificates
for the Option Shares as to which this Option shall have been so exercised shall
be registered in the name of the person or persons so exercising this Option
(or, if this Option shall be exercised by the Optionee and if the Optionee shall
so request in the notice exercising this Option, shall be registered in the name
of the Optionee and another person jointly, with right of survivorship) and
shall be delivered as provided above to or upon the written order of the person
or persons exercising this Option. In the event this Option shall be exercised,
pursuant to Section 5 hereof, by any person or persons other than the Optionee,
such notice shall be accompanied by appropriate proof of the right of such
person or persons to exercise this Option. All Option Shares that shall be
purchased upon the exercise of this Option as provided herein shall be fully
paid and nonassessable.
10. OPTION NOT TRANSFERABLE. This Option is not transferable or
-----------------------
assignable except (a) to members of Employee's immediate family pursuant to a
bona fide gift or (b) by will or by the laws of descent and distribution.
- ---------
During the Optionee's lifetime only the Optionee or a donee who is a member of
Employee's immediate family can exercise this Option.
11. NO OBLIGATION TO EXERCISE OPTION. The grant and acceptance of this
--------------------------------
Option imposes no obligation on the Optionee to exercise it.
12. NO OBLIGATION TO CONTINUE BUSINESS RELATIONSHIP. The Company and any
-----------------------------------------------
affiliated corporations are not by the Plan or this Option obligated in any
manner to continue to maintain a Business Relationship with the Optionee.
13. NO RIGHTS AS STOCKHOLDER UNTIL EXERCISE. The Optionee shall have no
---------------------------------------
rights as a stockholder with respect to the Option Shares subject to this
Agreement until a stock certificate therefor has been issued to the Optionee and
is fully paid for by the Optionee. Except as is expressly provided in the Plan
with respect to certain changes in the capitalization of the Company, no
adjustment shall be made for dividends or similar rights for which the record
date is prior to the date such stock certificate is issued.
14. CAPITAL CHANGES AND BUSINESS SUCCESSIONS. It is the purpose of this
----------------------------------------
Option to encourage the Optionee to work for the best interests of the Company
and its stockholders. Because, for example, that might require the issuance of
a stock dividend or a merger with another corporation, the purpose of this
Option would not be served if such a stock dividend, stock split, merger or
similar occurrence would cause the Optionee's rights hereunder to be diluted or
terminated and thus be contrary to the Optionee's interest. The Plan contains
extensive provisions designed to preserve options at full value in a number of
contingencies. Therefore, provisions in the Plan for
<PAGE>
-5-
adjustment with respect to stock subject to options and the related provisions
with respect to successors to the business of the Company are hereby made
applicable hereunder and are incorporated herein by reference. In the event of
any stock dividend, stock split, recapitalization or other change in the capital
structure of the Company, this Option and the Option price shall be equitably
adjusted and, in lieu of issuing fractional shares upon exercise thereof, this
Option (and the corresponding Option Shares) shall be rounded upward or downward
to the nearest whole share (rounding upward for all amounts equal to or in
excess of .51). In particular, without affecting the generality of the
foregoing, it is understood that for the purposes of Sections 3 through 5
hereof, inclusive, maintaining or being involved in a Business Relationship with
the Company includes maintaining or being involved in a Business Relationship
with an affiliated corporation.
15. WITHHOLDING TAXES. The Optionee hereby agrees that the Company may
-----------------
withhold from the Optionee's wages or other remuneration the appropriate amount
of federal, state and local taxes attributable to the Optionee's exercise of any
installment of this Option. At the Company's discretion, the amount required to
be withheld may be withheld in cash from such wages or other remuneration, or in
kind from the Common Stock otherwise deliverable to the Optionee on exercise of
this Option. The Optionee further agrees that, if the Company does not withhold
an amount from the Optionee's wages or other remuneration sufficient to satisfy
the Company's withholding obligation, the Optionee will reimburse the Company on
demand, in cash, for the amount underwithheld.
16. [THIS SECTION INTENTIONALLY OMITTED].
17. NO EXERCISE OF OPTION IF ENGAGEMENT OR EMPLOYMENT TERMINATED FOR
----------------------------------------------------------------
CAUSE. If the employment or engagement of the Optionee is terminated for
"Cause," this Option shall terminate on the date of such termination and this
Option shall thereupon not be exercisable to any extent whatsoever. "Cause" is
conduct, as determined by the Board of Directors, involving one or more of the
following: (i) gross misconduct by the Optionee which is materially injurious
to the Company; or (ii) the commission of an act of embezzlement, fraud or
deliberate disregard of the rules or policies of the Company which results in
material economic loss, damage or injury to the Company; or (iii) the
unauthorized disclosure of any trade secret or confidential information of the
Company or any third party who has a business relationship with the Company or a
violation of any noncompetition covenant or assignment of inventions obligation
with the Company; or (iv) the commission of an act which induces any customer or
prospective customer of the Company to break a contract with the Company or to
decline to do business with the Company; or (v) the conviction of the Optionee
of a felony involving any financial impropriety or which would materially
interfere with the Optionee's ability to perform his or her services or
otherwise be injurious to the Company; or (vi) the failure of the Optionee to
perform in a material respect his or her employment or engagement obligations
without proper cause. In making such determination, the Board of Directors
shall act fairly and in utmost good faith.
<PAGE>
-6-
18. COMPANY'S RIGHT OF REPURCHASE. (A) RIGHTS OF REPURCHASE. If any of
----------------------------- --------------------
the events specified in Section 18(b) below occur, then,
(i) with respect to Option Shares acquired upon exercise of this
Option prior to the occurrence of such event, within 90 days after the
Company receives actual knowledge of the event, and
(ii) with respect to Option Shares acquired upon exercise of this
Option after the occurrence of such event, within 90 days following the
date of such exercise,
(in either case, the "Repurchase Period"), the Company shall have the right, but
not the obligation, to repurchase any or all the Option Shares from the
Optionee, or his or her transferee or legal representatives, as the case may be
(the "Repurchase Option"). The Repurchase Option shall be exercised by the
Company by giving the Optionee, or his or her transferee or legal
representative, written notice of its intention to exercise the Repurchase
Option on or before the last day of the Repurchase Period. If any of the events
specified in Section 18(b)(i)-(iii) occur, then the Company may exercise its
Repurchase Option by tendering to the Optionee, or his or her transferee or
legal representative, an amount equal to the higher of the Option exercise price
or the fair market value of the Option Shares. The Company may, in exercising
the Repurchase Option, designate one or more nominees to purchase the Option
Shares either within or without the Company. Upon timely exercise of the
Repurchase Option in the manner provided in this Section 18(a), Optionee, or his
or her transferee or legal representative, shall deliver to the Company the
stock certificate or certificates representing the Option Shares, duly endorsed
and free and clear of any and all liens, charges and encumbrances.
If the Option Shares are not purchased under the Repurchase Option, the
Optionee and his or her successor in interest, if any, will hold any of the
Option Shares in his or her possession subject to all of the provisions of this
Agreement.
(B) COMPANY'S RIGHT TO EXERCISE REPURCHASE OPTION. The Company
---------------------------------------------
shall have the Repurchase Option in the event that any of the following events
shall occur:
(i) The receivership, bankruptcy or other creditor's proceeding
regarding the Optionee or the taking of any of Optionee's Option Shares
by legal process, such as a levy of execution;
(ii) Distribution of shares held by the Optionee to his or her
spouse as such spouse's joint or community interest pursuant to a decree
of dissolution, operation of law, divorce, property settlement agreement
or for any other reason, except as may be otherwise permitted by the
Company; or
<PAGE>
-7-
(iii) The termination of the Optionee for "Cause" as defined in
Section 17.
(C) DETERMINATION OF FAIR MARKET VALUE. The fair market value of
----------------------------------
the Option Shares, as used in this Section 18, shall be an amount per share
determined on the basis of the price at which shares of the Common Stock could
reasonably be expected to be sold in an arms-length transaction, for cash, other
than on an installment basis, to a person not employed by, controlled by, in
control of or under common control with the Company. Fair market value shall be
determined by the Board of Directors, giving due consideration to recent grants
of incentive stock options for shares of Common Stock, recent arms-length
transactions involving shares of the Common Stock, if any, earnings of the
Company to the date of such determination, projected earnings of the Company,
the effect of the transfer restrictions to which the Option Shares are subject
under law and this Agreement, the absence of a public market for the Common
Stock and such other matters as the Board of Directors deems pertinent. If the
Common Stock of the Company is traded on any national securities exchange or the
Nasdaq National Market, fair market value shall be (i) the average of the high
and low closing sale prices, or (ii) the average of the last reported sale price
on the Nasdaq National Market, or (iii) the average of the closing bid prices
for the twenty (20) consecutive trading days preceding the date the Company
exercises its Repurchase Option and tenders payment for the Option Shares. The
determination by the Board of Directors of the fair market value shall be
conclusive and binding. The fair market value of the Option Shares shall be
determined as of the day on which the event occurs.
19. [THIS SECTION INTENTIONALLY OMITTED].
20. METHOD OF PAYMENT OF OPTION. The Company may, in its sole discretion,
---------------------------
pay the purchase price for any Option or Option Shares repurchased by it
hereunder under Sections 18 either in cash or, alternatively, if such purchase
price exceeds $2,000, by delivery on the date of purchase of a check in an
amount equal to at least fifteen percent (15%) of such purchase price, together
with the Company's unsecured promissory note in a principal amount equal to the
remainder of such purchase price (the "Note"). In the event of payment by Note,
the Note shall be due and payable not later than three years from the date of
issuance, with principal and interest thereon payable on an unsecured basis in
equal annual installments. Interest on the Note shall be equal to the lowest
applicable Federal rate, as defined in Section 1274(d) of the Code, as of the
date of the Note's issuance.
21. GOVERNING LAW. This Agreement shall be governed by and interpreted in
-------------
accordance with the internal laws of the State of Delaware.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
-8-
IN WITNESS WHEREOF the Company and the Optionee have caused this instrument
to be executed, and the Optionee whose signature appears below acknowledges
receipt of a copy of the Plan and acceptance of an original copy of this
Agreement.
____________________________ ASTEA INTERNATIONAL INC.
SIGNATURE OF OPTIONEE
____________________________ By:____________________________
Name Caesar J. Belbel
Vice President and General Counsel
____________________________
Street Address
____________________________
City State Zip Code
<PAGE>
Exhibit 10.12
ASTEA INTERNATIONAL INC.
INCENTIVE STOCK OPTION AGREEMENT
--------------------------------
UNDER 1997 STOCK OPTION PLAN
----------------------------
ASTEA INTERNATIONAL INC., a Delaware corporation (the "Company"), hereby
grants this_______day of_______, 199__(the "Grant Date"), to___________(the
"Employee"), an option to purchase a maximum of___________shares (the "Option
Shares") of its Common Stock, $.01 par value (the "Common Stock"), at the price
of_________________________________________________________________________
$_________per share, on the following terms and conditions:
1. GRANT UNDER 1997 STOCK OPTION PLAN. This option (the "Option") is
----------------------------------
granted pursuant to and is governed by the Company's 1997 Stock Option Plan (the
"Plan") and, unless the context otherwise requires, terms used herein shall have
the same meaning as in the Plan. Determinations made in connection with this
Option pursuant to the Plan shall be governed by the Plan as it exists on this
date.
2. GRANT AS INCENTIVE STOCK OPTION; OTHER OPTIONS. This Option is
----------------------------------------------
intended to qualify as an incentive stock option under Section 422 of the
Internal Revenue Code of 1986 (the "Code"). This Option is in addition to any
other options heretofore or hereafter granted to the Employee by the Company,
but a duplicate original of this instrument shall not effect the grant of
another option.
3. EXTENT OF OPTION IF EMPLOYMENT CONTINUES. If the Employee has
----------------------------------------
continued to be employed by the Company (or any affiliated corporation) on the
following dates, this Option may be exercised for the number of shares set
opposite the applicable date:
Prior to the first anniversary - 0% of the total Option
of the Grant Date Shares
One year but less than two years - an additional 25% of the
from the Grant Date total Option Shares
Two years but less than three years - an additional 25% of the
from the Grant Date total Option Shares
Three years but less than four years - an additional 25% of the
from the Grant Date total Option Shares
<PAGE>
2
Four years from the Grant Date - an additional 25% of the
total Option Shares
The foregoing rights are cumulative and, while the Employee continues to be
employed by the Company, may be exercised up to and including the date which is
ten (10) years from the date this Option is granted. All of the foregoing
rights are subject to Sections 4, 5 and 18, as appropriate, if the Employee
ceases to be employed by the Company or dies or becomes disabled while in the
employ of the Company.
4. TERMINATION OF EMPLOYMENT. Subject to Section 18, if the Employee
-------------------------
ceases to be employed by the Company (or any affiliated corporation), other than
by reason of death or disability as defined in Section 5, no further
installments of this Option shall become exercisable and this Option shall
terminate after the passage of ninety (90) days from the date employment ceases,
but in no event later than the scheduled expiration date. In such a case, the
Employee's only rights hereunder shall be those which are properly exercised
before the termination of this Option.
5. DEATH; DISABILITY. If the Employee dies while in the employ of the
-----------------
Company (or any affiliated corporation), this Option may be exercised, to the
extent of the number of Option Shares with respect to which the Employee could
have exercised it on the date of his or her death, by his or her estate,
personal representative or beneficiary or family member to whom this Option has
been gifted pursuant to Section 10, at any time within 180 days after the date
of death, but not later than the scheduled expiration date. If the Employee
ceases to be employed by the Company by reason of his or her disability (as
defined in the Plan), this Option may be exercised, to the extent of the number
of Option Shares with respect to which he or she could have exercised it on the
date of the termination of his or her employment, at any time within 180 days
after such termination, but not later than the scheduled expiration date. At
the expiration of such 180-day period or the scheduled expiration date,
whichever is the earlier, this Option shall terminate and the only rights
hereunder shall be those as to which the Option was properly exercised before
such termination.
