<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------------------
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1998
-------------------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934.
For the transition period from to
------ ------
Commission File Number: 0-26330
-------
ASTEA INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
DELAWARE 23-2119058
- --------------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
455 BUSINESS CENTER DRIVE, HORSHAM, PA 19044
--------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 682-2500
---------------
N/A
---
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of November 13, 1998, 13,540,201 shares of the registrant's Common Stock, par
value $.01 per share, were outstanding.
<PAGE>
ASTEA INTERNATIONAL INC.
FORM 10-Q
QUARTERLY REPORT
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Facing Sheet 1
Index 2
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets (Unaudited) 3
Consolidated Statements of Operations (Unaudited) 4
Consolidated Statements of Cash Flows (Unaudited) 5
Notes to Unaudited Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
Condition and Results of Operations 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 14
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS 14
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
ITEM 5. OTHER INFORMATION 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16
EXHIBIT 27 FINANCIAL DATA SCHEDULE 17
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
ASTEA INTERNATIONAL INC.
-------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
1998 1997
---------------------- ----------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $16,079,000 $ 6,396,000
Investments available for sale 16,441,000 1,359,000
Notes receivable 8,400,000 -
Receivables, net of reserves of $1,099,000 and $1,348,000 10,151,000 12,691,000
Prepaid expenses and other 2,248,000 2,046,000
Deferred income taxes 75,000 394,000
-----------------------------------------------
Total current assets 53,394,000 22,886,000
Property and equipment, net 1,965,000 2,547,000
Net assets of discontinued operations - 4,334,000
Capitalized software development costs, net 3,578,000 3,556,000
Goodwill, net 725,000 1,103,000
-----------------------------------------------
Total assets $59,662,000 $ 34,426,000
===============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 906,000 $ 914,000
Current portion of long-term debt 663,000 1,052,000
Accounts payable and accrued expenses 8,906,000 11,369,000
Income taxes payable 2,211,000 -
Deferred revenues 4,876,000 4,932,000
-----------------------------------------------
Total current liabilities 17,562,000 18,267,000
Deferred income taxes 1,253,000 1,253,000
Long-term debt 973,000 1,477,000
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued - -
Common stock, $.01 par value, 25,000,000 shares
authorized, 13,537,000 and 13,361,000 issued and
outstanding 135,000 134,000
Additional paid-in capital 49,756,000 49,585,000
Deferred compensation (42,000) (43,000)
Cumulative currency translation adjustment (932,000) (745,000)
Accumulated deficit (9,043,000) (35,502,000)
-----------------------------------------------
Total stockholders' equity 39,874,000 13,429,000
-----------------------------------------------
Total liabilities and stockholders' equity $59,662,000 $ 34,426,000
===============================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
3
<PAGE>
ASTEA INTERNATIONAL INC.
------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------------- --------------------------
1998 1997 1998 1997
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues:
Software license fees $ 1,709,000 $ 3,694,000 $ 5,526,000 $ 8,645,000
Services and maintenance 7,228,000 6,835,000 20,456,000 20,979,000
-------------------------------------------------------
Total revenues 8,937,000 10,529,000 25,982,000 29,624,000
-------------------------------------------------------
Costs and expenses:
Cost of software license fees 648,000 818,000 1,695,000 2,449,000
(Note 3)
Cost of services and maintenance 5,667,000 4,288,000 15,923,000 15,023,000
Product development 2,005,000 2,240,000 5,066,000 7,138,000
Sales and marketing 2,700,000 2,569,000 7,937,000 8,903,000
General and administrative
(Notes 3 and 4) 1,490,000 1,121,000 4,777,000 10,619,000
Restructuring charge (Note 3) - - (800,000) 5,328,000
-------------------------------------------------------
Total costs and expenses 12,510,000 11,036,000 34,598,000 49,460,000
-------------------------------------------------------
Loss from continuing operations before (3,573,000) (507,000) (8,616,000) (19,836,000)
interest and taxes
Net interest income (expense) 58,000 (17,000) 64,000 (106,000)
-------------------------------------------------------
Loss from continuing operations before (3,515,000) (524,000) (8,552,000) (19,942,000)
income tax
Income tax benefit - (190,000) (432,000) (659,000)
-------------------------------------------------------
Loss from continuing operations (3,515,000) (334,000) (8,120,000) (19,283,000)
Gain on disposal of discontinued 33,902,000 - 33,902,000 -
operations, net of income taxes
Income from discontinued operations - 281,000 677,000 677,000
-------------------------------------------------------
Net income (loss) $30,387,000 $ (53,000) $26,459,000 $(18,606,000)
=======================================================
Basic and diluted net income (loss) per
share: $ (0.26) $ (0.02) $ (0.60) $ (1.46)
Continuing operations
Discontinued operations $ 2.51 $ 0.02 $ 2.57 $ 0.05
-------------------------------------------------------
Net income (loss) $ 2.25 $ - $ 1.97 $ (1.41)
=======================================================
Share outstanding used in computing basic 13,535,000 13,234,000 13,457,000 13,215,000
and diluted net income (loss) per share
=======================================================
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
ASTEA INTERNATIONAL INC.
