<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------------------
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 1999
--------------------------------
or
[_] Transition Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934.
For the transition period from to
------------- -------------
Commission File Number: 0-26330
-------
ASTEA INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Delaware 23-2119058
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
455 Business Center Drive, Horsham, PA 19044
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 682-2500
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of August 10, 1999, 13,943,617 shares of the registrant's Common Stock, par
value $.01 per share, were outstanding.
<PAGE>
ASTEA INTERNATIONAL INC.
FORM 10-Q
QUARTERLY REPORT
INDEX
Page No.
--------
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 13
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 14
Signatures 15
Exhibit 10.1 Employment Letter to Bruce R. Rusch
Exhibit 27 Financial Data Schedule
2
<PAGE>
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
ASTEA INTERNATIONAL INC.
------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,634,000 $ 14,291,000
Investments available for sale 25,449,000 22,603,000
Notes and escrow receivable 9,407,000 9,407,000
Receivables, net of reserves of $755,000 and $768,000 8,684,000 9,347,000
Prepaid expenses and other 2,476,000 2,097,000
Deferred income taxes 1,462,000 1,462,000
-------------------------------------
Total current assets 55,112,000 59,207,000
Property and equipment, net 1,261,000 1,469,000
Capitalized software development costs, net 2,601,000 2,937,000
=====================================
Total assets $ 58,974,000 $63,613,000
=====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 193,000 $ 887,000
Accounts payable and accrued expenses 5,757,000 8,673,000
Deferred revenues 3,859,000 4,105,000
-------------------------------------
Total current liabilities 9,809,000 13,665,000
Deferred income taxes 463,000 463,000
Long-term debt 369,000 468,000
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued - -
Common stock, $.01 par value, 25,000,000 shares
authorized, 13,932,000 and 13,540,000 issued and
outstanding 139,000 135,000
Additional paid-in capital 51,987,000 51,098,000
Deferred compensation (76,000) (29,000)
Cumulative currency translation adjustment (507,000) (836,000)
Accumulated deficit (3,210,000) (1,351,000)
-------------------------------------
Total stockholders' equity 48,333,000 49,017,000
=====================================
Total liabilities and stockholders' equity $58,974,000 $63,613,000
=====================================
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
ASTEA INTERNATIONAL INC.
------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
---------------------------------- ---------------------------------
1999 1998 1999 1998
---- ---- ----- ----
<S> <C> <C> <C> <C>
Revenues:
Software license fees $ 2,368,000 $ 1,628,000 $ 4,320,000 $ 2,854,000
Services and maintenance 5,521,000 5,404,000 11,307,000 10,604,000
-------------------------------------------------------------------------
Total revenues 7,889,000 7,032,000 15,627,000 13,458,000
-------------------------------------------------------------------------
Costs and expenses:
Cost of software license fees 504,000 524,000 1,228,000 861,000
Cost of services and maintenance 4,099,000 4,137,000 8,869,000 8,204,000
Product development 1,294,000 1,268,000 2,623,000 2,478,000
Sales and marketing 1,913,000 1,898,000 4,322,000 3,470,000
General and administrative 1,005,000 1,586,000 1,912,000 2,748,000
Restructuring charge (Note 3) - (800,000) - (800,000)
-------------------------------------------------------------------------
Total costs and expenses 8,815,000 8,613,000 18,954,000 16,961,000
-------------------------------------------------------------------------
Loss from continuing operations before interest
and taxes (926,000) (1,581,000) (3,327,000) (3,503,000)
Net interest income (expense) 477,000 (15,000) 1,092,000 19,000
-------------------------------------------------------------------------
Loss from continuing operations before income tax (449,000) (1,596,000) (2,235,000) (3,484,000)
Income tax benefit - (296,000) (376,000) (432,000)
-------------------------------------------------------------------------
Loss from continuing operations (449,000) (1,300,000) (1,859,000) (3,052,000)
-------------------------------------------------------------------------
Loss from discontinued operations, net of taxes - (402,000) - (876,000)
-------------------------------------------------------------------------
Net loss $ (449,000) $ (1,702,000) $ (1,859,000) $ (3,928,000)
Basic and diluted net loss per share:
Continuing operations $ (0.03) $ (0.10) $ (0.13) $ (0.23)
Discontinued operations - (0.03) - (0.06)
-------------------------------------------------------------------------
Net Loss $ (0.03) $ (0.13) $ (0.13) $ (0.29)
=========================================================================
Share outstanding used in computing basic and
diluted net loss per share 13,919,000 13,457,000 13,804,000 13,417,000
=========================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
ASTEA INTERNATIONAL INC.