6. PARTIAL EXERCISE. Exercise of this Option up to the extent above
----------------
stated may be made in part at any time and from time to time within the above
limits, except that this Option may not be exercised for a fraction of a share
unless such exercise is with respect to the final installment of Option Shares
subject to this Option and a fractional share (or cash in lieu thereof) must be
issued to permit the Employee to exercise completely such final installment.
Any fractional share with respect to which an installment of this Option cannot
be exercised because of the limitation contained in the preceding sentence shall
remain subject to this Option and shall be available for later purchase by the
Employee in accordance with the terms hereof.
<PAGE>
3
7. PAYMENT OF PRICE. The Option price is payable in United States
----------------
dollars only and must be paid:
(a) in cash or by personal check, or any combination of the
foregoing, equal in amount to the Option price; or
(b) in the discretion of the Board of Directors, in cash, by personal
check, by delivery of shares of the Company's Common Stock having an aggregate
fair market value (as determined by the Board of Directors) equal to the Option
price as of the date of exercise, by delivery of a personal recourse promissory
note, through the delivery of an assignment to the Company of a sufficient
amount of the proceeds from the sale of the Common Stock acquired upon exercise
of the Option and an authorization to the broker or selling agent to pay that
amount to the Company, which sale shall be at the Employee's direction at the
time of exercise, or by any combination of the foregoing, equal in amount to the
Option price.
Notwithstanding the foregoing, the Employee may not pay any part of the
---
exercise price for the Option by transferring shares of Common Stock to the
Company if such Common Stock is both subject to a substantial risk of forfeiture
and not transferable within the meaning of Section 83 of the Code.
8. AGREEMENT TO PURCHASE FOR INVESTMENT. By acceptance of this Option,
------------------------------------
the Employee agrees that a purchase of Option Shares under this Option will not
be made with a view to their distribution, as that term is used in the
Securities Act of 1933, as amended (the "Securities Act"), unless in the opinion
of counsel to the Company such distribution is in compliance with or exempt from
the registration and prospectus requirements of the Securities Act and
applicable state securities laws, and the Employee agrees to sign a certificate
to such effect at the time of exercising this Option and agrees that the
certificate for the Option Shares so purchased may be inscribed with a legend to
ensure compliance with the Securities Act and applicable state securities laws.
THIS SECTION SHALL NOT APPLY IN THE EVENT THE SHARES OF COMMON STOCK ISSUABLE
UPON EXERCISE OF THIS OPTION HAVE BEEN REGISTERED ON A REGISTRATION STATEMENT ON
FORM S-8 WHICH IS EFFECTIVE AND CURRENT UNDER THE SECURITIES ACT.
9. METHOD OF EXERCISING OPTION. Subject to the terms and conditions of
---------------------------
this Agreement, this Option may be exercised by written notice to the Vice
President and General Counsel of the Company, at its Bedford, Massachusetts
office, or to such transfer agent as the Company shall designate. Such notice
shall state the election to exercise this Option and the number of Option Shares
in respect of which it is being exercised and shall be signed by the person or
persons so exercising this Option. Such notice shall be accompanied by payment
of the full purchase price of such Option Shares, and the Company or its
transfer agent shall deliver a certificate or certificates representing such
Option Shares as soon as practicable after the notice shall be received. The
certificate or certificates for the Option Shares as to which this Option shall
have been so exercised shall be registered in the name of the person or persons
so exercising this Option (or, if
<PAGE>
4
this Option shall be exercised by the Employee and if the Employee shall so
request in the notice exercising this Option, shall be registered in the name of
the Employee and another person jointly, with right of survivorship) and shall
be delivered as provided above to or upon the written order of the person or
persons exercising this Option. In the event this Option shall be exercised,
pursuant to Section 5 hereof, by any person or persons other than the Employee,
such notice shall be accompanied by appropriate proof of the right of such
person or persons to exercise this Option. All Option Shares that shall be
purchased upon the exercise of this Option as provided herein shall be fully
paid and non-assessable.
10. OPTION NOT TRANSFERABLE. This Option is not transferable or
-----------------------
assignable except (a) to member of Employee's immediate family pursuant to a
bona fide gift or (b) by will or by the laws of descent and distribution.
- ---------
During the Employee's lifetime only the Employee or a donee who is a member of
Employee's immediate family can exercise this Option.
11. NO OBLIGATION TO EXERCISE OPTION. The grant and acceptance of this
--------------------------------
Option imposes no obligation on the Employee to exercise it.
12. NO OBLIGATION TO CONTINUE EMPLOYMENT. The Company and any affiliated
------------------------------------
corporations are not by the Plan or this Option obligated in any manner to
continue the Employee in its employment.
13. NO RIGHTS AS STOCKHOLDER UNTIL EXERCISE. The Employee shall have no
---------------------------------------
rights as a stockholder with respect to Option Shares subject to this Agreement
until a stock certificate therefor has been issued to the Employee and is fully
paid for by the Employee. Except as is expressly provided in the Plan with
respect to certain changes in the capitalization of the Company, no adjustment
shall be made for dividends or similar rights for which the record date is prior
to the date such stock certificate is issued.
14. CAPITAL CHANGES AND BUSINESS SUCCESSIONS. It is the purpose of this
----------------------------------------
Option to encourage the Employee to work for the best interests of the Company
and its stockholders. Because, for example, that might require the issuance of
a stock dividend or stock split, or a merger with another corporation, the
purpose of this Option would not be served if such a stock dividend, stock
split, merger or similar occurrence would cause the Employee's rights hereunder
to be diluted or terminated and thus be contrary to the Employee's interest.
The Plan contains extensive provisions designed to preserve options at full
value in a number of contingencies. Therefore, provisions in the Plan for
adjustment with respect to stock subject to options and the related provisions
with respect to successors to the business of the Company are hereby made
applicable hereunder and are incorporated herein by reference. In the event of
any stock dividend, stock split, recapitalization or other change in the capital
structure of the Company, this Option and the Option price shall be equitably
adjusted and, in lieu of issuing fractional shares upon exercise thereof, this
Option (and the corresponding Option Shares) shall be rounded upward or downward
to the nearest whole share (rounding upward for all amounts equal
<PAGE>
5
to or in excess of .51). In particular, without affecting the generality of the
foregoing, it is understood that for the purposes of Sections 3 through 5
hereof, both inclusive, employment by the Company includes employment by any
affiliated corporation.
15. DISQUALIFYING DISPOSITION. The Employee agrees to notify the Company
-------------------------
in writing immediately after the Employee makes a Disqualifying Disposition of
any Option Shares received pursuant to the exercise of this Option. A
Disqualifying Disposition is any disposition (including any sale) of such Option
Shares before the later of (a) two years after the date the Employee was granted
------------
this Option, or (b) one year after the date the Employee acquired Option Shares
by exercising this Option. The Employee also agrees to provide the Company with
any information which it shall request concerning any such Disqualifying
Disposition. The Employee acknowledges that pursuant to United States tax laws,
he or she will forfeit the favorable income tax treatment otherwise available
with respect to the exercise of an incentive stock option if he or she makes a
Disqualifying Disposition of the Option Shares received on exercise of this
Option.
16. WITHHOLDING TAXES. If the Company in its discretion determines that
-----------------
it is obligated to withhold tax with respect to a Disqualifying Disposition (as
defined in Section 15) of Common Stock received on exercise of this Option, the
Employee hereby agrees that the Company may withhold from the Employee's wages
the appropriate amount of federal, state and local withholding taxes
attributable to such Disqualifying Disposition. If any portion of this Option
is treated as a non-qualified option, the Employee hereby agrees that the
Company may withhold from the Employee's wages the appropriate amount of
federal, state and local withholding taxes attributable to the Employee's
exercise of such non-qualified option. At the Company's discretion, the amount
required to be withheld may be withheld in cash from such wages, or in kind
(with respect to compensation income attributable to the exercise of this
Option) from the Common Stock otherwise deliverable to the Employee on exercise
of this Option. The Employee further agrees that, if the Company does not
withhold an amount from the Employee's wages sufficient to satisfy the Company's
withholding obligation, the Employee will reimburse the Company on demand, in
cash, for the amount underwithheld.
17. [THIS SECTION INTENTIONALLY OMITTED].
18. NO EXERCISE OF OPTION IF EMPLOYMENT TERMINATED FOR CAUSE. If the
--------------------------------------------------------
employment of the Employee is terminated for "Cause," this Option shall
terminate on the date of such termination of employment and this Option shall
thereupon not be exercisable to any extent whatsoever. "Cause" is conduct, as
determined by the Board of Directors, involving one or more of the following:
(i) gross misconduct by the Employee which is materially injurious to the
Company; or (ii) the commission of an act of embezzlement, fraud or deliberate
disregard of the rules or policies of the Company which results in material
economic loss, damage or injury to the Company; or (iii) the unauthorized
disclosure of any trade secret or confidential information of the Company or
<PAGE>
6
any third party who has a business relationship with the Company or the
violation of any noncompetition covenant or assignment of inventions obligation
with the Company; or (iv) the commission of an act which induces any customer or
prospective customer of the Company to break a contract with the Company or to
decline to do business with the Company; or (v) the conviction of the Employee
of a felony involving any financial impropriety or which would materially
interfere with the Employee's ability to perform his or her services or
otherwise be injurious to the Company; or (vi) the failure of the Employee to
perform in a material respect his or her employment obligations without proper
cause. In making such determination, the Board of Directors shall act fairly and
in utmost good faith. For the purposes of this Section 18, termination of
employment shall be deemed to occur when the Employee receives notice that his
employment is terminated.
19. COMPANY'S RIGHT OF REPURCHASE. (A) RIGHTS OF REPURCHASE. If any of
----------------------------- --------------------
the events specified in Section 19(b) below occur, then,
(i) with respect to Option Shares acquired upon exercise of this
Option prior to the occurrence of such event, within 90 days after the
Company receives actual knowledge of the event, and
(ii) with respect to Option Shares acquired upon exercise of this
Option after the occurrence of such event, within 90 days following the
date of such exercise,
(in either case, the "Repurchase Period"), the Company shall have the right, but
not the obligation, to repurchase all or a portion of the Option Shares from the
Employee, or his or her transferee or legal representatives, as the case may be
(the "Repurchase Option"). The Repurchase Option shall be exercised by the
Company by giving the Employee, or his or her transferee or legal
representative, written notice of its intention to exercise the Repurchase
Option on or before the last day of the Repurchase Period. If any of the events
specified in Section 19(b)(i)-(iii) below occur, then the Company may exercise
its Repurchase Option by tendering to the Employee, or his or her transferee or
legal representative, an amount equal to the higher of the Option exercise price
or the fair market value of the Option Shares. The Company may, in exercising
the Repurchase Option, designate one or more nominees to purchase the Option
Shares either within or without the Company. Upon timely exercise of the
Repurchase Option in the manner provided in this Section 19(a), Employee, or his
or her transferee or legal representative, shall deliver to the Company the
stock certificate or certificates representing the Option Shares, duly endorsed
and free and clear of any and all liens, charges and encumbrances.
If the Option Shares are not purchased under the Repurchase Option, the
Employee and his or her successor in interest, if any, will hold any of the
Option Shares in his or her possession subject to all of the provisions of this
Agreement.
<PAGE>
7
(B) COMPANY'S RIGHT TO EXERCISE REPURCHASE OPTION. The Company shall
---------------------------------------------
have the Repurchase Option in the event that any of the following events shall
occur:
(i) The receivership, bankruptcy or other creditor's proceeding
regarding the Employee or the taking of any of Employee's Option Shares by
legal process, such as a levy of execution;
(ii) Distribution of shares held by the Employee to his or her spouse
as such spouse's joint or community interest pursuant to a decree of
dissolution, operation of law, divorce, property settlement agreement or
for any other reason, except as may be otherwise permitted by the Company;
or
(iii) The termination of the Employee for "Cause" as defined in
Section 18.
(C) DETERMINATION OF FAIR MARKET VALUE. The fair market value of the
----------------------------------
Option Shares, as used in this Section 19, shall be an amount per share
determined on the basis of the price at which shares of the Common Stock could
reasonably be expected to be sold in an arms-length transaction, for cash, other
than on an installment basis, to a person not employed by, controlled by, in
control of or under common control with the Company. Fair market value shall be
determined by the Board of Directors, giving due consideration to recent grants
of incentive stock options for shares of Common Stock, recent arms-length
transactions involving shares of the Common Stock, if any, earnings of the
Company to the date of such determination, projected earnings of the Company,
the effect of the transfer restrictions to which the Option Shares are subject
under law and this Agreement, the absence of a public market for the Common
Stock and such other matters as the Board of Directors deems pertinent. If the
Common Stock of the Company is traded on any national securities exchange or the
Nasdaq National Market, fair market value shall be (i) the average of the high
and low closing sale prices, or (ii) the average of the last reported sale price
on the Nasdaq National Market, or (iii) the average of the closing bid prices
for the twenty (20) consecutive trading days preceding the date the Company
exercises its Repurchase Option and tenders payment for the Option Shares. The
determination by the Board of Directors of the fair market value shall be
conclusive and binding. The fair market value of the Option Shares shall be
determined as of the day on which the event occurs.
20. [THIS SECTION INTENTIONALLY OMITTED].
21. METHOD OF PAYMENT OF OPTION. The Company may, in its sole discretion,
---------------------------
pay the purchase price for any Option or Option Shares repurchased by it
hereunder under Section 19 either in cash or by delivery of the Company's
unsecured promissory note in a principal amount equal to the purchase price (the
"Note") of the Option Shares or the Option. In the event of payment by Note,
the Note shall be due and payable not later than three years from the date of
issuance, with principal and interest
<PAGE>
8
thereon payable on an unsecured basis in equal annual installments. Interest on
the Note shall be equal to the lowest applicable Federal rate, as defined in
Section 1274(d) of the Code, as of the date of the Note's issuance.