------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------------------------
1998 1997
-----------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 26,459,000 $(18,606,000)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Income from discontinued operations (677,000) (677,000)
Gain on disposal of business (33,902,000) -
Depreciation and amortization 2,286,000 2,233,000
Goodwill write-down - 2,058,000
Expense related to stock, stock options and debt issued in dispute
Settlements - 1,522,000
Write-off of capitalized software - 453,000
Other (433,000) 11,000
Changes in operating assets and liabilities:
Receivables 2,579,000 6,430,000
Prepaid expenses and other (208,000) 60,000
Restructuring charge, net (1,474,000) 3,217,000
Income tax refund receivable - 1,516,000
Accounts payable and accrued expenses (1,640,000) 1,276,000
Deferred revenues (61,000) (310,000)
Deferred income taxes 319,000 180,000
-----------------------------------------
Net cash used in operating activities of continuing operations (6,752,000) (637,000)
Net cash provided by (used in) discontinued operations (510,000) 247,000
-----------------------------------------
Net cash used in operating activities (7,262,000) (390,000)
-----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales (purchases) of investments available for sale (15,082,000) 4,806,000
Purchases of property and equipment (661,000) (352,000)
Capitalized software development costs (600,000) (600,000)
Proceeds from disposition of business 34,078,000 -
----------------------------------------
Net cash provided by investing activities 17,735,000 3,854,000
----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments on line of credit (8,000) (635,000)
Proceeds from exercise of stock options and employee stock purchase 136,000 180,000
plan
Net repayments of long-term debt (892,000) (573,000)
-----------------------------------------
Net cash used in financing activities (764,000) (1,028,000)
-----------------------------------------
Effect of exchange rate changes on cash and cash equivalents (26,000) 21,000
-----------------------------------------
Net increase in cash and cash equivalents 9,683,000 2,457,000
Cash and cash equivalents balance, beginning of period 6,396,000 2,187,000
-----------------------------------------
Cash and cash equivalents balance, end of period $ 16,079,000 $ 4,644,000
=========================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
5
<PAGE>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------
ASTEA INTERNATIONAL INC.
------------------------
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
1. BASIS OF PRESENTATION
---------------------
The consolidated financial statements at September 30, 1998 and for the three
and nine month periods ended September 30, 1998 and 1997 of Astea International
Inc. and subsidiaries (the "Company") are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial position and
operating results for the interim periods. The consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto, together with Management's Discussion and Analysis
of Financial Condition and Results of Operations, contained in the Company's
1997 Annual Report on Form 10-K which are hereby incorporated by reference in
this quarterly report on Form 10-Q.
2. SALE OF BENDATA
---------------
On September 4, 1998, Astea completed the sale of the capital stock of its
subsidiary, Bendata, which was accounted for as if it were effective on July 1,
1998. The financial statements reflect as discontinued operations for all
periods presented that subsidiary's net assets and operating results, as well as
the related transaction gain, separate from continuing operations. Related
footnotes and management's discussion and analysis have been restated to reflect
only continuing operations.
In consideration for the sale of Bendata, Astea received (a) $35 million in cash
and (b) a promissory note in the principal amount of $7.5 million, payable on
September 4, 1999, bearing interest at 4.89% per annum, secured by an
irrevocable letter of credit. In addition, Astea will receive a secured
promissory note, payable on September 4, 1999, in the principal amount of
approximately $900,000 subject to certain post-closing adjustments that have not
yet been calculated related to taxes. Net proceeds will be approximately $42.1
million and resulted in a gain of $33.9 million, including $2.5 million of
estimated taxes. The proceeds will be used to purchase temporary investments,
pay down debt, fund working capital for product development activities and
general operations, and to purchase property and equipment.