------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
--------------------------------
1999 1998
--------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,859,000) $(3,928,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,298,000 1,149,000
Other 10,000 (433,000)
Changes in operating assets and liabilities:
Receivables 816,000 1,737,000
Prepaid expenses and other (363,000) (95,000)
Accounts payable and accrued expenses (2,805,000) (2,662,000)
Deferred revenues (197,000) 459,000
Deferred income taxes - 342,000
--------------------------------
Net cash used in operating activities of continuing operations (3,100,000) (3,431,000)
Net cash provided by discontinued operations - 79,000
--------------------------------
Net cash used in operating activities (3,100,000) (3,352,000)
--------------------------------
Cash flows from investing activities:
Purchases of investments available for sale (2,846,000) (594,000)
Purchases of property and equipment (359,000) (371,000)
Capitalized software development costs (400,000) (400,000)
--------------------------------
Net cash used in investing activities (3,605,000) (1,365,000)
--------------------------------
Cash flows from financing activities:
Proceeds from exercise of stock options and employee stock
purchase plan 822,000 106,000
Net borrowings from line of credit - 600,000
Net repayments of long-term debt (793,000) (468,000)
--------------------------------
Net cash provided by financing activities 29,000 238,000
--------------------------------
Effect of exchange rate changes on cash and cash equivalents 19,000 2,000
--------------------------------
Net (decrease) in cash and cash equivalents (6,657,000) (4,477,000)
Cash and cash equivalents balance, beginning of period 14,291,000 6,396,000
================================
Cash and cash equivalents balance, end of period $ 7,634,000 $ 1,919,000
================================
</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 June 30, 1999 and for the three and six
month periods ended June 30, 1999 and 1998 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 1998 Annual
Report on Form 10-K which are hereby incorporated by reference in this quarterly
report on Form 10-Q.
2. DISCONTINUED OPERATIONS
-----------------------
In September and December 1998, the Company completed the sales of its Bendata,
Inc. and Abalon AB subsidiaries, respectively.
Bendata and Abalon have been accounted for as discontinued operations. The
accompanying Consolidated Financial Statements reflect the operating results of
the discontinued operations separately from continuing operations.
Losses from the discontinued operations of Bendata and Abalon in the
accompanying consolidated statements of operations were:
Three Months Six Months
Ended June 30, 1998 Ended June 30, 1998
Revenues $ 7,777,000 $ 14,711,000
Loss before income taxes (106,000) (444,000)
Income taxes 296,000 432,000
----------------- -----------------
Net loss $ (402,000) $ (876,000)
----------------- -----------------
3. RESTRUCTURING 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. During the second quarter of 1998, the Company
evaluated its restructuring accrual based upon then current facts and determined
that $800,000 was not needed and, accordingly, the accrual was adjusted. This
excess related to lower than expected office-closing costs.
6
<PAGE>
4. STOCKHOLDERS' EQUITY/COMPREHENSIVE INCOME (LOSS)
------------------------------------------------
The reconciliation of Stockholders' Equity and comprehensive loss from
December 31, 1998 to June 30, 1999 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, 1998 $135,000 $51,098,000 $(29,000) $(836,000) $(1,351,000) -
Grant of stock options below
fair market value - 61,000 (61,000) - - -
Amortization of deferred
compensation - - 14,000 - - -
Exercise of options 4,000 828,000 - - - -
Cumulative currency
translation adjustment - - - 329,000 - 329,000
Net Loss - - - - (1,859,000) (1,859,000)
------------------------------------------------------------------------------------------
Balance at June 30, 1999 $139,000 $51,987,000 $(76,000) $(507,000) $(3,210,000) $(1,530,000)
==========================================================================================
</TABLE>
5. MAJOR CUSTOMERS
---------------
In the second quarter of 1999, the Company had two customers that each accounted
12% of total revenues. In the second quarter 1998, the same two customers
accounted for 10% and same 17% of total revenues, respectively. For the first
six months of 1999, the same two customers each accounted 12% of total revenues.
