<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, 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 November 09, 1999, 13,996,017 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> <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 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
</TABLE>
Exhibit 10.1 Loan and Security Agreement by and between Astea International
Inc. and Silicon Valley Bank
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>
SEPTEMBER 30, December 31,
1999 1998
---------------------- ----------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $15,438,000 $14,291,000
Investments available for sale 25,609,000 22,603,000
Notes and escrow receivable - 9,407,000
Receivables, net of reserves of $838,000 and $768,000 10,763,000 9,347,000
Prepaid expenses and other 1,898,000 2,097,000
Deferred income taxes 1,462,000 1,462,000
-----------------------------------------------
Total current assets 55,170,000 59,207,000
Property and equipment, net 1,120,000 1,469,000
Capitalized software development costs, net 2,434,000 2,937,000
-----------------------------------------------
Total assets $58,724,000 $63,613,000
===============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 198,000 $ 887,000
Accounts payable and accrued expenses 5,603,000 8,673,000
Deferred revenues 3,786,000 4,105,000
-----------------------------------------------
Total current liabilities 9,587,000 13,665,000
Deferred income taxes 463,000 463,000
Long-term debt 317,000 468,000
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued - -
Common stock, $.01 par value, 25,000,000 shares
authorized, 13,995,000 and 13,540,000 issued and
outstanding 140,000 135,000
Additional paid-in capital 52,067,000 51,098,000
Deferred compensation (49,000) (29,000)
Cumulative currency translation adjustment (659,000) (836,000)
Accumulated deficit (3,142,000) (1,351,000)
-----------------------------------------------
Total stockholders' equity 48,357,000 49,017,000
-----------------------------------------------
Total liabilities and stockholders' equity $58,724,000 $63,613,000
===============================================
The accompanying notes are an integral part of these statements.
</TABLE>
3
<PAGE>
ASTEA INTERNATIONAL INC.
------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------------------------------------------
1999 1998 1999 1998
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Software license fees $ 2,618,000 $ 854,000 $ 6,938,000 $ 3,708,000
Services and maintenance 5,537,000 5,970,000 16,844,000 16,574,000
----------------------------------------------------------
Total revenues 8,155,000 6,824,000 23,782,000 20,282,000
----------------------------------------------------------
Costs and expenses:
Cost of software license fees 459,000 559,000 1,687,000 1,420,000
Cost of services and maintenance 4,301,000 4,593,000 13,170,000 12,797,000
Product development 1,070,000 1,803,000 3,693,000 4,281,000
Sales and marketing 1,865,000 1,996,000 6,187,000 5,466,000
General and administrative 903,000 1,215,000 2,815,000 3,963,000
Restructuring charge (Note 3) - - - (800,000)
----------------------------------------------------------
Total costs and expenses 8,598,000 10,166,000 27,552,000 27,127,000
----------------------------------------------------------
Loss from continuing operations before (443,000) (3,342,000) (3,770,000) (6,845,000)
interest and taxes
Net interest income 511,000 101,000 1,603,000 120,000
----------------------------------------------------------
Income (loss) from continuing operations 68,000 (3,241,000) (2,167,000) (6,725,000)
before income tax
Income tax benefit - - (376,000) (432,000)
----------------------------------------------------------
Income (loss) from continuing operations 68,000 (3,241,000) (1,791,000) (6,293,000)
Gain on disposal of discontinued - 33,902,000 - 33,902,000
operations, net of taxes - (274,000) (1,150,000)
Loss from discontinued operations, net of
taxes
----------------------------------------------------------
Net income (loss) $ 68,000 $30,387,000 $(1,791,000) $26,459,000
----------------------------------------------------------
Basic and diluted net earnings (loss) per
share:
Continuing operations $ - $ (0.24) $(0.13) $ (0.47)
Gain on sale of discontinued
operations - 2.51 - 2.53
Discontinued operations - (0.02) - (0.09)
----------------------------------------------------------
Net income (loss) $ - $ 2.25 $(0.13) $ 1.97
==========================================================
Shares used in computing basic earnings
(loss) per share 13,944,000 13,535,000 13,856,000 13,457,000
Shares used in computing diluted earnings
(loss) per share 14,442,000 13,535,000 13,856,000 13,457,000
==========================================================
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
ASTEA INTERNATIONAL INC.
------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------------------------
1999 1998
-----------------------------------------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $(1,791,000) $ 26,459,000
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Gain on sale of discontinued business - (33,902,000)
Depreciation and amortization 1,889,000 1,786,000
Other 16,000 (433,000)
Changes in operating assets and liabilities:
Receivables (1,315,000) 1,177,000
Prepaid expenses and other 204,000 (167,000)
Accounts payable and accrued expenses (2,883,000) (2,248,000)
Deferred revenues (318,000) 463,000
Deferred income taxes - 342,000
-----------------------------------------
Net cash used in operating activities of continuing operations (4,198,000) (6,523,000)
Net cash used in discontinued operations - (825,000)
-----------------------------------------
Net cash used in operating activities (4,198,000) (7,348,000)
-----------------------------------------
Cash flows from investing activities:
Purchases of investments available for sale (3,006,000) (15,082,000)
Purchases of property and equipment (437,000) (659,000)
Proceeds from sale of discontinued operations 9,276,000 34,078,000
Capitalized software development costs (600,000) (600,000)
-----------------------------------------
Net cash provided by investing activities 5,233,000 17,737,000
-----------------------------------------
Cash flows from financing activities:
Proceeds from exercise of stock options and employee stock purchase 921,000 136,000
plan
Net repayments of long-term debt (840,000) (835,000)
-----------------------------------------
Net cash provided by (used in) financing activities 81,000 (699,000)
-----------------------------------------
Effect of exchange rate changes on cash and cash equivalents 31,000 7,000
-----------------------------------------
Net increase in cash and cash equivalents 1,147,000 9,683,000
Cash and cash equivalents balance, beginning of period 14,291,000 6,396,000
-----------------------------------------
Cash and cash equivalents balance, end of period $ 15,438,000 $ 16,079,000
=========================================
The accompanying notes are an integral part of these statements.
</TABLE>
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, 1999 and for the three
and nine month periods ended September 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:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, 1998 Ended September 30, 1998
------------------------ ------------------------
<S> <C> <C>
Revenues $ 2,113,000 $ 16,824,000
------------ -------------
Loss before income taxes (274,000) (718,000)
Income taxes 0 432,000
------------ -------------
Net loss $ (274,000) $ (1,150,000)
------------ -------------
</TABLE>
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 September 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) $34,060,000
Grant of stock options below
fair market value - 61,000 (61,000) - - -
Amortization of deferred
compensation - (24,000) 24,000 - - -
Cancellation of stock options - - 17,000 - - -
Exercise of options 5,000 932,000 - - - -
Cumulative currency
translation adjustment - - - 177,000 - 177,000
Net Loss - - - - (1,791,000) (1,791,000)
------------------------------------------------------------------------------
Balance at September 30, 1999 $140,000 $52,067,000 $(49,000) $(659,000) $(3,142,000) $32,446,000
==============================================================================
</TABLE>
5. MAJOR CUSTOMERS
---------------
In the third quarter of 1999, the Company had one customer that accounted for
37% of total revenues. In the third quarter 1998, the same customer accounted
for 16% of total revenues and another customer accounted for 13% of total
revenues. For the first nine months of 1999, two customers accounted for 21% and
11% of total revenues. In the first nine months 1998, the same two customers
accounted for 16% and 11% 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 Relationship Management (CRM) 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 September 30, 1999 and 1998
- ------------------------------------------------------------
Continuing Operations
- ---------------------
Revenues
- --------
Revenues increased $1,331,000, or 20%, to $8,155,000 for the three months ended
September 30, 1999 from $6,824,000 for the three months ended September 30,
1998. Software license fee revenues increased $1,764,000, or 207%, from the same
period last year. Services and maintenance revenues for the three months ended
September 30, 1999 amounted to $5,537,000, a 7% decrease from the same quarter
in 1998.
The Company's international operations contributed $1,863,000 of revenues in the
third quarter of 1999 compared to $2,142,000 in the third quarter of 1998. This
represents a 13% decrease from the same period last year and 23% of total
revenues in the third quarter 1999.
Software license fee revenues increased 207% to $2,618,000 in the third quarter
of 1999 from $854,000 in the third quarter of 1998. The increase in license
revenue was principally attributable to the sale of $1,848,000 of DISPATCH-1
source code. DISPATCH-1 license fee revenue increased $1,568,000, or 385%, from
$407,000 in the third quarter of 1998 to $1,975,000 in the third quarter of
1999. DISPATCH-1 accounted for 75% of total software license fee revenues in the
third quarter of 1999 compared to 48% of total license fee revenues in the third
quarter of 1998. The increase is also partially attributable to the continued
market acceptance of ServiceAlliance. ServiceAlliance license revenues increased
$189,000 or 43%, to $625,000 in the third quarter of 1999 from $436,000 in the
third quarter of 1998. In addition, software license fee revenues from royalties
received on PowerHelp, which is sold via a distributor, were $18,000 in the
third quarter of 1999 compared to $11,000 in the quarter ended September 30,
1998.
Services and maintenance revenues decreased 7% to $5,537,000 in the third
quarter of 1999 from $5,970,000 in the third quarter of 1998. The increase
relates to a decrease in service and maintenance revenues from DISPATCH-1
partially offset by an increase in service and maintenance revenues from
ServiceAlliance. Services and maintenance revenues from ServiceAlliance
increased $739,000 to $1,092,000 from $353,000 in the third quarter of 1998.