Income from discontinued operations in the accompanying consolidated statements
of operations was:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenues: $ - $4,888,000 $11,124,000 $14,144,000
========================================================================
Income before income taxes - 471,000 1,109,000 1,336,000
Income taxes - 190,000 432,000 659,000
------------------------------------------------------------------------
Net income $ - $ 281,000 $ 677,000 $ 677,000
========================================================================
</TABLE>
6
<PAGE>
The assets and liabilities of Bendata have been reclassified in the accompanying
balance sheets to separately identify them as net assets of discontinued
operations. A summary of these net assets of discontinued operations is as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
1998 1997
--------------------- ----------------------
<S> <C> <C>
Current assets, excluding accounts receivable $ - $ 4,892,000
Accounts receivables - 5,378,000
Property and equipment, net - 1,411,000
Current liabilities - (7,089,000)
Long-term liabilities - (258,000)
----------------------------------------------
Net assets of discontinued operations $ - $ 4,334,000
==============================================
</TABLE>
3. RESTRUCTURING AND OTHER CHARGES
-------------------------------
During the first quarter of 1997, the Company recorded a restructuring charge of
$5,328,000 for actions aimed at reducing costs and consolidating its development
activities primarily in its service automation product line. Since the
restructuring was announced, the Company aggressively continued to close and
consolidate excess capacity. Through September 1998, these payments totaled
$4,134,000, including severance of $1,356,000, office-closing costs and
unutilized lease expense of $2,304,000 and other consolidation costs of
$474,000. During the second quarter of 1998, the Company based upon current
facts, evaluated its restructuring accrual and determined that $800,000 was not
needed and, accordingly, the accrual was adjusted. This excess related to lower
than expected office closing costs.
As of September 30, 1998, the balance of the accrued restructuring charge of
$394,000 is required for real and personal property leases and severance
commitments payable through June 1999.
As a result of the restructuring, during the first quarter of 1997, the Company
recorded a goodwill impairment charge of $2,058,000, which is included in
general and administrative expense. This charge related to the 1995 acquisition
of Astea Service and Distribution System BV ("Astea BV"), which experienced a
deterioration in its operations. In 1997, as a result of the restructuring of
its operation, the Company closed certain locations which were part of Astea BV.
Included in cost of software license fees in the first quarter of 1997 is a
write-off of $453,000 of capitalized software development costs related to one
of the Company's support automation products, PowerHelp, and to older versions
of certain service automation modules which are no longer marketed by the
Company.
4. CHARGES FOR CONTINGENCIES
-------------------------
Included in the first quarter of 1997 general and administrative expense are
charges for contingencies of $3,073,000. These charges include a reserve for
failure to deliver a commercial release of a software product under beta
development, a settlement of a dispute in cash, note payable and stock options
with a stockholder and other legal contingencies.
7
<PAGE>
5. STOCKHOLDERS' EQUITY/COMPREHENSIVE INCOME (LOSS)
------------------------------------------------
The reconciliation of Stockholders' Equity and comprehensive loss from December
31, 1997 to September 30, 1998 is summarized as follows:
<TABLE>
<CAPTION>
CUMULATIVE
ADDITIONAL CURRENCY
COMMON PAID-IN DEFERRED TRANSLATION ACCUMULATED COMPREHENSIVE
STOCK CAPITAL COMPENSATION ADJUSTMENT DEFICIT INCOME (LOSS)
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, $134,000 $49,585,000 $(43,000) $(745,000) $(35,502,000)
1997
Grant of stock options
below fair market value - 38,000 (38,000) - -
Amortization of deferred
compensation - - 39,000 - -
Exercise of options 1,000 133,000 - - -
Cumulative currency
translation adjustment - - - (187,000) - (187,000)
Net Income - - - - 26,459,000 26,459,000
-----------------------------------------------------------------------------------
Balance at September $135,000 $49,756,000 $(42,000) $(932,000) $ (9,043,000) $26,272,000
30, 1998
=====================================================================================
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------- -----------------------------------------------------------------
RESULTS OF OPERATIONS
----------------------
Overview
- --------
This document contains various forward-looking statements and information that
are based on management's beliefs as well as assumptions made by and information
currently available to management. Such statements are subject to various risks
and uncertainties, which could cause actual results to vary materially from
those contained in such forward-looking statements. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, estimated,
expected or projected. Certain of these, as well as other risks and
uncertainties, are described in more detail herein and in the Company's Annual
Report on Form 10-K for 1997 and Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998.