In the first six months 1998, the same two customers accounted for 10% and 14%
of total revenues, respectively.
7
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Overview
- --------
This document contains various forward-looking statements and information that
are based on management's beliefs, assumptions made by management 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 the fiscal year ended December 31,
1998.
The Company develops, markets and supports front-office solutions for the
Customer Management Solutions (CMS) software market. Astea's client/server and
host-based applications are designed specifically for organizations for which
field service and customer support are considered mission critical aspects of
business operations. The Company maintains operations in the United States,
Canada, Australia, New Zealand, the Netherlands, France, the United Kingdom,
Japan and Israel.
Results of Operations
- ---------------------
Comparison of Three Months Ended June 30, 1999 and 1998
- -------------------------------------------------------
Continuing Operations
- ---------------------
Revenues
- --------
Revenues increased $857,000, or 12%, to $7,889,000 for the three months ended
June 30, 1999 from $7,032,000 for the three months ended June 30, 1998. Software
license fee revenues increased $740,000, or 45%, from the same period last year.
Services and maintenance fees for the three months ended June 30, 1999 amounted
to $5,521,000, a 2% increase from the same quarter in 1998.
The Company's international operations contributed $2,152,000 of revenues in the
second quarter of 1999 compared to $2,220,000 in the second quarter of 1998.
This represents a 3% decrease from the same period last year and 27% of total
revenues in the second quarter 1999.
Software license fee revenues increased 45% to $2,368,000 in the second quarter
of 1999 from $1,628,000 in the second quarter of 1998. The increase is
attributable to the continued market acceptance of ServiceAlliance.
ServiceAlliance license revenues increased $827,000 or 551%, to $977,000 in the
second quarter of 1999 from $150,000 in the second quarter of 1998. The increase
in Service Alliance license revenue was offset by a decrease in DISPATCH-1
license fee revenue, which decreased $56,000 or 4% from $1,446,000 in the second
quarter of 1998 to $1,390,000 in the second quarter of 1999 due to decreasing
demand for this product. DISPATCH-1 accounted for 59% of total software license
fee revenues in the second quarter of 1999 compared to 89% of total license fee
revenues in the second quarter of 1998. In addition, software license fee
revenues from royalties received on PowerHelp, which is sold via a distributor,
were $1,000 in the second quarter of 1999 compared to $32,000 in the quarter
ended June 30, 1998.
Services and maintenance revenues increased 2% to $5,521,000 in the second
quarter of 1999 from $5,404,000 in the second quarter of 1998. The increase
primarily relates to service and maintenance revenues from ServiceAlliance,
which increased $753,000 to $931,000 from $178,000 in the second quarter of
1998. Service and maintenance revenues from DISPATCH-1 decreased 12% to
$4,551,000 in the second quarter of 1999 from $5,156,000 in the second quarter
of 1998. In addition, service and maintenance revenue from PowerHelp was $39,000
in the second quarter of 1999 compared to $70,000 in the second quarter of 1998.
8
<PAGE>
In the second quarter of 1999, the Company had two customers that each accounted
for 12% of total revenues. In the second quarter 1998, the same two customers
accounted for 10% and 17% of total revenues, respectively.
Costs of Revenues
- -----------------
Cost of software license fees decreased 4% to $504,000 in the second quarter of
1999 from $524,000 in the second quarter of 1998. Included in the cost of
software license fees is the fixed cost of capitalized software amortization.
Capitalized software amortization was $368,000 and $266,000 in the second
quarters of 1999 and 1998 respectively. The decrease in the cost of software
license fees represents decreased third party software costs attributable to the
mix of products sold in conjunction with the company's products, in the second
quarter of 1999 offset by an increase in capitalized software amortization. The
software licenses gross margin percentage was 79% in the second quarter of 1999
compared to 68% in the second quarter of 1998.
This increase in gross margin was attributable to increased license fee
revenues.