22. GOVERNING LAW. This Agreement shall be governed by and interpreted in
-------------
accordance with the internal laws of the State of Delaware.
IN WITNESS WHEREOF the Company and the Employee have caused this instrument
to be executed, and the Employee whose signature appears below acknowledges
receipt of a copy of the Plan and acceptance of an original copy of this
Agreement.
______________________________ ASTEA INTERNATIONAL INC.
SIGNATURE OF EMPLOYEE
______________________________ By:____________________________
Name
______________________________ Title:_________________________
Street Address
______________________________
City State Zip Code
<PAGE>
EXHIBIT 10.17
-------------
AGREEMENT OF LEASE
------------------
AGREEMENT OF LEASE made this _____ day of June ___, 1996, by and between
C/N HORSHAM TOWNE LIMITED PARTNERSHIP, a Pennsylvania limited partnership, c/o
Nichols Realty Services Company, a Pennsylvania limited partnership, with its
principal place of business at 16 Campus Boulevard, Newtown Square, Pennsylvania
19073, telefax no. 610-325-5622 ("Landlord"), party of the first part, and ASTEA
INTERNATIONAL, INC., a Delaware corporation, with its principal place of
business at 100 Highpoint Drive, Chalfont, PA 18914, telefax no. 215-997-0871
("Tenant"), party of the second part.
WITNESSETH THAT, for and in consideration of the rents, covenants and
agreements herein contained and intending to be legally bound hereby, the
parties hereto covenant and agree as follows:
1. Reference Data. As used in this Lease, the following terms shall be
--------------
defined as indicated and refer to the data set forth in this Section 1.
LANDLORD'S ADDRESS: c/o Nichols Realty Services Company
16 Campus Boulevard, Suite 150
Newtown Square, PA 19073
TENANT'S ADDRESS
ON COMMENCEMENT DATE: 455 Business Center Drive, Suite _____
Horsham, PA 19044
PREMISES "A": that 33,505 square foot portion of the building (the "Building")
owned by Landlord situated on certain land located at 455
Business Center Drive in Horsham Township, Montgomery County,
Pennsylvania (the "Land") in the Horsham Business Center (the
"Business Park"), as further identified in Exhibit "A" attached
hereto and made a part hereof. Landlord shall provide to Tenant
the method by which square footage in the Building is calculated.
PREMISES "B": that 18,000 square foot portion of the Building, as further
identified in Exhibit "A" attached hereto and made a part hereof.
PREMISES "A" SCHEDULED COMMENCEMENT DATE: August 19, 1996
<PAGE>
PREMISES "B" SCHEDULED COMMENCEMENT DATE: Between October 1, 1997, and December
1, 1997. Within sixty (60) days from the date hereof, Landlord shall
notify Tenant in writing as to the exact Premises "B" Scheduled
Commencement Date.
TERM: Seventy-four (74) months after the Premises "A" Commencement Date or
Sixty (60) months after the Premises "B" Commencement Date, whichever
is later.
PREMISES "A" BASE RENT: $577,961.25 per year ($17.25 psf), in monthly
installments of $48,163,44.
PREMISES "B" BASE RENT: $310,500.00 per year ($17.25 psf), in monthly
installments of $25,875.00.
LEASE YEAR: Any twelve (12) month period beginning on the Premises "A"
Commencement Date or any anniversary thereof.
FIXED RENT: Base Rent plus Operating Expense Allowance.
ADDITIONAL RENT: Sums not including Fixed Rent which Tenant is obligated to
pay to Landlord from time to time pursuant to the terms of
this Lease.
TENANT'S PREMISES "A"
PROPORTIONATE SHARE: 65.05% (determined by dividing the area of the Premises by
the area of the Building [51,505]).
TENANT'S PREMISES "B"
PROPORTIONATE SHARE: 34.95% (determined by dividing the area of the Premises by
the area of the Building [51,505]).
PERMITTED USES: Tenant shall use and occupy the Premises for general office and
other related functions of the software business (provided all
such functions comply with applicable requirements) and for no
other purpose.
2. Demise. Landlord hereby demises and lets to Tenant and Tenant hereby
------
hires and leases from Landlord the Premises, TOGETHER WITH, appurtenant to the
Premises, the right to use in common with Landlord and other tenants, occupants
and visitors to the Building, the common driveways, parking lots,
-2-
<PAGE>
walkways and sidewalks of the Business Park and the Land and whatever facilities
may be located in or about the Building (collectively, the "Common Facilities").
Landlord represents to Tenant that the parking lots presently constructed on the
Land contain at least five parking spaces for every 1,000 square feet of
rentable area. Tenant shall have the right to use such parking spaces on a non-
reserved basis. Notwithstanding the above, Landlord shall designate one reserved
parking space for Tenant's exclusive use as of the Premises "A" Commencement
Date. In addition, Landlord shall designate a total of fifteen parking spaces
along the side of the building facing Business Center Drive for Tenant's
exclusive use as of the Premises "B" Commencement Date.
3. Construction by Landlord.
------------------------
a. Landlord shall complete, alter or improve Premises "A" in
accordance with the plans and specifications listed on Exhibit "B" and made a
part hereof (the "Premises "A" Plans"), all work to be done in compliance with
applicable laws and ordinances governing same (the "Premises 'A' Improvements").
Tenant hereby approves the Premises "A" Plans attached hereto as Exhibit "B."
b. Landlord shall complete, alter or improve Premises "B" in
accordance with the plans and specifications listed on Exhibit "C" and made a
part hereof (the "Premises "B" Plans"), all work to be done in compliance with
applicable laws and ordinances governing same (the "Premises 'B' Improvements").
c. Landlord and Tenant shall appoint construction representatives to
act for each of them with respect to all construction and construction related
matters involving the Improvements. The construction representatives shall be
available to attend regularly scheduled and special meetings throughout the
construction process including but not limited to bidding process and on-site
job meetings.
Tenant's Construction Representative shall be David W. Hinson or his
designee from Ballinger - (215) 665-0900.
Landlord's Construction Representative shall be Kevin Nichols or his
designee - (610)-325-5600.
d. Landlord and Tenant acknowledge that the General Contractor
selected to construct the Premises "A" and Premises "B" Improvements is Fricker
Construction Co. If
-3-
<PAGE>
possible, each trade will be bid to at least three subcontractors. Tenant shall
have the right to review all bids and participate in the selection of the
subcontractor for each trade.
e. If Landlord deems any changes, additions or alterations in either
the Premises "A" Plans or the Premises "B" Plans necessary in connection with
the construction of the Premises, such changes, additions or alterations shall
be submitted to Tenant for approval, which approval shall not be unreasonably
withheld or delayed and shall be deemed to be given if not disapproved in
writing within three (3) days after Landlord's submission of the same to Tenant.
Any dispute as to the content of such changes, additions or alterations may, at
the option of either party hereto, be conclusively determined by the independent
architect or engineer retained by Landlord ("Landlord's Architect").
f. As used herein, "Substantial Completion" shall mean the dates (for
Premises "A" and "B") when Landlord obtains at least a temporary certificate of
occupancy permitting Tenant to occupy and use the applicable space for its
intended use and Tenant's architect, Ballinger, issues a certificate of
substantial completion for such space. In the event Ballinger refuses to issue
a certificate of substantial completion and Landlord believes that the
applicable Premises have, in fact, been substantially completed, the dispute
between Ballinger and Landlord shall be resolved by Landlord's Architect.
g. The Premises "A" Improvements shall be Substantially Completed on
or before the Premises "A" Scheduled Commencement Date, provided that the
Premises "A" Scheduled Commencement Date shall be extended for the time
equivalent to any time lost by Landlord due to strikes, labor disputes,
governmental restrictions or limitations, scarcity of or inability to obtain
material, accidents, fire or other casualties, weather conditions, or any cause
similar or dissimilar to the foregoing beyond the reasonable control of
Landlord.
h. The Premises "B" Improvements shall be Substantially Completed on
or before the Premises "B" Scheduled Commencement Date, provided that the
Premises "B" Scheduled Commencement Date shall be extended for the time
equivalent to any time lost by Landlord due to strikes, labor disputes,
governmental restrictions or limitations, scarcity of or inability to obtain
material, accidents, fire or other
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casualties, weather conditions, or any cause similar or dissimilar to the
foregoing beyond the reasonable control of Landlord.
i. In the event that the Premises "A" Improvements are not
Substantially Completed by August 30, 1996, due to a Landlord Delay (as
hereinafter defined), Tenant shall receive a day for day accumulation of free
Base Rent to be applied to the Lease Term as of the actual Commencement Date. To
the extent Landlord Delay constitutes a period of one hundred twenty (120) days
or greater, Tenant may cancel the Lease at its sole option provided Tenant
elects to terminate the lease as of such 120th day by giving Landlord less than
ten days prior written notice and provided further Landlord thereafter fails to
substantially complete Premises "A" prior to the 120th day. The term "Landlord
Delay" as used herein means any delay in the date of Substantial Completion of
the Improvement which is due to any cause other than Force Majeure or delays
caused by Tenant. In the event that the Premises "B" Improvements are not
Substantially Completed within fifteen (15) days after the Premises "B"
Scheduled Commencement Date due to a Landlord Delay, Tenant shall receive a day
for day accumulation of free Base Rent for Premises "B" to be applied to the
Lease Term as of the actual Premises "B" Commencement Date.
j. At the applicable Commencement Date with respect to any portion of
the Premises as to which Landlord is to perform work, Tenant shall furnish
Landlord with a list of those specific items that are defective, deficient, or
incomplete or not completed in accordance with the applicable Final Plans
("Punch List Items"). Landlord shall use its best efforts to complete or correct
all such Punch List Items within thirty (30) days after Tenant delivers such
list to Landlord.
k. Tenant and its authorized agents, employees and contractors shall
have the right, at Tenant's own risk, expense and responsibility, at all
reasonable times prior to the Commencement Date to enter the Premises for the
purpose of taking measurements and installing its furnishings, fixtures and
equipment, provided that Tenant, in so doing, shall comply with the following
provisions:
(1) Tenant shall first obtain the approval of Landlord, in
writing, of the specific work it proposes to perform and shall furnish
Landlord with reasonably detailed plans and specifications
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therefor (such approval not to be unreasonably withheld);
(2) The work shall be performed by responsible contractors and
subcontractors who shall not prejudice Landlord's relationship with
Landlord's contractors or subcontractors or the relationship between
such contractors and their subcontractors or employees, or disturb
harmonious labor relations, and who shall furnish in advance and
maintain in effect Workmen's Compensation Insurance in accordance with
statutory requirements and comprehensive public liability insurance
(naming Landlord and Landlord's contractors and subcontractors as
additional insureds) with limits satisfactory to Landlord;
(3) No such work shall be performed in such manner or at such
times as to cause any delay in connection with any work being done by
any of Landlord's contractors or subcontractors in the Premises or in
the Building generally (Landlord agrees to notify Tenant of any such
delay promptly after Landlord learns of the same);
(4) Tenant and its contractors and subcontractors shall be solely
responsible for the transportation, safekeeping and storage of
materials and equipment used in the performance of such work, for the
removal of waste and debris resulting therefrom, and for any damage
caused by them to any installations or work performed by Landlord's
contractors and subcontractors.
l. Landlord shall be responsible to make any repairs necessitated by
defective workmanship or materials in the aforesaid work, provided that such
defect appears and Tenant gives Landlord written notice thereof during the first
one hundred eighty (180) days of the Term.
m. Tenant shall receive an allowance from Landlord in the amount of
$1,287,625 [$25 psf x (33,505 + 18,000)] to complete the improvements shown on
Exhibits "B" and "C" (the "Construction Allowance"). The Construction Allowance
shall first be applied toward all costs associated with the design and
construction of the improvements shown on Exhibits "B" and "C", including the
cost to install a card access security
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<PAGE>
system, with Tenant responsible for any cost thereof in excess of the
Construction Allowance. To the extent the cost of completing the improvements
shown on either Exhibit "B" or "C" shall exceed the applicable Construction
Allowance, Tenant shall reimburse Landlord for such difference immediately upon
being billed therefor as Additional Rent. Tenant shall have the right to apply
up to $200,000 of the Construction Allowance toward moving expenses and the cost
of any permanent tenant improvements installed in the Premises by Tenant such as
cabling and wiring, provided that Tenant shall provide documentation reasonably
satisfactory to Landlord detailing each such expenditure. Landlord shall
reimburse Tenant for such expenses within thirty (30) days after being billed
therefor or Landlord shall pay directly the vendor providing the services, as
requested by Tenant.
4. Term. a. The Term shall commence on the earlier of (the
----
"Premises "A" Commencement Date"): (i) the date when Tenant, with Landlord's
consent, assumes possession of Premises "A" or any part thereof (except for the
purposes set forth in subsection 3(k) above), or (ii) the date that Premises "A"
are Substantially Completed as defined in Section 3 above.
b. The "Premises "B" Commencement Date" shall occur on the earlier of:
(i) the date when Tenant, with Landlord's consent, assumes possession of
Premises "B" or any part thereof (except for the purposes set forth in
subsection 3(k) above), or (ii) the fifth (5th) consecutive business day
following Landlord's notice to Tenant that Premises "B" are Substantially
Completed.
c. The commencement and expiration dates of the Term, when determined
as above provided, shall be confirmed by an addendum to this Lease.
d. Tenant shall have the option to renew this Lease for an additional
term of five (5) years provided that Tenant shall not be in default hereunder
either at the time Tenant exercises the option or on the Commencement Date of
the renewal term and further provided that Tenant shall exercise such option in
writing not later than twelve (12) months prior to the expiration of the initial
Term upon the same terms and conditions of this Lease (including, without
limitation, the obligation to pay Operating Expense Adjustment) except that the
annual Base Rent during such renewal term shall equal $994,046.50 ($19.30 psf).