The Company develops, licenses, implements and supports a suite of client/server
and host-based applications for the Customer Management Solutions (CMS) software
market that permit organizations of various sizes across a wide range of
industries to automate field service, customer support and sales and marketing
functions. The Company maintains operations in the United States, Australia,
New Zealand, the Netherlands, France, the United Kingdom, Sweden and Israel.
Results of Operations
- ---------------------
Comparison of Three Months Ended September 30, 1998 and 1997
- ------------------------------------------------------------
Revenues
- --------
Continuing Operations
- ---------------------
Revenues decreased $1,592,000, or 15%, to $8,937,000 for the three months ended
September 30, 1998 from $10,529,000 for the three months ended September 30,
1997. Software license fee revenues decreased $1,985,000, or 54%, from the same
period last year. Services and maintenance fees for the three months ended
September 30, 1998 amounted to $7,228,000, a 6% increase from the same quarter
in 1997.
8
<PAGE>
The Company's international operations contributed $4,248,000 of revenues in the
third quarter of 1998 compared to $4,153,000 in the third quarter of 1997. This
represents a 2% increase from the same period last year and 48% of total
revenues in the third quarter 1998.
Software license fee revenues decreased 54% to $1,709,000 in the third quarter
of 1998 from $3,694,000 in the third quarter of 1997. The decrease primarily
relates to DISPATCH-1 sales, within the Service Automation product line, which
decreased $2,050,000 or 83% from $2,457,000 in the third quarter of 1997 to
$407,000 in the third quarter of 1998 due to decreasing demand for this product.
DISPATCH-1 accounted for only 24% of total software license fee revenues in the
third quarter of 1998 compared to 67% of total license fee revenues in the third
quarter of 1997. ServiceAlliance, within the Service Automation product line,
license revenues increased $186,000, to $436,000 in the third quarter of 1998
from $250,000 in the third quarter of 1997. License fees from the Sales
Automation (Abalon) product line increased $31,000 or 5% to $685,000 from
$654,000 in the third quarter of 1997. After the sale of Bendata, the support
automation product line consists of HEAT revenue sold through the Australian
branch until September 30, 1998 and royalties received on PowerHelp, which is
sold through a distributor. Effective October 1, 1998, the Australian branch
will no longer sell HEAT. During the third quarter of 1998 total support
automation license fee revenues were $181,000 compared to $333,000 in the third
quarter of 1997.
Services and maintenance revenues increased 6% to $7,228,000 in the third
quarter of 1998 from $6,835,000 in the third quarter of 1997. The increase in
services and maintenance revenues is primarily attributable to the Sales
Automation and Service Automation product lines partially offset by a decrease
in the Support Automation product line. The Sales Automation product line
(Abalon) service and maintenance revenues increased $149,000 to $1,182,000, from
$1,033,000 in the third quarter of 1997 or 14%. The Service Automation product
line (DISPATCH-1 and ServiceAlliance) increased 5% to $5,921,000 in the third
quarter of 1998 from $5,625,000 in the third quarter of 1997. The Support
Automation product line, HEAT and PowerHelp, contributed services and
maintenance revenues of $125,000, a 29% decrease over the same quarter in the
prior year.
In the third quarter of 1998 and 1997, none of the Company's customers accounted
for more than 10% of total revenues.
Costs of Revenues
- -----------------
Cost of software license fees decreased 21% to $648,000 in the third quarter of
1998 from $818,000 in the third quarter of 1997. The software licenses gross
margin percentage was 62% in the third quarter of 1998 compared to 78% in the
third quarter of 1997. This decrease in gross margin was attributable to the
combination of lower software license fee revenues and fixed costs of
capitalized software amortization.
Cost of services and maintenance increased 32% to $5,667,000 in the third
quarter of 1998 from $4,288,000 in the third quarter of 1997. The services and
maintenance gross margin percentage was 22% in the third quarter of 1998
compared to 37% in the third quarter of 1997. This decrease in services and
maintenance gross margin was primarily due to non-billable services and
maintenance relating to the start up costs associated with ServiceAlliance, the
Company's newest product offering in the Service Automation product line.