Cost of services and maintenance decreased 1% to $4,099,000 in the second
quarter of 1999 from $4,137,000 in the second quarter of 1998. The services and
maintenance gross margin percentage was 26% in the second quarter of 1999
compared to 23% in the second quarter of 1998. The increase in services and
maintenance gross margin was primarily due to increased utilization from
ServiceAlliance service professionals.
Product Development
- -------------------
Product development expense increased 2% to $1,294,000 in the second quarter of
1999 from $1,268,000 in the second quarter of 1998. Product development as a
percentage of revenues decreased to 16% in the second quarter of 1999 from 18%
in the second quarter of 1998.
Sales and Marketing
- -------------------
Sales and marketing expense increased 1% to $1,913,000 in the second quarter of
1999 from $1,898,000 in the second quarter of 1998. As a percentage of revenues,
sales and marketing expenses decreased to 24% from 27% in the second quarter of
1998.
General and Administrative
- --------------------------
General and administrative expenses decreased 37% to $1,005,000 in the second
quarter of 1999 from $1,586,000 in the second quarter of 1998. The decrease
primarily relates to the Company's ongoing cost containment efforts.
Restructuring Charge
- --------------------
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. Since the restructuring was announced, the Company aggressively
continued to close and consolidate excess capacity. During the second quarter of
1998, the Company, based upon then 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.
Net Interest Income (Expense)
- -----------------------------
Net interest income increased $492,000 to $477,000 in the second quarter of 1999
from an interest expense of $15,000 in the second quarter of 1998. The increase
of interest income is attributable to the interest earned on the proceeds from
the sales of Bendata and Abalon.
9
<PAGE>
International Operations
- ------------------------
Total revenue from the Company's international operations decreased by $68,000,
or 3%, to $2,152,000 in second quarter of 1999 from $2,220,000 in the same
quarter in 1998. The decrease in revenue from international operations was
primarily attributable to the decrease in DISPATCH-1 licenses purchased in 1999,
offset by increased ServiceAlliance license revenue in 1999. International
operations resulted in a $391,000 net loss for the second quarter ended June 30,
1999 compared to a net loss of $415,000 in the same quarter in 1998.
Comparison of Six Months Ended June 30, 1999 and 1998
- -----------------------------------------------------
Continuing Operations
- ---------------------
Revenues
- --------
Revenues increased $2,169,000, or 16%, to $15,627,000 for the six months ended
June 30, 1999 from $13,458,000 for the six months ended June 30, 1998. Software
license fee revenues increased $1,466,000, or 51%, from the same period last
year. Services and maintenance fees for the six months ended June 30, 1999
amounted to $11,307,000, a 7% increase from the same six months in 1998.
The Company's international operations contributed $4,558,000 of revenues in the
first six months of 1999 compared to $4,342,000 in the first six months of 1998.
This represents a 5% increase from the same period last year and 29% of total
revenues in the first six months of 1999.
Software license fee revenues increased 51% to $4,320,000 in the first six
months of 1999 from $2,854,000 in the first six months of 1998. The increase is
attributable to the continued market acceptance of ServiceAlliance.
ServiceAlliance license revenues increased $1,669,000 or 379%, to $2,109,000 in
the first six months of 1999 from $440,000 in the first six months of 1998. The
increase in Service Alliance license revenue was offset by a decrease in
DISPATCH-1 license fee revenue, which decreased $198,000 or 9% from $2,310,000
in the first six months of 1998 to $2,112,000 in the first six months of 1999
due to decreasing demand for this product. DISPATCH-1 accounted for only 49% of
total software license fee revenues in the first six months of 1999 compared to
81% of total license fee revenues in the first six months of 1998. In addition,
software license fee revenues from royalties received on PowerHelp, which is
sold via a distributor, was $99,000 in the first six months of 1999 compared to
$104,000 in the six months ended June 30, 1998.
Services and maintenance revenues increased 7% to $11,307,000 in the first six
months of 1999 from $10,604,000 in the six months of 1998. The increase
primarily relates to service and maintenance revenues from ServiceAlliance,
which increased $1,287,000 to $1,558,000 from $271,000 in the first six months
of 1998. Service and maintenance revenues from DISPATCH-1 decreased 4% to
$9,695,000 in the first six months of 1999 from $10,149,000 in the first six
months of 1998. In addition, service and maintenance revenue from PowerHelp was
$54,000 in the first six months of 1999 compared to $184,000 in the first six
months of 1998.