Service and maintenance revenues from DISPATCH-1 decreased 20% to $4,438,000 in
the third quarter of 1999 from $5,568,000 in the third quarter of 1998. In
addition, service and maintenance revenue from PowerHelp was $7,000 in the third
quarter of 1999 compared to $49,000 in the third quarter of 1998.
In the third quarter of 1999, the Company had one customer that accounted for
37% of total revenues. In the third quarter 1998, the same customer accounted
for 16% and another customer accounted for 13% of total revenues.
8
<PAGE>
Costs of Revenues
- -----------------
Cost of software license fees decreased 18% to $459,000 in the third quarter of
1999 from $559,000 in the third 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 $321,000 in the third
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 third
quarter of 1999 offset by an increase in capitalized software amortization. The
software licenses gross margin percentage was 82% in the third quarter of 1999
compared to 35% in the third quarter of 1998. This increase in gross margin was
attributable to increased license fee revenues.
Cost of services and maintenance decreased 6% to $4,301,000 in the third quarter
of 1999 from $4,593,000 in the third quarter of 1998. The decrease in cost of
services and maintenance is primarily attributed to reduced third party
consultant costs. The services and maintenance gross margin percentage was 22%
in the third quarter of 1999 compared to 23% in the third quarter of 1998. The
decrease in gross margin is primarily due to a lower utilization of service
professionals.
Product Development
- -------------------
Product development expense decreased 41% to $1,070,000 in the third quarter of
1999 from $1,803,000 in the third quarter of 1998. The decrease in product
development expenses is primarily attributable to reduced third party consultant
costs and fewer DISPATCH-1 development personnel. Product development as a
percentage of revenues decreased to 13% in the third quarter of 1999 from 26% in
the third quarter of 1998 due to increased revenue and decreased development
expense in the third quarter of 1999.
Sales and Marketing
- -------------------
Sales and marketing expense decreased 7% to $1,865,000 in the third quarter of
1999 from $1,996,000 in the third quarter of 1998. As a percentage of revenues,
sales and marketing expenses decreased to 23% from 29% in the third quarter of
1998.
General and Administrative
- --------------------------
General and administrative expenses decreased 26% to $903,000 in the third
quarter of 1999 from $1,215,000 in the third quarter of 1998. The decrease
primarily relates to the Company's ongoing cost containment efforts.
Net Interest Income
- -------------------
Net interest income increased $410,000 to $511,000 in the third quarter of 1999
from an interest income amount of $101,000 in the third quarter of 1998. The
increase of interest income is attributable to the interest earned on the
proceeds from the sales of Bendata in September 1998 and Abalon in December
1998.
International Operations
- ------------------------
Total revenue from the Company's international operations decreased by $279,000,
or 13%, to $1,863,000 in third quarter of 1999 from $2,142,000 in the same
quarter in 1998. The decrease in revenue from international operations was
primarily attributable to the decrease in licenses purchased in Europe and a
decrease of DISPATCH-1 service revenue in the Pacific rim during 1999.
International operations resulted in $382,000 net loss for the third quarter
ended September 30, 1999 compared to a net loss of $592,000 in the same quarter
in 1998.
9
<PAGE>
Comparison of Nine Months Ended September 30, 1999 and 1998
- -----------------------------------------------------------
Continuing Operations
- ---------------------
Revenues
- --------
Revenues increased $3,500,000, or 17%, to $23,782,000 for the nine months ended
September 30, 1999 from $20,282,000 for the nine months ended September 30,
1998. Software license fee revenues increased $3,230,000, or 87%, from the same
period last year. Services and maintenance fees for the nine months ended
September 30, 1999 amounted to $16,844,000, a 2% increase from the same nine
months in 1998.
The Company's international operations contributed $6,421,000 of revenues in the
first nine months of 1999 compared to $6,484,000 in the first nine months of
1998. This represents a 1% decrease from the same period last year and 27% of
total revenues in the first nine months of 1999.
Software license fee revenues increased 87% to $6,938,000 in the first nine
months of 1999 from $3,708,000 in the first nine months of 1998. The increase is
attributable to the continued market acceptance of ServiceAlliance.
ServiceAlliance license revenues increased $1,906,000, or 218%, to $2,782,000 in
the first nine months of 1999 from $876,000 in the first nine months of 1998.
The increase is also attributable to an increase in DISPATCH-1 license fee
revenue, which increased $1,322,000 or 49% from $2,717,000 in the first nine
months of 1998 to $4,039,000 in the first nine months of 1999. The increase in
DISPATCH-1 license revenue was principally attributable to the sale of
$1,848,000 of DISPATCH-1 source code in September 1999. DISPATCH-1 accounted for
58% of total software license fee revenues in the first nine months of 1999
compared to 73% of total license fee revenues in the first nine months of 1998.
In addition, software license fee revenues from royalties received on PowerHelp,
which is sold via a distributor, was $117,000 in the first nine months of 1999
compared to $115,000 in the nine months ended September 30, 1998.
Services and maintenance revenues increased 2% to $16,844,000 in the first nine
months of 1999 from $16,574,000 in the nine months of 1998. The increase
primarily relates to service and maintenance revenues from ServiceAlliance,
which increased $2,065,000 to $2,689,000 from $624,000 in the first nine months
of 1998. Service and maintenance revenues from DISPATCH-1 decreased 10% to
$14,097,000 in the first nine months of 1999 from $15,717,000 in the first nine
months of 1998. In addition, service and maintenance revenue from PowerHelp was
$58,000 in the first nine months of 1999 compared to $233,000 in the first nine
months of 1998.
In the first nine months of 1999, the Company had two customers that accounted
for 21% and 11% of total revenues. In the first nine months of 1998, the same
two customers accounted for 16% and 11% of total revenues, respectively.
Costs of Revenues
- -----------------
Cost of software license fees increased 19% to $1,687,000 in the first nine
months of 1999 from $1,420,000 in the first nine months of 1998. Included in the
cost of software license fees is the fixed cost of capitalized software
amortization. Capitalized software amortization was $1,104,000 and $788,000 in
the first nine months of 1999 and 1998, respectively. The increase in the cost
of software license fees represents the increase in capitalized software
amortization off set by a decrease in third party software costs attributable to
the mix of products sold in conjunction with the company's products in the first
nine months of 1999. The software license gross margin percentage was 76% in the
first nine months of 1999 compared to 62% in the first nine months of 1998. This
increase in gross margin was attributable to increased license fee revenue.
Cost of services and maintenance increased 3% to $13,170,000 in the first nine
months of 1999 from $12,797,000 in the first nine months of 1998. The services
and maintenance gross margin percentage was 22% in the first nine months of 1999
compared to 23% in the first nine 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.
10
<PAGE>
Product Development
- -------------------
Product development expense decreased 14% to $3,693,000 in the first nine months
of 1999 from $4,281,000 in the first nine months of 1998. The decrease in
product development expense is primarily attributable to reduced third party
consultant costs. Product development as a percentage of revenues decreased to
16% in the first nine months of 1999 from 21% in the first nine months of 1998.
Sales and Marketing
- -------------------
Sales and marketing expense increased 13% to $6,187,000 in the first nine months
of 1999 from $5,466,000 in the first nine 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 decreased to 26% from 27% in the first nine months
of 1998.
General and Administrative
- --------------------------
General and administrative expense decreased 29% to $2,815,000 in the first nine
months of 1999 from $3,963,000 in the first nine months 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 is related to lower than expected office-
closing costs.
Net Interest Income
- -------------------
Net interest income increased $1,483,000 to $1,603,000 in the first nine months
of 1999 from $120,000 in the first nine months of 1998. This increase is
attributable to the interest earned on the proceeds from the sales of Bendata in
September 1998 and Abalon in December 1998.
International Operations
- ------------------------
Total revenue from the Company's international operations declined by $63,000,
or 1%, to $6,421,000 in the first nine months of 1999 from $6,484,000 in the
same nine months of 1998. The decrease in revenue from international operations
represents a decrease in revenue from the DISPATCH-1 product offset by an
increase in revenue from the ServiceAlliance product. International operations
resulted in a $1,366,000 loss for the nine months ended September 30, 1999 as
compared to a loss of $1,146,000 for the nine months ended September 30, 1998.
Liquidity and Capital Resources
- -------------------------------
Net cash used in operating activities was $4,198,000 for the nine months ended
September 30, 1999 compared to $7,348,000 for the nine months ended September
30, 1998. This decrease in cash used was primarily attributable to a reduced
overall net loss offset by reduced collections of accounts receivable.
The Company's investing activities provided $5,233,000 of cash in the first nine
months of 1999 compared to $17,737,000 in the first nine months of 1998. The
decrease in cash provided by investing activities was primarily attributable to
reduced proceeds from the 1998 sales of discontinued operations offset by
decreased purchases of investments available for sale.
11
<PAGE>
The Company provided $81,000 from financing activities during the nine months
ended September 30, 1999 compared to the use of $699,000 in the first nine
months of 1998. This increase is due to increased proceeds from the exercise of
stock options and employee stock purchase plan.
The Company maintains a line of credit with a maximum borrowing availability of
$5,000,000. The line of credit bears interest at the lending bank's prime rate.
Borrowings under the line of credit are secured by the Company's assets. The
line expires on September 29, 2000.
At September 30, 1999, the Company had a working capital ratio of 5.8, with cash
and investments available for sale of $41,047,000. In September 1999, the
company received $9,276,000 of notes and escrows receivable from the 1998
divestitures of Abalon and Bendata. 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.