ServiceAlliance was commercially released in September 1997.
Product Development
- -------------------
Product development expense decreased 10% to $2,005,000 in the third quarter of
1998 from $2,240,000 in the third quarter of 1997. Product development as a
percentage of revenues increased to 22% in the third quarter of 1998 from 21% in
the third quarter of 1997.
9
<PAGE>
Sales and Marketing
- -------------------
Sales and marketing expense increased 5% to $2,700,000 in the third quarter of
1998 from $2,569,000 in the third quarter of 1997. This increase resulted from
the Company's increased emphasis on the sales and marketing organizations
primarily in the Service Automation and Support Automation product lines. As a
percentage of revenues, sales and marketing expenses increased to 30% from 24%
in the third quarter of 1997.
General and Administrative
- --------------------------
General and administrative expenses increased 33% to $1,490,000 in the third
quarter of 1998 from $1,121,000 in the third quarter of 1997. The increase
primarily relates to an additional contingency reserve recorded in the third
quarter of 1998.
Net Interest Income (Expense)
- -----------------------------
Net interest income increased 441% to $58,000 of interest income in the third
quarter of 1998 from $17,000 of interest expense in the third quarter of 1997.
This increase was primarily attributable to the interest income earned on the
proceeds from the sale of Bendata.
Comparison of Nine Months Ended September 30, 1998 and 1997
- -----------------------------------------------------------
Revenues
- --------
Total revenues decreased $3,642,000, or 12%, to $25,982,000 for the nine months
ended September 30, 1998 from $29,624,000 for the nine months ended September
30, 1997. This overall decrease was comprised of a decrease in software license
fees of $3,119,000 or 36% on a comparative nine month basis and a decrease in
professional services and maintenance of $523,000 or 2% over the same
comparative period. The Company's international operations contributed
$12,166,000 in the first nine months of 1998 compared to $12,049,000 for the
first nine months of 1997. This represents a 1% increase over the same period
last year and is 47% of total revenues in the period.
Software license fee revenues decreased 36% to $5,526,000 in the first nine
months of 1998 from $8,645,000 in the first nine months of 1997. License fee
revenues for the DISPATCH-1, within the Service Automation product line,
decreased $2,387,000 or 47% from $5,105,000 in the first nine months of 1997 to
$2,718,000 in the first nine months of 1998 due to decreasing demand for this
product. License fees from the Sales Automation (Abalon) product line decreased
$920,000 or 40% to $1,370,000 in the first nine months of 1998 from $2,290,000
in the first nine months of 1997. Support Automation (HEAT) product line
license fee revenues increased $138,000 or 45% from $309,000 in the first nine
months of 1997 to $447,000 in the first nine months of 1998. Effective October
1, 1998, HEAT will no longer be sold due to the sale of Bendata.
ServiceAlliance, which was introduced in August 1997, license fee revenues were
$876,000 in the first nine months of 1998 compared to $250,000 in the first nine
months of 1997.
Total services and maintenance revenues decreased 2% to $20,456,000 in the first
nine months of 1998 from $20,979,000 in the first nine months of 1997. The
decrease in service and maintenance revenues is primarily attributable to the
Service Automation and Support Automation product lines offset by an increase in
the Sales Automation product line. The Sales Automation product line (Abalon)
services and maintenance revenues increased $577,000 or 19% from $3,080,000 in
the first nine months of 1997 to $3,657,000 in the first nine months of 1998.
Service Automation product line (DISPATCH-1 and ServiceAlliance) service and
maintenance revenues decreased 6% to $16,345,000 in the first nine months of
1998, this decrease is a result of a decrease in new licenses sold in prior
periods. The Support Automation product line contributed services and
maintenance revenues of $454,000, an 18% decrease over the first nine months of
1997.
In the first nine months of 1998 and 1997, the Company had no customers which
accounted for greater than 10% of total revenues.