In the first six months of 1999, the Company had two customers that each
accounted for 12% of total revenues. In the first six months of 1998, the same
two customers accounted for 10% and 14% of total revenues, respectively.
Costs of Revenues
- -----------------
Cost of software license fees increased 43% to $1,228,000 in the first six
months of 1999 from $861,000 in the first six months of 1998. Included in the
cost of software license fees is the fixed cost of capitalized software
amortization. Capitalized software amortization was $736,000 and $467,000 in the
first six months of 1999 and 1998, respectively. The increase in the cost of
software license fees represents increased third party software costs
attributable to the mix of products sold in conjunction with the company's
products in the first six months of 1999 and an increase in capitalized software
amortization. The software licenses gross margin percentage was 72% in
10
<PAGE>
the first six months of 1999 compared to 70% in the first six months of 1998.
This increase in gross margin was attributable to increased license fee revenue.
Cost of services and maintenance increased 8% to $8,869,000 in the first six
months of 1999 from $8,204,000 in the first six months of 1998. The services and
maintenance gross margin percentage was 22% in the first six months of 1999
compared to 23% in the first six months of 1998. The 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, and due to lower than planned utilization for
DISPATCH-1 service professionals in the first quarter of 1999.
Product Development
- -------------------
Product development expense increased 6% to $2,623,000 in the first six months
of 1999 from $2,478,000 in the first six months of 1998. Product development as
a percentage of revenues decreased to 17% in the first six months of 1999 from
18% in the first six months of 1998.
Sales and Marketing
- -------------------
Sales and marketing expense increased 25% to $4,322,000 in the first six months
of 1999 from $3,470,000 in the first six months of 1998. This increase resulted
from the Company's continued effort to increase market share and expand its
presence through both direct and indirect channels. As a percentage of revenues,
sales and marketing expenses increased to 28% from 26% in the first six months
of 1998.
General and Administrative
- --------------------------
General and administrative expense decreased 30% to $1,912,000 in the first six
months of 1999 from $2,748,000 in the first six months of 1998. The decrease
primarily relates to the Company's ongoing cost containment efforts.
Net Interest Income
- -------------------
Net interest income increased $1,073,000 to $1,092,000 in the first six months
of 1999 from $19,000 in the first six months of 1998. This increase is
attributable to the interest earned on the proceeds from the sales of Bendata
and Abalon.
International Operations
- ------------------------
Total revenue from the Company's international operations grew by $216,000, or
5%, to $4,558,000 in first six months of 1999 from $4,342,000 in the same six
months of 1998. The increase in revenue from international operations was
primarily attributable to the introduction of ServiceAlliance in the third
quarter of 1997, offset by reductions in DISPATCH-1 and PowerHelp due to
decreasing demand. International operations resulted in a $598,000 loss for the
six months ended June 30, 1999 as compared to a loss of $554,000 for the six
months ended June 30, 1998.
Liquidity and Capital Resources
- -------------------------------
Net cash used in operating activities was $3,100,000 for the six months ended
June 30, 1999 compared to $3,352,000 for the six months ended June 30, 1998.
This decrease in cash used was primarily attributable to a reduced net loss
offset by reduced collections of accounts receivable.
The Company's investing activities used $3,605,000 of cash in the first six
months of 1999 compared to $1,365,000 in the first six months of 1998. The
increase in cash used was primarily attributable to increased purchases of
investments available for sale.
The Company provided $29,000 from financing activities during the six months
ended June 30, 1999 compared to $238,000 in the first six months of 1998. This
decrease is due to increased payments of long-term debt as well as a
11
<PAGE>
decrease in line of credit borrowings. This is offset by increased proceeds from
the exercise of stock options and employee stock purchase plan
At June 30, 1999, the Company had a working capital ratio of 6:1, with cash and
investments available for sale of $33,083,000. In July 1999, the Company
received $1,732,000 of the notes and escrow receivables. In September 1999, the
Company expects to receive $6,400,000, the remainder of the notes receivable
less approximately $275,000 withheld for items indemnified in the purchase
agreement which is included in accrued expenses at June 30, 1999. The Company
believes that it has adequate cash resources to make the investments necessary
to maintain or improve its current position and to sustain its continuing
operations for the foreseeable future. The Company does not anticipate that its
operations or financial condition will be affected materially by inflation.