12
<PAGE>
Costs and Contingency Plans. Based on in-house compliance testing
performed during 1999, the Company believes its third-party vendors are Year
2000 compliant and does not feel a contingency plan is necessary to address
third-party Year 2000 risks. 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.
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 Relationship Management (CRM) software market is intensely
competitive.
. International sales for the Company's products and services, and the
Company's expenses related to these sales, continue to be a substantial
component of the Company's operations. International sales are subject to a
variety of risks, including difficulties in establishing and managing
international operations and in translating products into foreign
languages.
. 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.
13
<PAGE>
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 September 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.
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,
1999.
Item 3. Defaults Upon Senior Securities
- ---------------------------------------
There have been no defaults by the Company on any Senior Securities during the
quarter ended September 30, 1999.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
No matters were submitted to a vote of the Company's stockholders during the
third quarter of the fiscal year covered by this report through the solicitation
of proxies or otherwise.
Item 5. Other Information
- -------------------------
None.
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(A) Exhibits
(10.1) Loan and Security Agreement by and between Astea International
Inc. and Silicon Valley Bank
(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 10th day of
November 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
LOAN AND SECURITY AGREEMENT
BY AND BETWEEN
ASTEA INTERNATIONAL INC., as Borrower
AND
SILICON VALLEY BANK, the Bank
SEPTEMBER 30, 1999
<PAGE>
LOAN AND SECURITY AGREEMENT
---------------------------
THIS LOAN AND SECURITY AGREEMENT is entered into as of September 30, 1999,
by and between SILICON VALLEY BANK, a California chartered bank ("Bank") with
its principal place of business at 3003 Tasman Drive, Santa Clara, California
95054 and with a loan production office located at 5 Radnor Corporate Center,
Suite 555, 100 Matsonford, Radnor, Pennsylvania 19087 and ASTEA INTERNATIONAL
INC., a corporation in good standing under the laws of the State of Delaware
("Borrower").
RECITALS
--------
Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower will repay the amounts
owing to Bank.
AGREEMENT
---------
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
----------------------------
1.1 Definitions. As used in this Agreement, the following terms shall
-----------
have the following definitions:
"Accounts" means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods (including, without limitation, the
licensing of software and other technology) or the rendering of services by
Borrower, whether or not earned by performance, and any and all credit
insurance, guaranties, and other security therefor, as well as all merchandise
returned to or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.
"Advance" or "Advances" means a loan advance under the Committed
Revolving Line.
"Affiliate" means, with respect to any Person, any Person that owns or
controls directly or indirectly such Person, any Person that controls or is
controlled by or is under common control with such Person, and each of such
Person's senior executive officers, directors, partners and, for any Person that
is a limited liability company, such Persons, managers and members.
2
<PAGE>
"Copyrights" means any and all copyright rights, copyright
applications, copyright registrations and like protections in each work or
authorship and derivative work thereof, whether published or unpublished and
whether or not the same also constitutes a trade secret, now or hereafter
existing, created, acquired or held.
"Credit Extension" means each Advance, Equipment Advance, Letter of
Credit, Term Loan, Exchange Contract or any other extension of credit by Bank
for the benefit of Borrower hereunder.
"Current Assets" means, as of any applicable date, all amounts that
should, in accordance with GAAP, be included as current assets on the
consolidated balance sheet of Borrower and its Subsidiaries as at such date.
"Current Liabilities" means, as of any applicable date, all amounts
that should, in accordance with GAAP, be included as current liabilities on the
consolidated balance sheet of Borrower and its Subsidiaries, as at such date,
plus, to the extent not already included therein, all outstanding Credit
Extensions made under this Agreement, including all Indebtedness that is payable
upon demand or within one year from the date of determination thereof unless
such Indebtedness is renewable or extendable at the option of Borrower or any
Subsidiary to a date more than one year from the date of determination, but
excluding Subordinated Debt.
"Equipment" means all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments in
which Borrower has any interest.
"ERISA" means the Employment Retirement Income Security Act of 1974,
as amended, and the regulations thereunder.
"GAAP" means generally accepted accounting principles as in effect in
the United States from time to time.
"Indebtedness" means (a) all indebtedness for borrowed money or the
deferred purchase price of property or services, including without limitation
reimbursement and other obligations with respect to surety bonds and letters of
credit, (b) all obligations evidenced by notes, bonds, debentures or similar
instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.
"Insolvency Proceeding" means any proceeding commenced by or against
any person or entity under any provision of the United States Bankruptcy Code,
as amended, or under any other bankruptcy or insolvency law, including
assignments for the benefit of creditors, formal or informal moratoria,
compositions, extension generally with its creditors, or proceedings seeking
reorganization, arrangement, or other relief.
3
<PAGE>
"Bank Expenses" means all reasonable costs or expenses (including
reasonable attorneys' fees and expenses) incurred in connection with the
preparation, negotiation, administration, and enforcement of the Loan Documents;
and Bank's reasonable attorneys' fees and expenses incurred in amending,
enforcing or defending the Loan Documents, (including fees and expenses of
appeal or review, or those incurred in any Insolvency Proceeding) whether or not
suit is brought.
"Borrower's Books" means all of Borrower's books and records
including, without limitation: ledgers; records concerning Borrower's assets or
liabilities, the Collateral, business operations or financial condition; and all
computer programs, or tape files, and the equipment, containing such
information.
"Business Day" means any day that is not a Saturday, Sunday, or other
day on which banks in the State of Pennsylvania are authorized or required to
close.
"Closing Date" means the date of this Agreement.
"Code" means the Pennsylvania Uniform Commercial Code.
"Collateral" means the property described on Exhibit A attached
---------
hereto.
"Committed Revolving Line" means a credit extension of up to Five
Million Dollars ($5,000,000).
"Contingent Obligation" means, as applied to any Person, any direct or
indirect liability, contingent or otherwise, of that Person with respect to (i)
any indebtedness, lease, dividend, letter of credit or other obligation of
another, including, without limitation, any such obligation directly or
indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by
that Person, or in respect of which that Person is otherwise directly or
indirectly liable; (ii) any obligations with respect to undrawn letters of
credit issued for the account of that Person; and (iii) all obligations arising
under any interest rate, currency or commodity swap agreement, interest rate cap
agreement, interest rate collar agreement, or other agreement or arrangement
designated to protect a Person against fluctuation in interest rates, currency
exchange rates or commodity prices; provided, however, that the term "Contingent
Obligation" shall not include endorsements for collection or deposit in the
ordinary course of business. The amount of any Contingent Obligation shall be
deemed to be an amount equal to the stated or determined amount of the primary
obligation in respect of which such Contingent Obligation is made or, if not
stated or determinable, the maximum reasonably anticipated liability in respect
thereof as determined by such Person in good faith; provided, however, that such
amount shall not in any event exceed the maximum amount of the obligations under
the guarantee or other support arrangement.
4
<PAGE>
"Intellectual Property Collateral" means
(a) Copyrights, Trademarks, Patents, and Mask Works (other than
those belonging to a third party);
(b) Any and all trade secrets, and any and all intellectual
property rights in computer software and computer software products now or
hereafter existing, created, acquired or held;
(c) Any and all design rights which may be available to Borrower
now or hereafter existing, created, acquired or held;
(d) Any and all claims for damages by way of past, present and
future infringement of any of the rights included above, with the right, but not
the obligation, to sue for and collect such damages for said use or infringement
of the intellectual property rights identified above;
(e) All licenses or other rights to use any of the Copyrights,
Patents, Trademarks, or Mask Works, and all license fees and royalties arising
from such use to the extent permitted by such license or rights;
(f) All amendments, renewals and extensions of any of the
Copyrights, Trademarks, Patents, or Mask Works; and
(g) All proceeds and products of the foregoing, including
without limitation all payments under insurance or any indemnity or warranty
payable in respect of any of the foregoing.
"Intellectual Property Security Agreement" means that certain
Intellectual Property Security Agreement of even date herewith by and between
Bank and Borrower.
"Inventory" means all present and future inventory in which Borrower
has any interest, including merchandise, raw materials, parts, supplies, packing
and shipping materials, work in process and finished products intended for sale
or lease or to be furnished under a contract of service, of every kind and
description now or at any time hereafter owned by or in the custody or
possession, actual or constructive, of Borrower, including such inventory as is
temporarily out of its custody or possession or in transit and including any
returns upon any accounts or other proceeds, including insurance proceeds,
resulting from the sale or disposition of any of the foregoing and any documents
of title representing any of the above.
"Investment" means any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.
5
<PAGE>
"IRC" means the Internal Revenue Code of 1986, as amended, and the
regulations thereunder.
"Lien" means any mortgage, lien, deed of trust, charge, pledge,
security interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement, the Note, the
Intellectual Property Security Agreement, any note or notes executed by
Borrower, and any other present or future agreement entered into between
Borrower and/or for the benefit of Bank in connection with this Agreement, all
as amended, extended or restated from time to time.
"Mask Works" means all mask work or similar rights available for the
protection of semiconductor chips, now owned or hereafter acquired.
"Material Adverse Effect" means a material adverse effect on (i) the
business operations or condition (financial or otherwise) of Borrower and its
Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the
Obligations or otherwise perform its obligations under the Loan Documents.
"Maturity Date" means the Revolving Maturity Date.
"Negotiable Collateral" means all of Borrower's present and future
letters of credit of which it is a beneficiary, notes, drafts, instruments,
securities, documents of title, and chattel paper.