10
<PAGE>
Costs of Revenues
- -----------------
Costs of software license fees decreased 31% to $1,695,000 in the first nine
months of 1998 from $2,449,000 in the first nine months of 1997. The software
licenses gross margin percentage was 69% in the nine months ended September 30,
1998 compared to 72% in the nine months ended September 30, 1997. This
decrease in gross margin was due to the combination of lower software license
fee revenues and fixed cost of capitalized software amortization partially
offset by the write-off of capitalized software in the first quarter of 1997
relating to products and versions which will no longer be marketed in
conjunction with the Company's restructuring of its product lines.
Costs of services and maintenance increased 6% to $15,923,000 in the first nine
months of 1998 from $15,023,000 in the first nine months of 1997. The services
and maintenance gross margin percentage was 22% in the nine months ended
September 30, 1998 compared to 28% in the nine months ended September 30, 1997.
The lower margins were primarily attributable to start-up costs associated with
ServiceAlliance.
Product Development
- -------------------
Product development expense decreased 29% to $5,066,000 in the first nine months
of 1998 from $7,138,000 in the first nine months of 1997. Product development
as a percentage of revenue decreased to 19% in the first nine months of 1998
compared to 24% in the first nine months of 1997. This decrease is a result of
cost reductions as a result of the first quarter 1997 restructuring and on-going
cost containment efforts.
Sales and Marketing
- -------------------
Sales and marketing expenses decreased 11% to $7,937,000 in the first nine
months of 1998 from $8,903,000 in the first nine months of 1997. As a
percentage of revenues, sales and marketing expenses remained flat at 31% in the
first nine months of 1998 and 30% in the first nine months of 1997. Sales and
marketing expenses decreased for the nine months ended September 30, 1998
primarily due to decreased variable selling expenses related to the reduced
license volume.
General and Administrative
- --------------------------
General and administrative expenses decreased 55% to $4,777,000 in the first
nine months of 1998 from $10,619,000 in the first nine months of 1997. The
decrease primarily relates to non-recurring charges of $5,131,000 in the first
quarter of 1997. These charges included $2,058,000 for the write-off of Astea
BV goodwill and $3,073,000 of contingency reserve for the possible failure to
deliver a commercial release of software product under a beta development
agreement, payment of cash, note payable and stock options related to the
settlement of dispute with a stockholder and other contingencies. Excluding the
one-time charges recorded in the first quarter of 1997, general and
administrative expenses decreased $711,000 due to reductions in charges for
reserves.
11
<PAGE>
Restructuring Charge
- ---------------------
During the first quarter of 1997, the Company recorded a restructuring charge of
$5,328,000 for actions aimed at reducing costs primarily in its Service
Automation product line and enhancing the Company's performance by increasing
the focus on the Support Automation and Sales Automation product lines. Since
the restructuring was announced, the Company aggressively continued to close and
consolidate excess capacity. Through September 1998, these payments totaled
$4,134,000, including severance of $1,356,000, office-closing costs and
unutilized lease expense of $2,304,000 and other consolidation costs of
$474,000. During the third quarter of 1998, the Company based upon current
facts, evaluated its restructuring accrual and determined that $800,000 was not
needed and, accordingly, the accrual was adjusted. This excess restructuring
accrual related to lower than expected office closing costs.
Net Interest Income (Expense)
- -----------------------------
Net interest income increased 160% to $64,000 of interest income in the first
nine months of 1998 from $106,000 of interest expense in the first nine months
of 1997. This increase was primarily attributable to the interest income earned
on the proceeds from the Bendata sale and the termination of the capital lease
obligation for the Company's former office headquarters, offset by the operating
cash requirements of the Company, which reduced its investments.
Liquidity and Capital Resources
- -------------------------------
Net cash used in operating activities was $7,262,000 for the nine months ended
September 30, 1998 compared to $390,000 for the nine months ended September 30,
1997. This increase was primarily attributable to reduced collection of
accounts receivable, increases in payments of accounts payable and accrued
expenses, payments of restructuring accruals offset by reduced net loss from
operations and non-cash goodwill write down.
The Company's investing activities provided $17,735,000 of cash in the first
nine months of 1998 compared to $3,854,000 in the first nine months of 1997.
The increase was attributable to the proceeds from the disposition of Bendata
partially offset by investing these proceeds by purchasing investments available
for sale.
The Company used $764,000 from financing activities during the nine months ended
September 30, 1998 compared to $1,028,000 in the first nine months of 1997.
This decrease is due to lower repayments on the line of credit offset by
increased payments on long term debt.