Risk Associated with the Year 2000
- ----------------------------------
The "Year 2000" risk arises because some computer programs, particularly older
ones, were 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's Software. The Company continues to review and test its
existing product offerings to ensure that these offerings are adequately able to
address the issues expected to arise in connection with the upcoming change in
the century. The Company does not believe that it has material exposure to the
Year 2000 issue with respect to its own products and information systems.
ServiceAlliance and certain later recent releases of DISPATCH-1 (versions 8.0,
6.0j and 6.2g) are designed to accurately calculate, compare and sequence date
and time data between the twentieth and twenty-first centuries. The Company has
implemented plans and announced timetables for modifying or phasing out the
remainder of its products (older versions of DISPATCH-1) that are not currently
able to calculate, compare and sequence all date and time data between the
twentieth and twenty-first centuries. The Company regularly provides its
customers with current information on the status of these development and
support efforts. There can be no assurance, however, that the Company will
successfully complete this development in the published timeframes. In addition,
the Company has not fully determined the extent to which the Company's products
may be impacted by third parties' systems, which may not be Year 2000 compliant.
Failure by the Company to successfully modify or phase out its older systems
that are not year 2000 compliant within the published timeframes could have a
material, adverse effect on the Company's operations and financial condition.
Other Software and Hardware. Non-information technology systems that
use embedded technology, such as microcontrollers, may also face Year 2000
risks. The Company believes, however, that it does not have a material Year 2000
risk related to non-information technology systems, and the Company is currently
reviewing these systems. In addition, the Company conducted 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 risk. All major vendors
have been reviewed and are compliant. While the Company has made efforts to seek
reassurance from its suppliers, there can be no assurance that the systems of
other companies with which the Company deals or on which the Company's systems
rely will be timely converted, or that any such failure to convert by another
company could not have an adverse effect on the Company. The Company also faces
potential loss of revenue from customers who may have Year 2000 problems 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.
Costs and Contingency Plans. 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 remediation at the Company have been and are expected to be
immaterial, since 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 that new systems
and those of 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.
12
<PAGE>
Legal Liabilities. The law regarding liability for Year 2000 problems
is evolving rapidly. The Company limits its contractual warrantees on Year 2000
compliance to objective performance standards that the Company has tested, and
the Company makes no warrantees for nonconformance if the Company's software
products are combined with other software or data that are not conducive to
accurately calculating, comparing or sequencing date and time data between the
twentieth and twenty-first centuries. Nonetheless, there can be no assurance
that some of the Company's customers will not assert legal claims against the
Company based on Year 2000 theories of liability. While the Company believes
that such claims would be precluded by its contracts, if such a claim were
upheld in court, the resulting expense to the Company and diversion of
management and development time could have a material, adverse effect on the
Company's operations and financial condition.
Variability of Quarterly Results and Potential Risks Inherent in the Business
- -----------------------------------------------------------------------------
The Company's operations are subject to a number of risks, which are described
in more detail in the Company's prior SEC filings. Risks which are peculiar to
the Company on a quarterly basis, and which may vary from quarter to quarter,
include but are not limited to the following:
. The Company's quarterly operating results have in the past varied and may in
the future vary significantly depending on factors such as the size, timing
and recognition of revenue from significant orders, the timing of new product
releases and product enhancements, and market acceptance of these new
releases and enhancements, increases in operating expenses, and seasonality
of its business.