"Note" means the Revolving Promissory Note, and "Notes" means the
Revolving Promissory Note(s).
"Obligations" means all debt, principal, interest, Bank Expenses and
other amounts owed to Bank by Borrower pursuant to this Agreement or any other
agreement, whether absolute or contingent, due or to become due, now existing or
hereafter arising, including any interest that accrues after the commencement of
an Insolvency Proceeding and including any debt, liability, or obligation owing
from Borrower to others that Bank may have obtained by assignment or otherwise.
"Patents" means all patents, patent applications and like protections
including without limitation improvements, divisions, continuations, renewals,
reissues, extensions and continuations-in-part of the same.
"Payment Date" means the fifth (5th) calendar day of each month
commencing on the first such date after the Closing Date and ending on the
Revolving Maturity Date.
"Permitted Indebtedness" means:
6
<PAGE>
(a) Indebtedness of Borrower in favor of Bank arising under this
Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date and disclosed in
the Schedule;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred in the ordinary
course of business; and
(e) Indebtedness secured by Permitted Liens.
"Permitted Investment" means:
(a) Investments existing on the Closing Date disclosed in the
Schedule; and
(b) (i) marketable direct obligations issued or unconditionally
guaranteed by the United States of America or any agency or any State thereof
maturing within one (1) year from the date of acquisition thereof, (ii)
commercial paper maturing no more than one (1) year from the date of creation
thereof and currently having the highest rating obtainable from either Standard
& Poor's Corporation or Moody's Investors Service, Inc., and (iii) certificates
of deposit maturing no more than one (1) year from the date of investment
therein issued by Bank.
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and disclosed in the
Schedule or arising under this Agreement or the other Loan Documents;
(b) Liens for taxes, fees, assessments or other governmental
charges or levies, either not delinquent or being contested in good faith by
appropriate proceedings and as to which adequate reserves are maintained on
Borrower's Books in accordance with GAAP, provided the same have no priority
--------
over any of Bank's security interests;
(c) Liens (i) upon or in any Equipment acquired or held by
Borrower or any of its Subsidiaries to secure the purchase price of such
Equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such Equipment, or (ii) existing on such equipment at the time of
its acquisition, provided that the Lien is confined solely to the property
--------
so acquired and improvements thereon, and the proceeds of such equipment;
7
<PAGE>
(d) Leases or subleases and licenses or sublicenses granted to
others in the ordinary course of Borrower's business not interfering in any
material respect with the business of Borrower and its Subsidiaries taken as a
whole, and any interest or title of a lessor, licensor or under any lease or
license provided that such leases, subleases, licenses and sublicenses do not
prohibit the grant of the security interest granted hereunder; and
(e) Liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by Liens of the type described in
clauses (a) through (c) above, provided that any extension, renewal or
--------
replacement Lien shall be limited to the property encumbered by the existing
Lien and the principal amount of the indebtedness being extended, renewed or
refinanced does not increase.
"Person" means any individual, sole proprietorship, partnership,
limited liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or governmental agency.
"Prime Rate" means the variable rate of interest, per annum, most
recently announced by Bank, as its "prime rate," whether or not such announced
rate is the lowest rate available from Bank.
"Profitable" means the Borrower has a positive net profit (net of
increases in capitalized software and excluding any extraordinary charges) for
the period measured.
"Quick Assets" means, as of any applicable date, the consolidated
cash, cash equivalents, accounts receivable and investments with maturities of
fewer than 90 days of Borrower determined in accordance with GAAP.
"Responsible Officer" means each of the Chief Executive Officer, the
President, the Chief Financial Officer and the Controller of Borrower.
"Revolving Maturity Date" means September 29, 2000.
"Revolving Promissory Note" means that certain Revolving Promissory
Note of even date herewith in substantially the form of Exhibit D hereto in the
---------
maximum principal amount of Five Million Dollars ($5,000,000) from the Borrower
in favor of Bank, together with all renewals, amendments, modifications and
substitutions therefore.
"Schedule" means the schedule of exceptions attached hereto, if any.
"Subordinated Debt" means any debt incurred by Borrower that is
subordinated to the debt owing by Borrower to Bank on terms acceptable to Bank
(and identified as being such by Borrower and Bank).
8
<PAGE>
"Subsidiary" means with respect to any Person, corporation,
partnership, company association, joint venture, or any other business entity of
which more than fifty percent (50%) of the voting stock or other equity
interests is owned or controlled, directly or indirectly, by such Person or one
or more Affiliates of such Person.
"Trademarks" means any trademark and servicemark rights, whether
registered or not, applications to register and registrations of the same and
like protections, and the entire goodwill of the business of Assignor connected
with and symbolized by such trademarks.
1.2 Accounting and Other Terms. All accounting terms not specifically
--------------------------
defined herein shall be construed in accordance with GAAP and all calculations
and determinations made hereunder shall be made in accordance with GAAP. When
used herein, the term "financial statements" shall include the notes and
schedules thereto. The terms "including"/ "includes" shall always be read as
meaning "including (or includes) without limitation", when used herein or in any
other Loan Document.
2. LOAN AND TERMS OF PAYMENT
-------------------------
2.1 Advances. (a) Borrower promises to pay to the order of Bank, in
--------
lawful money of the United States of America, the aggregate unpaid principal
amount of all Advances made by Bank to Borrower hereunder. Borrower shall also
pay interest on the unpaid principal amount of such Advances at rates in
accordance with the terms hereof. Subject to and upon the terms and conditions
of this Agreement, Bank agrees to make Advances to Borrower in an aggregate
outstanding amount not to exceed the Committed Revolving Line. Subject to the
terms and conditions of this Agreement, amounts borrowed pursuant to this
Section 2.1 may be repaid and reborrowed at any time during the term of this
Agreement.
(b) Whenever Borrower desires an Advance, Borrower will notify Bank
by facsimile transmission or telephone no later than 3:00 p.m. Washington, D.C.
time, on the Business Day that the Advance is to be made. Each such
notification shall be promptly confirmed by a Payment/Advance Form in
substantially the form of Exhibit B hereto. Bank is authorized to make Advances
---------
under this Agreement, based upon instructions received from a Responsible
Officer or without instructions if in Bank's discretion such Advances are
necessary to meet Obligations which have become due and remain unpaid. Bank
shall be entitled to rely on any telephonic notice given by a person who Bank
reasonably believes to be a Responsible Officer and Borrower shall indemnify and
hold Bank harmless for any damages or loss suffered by Bank as a result of such
reliance. Bank will credit the amount of Advances made under this Section 2.1
to Borrower's deposit account.
(c) The Committed Revolving Line shall terminate on the Revolving
Maturity Date, at which time all Advances under this Section 2.1 and other
amounts due under this
9
<PAGE>
Agreement (except as otherwise expressly specified herein) shall be immediately
due and payable.
2.2 Overadvances. If, at any time or for any reason, the amount of
------------
Obligations owed by Borrower to Bank pursuant to Section 2.1 of this Agreement
is greater than the Committed Revolving Line, Borrower shall immediately pay to
Bank, in cash, the amount of such excess.
2.3 Interest Rates, Payments, and Calculations.
------------------------------------------
(a) Interest Rate. Except as set forth in Section 2.3(b), any
-------------
Advances shall bear interest, on the average daily balance thereof, as set forth
in the Note.
(b) Default Rate. All Obligations shall bear interest, from and after
------------
the occurrence of an Event of Default, at a rate equal to five (5) percentage
points above the interest rate applicable immediately prior to the occurrence of
the Event of Default.
(c) Payments. Interest hereunder shall be due and payable on each
--------
Payment Date. Borrower hereby authorizes Bank to debit any accounts with Bank,
including, without limitation, Account Number _____________________ for payments
of principal and interest due on the Obligations and any other amounts owing by
Borrower to Bank. Bank will promptly notify Borrower of all debits which Bank
has made against Borrower's accounts. Any such debits against Borrower's
accounts in no way shall be deemed a set-off. Any interest not paid when due
shall be compounded by becoming a part of the Obligations, and such interest
shall thereafter accrue interest at the rate then applicable hereunder.
(d) Computation. In the event the Prime Rate is changed from time to
-----------
time hereafter, the applicable rate of interest hereunder shall be increased or
decreased effective as of 12:01 a.m. on the day the Prime Rate is changed, by an
amount equal to such change in the Prime Rate. All interest chargeable under
the Loan Documents shall be computed on the basis of a three hundred sixty (360)
day year for the actual number of days elapsed.
2.4 Crediting Payments. Prior to the occurrence of an Event of Default,
------------------
Bank shall credit a wire transfer of funds, check or other item of payment to
such deposit account or Obligation as Borrower specifies. After the occurrence
of an Event of Default, the receipt by Bank of any wire transfer of funds,
check, or other item of payment, whether directed to Borrower's deposit account
with Bank or to the Obligations or otherwise, shall be immediately applied to
conditionally reduce Obligations, but shall not be considered a payment in
respect of the Obligations unless such payment is of immediately available
federal funds or unless and until such check or other item of payment is honored
when presented for payment. Notwithstanding anything to the contrary contained
herein, any wire transfer or payment received by Bank after 12:00 noon Pacific
time shall be deemed to have been received by Bank as of the opening of business
on the immediately following Business Day. Whenever any payment to Bank under
the Loan Documents would otherwise be due (except by reason of acceleration) on
a date that is not
10
<PAGE>
a Business Day, such payment shall instead be due on the next Business Day, and
additional fees or interest, as the case may be, shall accrue and be payable for
the period of such extension.