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<PAGE>
e. Provided Tenant shall have exercised the foregoing option, Tenant
shall have the further option to renew this Lease for an additional term of five
(5) years provided Tenant shall not be in default hereunder either at the time
Tenant exercises the option or on the Commencement Date of the second renewal
term and further provided that Tenant shall exercise such option in writing not
later than twelve (12) months prior to the expiration of the first renewal term
upon the same terms and conditions of this Lease (including, without limitation,
the obligation to pay Operating Expense Adjustment) except that the annual Base
Rent during such second renewal term shall be the then fair market rental for
space leases in the Business Park. If the parties are unable to agree on the
Base Rent to be paid by Tenant during the renewal term, then each party shall
select one appraiser who shall be a member of the American Institute of Real
Estate Appraisers within ten days after the parties shall fail to reach
agreement (and if either party fails to make a selection within that period, the
right to do so shall be deemed waived), and the two appraisers shall then select
a third appraiser, again within a ten day period, to comprise an appraiser
panel. The panel shall then determine, within twenty days after the selection of
the third appraiser, "the then fair market rental for space leases in the
Business Park." Notwithstanding the above, the annual Base Rent payable during
such renewal term shall not be less than the annual Base Rent payable during the
first renewal Term.
5. Base Rent.
---------
a. Tenant shall pay to Landlord Base Rent during the Term hereof,
without notice or demand, in the monthly installments specified in Section 1, in
advance on the first day of each calendar month of the Term, at Landlord's
principal office as indicated in Section 1 above. The first month's installment
of Premises "A" Base Rent shall be payable upon the execution of this Lease. If
the Term commences other than on the first day of a calendar month, then the
installments of Base Rent for the first and last calendar months of the Term
shall be adjusted proportionately. Notwithstanding anything in this subsection
5(a) to the contrary, the Premises "A" Base Rent payable hereunder for the first
104 days of the Term shall equal $13,262.40 per month [$4.75 per square foot to
cover Tenant's Proportionate Share of Operating Expenses] to be prorated on a
per diem basis.
- --- ----
b. Base Rent, Additional Rent and all other sums payable by Tenant
to Landlord hereunder shall be paid, without
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set-off or deduction, in lawful currency of the United States of America to
Landlord at the address set forth in Section 1 hereof, or at such other address
as Landlord may from time to time designate in writing to Tenant. In the event
that any such rent or other sums shall be unpaid on the expiration or
termination hereof, the obligation therefor shall survive such expiration or
termination of this Lease. In order to partially compensate Landlord for the
extra expense incurred in the handling of delinquent payments, Tenant agrees to
pay Landlord a late charge equal to the product obtained by multiplying each
installment of Fixed Rent Or Additional Rent not paid within ten (10) days after
its due date by five (5%) percent. Notwithstanding the above, Landlord agrees
not to assess such late charge until ten days have elapsed after Landlord has
given Tenant notice of such delinquency; provided, however, that Landlord shall
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have the right to assess such late charge without notice to Tenant in the event
Landlord has given Tenant notice of past delinquencies at least once during the
prior 12 months.
6. Rental Adjustments - Operating Expenses.
---------------------------------------
a. As used in this Section 6 and Section 1 where applicable, the
following words and terms shall be defined as hereinafter set forth:
(1) "Operating Year" shall mean each calendar year, or other
period of twelve (12) months as hereinafter may be adopted by
Landlord as its fiscal year, occurring during the Term.
(2) "Operating Expense Adjustment" shall mean Tenant's
Proportionate Share of the excess of the actual Operating
Expenses for the current Operating Year over the actual
Operating Expenses for 1996 Operating Year. Except as set forth
in subsection e. below, there shall be no Operating Expense
Adjustment for the 1996 Operating Year.
(3) "Operating Expense Allowance" shall mean Landlord's
projection of the Operating Expense Adjustment for the current
Operating Year.
(4) "Operating Expense Statement" shall mean a statement in
writing signed by Landlord,
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setting forth in reasonable detail (a) the Operating Expense
for the preceding Operating Year, (b) Tenant's Proportionate
Share of the Operating Expense, (c) Operating Expense
Allowance, and (d) Tenant's Operating Expense Adjustment for
such Operating Year, or portion thereof. The Operating Expense
Statement for each Operating Year shall be available for
inspection by Tenant at Landlord's office during normal
business hours.
(5) "Operating Expense" shall mean the following expenses
incurred by Landlord in connection with the operation, repair
and maintenance of the Building and the Land:
(A) Real estate taxes and other taxes or charges levied
in lieu of such taxes; general and special public
assessments; charges imposed by any governmental
authority pursuant to anti-pollution or environmental
legislation; taxes on the rentals of the Building or
the use, occupancy or renting of space therein;
Landlord reserves the right to bill Tenant for a "lump
sum" reimbursement of the Operating Expense Adjustment
for the taxes and assessments payable hereunder, which
lump sum amount will be (a) payable upon receipt of
Landlord's statement therefor which will be forwarded
at or about the times during each Operating Year that
the respective taxing authority issues its tax bill,
and (b) comprised of Tenant's Proportionate Share of
such tax bill less the then accrued monthly amounts
already paid by Tenant in its Operating Expense
Allowance which are allowable to the real estate taxes
or assessments that are included in the bill issued by
the taxing authority. In the event that Landlord
exercises such right with respect to all tax bills that
are payable in any Operating Year, the
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monthly amounts due under this subparagraph (A) will
nonetheless be paid provided that no such lump sum
amount will be due thereafter unless the accrual of
such monthly amounts is insufficient to satisfy the
Tenant's prorata share of subsequent tax bills, in
which event the lump sum shall be only that which is
necessary to cover the shortage. If a lump sum is paid
by Tenant during the Term, the unused portion thereof,
if any, shall be refunded or credited to the Tenant
upon the expiration of the Term, unused being that
portion of the lump sum that is apportionable to a
period of the time subsequent to the expiration of the
Term.
(B) Premiums and fees for fire and extended coverage
insurance, insurance against loss of rentals for space
in the Building and public liability insurance, all in
amounts and coverages (with additional policies against
additional risks) as may be required by Landlord or the
holder of any mortgage on the Building;
(C) Water and sewer service charges, electricity, heat,
air-conditioning and other utility charges not
separately metered to tenants in the Building;
(D) Maintenance and repair costs, including repairs and
replacement described in Section 8 below; repairs and
replacements of supplies and equipment; snow and trash
removal; repair and maintenance of all Common
Facilities; janitorial services; landscaping, lawn and
general grounds upkeep, maintenance and repair; the
cost of the maintenance contract for the Building's
heating, ventilating and air conditioning system; and
the costs of
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all labor, material and supplies incidental thereto;
(E) Wages, salaries, fees and other compensation and
payments and payroll taxes and contributions to any
social security, unemployment insurance, welfare,
pension or similar fund and payments for other fringe
benefits required by law, union agreement or otherwise
made to or on behalf of all employees of Landlord
performing services rendered in connection with the
operation and maintenance of the Building and/or Land,
including, without limitation, payments made directly
to or through independent contractors for performance
of such services or for the servicing of maintenance
contracts;
(F) Management fees payable to the managing agent for
the Building or Business Park;
(G) Any and all assessments paid by Landlord for the
repair, maintenance and upkeep of Common Facilities
located in the Business Park. For the purposes of this
subparagraph (G), such assessments shall equal the
product obtained by multiplying the total assessments
paid by Landlord by a fraction, the numerator of which
shall be the number of square feet in the Building as
set forth in Section 1 above, and the denominator of
which shall be the total number of square feet in all
buildings in the Business Park subject to the
assessment; and
(H) Any and all other expenditures of Landlord incurred
in connection with the operation, repair or maintenance
of the Premises, the Building or the Land which are
properly expensed (or regarded as "deferred expenses")
in accordance with generally accepted accounting
principles
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<PAGE>
consistently applied in the operation, maintenance, and
repair of a first-class office building facility.
Included herewith are items of expense designed to
result in savings or reductions in Operating Expenses
as hereinabove described to the extent such savings or
reductions are greater than the expense incurred, in
the event of which, the corresponding items shall be
deducted from the Operating Expense Allowance for the
Operating Year in which the expenditure was made.
(I) Landlord hereby agrees that the Building shall at
all times comply with the Americans with Disabilities
Act of 1990, together with all amendments thereto which
may be adopted from time to time, and all regulations
and rules promulgated thereunder (collectively, the
"ADA"). Any and all such compliance shall be at
Landlord's sole cost and expense, except for new
regulations or amendments to the ADA which pertain
solely to the Premises and which become effective after
the Commencement Date of this Lease, which shall be the
responsibility of Tenant, and except as set forth in
subsection (b) below. With regard to the ADA:
(a) Landlord warrants and represents to Tenant that any
and all areas, including common areas, of the Building
outside the Premises comply with and satisfy any and
all requirements of accessibility as required by the
ADA in effect as of the Commencement Date;
(b) Landlord agrees that any improvements or
modifications made to the Building required by
amendments to or subsequent regulations under the ADA
which become effective after the Commencement Date of
this Lease:
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<PAGE>
(1) shall be made by Landlord in a cost effective
manner;
(2) shall only be included in Operating Expenses
after being amortized over the useful life
of such improvement or modification; and
(3) in no event shall the cost of any
improvement or modification made to the
premises of any tenant in the Building be
included in Operating Expenses.
(c) Tenant agrees to make any improvements or
modifications to the Premises required by amendments to
or subsequent regulations under the ADA which become
effective after the Commencement Date.
Landlord shall hold Tenant, its agents, successors, assigns,
employees and invitees, harmless from liability for damages and losses suffered
by any person, including personal injury, death or property damage, including
reasonable legal fees, costs, and expenses, caused directly or indirectly by the
Building's failure to comply with the ADA. Tenant shall hold Landlord, its
agents, successors, assigns, employees and invitees, harmless from liability for
damages and losses suffered by any person, including personal injury, death or
property damage, including reasonable legal fees, costs, and expenses, caused
directly or indirectly by the Premises' failure to comply with Amendments to or
subsequent regulations under the ADA which become effective after the
Commencement Date.
Items of Operating Expense which are not exclusively incurred with
respect to the Building by reason of the nature of the items or otherwise shall
be equitably allocated by Landlord among the buildings to which the same relate
or for whose benefit the same have been incurred, and only the portion allocated
to the Building shall be included in calculating the Operating Expense for the
Building.
The term "Operating Expense" shall not include:
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(i) depreciation on the Building or equipment therein;
(ii) mortgage interest;
(iii) net income, franchise or capital stock taxes payable by Landlord;
(iv) executive salaries;
(v) real estate brokers, commission or the costs of services provided
specially for any particular tenant at such tenant's expense and
not uniformly available to all tenants of the Building;
(vi) any ground lease rental;
(vii) capital expenditures required by Landlord's failure to comply
with laws enacted on or before the date of this Lease;
(viii) costs incurred by Landlord for the repair of damage to the
Building, to the extent that Landlord is reimbursed by insurance
proceeds;
(ix) costs, including permits, licenses and inspection costs, incurred
with respect to the installation of tenant improvements, made for
tenants in the Building or incurred in renovating or otherwise
improving, decorating, painting or redecorating vacant space for
Tenant or other occupants of the Building;
(x) depreciation and amortization, except as provided in this list
of exclusion, and except on materials, tools, supplies and
vendor-type equipment purchased by Landlord to enable Landlord to
supply services Landlord might otherwise contract for with a
third party where such depreciation and amortization would
otherwise have been included in the charge for such third party's
services, all as determined in accordance with generally accepted
principles, consistently applied, and when depreciation or
amortization is permitted or required, the item shall be
amortized over its reasonably anticipated useful life;
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<PAGE>
(xi) leasing commissions, attorneys' fees, and other costs and
expenses incurred in connection with negotiations or disputes
with prospective tenants of the Building or litigation to collect
rent from tenants of the Building;
(xii) the costs or services rendered by any person or entity related to
or affiliated with Landlord which is in excess of commercially
reasonable rates for such services;
(xiii) expenses in connection with services or other benefits which are
not offered to Tenant or for which Tenant is charged directly but
which are not provided to another tenant or occupant of the
Building;
(xiv) overhead and profit increments paid to Landlord or to
subsidiaries or affiliates of Landlord for services in the
Building to the extent the same exceed the cost of such services
which is typical of a Class A office building in the Pennsylvania
Suburb of Philadelphia;
(xv) interest, principal, points and fees on debt or amortization on
any mortgage or mortgages or any other debt instrument
encumbering the Building;
(xvi) Landlord's general corporate overhead and general administrative
expenses;
(xvii) all items and services for which Tenant or any other tenant of
the Building reimburses Landlord and which Landlord provided
selectively to one or more tenants (other than Tenant) without
reimbursement;
(xviii) electric power costs of which any tenant directly contracts with
the local public service company;
(xix) tax penalties incurred as a result of Landlord's negligence or
inability or unwillingness to make payments when due;
(xx) any other expenses which, in accordance with generally accepted
accounting principles, consistently applied, would not normally
be
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treated as an Operating Expense by landlords of comparable office
buildings;
(xxi) costs incurred by Landlord due to the violation by Landlord or
any other tenant of the terms and conditions of any lease of
space in the Building;
(xxii) rentals and other related expenses incurred in leasing air
conditioning systems, elevators or other equipment ordinarily
considered to be of a capital nature, except equipment ordinarily
considered to be of a capital nature, except equipment not
affixed to the Building which is used in providing janitorial or
similar services; and
(xxiii) except as otherwise specifically set forth in this Lease, costs
incurred by Landlord for improvements which are considered
capital improvements and replacements under generally accepted
accounting principles consistently apply.
b. Tenant shall pay as Additional Rent to Landlord the Operating
Expenses Adjustment, which shall be comprised of the Operating Expense Allowance
plus any adjustment thereto as set forth in subsection 6d below.