. The Company's future success will depend in part on its ability to increase
licenses of ServiceAlliance and other new product offerings, and to develop
new products and product enhancements to complement its existing field
service 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, 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
- --------------------------------------------------------------------
Interest Rate Risk. The Company's exposure to market risk for changes
in interest rates relate primarily to the Company's investment portfolio. The
Company does not have any derivative financial instruments in its portfolio. The
Company places its investments in instruments that meet high credit quality
standards. The Company is adverse to principal loss and ensures the safety and
preservation of its invested funds by limiting default risk, market risk and
reinvestment risk. As of June 30, 1999, the Company's investments consisted of
U.S. government agencies securities, commercial paper and corporate bonds. The
Company does not expect any material loss with respect to its investment
portfolio.
Foreign Currency Risk. The Company does not use foreign currency
forward exchange contracts or purchased currency options to hedge local currency
cash flows or for trading purposes. All sales arrangements with international
customers are denominated in foreign currency. The Company does not expect any
material loss with respect to foreign currency risk.
13
<PAGE>
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
- ------------------------------
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. The Company is
not involved in any legal proceedings, which would, in management's opinion,
have a material adverse effect on the Company's business or results of
operations.
Item 2. Changes in Securities and Use of Proceeds
- ------------------------------------------------------
There have been no changes in securities during the quarter ended June 30, 1999.
Item 3. Defaults Upon Senior Securities
- --------------------------------------------
There have been no defaults by the Company on any Senior Securities during the
quarter ended June 30, 1999.
Item 4. Submission of Matters to a Vote of Security Holders
- ----------------------------------------------------------------
At the Annual Meeting of Stockholders held on May 13, 1999, pursuant to the
Notice of Annual Meeting of Stockholders dated April 9, 1999, the following
actions were taken:
1. The proposal to elect the following nominees as directors, to hold office
until the 2000 Annual Meeting of Stockholders and until their successors are
elected and qualified, was approved:
Nominee Votes For Votes Withheld Abstained
- ---------------------- --------------- ----------------- ------------
Zack B. Bergreen 12,858,827 101,597 -
Barry M. Goldsmith 12,925,853 34,571 -
Henry H. Greer 12,922,753 37,671 -
Charles D. LaMotta 12,921,653 38,771 -
Bruce R. Rusch 12,923,753 36,671 -
2. The proposal to appoint Arthur Andersen LLP as independent auditors for the
Company for the fiscal year ending December 31, 1999 was approved (12,906,753
shares in favor; 45,838 shares against; and 7,600 shares abstaining).
No other matters were submitted to a vote of the Company's stockholders during
the second quarter of the fiscal year covered by this report through the
solicitation of proxies or otherwise.
Item 5. Other Information
- ------------------------------
None.
Item 6. Exhibits and Reports on Form 8-K
- ---------------------------------------------
(A) Exhibits
(10.1) Employment offer letter to Bruce R. Rusch
(27) Financial Data Schedule
(B) Reports on Form 8-K
None.
14
<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 August
1999.
ASTEA INTERNATIONAL INC.
By: /s/Bruce R. Rusch
-----------------
Bruce R. Rusch
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)
15
<PAGE>
Exhibit 10.1
- ------------
July 13, 1999
Personal & Confidential
- -----------------------
Mr. Bruce R. Rusch
97 Brimstone Lane
Sudbury, MA 01776
Dear Bruce:
On behalf of Zack Bergreen and Astea International Inc., I am
delighted to take this opportunity to extend this offer of employment as
President and Chief Executive Officer of Astea International, Inc. ("Astea"),
reporting to Astea's Board of Directors. You will be responsible for developing,
implementing and administering Astea's policies, goals and objectives, subject
to the direction of the Board of Directors. Zack Bergreen will remain as
Chairman of the Board and an employee or consultant of the Company. Your
employment will begin on August 9, 1999, subject to the approval of this offer
letter by the Board of Directors.
You will be based in Astea's Horsham, Pennsylvania headquarters, and
it is expected that you will relocate your principal residence to this area
within one year. Astea will reimburse you for reasonable relocation expenses up
to $25,000, and will reimburse you for reasonable travel and temporary housing
expenses for up to the first six months of your employment until you relocate.
Your annual base salary will be $300,000 payable semi-monthly, less
appropriate federal, state and local taxes. Assuming satisfactory performance,
this base salary will be reviewed annually consistent with Astea's compensation
policy in effect from time to time. Additionally, you will be eligible for a
special executive bonus of $50,000 if the Company reports net income for two
consecutive fiscal quarters ending before July 1, 2000.