2.5 Fees. Borrower shall pay to Bank the following:
----
(a) Facility Fee. A Facility Fee equal to Six Thousand Two Hundred
------------
Fifty Dollars ($6,250), which fee shall be due on the Closing Date and shall be
fully earned and non-refundable;
(b) Financial Examination and Appraisal Fees. Bank's customary fees
----------------------------------------
and out-of-pocket expenses for Bank's audits of Borrower's Accounts, and for
each appraisal of Collateral and financial analysis and examination of Borrower
performed from time to time by Bank or its agents;
(c) Bank Expenses. Upon demand from Bank, including, without
-------------
limitation, upon the date hereof, all Bank Expenses incurred through the date
hereof, including reasonable attorneys' fees and expenses and, after the date
hereof, all Bank Expenses, including reasonable attorneys' fees and expenses, as
and when they become due.
2.6 Additional Costs. In case any law, regulation, treaty or official
----------------
directive or the interpretation or application thereof by any court or any
governmental authority charged with the administration thereof or the compliance
with any guideline or request of any central bank or other governmental
authority (whether or not having the force of law):
(a) subjects Bank to any tax with respect to payments of principal or
interest or any other amounts payable hereunder by Borrower or otherwise with
respect to the transactions contemplated hereby (except for taxes on the overall
net income of Bank imposed by the United States of America or any political
subdivision thereof);
(b) imposes, modifies or deems applicable any deposit insurance,
reserve, special deposit or similar requirement against assets held by, or
deposits in or for the account of, or loans by, Bank; or
(c) imposes upon Bank any other condition with respect to its
performance under this Agreement,
and the result of any of the foregoing is to increase the cost to Bank, reduce
the income receivable by Bank or impose any expense upon Bank with respect to
any loans, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank
the amount of such increase in cost, reduction in income or additional expense
as and when such cost, reduction or expense is incurred or determined, upon
presentation by Bank of a statement of the amount and setting forth Bank's
calculation thereof, all in reasonable detail, which statement shall be deemed
true and correct absent manifest error.
11
<PAGE>
2.7 Term. Except as otherwise set forth herein, this Agreement shall
-----
become effective on the Closing Date and, subject to Section 12.7, shall
continue in full force and effect for a term ending on the Revolving Maturity
Date. Notwithstanding the foregoing, Bank shall have the right to terminate its
obligation to make Credit Extensions under this Agreement immediately and
without notice upon the occurrence and during the continuance of an Event of
Default. Notwithstanding termination of this Agreement, Bank's lien on the
Collateral shall remain in effect for so long as any Obligations are
outstanding.
3. CONDITIONS OF LOANS
-------------------
3.1 Conditions Precedent to Initial Advance. The obligation of Bank to
------------------------------------------
make the initial Advance is subject to the condition precedent that Bank shall
have received, in form and substance satisfactory to Bank, the following:
(a) this Agreement;
(b) a certificate of the Secretary of Borrower with respect to
articles, bylaws, incumbency and resolutions authorizing the execution and
delivery of this Agreement;
(c) the Note;
(d) financing statements (Forms UCC-1);
(e) insurance certificates;
(f) payment of the fees and Bank Expenses then due specified in
Section 2.5 hereof;
(g) Certificate of Foreign Qualification (if applicable);
(h) Authorization to conduct the initial audit of Borrower's Accounts;
and
(i) such other documents, and completion of such other matters, as
Bank may reasonably deem necessary or appropriate.
3.2 Conditions Precedent to all Advances. The obligation of Bank to make
------------------------------------
each Advance, including the initial Advance, is further subject to the following
conditions:
(a) timely receipt by Bank of the Payment/Advance Form as provided in
Section 2.1;
12
<PAGE>
(b) evidence satisfactory to Bank that Borrower's existing debt (if
any) is subordinate to the Obligations; and
(c) the representations and warranties contained in Section 5 shall be
true and correct in all material respects on and as of the date of such
Payment/Advance Form and on the effective date of each Advance as though made at
and as of each such date, and no Event of Default shall have occurred and be
continuing, or would result from such Advance. The making of each Advance shall
be deemed to be a representation and warranty by Borrower on the date of such
Advance as to the accuracy of the facts referred to in this Section 3.2(b).
4. CREATION OF SECURITY INTEREST
-----------------------------
4.1 Grant of Security Interest. Borrower grants and pledges to Bank a
--------------------------
continuing security interest in all presently existing and hereafter acquired or
arising Collateral in order to secure prompt payment of any and all Obligations
and in order to secure prompt performance by Borrower of each of its covenants
and duties under the Loan Documents. Except as set forth in the Schedule, such
security interest constitutes a valid, first priority security interest in the
presently existing Collateral, and will constitute a valid, first priority
security interest in Collateral acquired after the date hereof. Borrower
acknowledges that Bank may place a "hold" on any Deposit Account pledged as
Collateral to secure the Obligations. Notwithstanding termination of this
Agreement, Bank's Lien on the Collateral shall remain in effect for so long as
any Obligations are outstanding.
4.2 Delivery of Additional Documentation Required. Borrower shall from
---------------------------------------------
time to time execute and deliver to Bank, at the request of Bank, all Negotiable
Collateral, all financing statements and other documents that Bank may
reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
4.3 Right to Inspect. Bank (through any of its officers, employees, or
----------------
agents) shall have the right, upon reasonable prior notice, from time to time
during Borrower's usual business hours, to inspect Borrower's Books and to make
copies thereof and to check, test, and appraise the Collateral in order to
verify Borrower's financial condition or the amount, condition of, or any other
matter relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES
------------------------------
Borrower represents and warrants as follows:
5.1 Due Organization and Qualification. Borrower and each Subsidiary is a
----------------------------------
corporation duly existing and in good standing under the laws of its state of
incorporation and qualified and licensed to do business in, and is in good
standing in, any state in which the conduct of its business or its ownership of
property requires that it be so qualified.
13
<PAGE>
5.2 Due Authorization; No Conflict. The execution, delivery, and
------------------------------
performance of the Loan Documents are within Borrower's powers, have been duly
authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Articles/Certificate of Incorporation or
Bylaws, nor will they constitute an event of default under any material
agreement to which Borrower is a party or by which Borrower is bound except to
the extent that certain intellectual property agreements prohibit the assignment
of the rights thereunder to a third party without the Borrower's or other
party's consent and the Loan Documents constitute an assignment. Borrower is
not in default under any agreement to which it is a party or by which it is
bound, which default could have a Material Adverse Effect.
5.3 No Prior Encumbrances. Borrower has good and indefeasible title to
---------------------
the Collateral, free and clear of Liens, except for Permitted Liens.
5.4 [Reserved].
5.5 Merchantable Inventory. All Inventory is in all material respects of
----------------------
good and marketable quality, free from all material defects.
5.6 Intellectual Property. Borrower is the sole owner of the Intellectual
---------------------
Property Collateral, except for non-exclusive licenses granted by Borrower to
its customers in the ordinary course of business. Each of the Patents is valid
and enforceable, and no part of the Intellectual Property Collateral has been
judged invalid or unenforceable, in whole or in part, and no claim has been made
that any part of the Intellectual Property Collateral violates the rights of any
third party. Except for and upon the filing with the United States Patent and
Trademark Office with respect to the Patents and Trademarks and the Register of
Copyrights with respect to the Copyrights and Mask Works necessary to perfect
the security interests created hereunder, and except as has been already made or
obtained, no authorization, approval or other action by, and no notice to or
filing with, any United States governmental authority or United States
regulatory body is required either (i) for the grant by Borrower of the security
interest granted hereby or for the execution, delivery or performance of Loan
Documents by Borrower in the United States or (ii) for the perfection in the
United States or the exercise by Bank of its rights and remedies hereunder.
5.7 Name; Location of Chief Executive Office. Except as disclosed in the
----------------------------------------
Schedule, Borrower has not done business and will not without at least thirty
(30) days prior written notice to Bank do business under any name other than
that specified on the signature page hereof. The chief executive office of
Borrower is located at the address indicated in Section 10 hereof.
5.8 Litigation. Except as set forth in the Schedule, there are no actions
----------
or proceedings pending, or, to Borrower's knowledge, threatened by or against
Borrower or any Subsidiary before any court or administrative agency in which an
adverse decision could have a Material
14
<PAGE>
Adverse Effect or a material adverse effect on Borrower's interest or Bank's
security interest in the Collateral
5.9 No Material Adverse Change in Financial Statements. All consolidated
--------------------------------------------------
financial statements related to Borrower and any Subsidiary that have been
delivered by Borrower to Bank fairly present in all material respects Borrower's
consolidated financial condition as of the date thereof and Borrower's
consolidated results of operations for the period then ended. There has not
been a material adverse change in the consolidated financial condition of
Borrower since the date of the most recent of such financial statements
submitted to Bank on or about the Closing Date.
5.10 Solvency. The fair saleable value of Borrower's assets (including
--------
goodwill minus disposition costs) exceeds the fair value of its liabilities; the
Borrower is not left with unreasonably small capital after the transactions
contemplated by this Agreement; and Borrower is able to pay its debts (including
trade debts) as they mature.
5.11 Regulatory Compliance. Borrower and each Subsidiary has met the
---------------------
minimum funding requirements of ERISA with respect to any employee benefit plans
subject to ERISA. No event has occurred resulting from Borrower's failure to
comply with ERISA that is reasonably likely to result in Borrower's incurring
any liability that could have a Material Adverse Effect. Borrower is not an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940. Borrower is not engaged
principally, or as one of its important activities, in the business of extending
credit for the purpose of purchasing or carrying margin stock (within the
meaning of Regulations G, T and U of the Board of Governors of the Federal
Reserve System). Borrower has complied with all the provisions of the Federal
Fair Labor Standards Act. Borrower has not violated any statutes, laws,
ordinances or rules applicable to it, violation of which could have a Material
Adverse Effect.
5.12 Environmental Condition. None of Borrower's or any Subsidiary's
-----------------------
properties or assets has ever been used by Borrower or any Subsidiary or, to the
best of Borrower's knowledge, by previous owners or operators, in the disposal
of, or to produce, store, handle, treat, release, or transport, any hazardous
waste or hazardous substance other than in accordance with applicable law; to
the best of Borrower's knowledge, none of Borrower's properties or assets has
ever been designated or identified in any manner pursuant to any environmental
protection statute as a hazardous waste or hazardous substance disposal site, or
a candidate for closure pursuant to any environmental protection statute; no
lien arising under any environmental protection statute has attached to any
revenues or to any real or personal property owned by Borrower or any
Subsidiary; and neither Borrower nor any Subsidiary has received a summons,
citation, notice, or directive from the Environmental Protection Agency or any
other federal, state or other governmental agency concerning any action or
omission by Borrower or any Subsidiary resulting in the release, or other
disposition of hazardous waste or hazardous substances into the environment.
15
<PAGE>
5.13 Taxes. Borrower and each Subsidiary has filed or caused to be filed
-----
all tax returns required to be filed on a timely basis, and has paid, or has
made adequate provision for the payment of, all taxes reflected therein.
5.14 Subsidiaries. Borrower does not own any stock, partnership interest
------------
or other equity securities of any Person, except for Permitted Investments.
5.15 Government Consents. Borrower and each Subsidiary has obtained all
-------------------
consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all governmental authorities that are necessary
for the continued operation of Borrower's business as currently conducted.
5.16 Full Disclosure. No representation, warranty or other statement made
---------------
by Borrower in any certificate or written statement furnished to Bank contains
any untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements contained in such certificates or
statements not misleading.
6. AFFIRMATIVE COVENANTS
---------------------
Borrower acknowledges and agrees that the covenants provided for herein are
structured in recognition of Borrower's current operating plan and that Bank
reserves the right to add to or modify such covenants at any time as it deems
appropriate. Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to make
a Credit Extension hereunder, Borrower shall do all of the following:
6.1 Good Standing. Borrower shall maintain its and each of its
-------------
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could have a Material Adverse Effect. Borrower shall
maintain, and shall cause each of its Subsidiaries to maintain, to the extent
consistent with prudent management of Borrower's business, in force all
licenses, approvals and agreements, the loss of which could have a Material
Adverse Effect.
6.2 Government Compliance. Borrower shall meet, and shall cause each
---------------------
Subsidiary to meet, the minimum funding requirements of ERISA with respect to
any employee benefit plans subject to ERISA. Borrower shall comply, and shall
cause each Subsidiary to comply, with all statutes, laws, ordinances and
government rules and regulations to which it is subject, noncompliance with
which could have a Material Adverse Effect or a material adverse effect on the
Collateral or the priority of Bank's Lien on the Collateral.
6.3 Financial Statements, Reports, Certificates. Borrower shall deliver
-------------------------------------------
to Bank: (a) as soon as available, but in any event within thirty (30) days
after the end of each month, a
16
<PAGE>
company prepared consolidated balance sheet and income statement covering
Borrower's consolidated operations during such period, in a form and certified
by an officer of Borrower reasonably acceptable to Bank; (b) as soon as
available, but in any event within ninety (90) days after the end of Borrower's
fiscal year, audited consolidated financial statements of Borrower prepared in
accordance with GAAP, consistently applied, together with an unqualified opinion
on such financial statements of an independent certified public accounting firm
reasonably acceptable to Bank; (c) within five (5) days of filing, copies of all
statements, reports and notices sent or made available generally by Borrower to
its security holders or to any holders of Subordinated Debt; (d) all reports on
Form 10-K filed with the Securities and Exchange Commission within ninety (90)
days of year end; (e) all reports on form 10-Q filed with the Securities and
Exchange Commission within forty five (45) days of quarter end; (f) promptly
upon receipt of notice thereof, a report of any legal actions pending or
threatened against Borrower or any Subsidiary that could result in damages or
costs to Borrower or any Subsidiary of One Hundred Thousand Dollars ($100,000)
or more; (g) prompt notice of any material change in the composition of the
Intellectual Property Collateral, including, but not limited to, any subsequent
ownership right of the Borrower in or to any Copyright, Patent or Trademark not
specified in any intellectual property security agreement between Borrower and
Bank or knowledge of an event that materially adversely effects the value of the
Intellectual Property Collateral; (h) as soon as available, but in any event
within thirty (30) days of year end, an annual operating plan and projections
for the coming year and (i) such budgets, sales projections, operating plans or
other financial information as Bank may reasonably request from time to time.
Within thirty (30) days after the last day of each month, Borrower shall
deliver to Bank with the monthly financial statements a Compliance Certificate
signed by a Responsible Officer in substantially the form of Exhibit C hereto.
---------
Bank shall have a right from time to time hereafter to audit Borrower's
Accounts at Borrower's expense, provided that such audits will be conducted no
more often than every twelve (12) months if no amounts are outstanding under the
Committed Revolving Line and no more often than every six (6) months if amounts
are outstanding under the Committed Revolving Line unless an Event of Default
has occurred and is continuing.
6.4 Inventory; Returns. Borrower shall keep all Inventory in good and
------------------
marketable condition, free from all material defects. Returns and allowances,
if any, as between Borrower and its account debtors shall be on the same basis
and in accordance with the usual customary practices of Borrower, as they exist
at the time of the execution and delivery of this Agreement. Borrower shall
promptly notify Bank of all returns and recoveries and of all disputes and
claims, where the return, recovery, dispute or claim involves more than Fifty
Thousand Dollars ($50,000).
6.5 Taxes. Borrower shall make, and shall cause each Subsidiary to make,
-----
due and timely payment or deposit of all material federal, state, and local
taxes, assessments, or contributions required of it by law, and will execute and
deliver to Bank, on demand, appropriate
17
<PAGE>
certificates attesting to the payment or deposit thereof; and Borrower will
make, and will cause each Subsidiary to make, timely payment or deposit of all
material tax payments and withholding taxes required of it by applicable laws,
including, but not limited to, those laws concerning F.I.C.A., F.U.T.A., state
disability, and local, state, and federal income taxes, and will, upon request,
furnish Bank with proof satisfactory to Bank indicating that Borrower or a
Subsidiary has made such payments or deposits; provided that Borrower or a
Subsidiary need not make any payment if the amount or validity of such payment
is (i) contested in good faith by appropriate proceedings, (ii) is reserved
against (to the extent required by GAAP) by Borrower and (iii) no lien other
than a Permitted Lien results.
6.6 Insurance.
---------
(a) Borrower, at its expense, shall keep the Collateral insured
against loss or damage by fire, theft, explosion, sprinklers, and all other
hazards and risks, and in such amounts, as ordinarily insured against by other
owners in similar businesses conducted in the locations where Borrower's
business is conducted on the date hereof. Borrower shall also maintain
insurance relating to Borrower's ownership and use of the Collateral in amounts
and of a type that are customary to businesses similar to Borrower's.
(b) All such policies of insurance shall be in such form, with such
companies, and in such amounts as are reasonably satisfactory to Bank. All such
policies of property insurance shall contain a lender's loss payable
endorsement, in a form satisfactory to Bank, showing Bank as an additional loss
payee thereof and all liability insurance policies shall show the Bank as an
additional insured, and shall specify that the insurer must give at least twenty
(20) days notice to Bank before canceling its policy for any reason. At Bank's
request, Borrower shall deliver to Bank certified copies of such policies of
insurance and evidence of the payments of all premiums therefor. All proceeds
payable under any such policy shall, at the option of Bank, be payable to Bank
to be applied on account of the Obligations.
6.7 Principal Depository. Borrower shall maintain its principal
--------------------
depository and operating accounts with Bank.
6.8 Quick Ratio. Borrower shall maintain, as of the last day of each
-----------
calendar month, a ratio of Quick Assets to Current Liabilities less deferred
revenues of at least 2.0 to 1.0.
6.9 Profitability. Borrower shall maintain minimum net profit (net of
-------------
increases in capitalized software and excluding any extraordinary charges)
tested on a quarterly basis of not less than the following amounts at the
following times:
Quarter Ending Net Profit (Loss)
-------------- -----------------
September 30, 1999 ($750,000)
December 31, 1999 $500,000
18
<PAGE>
March 31, 2000 $500,000
6.10 Further Assurances. At any time and from time to time Borrower shall
------------------
execute and deliver such further instruments and take such further action as may
reasonably be requested by Bank to effect the purposes of this Agreement.
7. NEGATIVE COVENANTS
------------------
Borrower covenants and agrees that, so long as any Credit Extension
hereunder shall be available and until payment in full of the outstanding
Obligations or for so long as Bank may have any commitment to make any Advances,
Borrower will not do any of the following:
7.1 Dispositions. Convey, sell, lease, transfer or otherwise dispose of
-------------
(collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer, all
or any part of its business or property, other than Transfers: (i) of inventory
in the ordinary course of business, (ii) of non-exclusive licenses and similar
arrangements for the use of the property of Borrower or its Subsidiaries in the
ordinary course of business; (iii) that constitute payment of normal and usual
operating expenses in the ordinary course of business; or (iv) of worn-out or
obsolete Equipment.