c. If Tenant's Proportionate Share of Operating Expense for any
Operating Year shall be greater (or less) than Tenant's total Operating Expense
Allowance for the same year, Tenant shall pay to Landlord as Additional Rent (or
Landlord shall credit to Tenant as hereinafter provided) an amount equal to the
difference (the amount of such difference is hereinafter referred to as the
"Operating Expense Adjustment"). If Tenant occupies the Premises or a portion
thereof for less than a full Operating Year, the Operating Expense Adjustment
will be calculated in proportion to the amount of time in such Operating Year
that Tenant occupied the Premises.
d. Such Operating Expense Adjustment shall be paid in the
following manner: within one hundred twenty (120) days following the end of the
first and each succeeding Operating Year, Landlord shall furnish Tenant an
Operating Expense Statement setting forth (i) the Operating Expense for the
preceding Operating Year, (ii) the Operating Expense Allowance for said
Operating Year, and (iii) Tenant's Operating Expense Adjustment for such
Operating Year. Within thirty (30) days
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following the receipt of such Operating Expense Statement (the "Expense
Adjustment Date") (A) Tenant shall pay to Landlord as Additional Rent the
Operating Expense Adjustment for such Operating Year, or (B) in the event that
(ii) should exceed (i), the excess amount shall be divided by twelve (12) and
the resultant sum shall be credited against the monthly payments of the
Operating Expense Allowance for the Operating Year then commencing.
e. Commencing with the first month of the 1997 Operating Year (and
continuing on the first month of each succeeding Operating Year thereafter
during the Term hereof), Tenant shall pay to Landlord the 1997 Operating Year
Operating Expense Allowance equal to one-twelfth (1/12th) of the estimated
Operating Expense Adjustment for such Operating Year, which estimated figure
will be included in the aforesaid Operating Expense Statement or given to Tenant
as soon thereafter as it is determined by Landlord. On the next succeeding
Expense Adjustment Date, Tenant shall pay to Landlord (or Landlord shall credit
to Tenant) any deficiency (or excess) between the installments paid on account
of the preceding year's Operating Expense Adjustment and the actual Operating
Expense Adjustment for such Operating Year. Notwithstanding anything in this
paragraph to the contrary, with regard to the 1996 Operating Year, Tenant shall
reimburse Landlord for any costs of snow and ice removal in excess of 10c per
square foot.
f. In calculating the annual Operating Expenses listed in
subsections (C), (D), (E) and (F) above, if for thirty (30) or more days during
the Operating Year less than ninety-five (95%) percent of the rentable area of
the Building shall have been occupied by tenants, then the annual Operating
Expense attributable to the four subsections listed above shall be deemed for
such Operating Year to be amounts equal to the like expenses which would
normally be expected to be incurred had such occupancy of the Building been at
ninety-five (95%) percent throughout such year, as reasonably determined by
Landlord and provided further that if during any Operating Year, Landlord shall
not furnish any item or items of Operating Expenses to any portion of the
Building because such portions are not occupied or because such item is not
required by the lessee of such portion, for the purposes of computing Operating
Expenses, an equitable adjustment shall be made so that the item of Operating
Expense in question shall be shared by tenants receiving the benefits thereof.
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g. During the calendar year in which the Term ends, Landlord shall
have the right to submit to Tenant a statement of Landlord's reasonable estimate
of the Operating Expense Adjustment during the period (the "final period")
beginning on the first day of the final Operating Year of the Term or, if later,
the date of the immediately preceding Operating Expense Adjustment, and ending
on the final day of the Term. Upon the earlier to occur of the thirtieth (30th)
day following Tenant's receipt of such statement or the final day of the Term,
Tenant shall pay to Landlord said estimated Operating Expense Adjustment minus
the total amount of payments previously made by Tenant pursuant to this section
during the final period. If requested by Tenant, Landlord shall submit to Tenant
a statement setting forth the actual amount of said Operating Expense Adjustment
after Landlord's final calculation of same, and within thirty (30) days after
Tenant's receipt of such statement, Tenant shall pay to Landlord the amount
shown thereon.
Tenant shall have the right to audit the Operating Expense Statement
subject to the following conditions: (a) Tenant must audit the Operating Expense
Statement within sixty (60) days after receiving the Operating Expense Statement
from Landlord; (b) Tenant shall give Landlord not less than fifteen (15) days'
prior written notice of Tenant's desire to audit the Operating Expense
Statement; (c) the audit shall be conducted in Landlord's offices during normal
business hours; and (d) Tenant shall bear the entire cost of such audit. In the
event such audit reveals any discrepancies from the Operating Expense Statement,
the Tenant's Proportionate Share of Operating Expense shall be adjusted as set
forth above in subsection 6(d).
7. Option to Lease Additional Space. Tenant shall have the option to
--------------------------------
lease either or both portions of the building located at 255 Business Center
Drive outlined on Exhibits "D-1" or "D-2" attached hereto and made a part hereof
(the "Option Space") provided (i) Tenant shall notify Landlord of its election
to exercise its option within sixty (60) days after the Premises "A"
Commencement Date, (ii) Tenant shall not be in default hereunder at the time it
exercises the option or on the Commencement Date for the lease covering the
Option Space, and (iii) Tenant's tangible net worth on the Option Space
Commencement Date shall be at least equal to its tangible net worth as of the
date hereof. As of the date hereof, Tenant's tangible net worth is $46,400,000.
The lease for the Option Space shall have a term equal to the remainder
of the Term of this Lease. Such lease shall be
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upon the terms and rates, including leasehold improvement allowance and renewal
rights, included in this Lease. The lease shall be substantially in the form of
this Lease. The lease must be executed by Tenant within fifteen (15) days after
Tenant receives the lease from Landlord. If Tenant fails to execute the lease as
set forth above within fifteen (15) days after exercise of its option for any
reason, then the option to lease set forth in this Section 7 shall terminate
absolutely and without further notice. The improvements to the Option Space
shall be similar in quantity and quality to those provided in Premises "A" and
"B". The Option Space Scheduled Commencement Date shall be the earlier of (i)
July 1, 1997, or (ii) the date on which the Option Space is Substantially
Completed.
8. Landlord's Services. So long as Tenant is not in default
-------------------
hereunder, Landlord shall:
a. Regularly on business days clean or cause the Premises and the
Building to be kept clean to the standards set forth in Exhibit "E" attached
hereto and made a part hereof, provided the same are kept in order by Tenant.
b. Arrange for all required utility services to the Premises;
provided, however, that Landlord shall not be liable to Tenant for any
- -------- -------
loss or damage arising from interruption in such utility services.
c. Provide the services referenced in subsection 6(a)(4)(D) above.
d. Make all repairs necessary to maintain the plumbing and
electrical systems, windows, floors (excluding carpeting), and all other items
which constitute a part of the Premises and are installed or furnished by
Landlord, except repairs to Tenant's trade fixtures and property and
installations which Tenant is obligated to make or which were performed by
Landlord at Tenant's request; provided , however, that Landlord shall not be
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obligated for any of such repairs until the expiration of a reasonable period or
time after written notice from Tenant that such repair is needed. In no event
shall Landlord be obligated under this paragraph to repair any damage caused by
any act, omission or negligence of Tenant or its employees, agents, invitees,
licenses, subtenants, or contractors.
Notwithstanding the terms and conditions of the previous paragraph, at
Landlord's sole cost and expense, Landlord
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shall be responsible for the maintenance and replacement of the primary heating,
ventilation and air conditioning systems in the Building (including individual
heat pumps), including the duct work servicing such systems, the existing
primary electrical service to each floor of the Building, the existing base
sprinkler loop within each floor, required renovations and modifications to the
restrooms and required modifications or renovations to the restrooms, elevators,
lobby areas and other building common areas required by the Americans with
Disabilities Act. Except as specifically set forth above or as otherwise herein
provided, all other expenses incurred by Landlord in maintaining the Building,
the Premises and the Land shall be Operating Expenses.
Tenant shall take good care of the Premises and the fixtures and
appurtenances therein. Tenant shall, at its sole cost and expense, repair and
replace all damage or injury to the Premises and the Building and to fixtures
and equipment caused by Tenant or its employees, agents, invitees, licensees,
subtenants, or contractors, or as the result of all or any of them moving in or
out of the Building or by installation or removal of furniture, fixtures or
other property, which repairs and replacements shall be in quality and class
equal to the original work or installations. If Tenant fails to make such
repairs or replacements, the same may be made by Landlord and such expense shall
be collectible as Additional Rent and paid by Tenant within fifteen (15) days
after rendition of a bill therefor.
Landlord shall not be liable by reason of any injury to or interference
with Tenant's business arising from the making of any repairs, alterations,
additions or improvements in or to the Premises or the Building or to any
appurtenances or equipment therein. Except as expressly provided in Sections 11
and 12 hereof, there shall be no abatement of rent because of such repairs,
alterations, additions or improvements.
9. No Other Services by Landlord. Landlord shall not be required to
-----------------------------
render any services to Tenant or to make any repairs or replacements to the
Premises, except as provided in Sections 3, 8, 11 and 12 hereof. Without
limiting the generality of the foregoing, it is specifically understood and
agreed that Tenant shall be solely responsible for all costs of electricity
consumed or used in the Premises. In the event PECO Energy is unwilling to bill
Tenant directly for electricity consumed or used in the Premises, Landlord shall
have the right to submeter the Premises at Landlord's expense and to bill Tenant
monthly an amount equal to Landlord's reasonable estimate of Tenant's
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electrical consumption against actual meter readings for the prior three (3)
months. In the event Tenant has consumed more electricity than is reflected by
the estimated monthly payments, then Tenant shall pay for such excess electrical
consumption within ten (10) days after receipt of a bill therefor from Landlord.
In the event that Tenant's monthly installments exceed Tenant's actual
electrical consumption, then the excess shall be credited against the next
estimated monthly payment due by Tenant.
10. Insurance.
---------
a. Tenant, at Tenant's expense, shall maintain in effect throughout
the Term, through insurance carriers reasonably satisfactory to Landlord,
insurance against claims for personal injury (including death) and property
damage, under a policy of general public liability insurance, in amounts not
less than Two Million ($2,000,000.00) Dollars combined single limit in respect
of bodily injury (including death) and Five Hundred Thousand ($500,000.00)
Dollars for property damage. The insurance policy shall name both Landlord and
Tenant as insured parties. In addition, Tenant at all times shall maintain fire
and extended coverage insurance insuring its interest in all furniture,
fixtures, equipment, supplies and other personal property located in the
Premises or elsewhere in the Building and all tenant improvements to the
Premises, for the full insurable replacement cost thereof.
b. Prior to the commencement of the Term, Tenant shall provide
Landlord with certificates of the insurance policies herein required of Tenant.
All policies shall provide that coverage thereunder may not be reduced or
terminated without at least thirty (30) days prior written notice to Landlord.
Tenant shall furnish to Landlord throughout the Term replacement certificates at
least thirty (30) days prior to the expiration date of the then current policies
and, upon request of Landlord, shall supply to Landlord copies of all policies
herein required of Tenant.
c. Landlord shall maintain and keep in effect throughout the Term of
this Lease insurance against loss or damage to the Building by fire or such
other casualties as may be included within either fire and extended coverage
insurance or all-risk insurance and such other insurance as Landlord may desire
or as may reasonably be required from time to time by any mortgagee. Tenant
shall pay to Landlord its Proportionate Share
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of the premiums to be paid by Landlord for such insurance in accordance with
Section 6 above.
d. Each of the parties hereto hereby releases the other from all
liability for all injury, loss or damage which may be inflicted upon the
property of such party, even if such liability results from the negligence of
the other party; provided, however, that this release shall be effective only
-------- -------
(i) during such time as the applicable insurance policy carried by such party
names the other party as a co-insured or contains a clause to the effect that
this release shall not affect said policy or the right of the insured to recover
thereunder, and (ii) to the extent of the coverage of such policy. If any policy
does not permit such a waiver, and if the party to benefit therefrom requests
that such a waiver be obtained, the other party agrees to obtain an endorsement
to its insurance policies permitting such waiver of subrogation, if available,
and if an additional premium is charged for such waiver, the party benefiting
therefrom shall pay same promptly upon being billed therefor.
11. Casualty.
--------
a. If the Premises are damaged by fire or other casualty, Tenant
shall promptly notify Landlord and Landlord shall repair the damaged portions of
the Premises (but not any of Tenant's property therein or improvements or
alterations made by Tenant), except that if (i) in Landlord's reasonable
judgment, the damage would require more than ninety (90) days of work to repair,
(ii) the insurance proceeds (excluding rent insurance) which Landlord
anticipates receiving must be applied to repay any mortgages encumbering the
Building or are otherwise inadequate to pay the cost of such repair, or (iii)
damage occurs during the last year of the Term and Tenant has failed to exercise
any renewal rights then available to Tenant, then Landlord shall have the right
to terminate this Lease by so notifying Tenant, which notice shall specify a
termination date not less than fifteen (15) days after its transmission. if
Landlord is so required to repair, the work shall be commenced and completed
with due diligence, taking into account the time required for Landlord to
procure insurance proceeds, and construction delays due to shortages of labor or
material or other causes beyond Landlord's reasonable control.
b. During the period when Tenant shall be deprived of possession of
the Premises by reason of such damage, Tenant's obligation to pay Base Rent
under Section 5 and
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Operating Expense Allowance under Section 6 shall abate in the proportion which
the damaged area of the Premises bears to the entire Premises.
c. Notwithstanding anything in this Section 11 to the contrary, if
Landlord does not restore the Premises or the affected portion to tenantability
within two hundred seventy (270) days after such casualty, Tenant may then
terminate this Lease, retroactive to the date of the casualty.