You will also be eligible to participate in Astea's corporate
incentive bonus program as and if such program may be in effect from time to
time. However, you understand that any participation in this program is within
the sole discretion of the Board of Directors. The payment to you of any
incentive award on one occasion shall not be deemed to create an obligation for
any subsequent grant or award.
As an additional incentive to you, you will be eligible for a grant of
options to purchase 500,000 shares of Astea's common stock at the fair market
value on the date of grant. This grant will be evidenced by a separate stock
option agreement on the date of Board approval of the options, with vesting tied
to the date your employment commences. Of such options:
<PAGE>
Bruce R. Rusch
July 13, 1999
Page 2 of 3
(a) Options to purchase 250,000 shares will vest in equal
installments on each of the first four anniversaries of the grant date.
(b) Options to purchase 125,000 shares will vest on the fifth
anniversary of the date of grant, or such earlier date that Astea reports net
income for two consecutive fiscal years, with operating income as a percentage
of revenue not less than 10% in each such year.
(c) Options to purchase the other 125,000 shares will vest on
the fifth anniversary of the date of grant, subject to earlier vesting as
follows:
(i) Options to purchase 62,500 shares will vest if the
average closing market price per share of Astea's common stock during a fiscal
quarter equals or exceeds $5; and
(ii) All unvested options of these 125,000 will vest if the
average closing market price per share of Astea's common stock during a fiscal
quarter equals or exceeds $8.
Upon termination of your employment with Astea, you may exercise any
vested options for a period of 90 additional days. In the event of a change in
control of Astea, your options that have not vested will vest immediately.
As an employee entrusted with confidential and sensitive information,
Astea requires that, upon your employment, you enter into a written agreement
containing noncompetitive covenants and restrictions on the use and ownership of
such information, as well as other terms and conditions. This agreement is
enclosed for your review.
Current Astea benefits include paid vacation days based upon length of
employment. In the first five years of your employment, you may accrue up to 15
days per year, accrued at a rate of 1.25 days per month. Thereafter, upon the
anniversary date of your employment, you will earn an additional paid vacation
day per year up to a maximum of 20 days per year. You will also be eligible to
receive other company paid benefits including holidays, earned sick days, and
certain personal absences.
Astea provides a progressive range of employee benefits including life
insurance, long-term disability insurance, a 40l(k) plan, profit sharing plan,
employee stock purchase plan, medical and dental plans and short-term disability
plans. You and your eligible dependents will be eligible to participate in these
benefits programs subject to the terms and conditions of the benefits programs.
Please note that the Astea benefits may change from time to time.
<PAGE>
Bruce R. Rusch
July 13, 1999
Page 3 of 3
If you wish to accept Astea's offer of employment, please sign and
return this original letter to me, keeping a copy for yourself. Your signature
below indicates your acceptance of the terms of this offer, and represents and
warrants to Astea that there is no other agreement in effect which prohibits or
otherwise restricts your employment by Astea.
This letter does not constitute a contract of employment. It creates
an employment-at-will relationship that may be terminated at any time by either
party. If Astea terminates your employment without cause (to be defined in the
stock option agreement), you will receive, as severance in a lump sum and in
lieu of any other severance, an amount equal to six months of your base salary
then in effect, subject to your execution of a reasonable release of any claims
against Astea.
I am looking forward to working with you and building the company, and
we are confident that you will find the Astea environment to be challenging and
rewarding.
Sincerely,
/s/ Robert G. Schwartz, Jr.
Robert G. Schwartz, Jr.
Vice President, General Counsel and Secretary
Astea International Inc.
/s/ Zack B. Bergreen
Zack B. Bergreen
Chairman and CEO
Astea International Inc.
AGREED:
/s/ Bruce R. Rusch
Bruce R. Rusch
<TABLE> <S> <C>
<PAGE>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S
QUARTERLY REPORT ON FORM 10Q FOR THE QUARTER ENDED JUNE 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-START> APR-01-1999 APR-01-1998
<PERIOD-END> JUN-30-1999 JUN-30-1998
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<SECURITIES> 25,449,000 0
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