7.2 Changes in Business, Ownership, or Management, Business Locations.
-----------------------------------------------------------------
Engage in any business, or permit any of its Subsidiaries to engage in any
business, other than the businesses currently engaged in by Borrower and any
business substantially similar or related thereto (or incidental thereto), or
suffer a change in Borrower's ownership or management. Borrower will not,
without at least thirty (30) days prior written notification to Bank, relocate
its chief executive office or add any new offices or business locations.
7.3 Mergers or Acquisitions. Merge or consolidate, or permit any of its
-----------------------
Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person.
7.4 Indebtedness. Create, incur, assume or be or remain liable with
------------
respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
7.5 Encumbrances. Create, incur, assume or suffer to exist any Lien with
------------
respect to any of its property, or assign or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries so to do, except for Permitted Liens.
7.6 Distributions. Pay any dividends or make any other distribution or
-------------
payment on account of or in redemption, retirement or purchase of any capital
stock.
19
<PAGE>
7.7 Investments. Directly or indirectly acquire or own, or make any
-----------
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments.
7.8 Transactions with Affiliates. Directly or indirectly enter into or
----------------------------
permit to exist any material transaction with any Affiliate of Borrower except
for transactions that are in the ordinary course of Borrower's business, upon
fair and reasonable terms that are no less favorable to Borrower than would be
obtained in an arm's length transaction with a nonaffiliated Person.
7.9 Intellectual Property Agreements. Borrower shall not permit the
--------------------------------
inclusion in any material contract to which it becomes a party of any provisions
that could or might in any way prevent the creation of a security interest in
Borrower's rights and interests in any property included within the definition
of the Intellectual Property Collateral acquired under such contracts.
7.10 Subordinated Debt. Make any payment in respect of any Subordinated
-----------------
Debt, or permit any of its Subsidiaries to make any such payment, except in
compliance with the terms of such Subordinated Debt, or amend any provision
contained in any documentation relating to the Subordinated Debt without Bank's
prior written consent.
7.11 Inventory. Store the Inventory with a bailee, warehouseman, or
---------
similar party unless Bank has received a pledge of any warehouse receipt
covering such Inventory. Except for Inventory sold in the ordinary course of
business and except for such other locations as Bank may approve in writing,
Borrower shall keep the Inventory only at the location set forth in Section 10
hereof and such other locations of which Borrower gives Bank prior written
notice and as to which Borrower signs and files a financing statement where
needed to perfect Bank's security interest.
7.12 Compliance. Become an "investment company" or a company controlled
----------
by an "investment company," within the meaning of the Investment Company Act of
1940, or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Advance for such purpose; fail
to meet the minimum funding requirements of ERISA; permit a Reportable Event or
Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the
Federal Fair Labor Standards Act or violate any other law or regulation, which
violation could have a Material Adverse Effect or a material adverse effect on
the Collateral or the priority of Bank's Lien on the Collateral; or permit any
of its Subsidiaries to do any of the foregoing.
8. EVENTS OF DEFAULT
-----------------
Any one or more of the following events shall constitute an Event of
Default by Borrower under this Agreement:
8.1 Payment Default. If Borrower fails to pay, when due, any of the
---------------
Obligations.
20
<PAGE>
8.2 Covenant Default.
----------------
(a) If Borrower fails to perform any obligation under Sections 6.3,
6.6, 6.7, 6.8 or 6.9 or violates any of the covenants contained in Article 7 of
this Agreement, or
(b) If Borrower fails or neglects to perform, keep, or observe any
other material term, provision, condition, covenant, or agreement contained in
this Agreement, in any of the Loan Documents, or in any other present or future
agreement between Borrower and Bank and as to any default under such other term,
provision, condition, covenant or agreement that can be cured, has failed to
cure such default within ten (10) days after the occurrence thereof; provided,
however, that if the default cannot by its nature be cured within the ten (10)
day period or cannot after diligent attempts by Borrower be cured within such
ten (10) day period, and such default is likely to be cured within a reasonable
time, then Borrower shall have an additional reasonable period (which shall not
in any case exceed thirty (30) days) to attempt to cure such default, and within
such reasonable time period the failure to have cured such default shall not be
deemed an Event of Default (provided that no Advances will be required to be
made during such cure period);
8.3 Material Adverse Change. If there (i) occurs a material adverse change
-----------------------
in the business, operations, or condition (financial or otherwise) of the
Borrower, or (ii) is a material impairment of the prospect of repayment of any
portion of the Obligations or (iii) is a material impairment of the value or
priority of Bank's security interests in the Collateral;
8.4 Attachment. If any material portion of Borrower's assets is attached,
----------
seized, subjected to a writ or distress warrant, or is levied upon, or comes
into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within ten (10) days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within ten (10) days
after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower (provided
that no Credit Extensions will be required to be made during such cure period);
8.5 Insolvency. If Borrower becomes insolvent, or if an Insolvency
----------
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced
against Borrower and is
21
<PAGE>
not dismissed or stayed within 30 days (provided that no Advances will be made
prior to the dismissal of such Insolvency Proceeding);
8.6 Other Agreements. If there is a default in any agreement to which
----------------
Borrower is a party with a third party or parties resulting in a right by such
third party or parties, whether or not exercised, to accelerate the maturity of
any Indebtedness in an amount in excess of One Hundred Thousand Dollars
($100,000) or that could have a Material Adverse Effect;
8.7 Subordinated Debt. If Borrower makes any payment on account of
-----------------
Subordinated Debt, except to the extent such payment is allowed under any
subordination agreement entered into with Bank;
8.8 Judgments. If a judgment or judgments for the payment of money in an
---------
amount, individually or in the aggregate, of at least Fifty Thousand Dollars
($50,000) shall be rendered against Borrower and shall remain unsatisfied and
unstayed for a period of ten (10) days (provided that no Credit Extensions will
be made prior to the satisfaction or stay of such judgment); or
8.9 Misrepresentations. If any material misrepresentation or material
------------------
misstatement exists now or hereafter in any warranty or representation set forth
herein or in any certificate or writing delivered to Bank by Borrower or any
Person acting on Borrower's behalf pursuant to this Agreement or to induce Bank
to enter into this Agreement or any other Loan Document.
9. BANK'S RIGHTS AND REMEDIES
--------------------------
9.1 Rights and Remedies. Upon the occurrence and during the continuance
-------------------
of an Event of Default, Bank may, at its election, without notice of its
election and without demand, do any one or more of the following, all of which
are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this Agreement, by
any of the other Loan Documents, or otherwise, immediately due and payable
(provided that upon the occurrence of an Event of Default described in Section
8.5 all Obligations shall become immediately due and payable without any action
by Bank);
(b) Cease advancing money or extending credit to or for the benefit
of Borrower under this Agreement or under any other agreement between Borrower
and Bank;
(c) Settle or adjust disputes and claims directly with account
debtors for amounts, upon terms and in whatever order that Bank reasonably
considers advisable;
(d) Without notice to or demand upon Borrower, make such payments and
do such acts as Bank considers necessary or reasonable to protect its security
interest in the Collateral. Borrower agrees to assemble the Collateral if Bank
so requires, and to make the
22
<PAGE>
Collateral available to Bank as Bank may designate. Borrower authorizes Bank to
enter the premises where the Collateral is located, to take and maintain
possession of the Collateral, or any part of it, and to pay, purchase, contest,
or compromise any encumbrance, charge, or lien which in Bank's determination
appears to be prior or superior to its security interest and to pay all expenses
incurred in connection therewith. With respect to any of Borrower's premises,
Borrower hereby grants Bank a license to enter such premises and to occupy the
same, without charge;
(e) Without prior notice to Borrower set off and apply to the
Obligations any and all (i) balances and deposits of Borrower held by Bank, or
(ii) indebtedness at any time owing to or for the credit or the account of
Borrower held by Bank; provided that Bank would promptly notify Borrower of such
set off after it has occurred;
(f) Ship, reclaim, recover, store, finish, maintain, repair, prepare
for sale, advertise for sale, and sell (in the manner provided for herein) the
Collateral. Bank is hereby granted a non-exclusive, royalty-free license or
other right, solely pursuant to the provisions of this Section 9.1, to use,
without charge, Borrower's labels, patents, copyrights, mask works, rights of
use of any name, trade secrets, trade names, trademarks, service marks, and
advertising matter, or any property of a similar nature, as it pertains to the
Collateral, in completing production of, advertising for sale, and selling any
Collateral and, in connection with Bank's exercise of its rights under this
Section 9.1, Borrower's rights under all licenses and all franchise agreements
shall inure to Bank's benefit;
(g) Sell the Collateral at either a public or private sale, or both,
by way of one or more contracts or transactions, for cash or on terms, in such
manner and at such places (including Borrower's premises) as Bank determines is
commercially reasonable, and apply the proceeds thereof to the Obligations in
whatever manner or order it deems appropriate;
(h) Bank may credit bid and purchase at any public sale, or at any
private sale as permitted by law; and
(i) Any deficiency that exists after disposition of the Collateral as
provided above will be paid immediately by Borrower.
(j) Bank shall have a non-exclusive, royalty-free license to use the
Intellectual Property Collateral to the extent reasonably necessary to permit
Bank to exercise its rights and remedies upon the occurrence of an Event of
Default.