12. Condemnation.
------------
a. If all of the Premises are taken through the exercise of the power
of eminent domain, this Lease shall terminate on the date when possession of the
Premises is required by the condemning authority. If only part of the Premises
is taken, then (i) if the condemnation award is insufficient to restore the
remaining portion of the Premises or if such award must be applied to repay any
mortgages encumbering the Building, (ii) if, in addition to a portion or the
Premises, a portion of the Building or Land is taken and Landlord deems it
commercially unreasonable to continue leasing all or a portion of the remaining
space in the Building, or (iii) if a substantial portion of the Premises is so
taken and it is commercially unreasonable for Tenant to continue its business
within the Premises as determined by Tenant in the exercise of its reasonable
business judgment, then Landlord in the case of (i) and (ii) above or Tenant in
the case of (iii) above, shall have the right to terminate this Lease on the
date when the condemned portion of the Premises, Building or Land is required to
be delivered to the condemning authority, which right shall be exercisable by
the exercising party so notifying the other party no later than thirty (30) days
prior to such date.
b. If this Lease is not so terminated after a partial condemnation,
then after the date when the condemned portion of the Premises is delivered to
the condemnor, the Fixed Rent shall be reduced in the proportion which the
condemned area bears to the entire area of the Premises, and Tenant's
Proportionate Share shall be reduced by the same proportion.
c. Tenant shall have the right to claim against the condemnor only for
removal and moving expenses and business dislocation damages which may be
separately payable to tenants in general under Pennsylvania law, provided such
payment does not reduce the award otherwise payable to Landlord. Subject to the
foregoing, Tenant hereby waives all claims against Landlord with
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respect to a condemnation, and hereby assigns to Landlord all claims against the
condemnor including, without limitation, all claims for leasehold damages and
diminution in the value of Tenant's leasehold estate,
13. Tenant's Fixtures. Tenant shall have the right to install trade
-----------------
fixtures, office machinery, computers and equipment (excluding alterations,
improvements and addition which are governed by Section 14) required by Tenant
or used by it in its business, provided that same do not impair the structural
strength of the Building and further provided that such trade fixtures, office
machinery, computers and equipment shall be limited to items normally used in an
office building. Without limiting the generality of the foregoing, it is
specifically understood and agreed that Tenant shall not have the right to
install or operate any electrical equipment or machinery in the Premises (other
than normal office machinery and equipment such as computers, adding machines,
and copiers) without Landlord's prior written consent. Tenant shall remove all
such trade fixtures, office machinery, computers and equipment, including, but
not limited to, cabling and wiring and free-standing dedicated HVAC equipment
for Tenant's mainframe computer unless Landlord notifies Tenant prior to the end
of the Term, that some or all of such computer-related equipment may remain in
the Premises, prior to the end of the Term, and Tenant shall repair and restore
any damage to the Premises and Building caused by such installation or removal.
Tenant shall not be obligated to remove the raised flooring and any dedicated
HVAC equipment for Tenant's mainframe computer mounted on the roof or exterior
of the Building. Tenant's personal property, fixtures and equipment are not
covered by any insurance policies maintained by Landlord under this Lease or
otherwise, and it shall be Tenant's responsibility to secure extended coverage
insurance against fire, vandalism, malicious mischief, sprinkler and other water
leakage and such additional perils as now are or hereafter may be included in a
standard extended coverage endorsement insuring its trade fixtures, machinery,
computers and equipment.
14. Alterations. Tenant shall not, without on each occasion first
-----------
obtaining Landlord's prior written consent, make any alterations, improvements
or additions to the Premises, except that Tenant may, without the consent of
Landlord but with prior written notice to Landlord, make minor improvements to
the interior of the Premises provided that: (i) they do not impair the
structural strength, operation or value of the Building, and (ii) Tenant shall,
prior to the commencement of the work, deliver to Landlord waivers of liens, in
form acceptable to Landlord,
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from all contractors, subcontractors and materialmen performing such work, and
shall take all steps required or permitted by law to avoid the imposition of any
mechanic's liens upon the Premises, Building and Land. All alterations,
improvements and additions, except for minor alterations and improvements as
aforesaid, upon completion of construction thereof, shall become part of the
Premises and the property of Landlord without payment therefor by Landlord and
shall be surrendered to Landlord at the end of the Term; provided, however, that
-------- -------
if so notified by Landlord at the time Tenant requests Landlord's approval,
Tenant shall, prior to the end of the Term, remove all such alterations and
improvements, or the parts thereof specified by Landlord, from the Premises and
shall repair all damage caused by installation and removal. For purposes of this
Section 14, "minor improvements" shall be defined as those improvements costing
no more than Five Thousand ($5,000.00) Dollars.
15. Mechanic's Lien. Tenant shall not, in the making of any repairs or
---------------
alterations pursuant to the provisions of Section 14 hereof, suffer or permit
any mechanic's, laborer's or materialman's lien to be filed against the
Premises, Building, Land or any part thereof by reason of labor or materials
supplied or claimed to have been supplied to Tenant; and if any such lien shall
be filed, Tenant, within thirty (30) days after notice of filing, shall cause it
to be discharged of record.
16. Use of Premises. Tenant may use and occupy the Premises only for the
---------------
express and limited purposes listed in Section 1 of this Lease, and the Premises
shall not be used or occupied, in whole or in part, for any other purpose
without the prior written consent of Landlord. Tenant shall not commit or
suffer any waste upon the Premises or Building, or any nuisance or any other act
which may disturb the quiet enjoyment of any other tenant in the Building or the
Business Park.
Tenant will not dump, flush, or in any way introduce any hazardous
substances or any other toxic substances into the public sanitary sewer system
serving the Premises; nor generate, store or dispose of hazardous substances on
the Premises or from the Premises to any other location without the prior
written consent of Landlord and then only in compliance with the Comprehensive
Environmental Response, Compensation and Liability Act, as amended 42 U.S.C.
9601 et seq. ("CERCLA"), and all other applicable laws, ordinances and
regulations. Tenant shall notify Landlord of any incident which would require
the filing of a notice under applicable federal, state or local environmental
protection law (collectively, "environmental laws"). "Hazardous
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substances" as used in this Section shall mean "hazardous substances" as defined
in CERCLA and any regulations adopted pursuant thereto. Landlord represents that
to the best of its actual knowledge the Building and Land are free from
asbestos, PCB's and other hazardous materials or substances. If any such
materials and/or substances are found on the Land or Building, the obligation
and cost for the clean up shall be upon Landlord unless Tenant contributed or
was responsible for the existence of such hazardous material or substance on the
Land or Building, in which event the Tenant shall be responsible therefor.
17. Rules and Regulations. Tenant covenants and agrees that Tenant, its
---------------------
employees, agents, invitees, licensees and other visitors, shall observe
faithfully, and comply strictly with, such reasonable Rules and Regulations as
Landlord or Landlord's agents may, after notice to Tenant, from time to time
adopt with respect to the buildings and common areas in the Business Park. The
Rules and Regulations currently in effect are attached hereto as Exhibit "F" and
made a part hereof.
18. Governmental Regulations. Tenant shall, in the use and occupancy
------------------------
of the Premises, comply with all applicable laws, ordinances, notices and
regulations of all governmental and municipal authorities, and with the
regulations of the insurers of the Premises. Tenant shall keep in force at all
times all licenses, consents and permits necessary for the lawful conduct of
Tenant's business at the Premises.
19. Signs. Landlord, at its expense, shall construct one (1) standard
-----
Business Park identification sign for Tenant upon the exterior of the Premises
at a location to be mutually selected by Landlord and Tenant. Except for signs
which are located wholly within the interior of the Premises and which are not
visible from the exterior thereof, no signs shall be erected by Tenant anywhere
upon the Premises, Building or Land without Landlord's prior written consent.
Notwithstanding the above, Tenant shall have the right to erect a sign on the
Building or a monument sign on the Land, subject to Landlord's prior approval of
the design and composition of such sign, which approval shall not be
unreasonably withheld. Any such sign must comply with all applicable code
requirements.
20. Landlord's Entry. Landlord and its agents, contractors and invitees
----------------
shall have the right to enter the Premises to inspect the same at all reasonable
times and after reasonable notice to Tenant except in emergencies, to exhibit
same to prospective purchasers, tenants and mortgagees, and to
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make any necessary repairs thereto. Landlord shall not be liable in any manner
to Tenant by reason of such entry or the performance of repair work in the
Premises and the obligations of Tenant hereunder shall not thereby be affected;
however, Landlord agrees (except in the case of Tenant's default hereunder) that
all repair work (excepting only emergency work or work which must, in Landlord's
judgment, be performed on an urgent basis) by Landlord shall be performed in a
reasonable manner at reasonable times.
21. Indemnification.
---------------
a. Tenant shall defend, indemnify and hold harmless Landlord against
and from all costs, expenses, liabilities, losses, damages, injunctions, suits,
actions, fines, penalties, claims, and demands of every kind or nature,
including reasonable counsel fees, by or on behalf of any person, entity or
governmental authority whatsoever arising out of (a) any failure by Tenant to
perform any of the agreements, terms, covenants or conditions of this Lease on
Tenant's part to be performed, (b) any accident, injury or damage that happens
in, about or outside the Premises caused by wilful or negligent act or omission
of Tenant, its agents, servants, or employees, or (c) Tenant's failure to comply
with any laws, ordinances, requirements, orders, directions, rules, or
regulations of any federal, state, county, or municipal governmental authority
or agreement of record affecting the Premises.
b. Notwithstanding anything herein to the contrary, and in addition to
any rights or remedies available at law or equity, Landlord shall defend,
indemnify, and hold harmless Tenant against and from all costs, expenses,
liabilities, losses, damages, injunctions, suits, actions, fines, penalties,
claims, and demands of every kind or nature, including reasonable counsel fees,
by or on behalf of any person, entity or governmental authority whatsoever
arising out of (a) any failure by Landlord to perform any of the agreements,
terms, covenants or conditions of this Lease on Landlord's part to be performed,
(b) any accident, injury or damage that happens in, about or outside the
Premises caused by the wilful or negligent act or omission of Landlord, its
agents, servants, or employees, or (c) Landlord's failure to comply with any
laws, ordinances, requirements, orders, directions, rules, or regulations of any
federal, state, county, or municipal governmental authority or agreement of
record affecting the Premises.
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<PAGE>
c. If the Premises or the Building, or any part thereof, is damaged by
fire or other cause against which Tenant is required to carry insurance pursuant
to this Lease, Landlord shall not be liable to Tenant for any loss, cost or
expense arising out of or in connection with such damage. Tenant hereby releases
Landlord, its directors, officers, shareholders, partners, employees, agents and
representatives, from any liability, claim or action arising out of or in
connection with such damage. Furthermore, Tenant shall, pursuant to Section 10,
maintain insurance against loss, injury, or damage which may be sustained by the
person, goods, wares, merchandise or property of Tenant, its agents,
contractors, employees, invitees or customers, or any other person in or about
the Premises, caused by or resulting from fire, steam, electricity, gas, water,
or rain, which may leak or flow from or into any part of the Premises or the
Building, or from the breakage, leakage, obstruction or other defects of the
pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting
fixtures of the same, whether such damage or injury results from conditions
arising within the Premises or other portions of the Building, or from other
sources, and Landlord shall not be liable therefor, unless caused by Landlord's
negligence or wrongful act, and in that event only to the extent not covered by
the insurance which Tenant is required to carry pursuant to this Lease. Landlord
shall not be liable to Tenant for any damages arising out of or in connection
with any act or omission of any other tenant in the Building or for losses due
to theft or burglary or other wrongful acts of third parties.
d. Tenant shall protect, indemnify and save Landlord harmless from and
against any and all liability, loss, damage, cost or expense that Landlord may
suffer or incur as a result of any claims, demands, damages, losses,
liabilities, costs, charges, suits, orders, judgments or adjudications asserted,
assessed, filed or entered against Landlord by any third party, including any
governmental authority, arising from the alleged deposit, storage, disposal,
burial, dumping, injecting, spilling, leaking or other use, placement or release
by Tenant, its employees, agents or contractors in, on or affecting the Premises
or any adjoining property owned by Landlord of a hazardous substance or
otherwise arising from any other alleged violation by Tenant, its employees,
agents or contractors, of any environmental law, including, but not limited to,
liability for costs and expenses of abatement, correction or clean-up, fines,
damages, response costs or penalties, or liability for personal injury or
property damage.
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e. Landlord has not used, generated, manufactured, produced, stored,
released, discharged or disposed of on, under or about the Land, any Hazardous
Substance or allowed any other person or entity to do so. Landlord has no
knowledge or reason to know that any Hazardous Substance has been produced,
stored, released, discharged or disposed of on, under or about the Land by any
entity, firm or person, or from any source whatsoever. To the best of Landlord's
knowledge, there is no asbestos or materials containing asbestos within the
Building.
f. Landlord shall protect, indemnify and save Tenant harmless from and
against any and all liability, loss, damage, cost or expense that Tenant may
suffer or incur as a result of any claims, demands, damages, losses,
liabilities, costs, charges, suits, orders, judgments or adjudications asserted,
assessed, filed or entered against Tenant by any third party, including any
governmental authority, arising from the alleged deposit, storage, disposal,
burial, dumping, injecting, spilling, leaking or other use, placement or release
by Landlord, its employees, agents or contractors in, on or affecting the
Premises or any adjoining property of a hazardous substance or otherwise arising
from any other alleged violation by Landlord, its employees, agents or
contractors, of any environmental law, including, but not limited to, liability
for costs and expenses of abatement, correction or clean-up, fines, damages,
response costs or penalties, or liability for personal injury or property
damage.