The Company maintains a line of credit with a maximum borrowing availability of
$2,000,000. Maximum borrowings are limited to certain percentages of eligible
accounts receivable (as defined). At September 30, 1998 the borrowing base was
$1,794,000. The line of credit bears interest at the lending bank's prime rate
(8.5% at September 30, 1998 and December 31, 1997). Borrowings under the line
of credit are fully secured by the Company's assets. The outstanding balances
as of September 30, 1998 and December 31, 1997 were $0. The line expires on
December 31, 1998.
The Company's Swedish subsidiary, Astea International AB, has a revolving line
of credit for up to 8,000,000 Swedish krona or $995,000. As of September 30,
1998 and December 31, 1997, Astea International AB's borrowing on its revolving
line of credit was $906,000 and $914,000, respectively. The revolving line of
credit bears interest at the bank's prime rate plus 2.4% (6.7% at September 30,
1998 and December 31, 1997). Borrowings under the revolving line of credit are
secured by a third security interest in all of Astea International AB's assets.
The line expires on December 31, 1998. Due to operating losses of Astea
International AB, the subsidiary has breached financial covenants of the line of
credit and is currently negotiating the terms of a new facility.
At September 30, 1998, the Company had a working capital ratio of approximately
3.0:1, with cash and investments available for sale of $32,520,000.
12
<PAGE>
Discontinued Operations
- -----------------------
On September 4, 1998, Astea completed the sale of the capital stock of its
subsidiary, Bendata, effective on July 1, 1998. Net proceeds will be
approximately $42.1 million and resulted in a gain of $33.9 million, including
an estimated $2.5 million of taxes. During the third quarter of 1998, the Astea
Australian branch continued to sell HEAT licenses and provide related services.
Effective October 1, 1998, HEAT will no longer be sold by the Australian branch.
During the nine months ended September 30, 1998 and 1997, Bendata had revenues
of $11,124,000 and $14,144,000 respectively. Net income was $677,000 for the
nine months ended September 30, 1998 and 1997.
Risk Associated with the Year 2000
- ----------------------------------
The Year 2000 issue is the result of some computer programs, particularly older
ones, being written using two digits rather than four to define the applicable
year. For example, date-sensitive software may recognize a date using "00" as
the year 1900 rather than the Year 2000. This could result in system failures or
miscalculations causing disruptions of operations, including, among others, a
temporary inability to process transactions and information, send invoices, or
engage in similar normal business activities.
The Company does not believe that it has material exposure to the Year 2000
issue with respect to its own products and information systems, since the
Company has reviewed its products and existing systems, and they either
correctly define the year 2000 or are expected to be corrected or replaced by
mid-1999 before Year 2000 issues will arise. Non-information technology systems
that utilize embedded technology, such as microcontrollers, may also face Year
2000 issues. However, the Company believes that it does not have significant
Year 2000 issues related to non-information technology systems and is currently
reviewing these systems. This review is expected to be completed during fiscal
1999. In addition, the Company is conducting an analysis to determine the
extent to which its major vendors' systems (insofar as they relate to the
Company's business) are subject to the Year 2000 issue. To date, all major
vendors are compliant. This review is expected to be completed by mid-1999 with
the replacement of all non-compliant vendors by the end of 1999.
The Company also faces potential loss of revenue from customers who may have
Year 2000 issues in their own businesses. Currently, the Company is unable to
predict how and to what extent its operations may be affected by Year 2000
issues at its customers; however, Year 2000 issues at a significant customer
could have a material adverse effect on the Company.
To date, the Company has not made any contingency plans to address third-party
Year 2000 risks. The Company plans to formulate contingency plans to the extent
necessary in fiscal 1999.
Costs related to Year 2000 issue remediation at the Company have been and are
expected to be immaterial as the Company's systems have been and will be
upgraded on a normal replacement schedule with only immaterial purchases of
hardware and software and opportunity costs of Company personnel to ensure new
systems and third parties are year 2000 compliant. The Company estimates that
the expenses and capital expenditures associated with achieving year 2000
compliance will approximate $100,000. Funding for these costs will come from
cash flows from operations. The Company has not deferred any significant system
projects due to its Year 2000 efforts.