9.2 Power of Attorney. Effective only upon the occurrence and during the
-----------------
continuance of an Event of Default, Borrower hereby irrevocably appoints Bank
(and any of Bank's designated officers, or employees) as Borrower's true and
lawful attorney to: (a) send requests for verification of Accounts or notify
account debtors of Bank's security interest in the Accounts; (b) endorse
Borrower's name on any checks or other forms of payment or security that
23
<PAGE>
may come into Bank's possession; (c) sign Borrower's name on any invoice or bill
of lading relating to any Account, drafts against account debtors, schedules and
assignments of Accounts, verifications of Accounts, and notices to account
debtors; (d) make, settle, and adjust all claims under and decisions with
respect to Borrower's policies of insurance; and (e) settle and adjust disputes
and claims respecting the accounts directly with account debtors, for amounts
and upon terms which Bank determines to be reasonable; (f) to modify, in its
sole discretion, any intellectual property security agreement entered into
between Borrower and Bank without first obtaining Borrower's approval of or
signature to such modification by amending Exhibit A, Exhibit B, Exhibit C, and
Exhibit D, thereof, as appropriate, to include reference to any right, title or
interest in any Copyrights, Patents, Trademarks, Mask Works acquired by Borrower
after the execution hereof or to delete any reference to any right, title or
interest in any Copyrights, Patents, Trademarks, or Mask Works in which Borrower
no longer has or claims any right, title or interest; (g) to file, in its sole
discretion, one or more financing or continuation statements and amendments
thereto, relative to any of the Collateral without the signature of Borrower
where permitted by law; and (h) to transfer the Intellectual Property Collateral
into the name of Bank or a third party to the extent permitted under the
Pennsylvania Uniform Commercial Code. The appointment of Bank as Borrower's
attorney in fact, and each and every one of Bank's rights and powers, being
coupled with an interest, is irrevocable until all of the Obligations have been
fully repaid and performed and Bank's obligation to provide advances hereunder
is terminated.
9.3 Accounts Collection. Upon the occurrence and during the continuance
-------------------
of an Event of Default, Bank may notify any Person owing funds to Borrower of
Bank's security interest in such funds and verify the amount of such Account.
Borrower shall collect all amounts owing to Borrower for Bank, receive in trust
all payments as Bank's trustee, and if requested or required by Bank,
immediately deliver such payments to Bank in their original form as received
from the account debtor, with proper endorsements for deposit.
9.4 Bank Expenses. If Borrower fails to pay any amounts or furnish any
-------------
required proof of payment due to third persons or entities, as required under
the terms of this Agreement, then Bank may do any or all of the following: (a)
make payment of the same or any part thereof; (b) set up such reserves under the
Committed Revolving Line as Bank deems necessary to protect Bank from the
exposure created by such failure; or (c) obtain and maintain insurance policies
of the type discussed in Section 6.6 of this Agreement, and take any action with
respect to such policies as Bank deems prudent. Any amounts so paid or
deposited by Bank shall constitute Bank Expenses, shall be immediately due and
payable, and shall bear interest at the then applicable rate hereinabove
provided, and shall be secured by the Collateral. Any payments made by Bank
shall not constitute an agreement by Bank to make similar payments in the future
or a waiver by Bank of any Event of Default under this Agreement.
9.5 Bank's Liability for Collateral. So long as Bank complies with
-------------------------------
reasonable banking practices, Bank shall not in any way or manner be liable or
responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage
thereto occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of
24
<PAGE>
any carrier, warehouseman, bailee, forwarding agency, or other person
whomsoever. All risk of loss, damage or destruction of the Collateral shall be
borne by Borrower.
9.6 Remedies Cumulative. Bank's rights and remedies under this Agreement,
-------------------
the Loan Documents, and all other agreements shall be cumulative. Bank shall
have all other rights and remedies not expressly set forth herein as provided
under the Code, by law, or in equity. No exercise by Bank of one right or
remedy shall be deemed an election, and no waiver by Bank of any Event of
Default on Borrower's part shall be deemed a continuing waiver. No delay by
Bank shall constitute a waiver, election, or acquiescence by it. No waiver by
Bank shall be effective unless made in a written document signed on behalf of
Bank and then shall be effective only in the specific instance and for the
specific purpose for which it was given.
9.7 Demand; Protest. Borrower waives demand, protest, notice of protest,
---------------
notice of default or dishonor, notice of payment and nonpayment, notice of any
default, nonpayment at maturity, release, compromise, settlement, extension, or
renewal of accounts, documents, instruments, chattel paper, and guarantees at
any time held by Bank on which Borrower may in any way be liable.
10. NOTICES
-------
Unless otherwise provided in this Agreement, all notices or demands by any
party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail, postage
prepaid) shall be personally delivered or sent by a recognized overnight
delivery service, by certified mail, postage prepaid, return receipt requested,
or by telefacsimile to Borrower or to Bank, as the case may be, at its addresses
set forth below:
If to Borrower: Astea International Inc.
455 Business Center Drive
Horsham, Pennsylvania 19044
Attn: John G. Phillips, CFO
FAX: (215) 682-2501
If to Bank:
Silicon Valley Bank
203 Ash Lane
Lafayette Hill, Pennsylvania 19444
Attn: Ash Lilani, Senior Vice President
FAX: (610) 940-4975
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
25
<PAGE>
11. CHOICE OF LAW AND VENUE
-----------------------
The Loan Documents shall be governed by, and construed in accordance with,
the internal laws of the Commonwealth of Pennsylvania, without regard to
principles of conflicts of law. Each of Borrower and Bank hereby submits to the
exclusive jurisdiction of the state and Federal courts located in the
Commonwealth of Pennsylvania, provided, however, if Bank cannot avail itself of
the courts of Pennsylvania, then Borrower submits to the jurisdiction of the
courts of Santa Clara County, California. BORROWER AND BANK EACH HEREBY WAIVE
THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED
UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS
CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY
CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND
AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO
ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS
REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND
VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL
COUNSEL.
12. GENERAL PROVISIONS
------------------
12.1 Successors and Assigns. This Agreement shall bind and inure to the
----------------------
benefit of the respective successors and permitted assigns of each of the
parties; provided, however, that neither this Agreement nor any rights hereunder
-------- -------
may be assigned by Borrower without Bank's prior written consent, which consent
may be granted or withheld in Bank's sole discretion. Bank shall have the right
without the consent of or notice to Borrower to sell, transfer, negotiate, or
grant participation in all or any part of, or any interest in, Bank's
obligations, rights and benefits hereunder.
12.2 Indemnification. Borrower shall, indemnify, defend, protect and hold
---------------
harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by the Loan Documents;
and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by
Bank as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under the Loan Documents, or
otherwise (including without limitation reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
12.3 Time of Essence. Time is of the essence for the performance of all
---------------
obligations set forth in this Agreement.
26
<PAGE>
12.4 Severability of Provisions. Each provision of this Agreement shall
--------------------------
be severable from every other provision of this Agreement for the purpose of
determining the legal enforceability of any specific provision.
12.5 Amendments in Writing, Integration. This Agreement cannot be amended
----------------------------------
or terminated except by a writing signed by Borrower and Bank. All prior
agreements, understandings, representations, warranties, and negotiations
between the parties hereto with respect to the subject matter of this Agreement,
if any, are merged into this Agreement and the Loan Documents.
12.6 Counterparts. This Agreement may be executed in any number of
------------
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
12.7 Survival. All covenants, representations and warranties made in this
--------
Agreement shall continue in full force and effect so long as any Obligations
remain outstanding. The obligations of Borrower to indemnify Bank with respect
to the expenses, damages, losses, costs and liabilities described in Section
12.2 shall survive until all applicable statute of limitations periods with
respect to actions that may be brought against Bank have run.
[SIGNATURES ON NEXT PAGE]
27
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
ATTEST: ASTEA INTERNATIONAL INC.
By:__________________________ By: _____________________________________
Name:
Title:
SILICON VALLEY BANK
By:________________________________
Ash Lilani
Senior Vice President
SILICON VALLEY BANK
By:________________________________
Name:
Title:
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S
QUARTERLY REPORT ON FORM 10-Q FOR AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1999 JUL-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 15,438,000 0
<SECURITIES> 25,609,000 0
<RECEIVABLES> 11,601,000 0
<ALLOWANCES> 838,000 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 55,170,000 0
<PP&E> 6,316,000 0
<DEPRECIATION> 5,196,000 0
<TOTAL-ASSETS> 58,724,000 0
<CURRENT-LIABILITIES> (9,587,000) 0
<BONDS> 0 0
0 0
0 0
<COMMON> (140,000) 0
<OTHER-SE> (58,584,000) 0
<TOTAL-LIABILITY-AND-EQUITY> (58,724,000) 0
<SALES> 2,618,000 854,000
<TOTAL-REVENUES> 8,155,000 6,824,000
<CGS> 459,000 559,000
<TOTAL-COSTS> 4,301,000 4,593,000
<OTHER-EXPENSES> 3,772,000 4,901,000
<LOSS-PROVISION> 66,000 113,000
<INTEREST-EXPENSE> 511,000 101,000
<INCOME-PRETAX> 68,000 (3,241,000)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 68,000 (3,241,000)
<DISCONTINUED> 0 33,628,000
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 68,000 30,387,000
<EPS-BASIC> 0.00 2.25
<EPS-DILUTED> 0.00 2.25
</TABLE>