22. Curing Tenant's Defaults. If Tenant shall default in performing any
------------------------
of its obligations hereunder, Landlord may (but shall not be so obliged), in
addition to Landlord's other rights and remedies and without waiver of such
default, cure such default on behalf of Tenant (and, if deemed necessary by
Landlord, enter and possess the Premises), provided that Landlord shall have
first given Tenant written notice of such default and Tenant shall have failed
within ten (10) days following said notice to cure or diligently to pursue the
cure of said default (which notice and opportunity to cure shall not be required
in case of emergency). Tenant, upon demand of Landlord, shall reimburse Landlord
for all costs (including reasonable counsel fees) incurred by Landlord with
respect to Landlord's efforts to cure the same, which costs shall be deemed
Additional Rent hereunder.
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23. Default.
-------
a. If (i) Tenant fails to pay any installment of Fixed Rent when due,
(ii) Tenant falls to pay any Additional Rent when due and such failure continues
for a period of ten (10) days after notice from Landlord, (iii) Tenant vacates
the Premises, (iv) Tenant fails to observe or perform any of Tenant's other
obligations herein contained and such failure continues for more than fifteen
(15) days after notice from Landlord, (v) Tenant makes an assignment for the
benefit of creditors, (vi) Tenant commits an act of bankruptcy or files a
petition or commences any proceeding under any bankruptcy or insolvency law,
(vii) a petition is filed or any proceeding is commenced against Tenant under
any bankruptcy or insolvency law and is not dismissed within thirty (30) days,
(viii) Tenant is adjudicated a bankrupt, (ix) a receiver or other official is
appointed for Tenant or for a substantial part of Tenant's assets or for
Tenant's interest in this Lease, or (x) any attachment or execution is filed or
levied against a substantial part of Tenant's assets or Tenant's interests in
this Lease or any of Tenant's property in the Premises, then, in any such event,
an Event of Default shall be deemed to exist and Tenant shall be in default
hereunder, and, at the option of Landlord: (a) the balance of the Fixed Rent for
the remainder of the Term shall be deemed to be due, payable and in arrears, as
if payable in advance hereunder; or (b) this Lease and the Term shall, without
waiver of Landlord's other rights and remedies, terminate without any right of
Tenant to save the forfeiture. Any acceleration of the rent by Landlord shall
not constitute a wavier of any right or remedy of Landlord, and if Tenant shall
fail to pay the accelerated rent upon Landlord's demand, then Landlord may
thereafter terminate this Lease, as aforesaid. Immediately upon such termination
by Landlord, Landlord shall have the right to recover possession of the
Premises, removing Tenant's and any third party's property therefrom, and making
any disposition thereof as Landlord may deem commercially reasonable.
b. Following such termination, Landlord shall have the unrestricted
right to lease the Premises or any part thereof to any person and pursuant to
any terms as Landlord may elect, but Landlord shall have no obligations to rent
the Premises so long as Landlord (or any related entity) has other comparable
vacant space available for leasing in the general geographical areas of the
Premises.
c. No act or forbearance by Landlord shall be deemed a waiver or
election of any right or remedy by Landlord
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<PAGE>
with respect to Tenant's obligations hereunder, unless and to the extent that
Landlord shall execute and deliver to Tenant a written instrument to such
effect, and any such written waiver by Landlord shall not constitute a waiver or
relinquishment for the future of any obligation of Tenant. Landlord's acceptance
of any payment from Tenant (regardless of any endorsement on any check or any
writing accompanying such payment) may be applied by Landlord to Tenant's
obligations then due hereunder, in any priority as Landlord may elect, and such
acceptance by Landlord shall not operate as an accord and satisfaction or
constitute a waiver of any right or remedy of Landlord with regard to Tenant's
obligations hereunder.
d. FOR THE PURPOSE OF PROCURING POSSESSION OF THE PREMISES WHEN THE
TERM SHALL END BY EXPIRATION OR BY TERMINATION THEREOF ON ACCOUNT OF TENANT'S
DEFAULT, TENANT HEREBY AUTHORIZES AND EMPOWERS ANY ATTORNEY OF ANY COURT OF
RECORD IN THE COMMONWEALTH OF PENNSYLVANIA OR ELSEWHERE, AS ATTORNEY FOR TENANT
AND ALL PERSONS CLAIMING UNDER OR THROUGH TENANT, TO SIGN AN AGREEMENT FOR
ENTERING IN ANY COMPETENT COURT AN ACTION IN EJECTMENT FOR POSSESSION OF THE
PREMISES AND TO APPEAR FOR AND CONFESS JUDGMENT AGAINST TENANT, AND AGAINST ALL
PERSONS CLAIMING UNDER OR THROUGH TENANT, FOR THE RECOVERY BY LANDLORD OF
POSSESSION OF THE SAME, WITHOUT ANY STAY OF EXECUTION, FOR WHICH THIS LEASE, OR
A COPY THEREOF VERIFIED BY AFFIDAVIT, SHALL BE A SUFFICIENT WARRANT; AND
THEREUPON A WRIT OF POSSESSION MAY BE ISSUED FORTHWITH, WITHOUT ANY PRIOR WRIT
OR PROCEEDING WHATSOEVER. TENANT HEREBY RELEASES LANDLORD FROM ALL ERRORS AND
DEFECTS WHATSOEVER IN ENTERING SUCH ACTION AND JUDGMENT AND IN CAUSING SUCH WRIT
OR WRITS TO BE ISSUED, AND HEREBY AGREES THAT NO WRIT OF ERROR, APPEAL, PETITION
TO OPEN OR STRIKE OFF JUDGMENT, OR OTHER OBJECTION SHALL BE FILED OR MADE WITH
RESPECT THERETO. IF FOR ANY REASON AFTER SUCH ACTION HAS BEEN COMMENCED THE SAME
SHALL BE DISCONTINUED OR POSSESSION OF THE PREMISES SHALL REMAIN IN OR BE
RESTORED TO TENANT, LANDLORD SHALL HAVE THE RIGHT FOR THE SAME DEFAULT OR ANY
SUBSEQUENT DEFAULT TO BRING ONE OR MORE FURTHER ACTIONS AS ABOVE PROVIDED TO
RECOVER POSSESSION OF THE PREMISES.
e. TENANT, BEING FULLY AWARE OF THE RIGHT TO NOTICE AND A HEARING
CONCERNING THE VALIDITY OF ANY AND ALL CLAIMS THAT MAY BE ASSERTED AGAINST
TENANT BY LANDLORD BEFORE A JUDGMENT CAN BE ENTERED HEREUNDER, HEREBY WAIVES
THESE RIGHTS AND AGREES AND CONSENTS TO JUDGMENT BEING ENTERED BY CONFESSION IN
ACCORDANCE WITH THE TERMS HEREOF WITHOUT FIRST BEING GIVEN NOTICE AND THE
OPPORTUNITY TO BE HEARD ON THE VALIDITY OF THE CLAIM OR CLAIMS UPON WHICH SUCH
JUDGMENT IS ENTERED.
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f. In the event of the failure by Landlord, after thirty (30) days'
prior written notice thereof, to perform any of the provisions, covenants,
agreements or conditions of this Lease on its part to be performed, Tenant may,
in addition to any remedies available to it at law or in equity, perform the
same for and on behalf of Landlord, the cost of which performance, upon the
proper payment thereof, shall be paid to Tenant by Landlord upon demand.
24. Quiet Enjoyment. So long as Tenant is not in default under the
---------------
covenants and agreements of this Lease, Tenant's quiet and peaceful enjoyment of
the Premises shall not be disturbed or interfered with by Landlord or by any
person claiming by, through or under Landlord.
25. Assignment and Subletting. Tenant shall not assign, pledge,
-------------------------
mortgage or otherwise transfer or encumber this Lease, nor sublet all or any
part of the Premises or permit the same to be occupied or used by anyone other
than Tenant or its employees without Landlord's prior written approval, which
approval shall not be unreasonably withheld. Without limiting the other
instances in which it may be reasonable for Landlord to withhold Landlord's
consent to an assignment or subletting. Landlord and Tenant acknowledge that it
shall be reasonable for Landlord to withhold Landlord's consent in the following
instances: The use of the Premises by such proposed assignee or subtenant would
not be a permitted use or would increase the parking requirements of the
Building beyond the existing (built or buildable) capacity of the Land; as a
separate lot; the proposed assignee or subtenant is not of sound financial
condition; the proposed assignee or subtenant does not have a good reputation as
a tenant of property; the assignment or subletting would entail any alterations
which would lessen the value of the leasehold improvements in the Premises; if
Landlord deems the business of the proposed assignee or subtenant not to be
consonant with that of other tenants in the Building, or if the intended use by
the proposed assignee or subtenant conflicts with any commitment made by
Landlord to any other tenant in the Building. Anything contained herein to the
contrary notwithstanding, Tenant may assign this Lease or sublet the Premises or
any portion thereof, without Landlord's consent, to any corporation which
controls, is controlled by or is under common control with Tenant, or to any
corporation resulting from a merger or consolidation with Tenant, or to any
person or entity which acquires all the assets of Tenant's business as a going
concern (collectively, an "Affiliate"), provided that (i) the assignee or
sublessee assumes, in full, the obligations of Tenant
-33-
<PAGE>
under this Lease, (ii) Tenant remains fully liable under this Lease, and (iii)
the use of the Premises remains unchanged.
Tenant's request for approval shall be in writing and contain the name,
address, and description of the business of the proposed assignee or subtenant,
its most recent financial statement and other evidence of financial
responsibility, its intended use of the Premises, and the terms and conditions
of the proposed assignment or subletting.
Within thirty (30) days from receipt of such request Landlord shall either:
(a) grant or refuse consent; or (b) elect to require Tenant (i) to execute an
assignment of lease or sublease of Tenant's interest hereunder to Landlord or
its designee upon the same terms and conditions as are contained herein,
together with an assignment of Tenant's interest as sublessor in any such
proposed sublease, or (ii) if the request is for consent to a proposed
assignment of this Lease, to terminate this Lease and the term hereof effective
as of the last day of the third month following the month in which the request
was received.
Each assignee or sublessee of Tenant's interest hereunder shall assume and
be deemed to have assumed this Lease and shall be and remain liable jointly and
severally with Tenant for all payments and for the due performance of all terms,
covenants, conditions and provisions herein contained on Tenant's part to be
observed and performed. No assignment shall be binding upon Landlord unless the
assignee shall deliver to Landlord an instrument in recordable form containing a
covenant of assumption by the assignee, but the failure or refusal of an
assignee to execute the same shall not release assignee from its liability as
set forth herein.
Any assignment or subletting of more than 50% of the combined Premises
except to an Affiliate shall terminate any right in Tenant (as may otherwise be
provided for herein) to renew or extend the Term of this Lease or any right of
expansion to new or additional space or any right of first refusal or first
offer with respect to additional space, and shall likewise terminate and render
void and of no effect any prior exercise of any of the rights enumerated above
(except and only to the extent that a renewal term is then in effect).
Any consent by Landlord hereunder shall not constitute a waiver of strict
future compliance by Tenant of the provisions of this Section 25 or a release of
Tenant from the full
-34-
<PAGE>
performance by Tenant of any of the terms, covenants, provisions, or conditions
in this Lease contained.
26. Subordination.
-------------
a. This Lease is and shall be subject and subordinate at all times to
any lease under which Landlord is in control of the Premises, to the rights of
the owners of the Building and Land, to all mortgages and other encumbrances now
or hereafter placed upon the Premises or the Building and to any and all
amendments to or modifications of any such lease, ownership right or mortgage,
without the necessity of any further instrument or act on the part of Tenant to
effectuate such subordination. Tenant shall from time to time execute and
deliver within ten (10) days following the request of Landlord and Landlord's
mortgagee, grantee or lessor, recordable instruments evidencing such
subordination and Tenants' agreement to attorn to the holder of such prior
right. Notwithstanding the foregoing, any mortgagee may at any time subordinate
its mortgage to this Lease, without Tenant's consent, by notice in writing to
Tenant, whereupon this Lease shall be deemed prior to such mortgage without
regard to their respective dates. Landlord shall, as an express condition to
Tenant's agreement to subordinate this Lease to any mortgage or other
encumbrance now or hereafter placed upon the Premises, obtain a non-disturbance
agreement from the holder of such mortgage or other encumbrance now or hereafter
placed upon the Premises providing that the holder of such mortgage or other
encumbrances shall not disturb Tenant's possession under this Lease in the event
of foreclosure, transfer in lieu thereof, and other enforcement proceedings,
provided that Tenant shall not be in default hereunder. Any such agreement shall
be prepared or such holder's standard form and may require Tenant to confirm the
subordination of this Lease and to agree to attorn to the holder of such
mortgage or other encumbrance.
b. If any successor in interest, including but not limited to, a
lessor of a superior lease or the holder, now or hereafter, of a superior
mortgages shall succeed to Landlord's estate in the Building or the rights of
Landlord under this Lease, whether through purchase, operation of law,
possession or foreclosure action or delivery of a new lease or deed or
otherwise, then at the election of such party so succeeding to Landlord's rights
(herein sometimes called "Successor Landlord"), Tenant shall attorn to and
recognize such Successor Landlord as Tenant's landlord under this Lease and
shall promptly execute, acknowledge and deliver any instrument that such
successor
-35-
<PAGE>
Landlord may reasonably request to evidence such attornment, provided only that
such Successor Landlord agrees not to disturb Tenant's possession under the
Lease so long as Tenant in not in default hereunder, Tenant hereby irrevocably
appoints such Successor Landlord as Tenant's attorney-in-fact to execute and
deliver such instrument for and on behalf of Tenant, such appointment being
coupled with an interest. To the extent permitted by law, Tenant hereby waives
any right Tenant may have under any present or future law to terminate this
Lease or surrender the Premises by reason of the institution of any proceeding
to terminate a superior lease or action to foreclose a superior mortgage, and
this Lease shall not be affected by any such proceeding or action unless and
until the lessor of the superior lease or holder, now and hereafter, of the
superior mortgage, elects in such proceeding or action to permit the termination
of this Lease by the Tenant.