Variability of Quarterly Results and Potential Risks Inherent in the Business
- -----------------------------------------------------------------------------
The Company's operations are subject to a number of risks, which are described
in more detail in the Company's prior SEC filings. Risks which are peculiar to
the Company on a quarterly basis, and which may vary from quarter to quarter,
include but are not limited to the following:
* The Company's quarterly operating results have in the past varied and may in
the future vary significantly depending on factors such as the size, timing
and recognition of revenue from significant orders, the timing of new product
releases and product enhancements, and market acceptance of these new releases
and enhancements, increases in operating expenses, and seasonality of its
business.
13
<PAGE>
* The Company's future success will depend in part on its ability to increase
licenses of ServiceAlliance and other new product offerings, and to develop
new products and product enhancements to complement its existing field
service, sales automation and customer support offerings.
* The Customer Management Solutions (CMS) market is intensely competitive.
* International sales for the Company's products and services, and the
Company's expenses related to these sales, continue to be a substantial
component of the Company's operations. International sales are subject to a
variety of risks, including difficulties in establishing and managing
international operations and in translating products into foreign languages.
* The market price of the common stock could be subject to significant
fluctuations in response to, and may be adversely affected by, variations in
quarterly operating results, changes in earnings estimates by analysts,
developments in the software industry, adverse earnings or other financial
announcements of the Company's customers and general stock market conditions,
as well as other factors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- -------------------------------------------------------------------
Not Applicable.
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS
- -----------------------------
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. The Company is
not involved in any legal proceedings, which would, in management's opinion,
have a material adverse effect on the Company's business or results of
operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
- -----------------------------------------------------
There have been no changes in securities during the quarter ended September 30,
1998.
As of September 30, 1998, the Company has used all of the $42,057,000 net
proceeds from its initial public offering of common stock. The use of proceeds
includes $9,952,000 for the acquisition of Astea International AB, $3,416,000
for expenses incurred in connection with the merger with Bendata, Inc.,
$7,779,000 of S Corporation distributions paid to the majority stockholder,
$6,900,000 for purchases and installation of property and equipment, $2,536,000
for repayment of indebtedness and $11,474,000 of working capital for product
development activities and general operations.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- -------------------------------------------
There have been no defaults by the Company on any Senior Securities during the
quarter ended September 30, 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ---------------------------------------------------------------
No matters were submitted to a vote of the Company's stockholders during the
third quarter of the fiscal year covered by this report through the solicitation
of proxies or otherwise.
ITEM 5. OTHER INFORMATION
- -----------------------------
None.
14
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
- ---------------------------------------------
(A) Exhibits
(27) Financial Data Schedule
(B) Reports on Form 8-K
During the quarter ended September 30, 1998, the Registrant filed a Current
Report on Form 8-K dated August 14, 1998 reporting the agreement to sell its
subsidiary, Bendata, Inc., and a Current Report on Form 8-K dated September 4,
1998 reporting the completion of the sale of its subsidiary, Bendata Inc.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized this 13th day of
November 1998.
ASTEA INTERNATIONAL INC.
By: /s/Zack B. Bergreen
-------------------
Zack B. Bergreen
Chairman and Chief Executive Officer
(Principal Executive Officer)
By: /s/John G. Phillips
-------------------
John G. Phillips
Vice President and Chief Financial Officer
(Principal Financial and Chief
Accounting Officer)
16
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<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
<CASH> 16,079,000 6,396,000
<SECURITIES> 16,441,000 1,359,000
<RECEIVABLES> 11,250,000 14,039,000
<ALLOWANCES> 1,099,000 1,348,000
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<CURRENT-ASSETS> 53,394,000 22,886,000
<PP&E> 6,887,000 6,226,000
<DEPRECIATION> 4,922,000 3,679,000
<TOTAL-ASSETS> 59,662,000 34,426,000
<CURRENT-LIABILITIES> 17,562,000 18,267,000
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<TOTAL-REVENUES> 25,982,000 29,624,000
<CGS> 1,695,000 2,449,000
<TOTAL-COSTS> 17,618,000 17,472,000
<OTHER-EXPENSES> 16,039,000 31,153,000
<LOSS-PROVISION> 941,000 835,000
<INTEREST-EXPENSE> (64,000) 106,000
<INCOME-PRETAX> (8,552,000) (19,942,000)
<INCOME-TAX> (432,000) (659,000)
<INCOME-CONTINUING> (8,120,000) (19,283,000)
<DISCONTINUED> 34,579,000 677,000
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