27. Tenant's Certificates. Tenant shall from time to time, within five
---------------------
(5) days after Landlord's request, execute and deliver to Landlord a recordable
written instruments certifying that this Lease is unmodified and in full effect
(or if there have been modifications, that it is in effect as modified), the
dates to which rental charges have been prepaid by Tenant, if any, whether or
not Landlord is in default of any of its obligations hereunder, and covering
such other matters as Landlord may reasonably request. Tenant agrees that such
statement may be relied upon by any mortgagee, purchaser or assignee of
Landlord's interest in this lease or the Premises. Upon Landlord's written
request from time to time, but not more than twice during any Lease Year, Tenant
shall promptly furnish Landlord financial statements evidencing Tenant's (and/or
its Guarantor, if any) then current financial condition.
28. Acceptance; Surrender. By entry and possession of the Premises,
---------------------
Tenant thereby acknowledges that Tenant has examined the Premises and accepts
the same as being in the condition called for by this Lease. Tenant shall, at
the end of the Term, promptly surrender the Premises in good order and condition
and in conformity with the applicable provisions of this Lease, excepting only
reasonable wear and tear and damage by fire or other insured casualty.
29. Antenna(s) Installation. Should Tenant wish to install an antenna(s),
-----------------------
satellite dish and associated equipment (collectively, an "antenna") on property
belonging to Landlord, including on the roof of the Building, Landlord agrees
that said property may be used for such purposes at no additional cost to
-36-
<PAGE>
Tenant, subject to such reasonable approvals, rules and regulations as Landlord
may adopt. Landlord grants Tenant the right in common with Landlord and other
tenants, subject to the following provisions of this Section, to install,
operate and maintain, at Tenant's expense and risk, a lawfully permitted
antenna(s) and associated equipment (the "Antenna Premises"):
(a) Tenant shall submit, at Tenant's expense, a full set of engineering
plans and specifications of the proposed antenna(s) installation to Landlord for
approval, such approval not to be unreasonably withheld, conditioned or delayed;
(b) Tenant shall make all connections by conduit or cable as required
between Tenant's equipment in the Premises and the Antenna Premises utilizing
Building services, subject to Tenant's payment for reasonable costs of such
services, as necessary to effect the operation of the antenna(s). Said
connections shall be approved by Landlord, which approval shall not be
unreasonably withheld, conditioned or delayed;
(c) Any antenna(s) installed by Tenant shall be erected and operated so as
not to interfere with the operation of any previously erected antenna(s).
Tenant agrees to remedy at Tenant's expense any interference with other tenants
or third parties caused by the operation of Tenant's antenna(s), and Tenant
agrees to indemnify and hold harmless Landlord from all liability and claims,
including, without limitation, court costs, attorneys' fees and costs of
investigation, related to or arising from the operation and/or maintenance of
Tenant's antenna(s);
(d) Tenant or Tenant's representatives shall, at all reasonable times, have
the unrestricted right to enter or leave the Antenna Premises where the
antenna(s) and equipment are located;
(e) Landlord agrees that it will not give unauthorized persons access to
Tenant's Antenna Premises or equipment;
(f) Tenant shall obtain all necessary municipal, state and federal permits
and authorizations required to install, maintain and operate an antenna(s) and
associated equipment and pay any charges levied by government agencies annually
or otherwise which are the sole result of Tenant's having an antenna(s);
(g) Tenant agrees to maintain the Antenna Premises and associated equipment
in a good state of repair, to save Landlord
-37-
<PAGE>
harmless from any loss, costs or damages as a result of the erection, operation,
maintenance, existence or removal of said antenna(s);
(h) At the conclusion of the Term, unless Landlord permits otherwise,
Tenant shall remove the antenna(s) and surrender and restore the Antenna
Premises to Landlord in as good order and same condition as when received;
(i) The liability insurance to be carried by Tenant pursuant to the
provisions of this Lease shall include coverage for the activity of Tenant on
the Antenna Premises. Tenant shall pay any increase in rates for insurance
which Landlord is required to carry under the Lease because of the installation
and use of the antenna(s) by Tenant; and
(j) Any notice or demand required or permitted to be given hereunder shall
be made in accordance with the terms of this Lease.
30. Holding Over. This Lease shall expire absolutely and without notice
------------
an the last day of the Term, provided that if Tenant, with the prior written
consent of Landlord, retains possession of the Premises or any part thereof
after the termination of this Lease by expiration of the Term or otherwise, a
month-to-month tenancy shall be deemed to exist, and Tenant shall continue to
pay the Fixed Rent and Additional Rent due hereunder. If such holding over
exists without Landlord's prior written consent, Tenant shall pay Landlord, as
partial compensation for such unlawful retention, an amount calculated on a per
diem basis for each day of such continued unlawful retention, equal to 150% of
the Base Rent for the time Tenant thus remains in possession. Such payments for
unlawful retention shall not limit any rights or remedies of Landlord resulting
by reason of the wrongful holding over by Tenant or create any right in Tenant
to continue in possession of the Premises.
31. Notices. All notices, requests and consents herein required or
-------
permitted from either party to the other shall be in writing and shall be sent
by personal delivery, nationally-recognized courier guaranteeing overnight
delivery, facsimile (with receipt confirmed) or by mailing the same by
registered or certified mail, postage prepaid, return receipt requested,
addressed to Landlord at its address aforesaid, with a copy to any mortgagee
designated by Landlord, or, as the case may be, addressed to Tenant at its
address aforesaid, or to such other address as the party to receive same may
designate by notice to
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<PAGE>
the other. All such notices, requests and other communications shall be deemed
to have been sufficiently given for all purposes on the date of personal
delivery, upon confirmation of receipt of facsimile, on the day after the date
of deposit with a courier guaranteeing overnight delivery, or if deposited in
the United
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<PAGE>
States mail, the date when the notice is either received or rejected by the
addressee.
32. Broker. Tenant represents and warrants to Landlord that all of
------
Tenant's dealings in regard to the Premises have been solely with The Nichols
Company and Julien J. Studley, Inc. ("Studley") that no other broker, agent or
party has shown the Premises to Tenant or negotiated with Tenant in regard
thereto. Landlord shall be responsible for the payment of any commission due and
owing to Studley.
33. Definition of Parties. The word "Landlord" is used herein to include
---------------------
the Landlord named above and any subsequent person who succeeds to the rights of
Landlord herein, each of whom shall have the same rights and remedies as he
would have had had he originally signed this Lease as Landlord, and in all
events, Tenant shall look solely to the landlord's interest in the Land and
Building and rents derived therefrom for enforcement of any obligation hereunder
or by law assumed or enforceable against Landlord or such other person,
provided, however, that neither Landlord nor any successor to Landlord shall
have any liability hereunder after he ceases to hold a fee or leasehold interest
in the Premises, except for obligations which may have theretofore accrued. The
word "Tenant" is used herein to include the party named above as Tenant as well
as its or their respective heirs, personal representatives, successors and
assigns, each of whom shall be under the same obligations, liabilities and
disabilities and have only such rights, privileges and powers as he would have
possessed had he originally signed this Lease as Tenant.
34. Landlord's Waiver. So long as Tenant is not in default hereunder,
-----------------
Landlord agrees to execute landlord's waivers in form and content reasonably
satisfactory to Landlord in conjunction with the financing of Tenant's fixtures,
inventory and equipment.
35. Right of First Offer. Horsham Valley, Inc. ("Horsham Valley"), the
--------------------
owner of an adjoining parcel containing approximately 6.763 acres less
approximately three acres required by Landlord to construct an office building
for the tenant presently occupying Premises "B" (the "Parcel"), has agreed to
grant Tenant a right of first offer upon the sale or lease of the Parcel. In the
event Horsham Valley desires to sell the Parcel, Horsham Valley shall so notify
Tenant of its intent to sell the Parcel. If Tenant notifies Horsham Valley
within five (5) days after receipt of such notice of Tenant's desire to purchase
the Parcel, Horsham Valley and Tenant shall thereafter negotiate in
-40-
<PAGE>
good faith the terms and conditions upon which Horsham Valley is willing to sell
the Parcel to Tenant and Tenant is willing to purchase the Parcel from Horsham
Valley. In the event the parties are unable to enter into a mutually-
satisfactory Agreement of Sale within sixty (60) days after Tenant's notice to
Horsham Valley or in the event Tenant fails to notify Horsham Valley of its
interest in purchasing the parcel within five (5) days after receipt of Horsham
Valley's notice of its intent to sell, then Horsham Valley shall be free to sell
Parcel to any other purchaser. In addition, in the event Horhsam Valley desires
to construct an office building for lease to third parties on the Parcel,
Horsham Valley shall so notify Tenant. Tenant shall have five (5) days after
receipt of such notice to advise Horsham Valley of its desire to enter into a
lease for a build-to-suit office building to be constructed by Horsham Valley on
the Parcel. Horsham Valley and Tenant shall thereafter negotiate in good faith
the lease of the building to be constructed by Horsham Valley on the Parcel. In
the event the parties are unable to enter into a mutually-satisfactory lease
within sixty (60) days after Tenant's notice to Horsham Valley or in the event
Tenant fails to notify Horsham Valley of its interest in leasing the building
within five (5) days after receipt of Horsham Valley's notice of its intent to
build an office building, then Horsham Valley shall be free to lease the
building to any other tenant or tenants.
36. Entire Agreement; Interpretation. This Lease constitutes the entire
--------------------------------
agreement between the parties hereto with respect to the Premises and there are
no other agreements or understandings. This Lease shall not be modified except
by written instrument executed by both parties. The captions used herein are
for convenience only, and are not part of the Lease.
-41-
<PAGE>
This Lease shall be construed in accordance with the laws of the Commonwealth of
Pennsylvania.
IN WITNESS WHEREOF, the parties hereto have executed this Lease, under
seal, as of the day and year first above written.
LANDLORD:
C/N HORSHAM TOWNE LIMITED
PARTNERSHIP, acting by and
through its General Partner,
WITNESS: C/N HORSHAM TOWNE, INC.
__________________________ By:______________________________
Anthony A. Nichols - President
TENANT:
WITNESS: ASTEA INTERNATIONAL, INC.
__________________________ By:______________________________
Len VonVital - Vice President
and Chief Financial Officer
Exhibit "A" Description of Premises "A" and Premises "B"
Exhibit "B" Premises "A" Space Plan
Exhibit "C" Premises "B" Space Plan
Exhibits "D-1"
and "D-2" Plans of Expansion Areas
Exhibits "E-1"
and "E-2 Cleaning Specifications
Exhibit "F" Rules and Regulations
-42-
<PAGE>
EXHIBIT "C"
-----------
Premises "B" Plans and Specifications
To be attached to the Lease at least six (6) months prior to Tenant's
occupancy of Premises "B".
-43-
<PAGE>
HORSHAM VALLEY, INC, the owner of the Parcel described in Section 35 above,
hereby joins in this Agreement for the sole purpose of evidencing its consent to
the terms and conditions of Section 35.
HORSHAM VALLEY, INC.
By:______________________________
C.W. Schrenk - President
(Corporate Seal) Attest:__________________________
Frank Kelly - Secretary
-44-
<PAGE>
EXHIBIT 11.1
Computation of Pro Forma Net Income (Loss) Per Common Share
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Years Ended
December 31,
-----------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Pro forma net income (loss) $ (19,238) $ 5,178 $ 1,783
-----------------------------------
Weighted average number of
common equivalent shares
Common stock 12,844 10,514 9,100
-----------------------------------
Dilutive effect of stock options - 970 439
-----------------------------------
Pro forma weighted average
shares outstanding 12,844 11,484 9,539
-----------------------------------
Pro forma net income (loss)
per share $ (1.50) $ 0.45 $ 0.19
===================================
</TABLE>
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Company Name Jurisdiction of Organization
- ------------ ----------------------------
Abalon AB Sweden
Astea FSC Barbados
Astea GmbH Germany
Astea Israel Ltd. Israel
Astea Ltd. England
Astea Sarl France
Astea Service and Distribution Systems B.V. Netherlands
Bebalon AB Sweden
Bendata, Inc. Colorado
Bendata (UK) Limited LLC Colorado
Group Technologies, Inc. Delaware
Network Data, Inc. Delaware
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Astea International Inc.:
As independent public accountants, we hereby consent to the incorporation of our
report, included in this Form 10-K, into the Company's previously filed Form S-8
Registration Statement File No. 33-97064 and Form S-3 Registration Statement
File Nos. 333-11949 and 333-17459.
Arthur Andersen LLP
Philadelphia, Pa.,
March 27, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 3,334,000 4,021,000
<SECURITIES> 8,994,000 30,822,000
<RECEIVABLES> 25,868,000 22,940,000
<ALLOWANCES> 1,681,000 1,380,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 42,179,000 59,514,000
<PP&E> 13,052,000 8,815,000
<DEPRECIATION> 4,935,000 2,993,000
<TOTAL-ASSETS> 57,691,000 69,370,000
<CURRENT-LIABILITIES> 21,419,000 18,782,000
<BONDS> 0 0
0 0
0 0
<COMMON> 131,000 124,000
<OTHER-SE> 32,089,000 48,299,000
<TOTAL-LIABILITY-AND-EQUITY> 57,691,000 69,370,000
<SALES> 28,857,000 29,904,000
<TOTAL-REVENUES> 62,708,000 53,966,000
<CGS> 3,982,000 3,880,000
<TOTAL-COSTS> 27,459,000 20,078,000
<OTHER-EXPENSES> 56,876,000 24,297,000
<LOSS-PROVISION> 264,000 1,140,000
<INTEREST-EXPENSE> (571,000) (179,000)
<INCOME-PRETAX> (21,320,000) 8,630,000
<INCOME-TAX> (1,613,000) 1,883,000
<INCOME-CONTINUING> (19,707,000) 6,747,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (19,707,000) 6,747,000
<EPS-PRIMARY> (1.50) .45
<EPS-DILUTED> 0 0
</TABLE>
