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.
ASTEA INTERNATIONAL INC.
FORM 10-Q
QUARTERLY REPORT
INDEX
Page No.
--------
Facing Sheet 1
Index 2
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets (Unaudited) 3
Consolidated Statements of Operations (Unaudited) 4
Consolidated Statements of Cash Flows (Unaudited) 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosure About Market Risk 13
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Exhibit 10.1 Loan and Security Agreement by and between Astea International
Inc. and Silicon Valley Bank
Exhibit 27 Financial Data Schedule
2
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
ASTEA INTERNATIONAL INC.
------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Unaudited)
SEPTEMBER 30, December 31,
1999 1998
---------------------- ----------------------
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.
3
ASTEA INTERNATIONAL INC.
------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------------------------------------------
1999 1998 1999 1998
------------ ------------- ------------- -------------
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
==========================================================
The accompanying notes are an integral part of these statements.
4
ASTEA INTERNATIONAL INC.
------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(UNAUDITED)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------------------------
1999 1998
-----------------------------------------
Cash flows from operating activities:
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.
5
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:
Three Months Nine Months
Ended September 30, 1998 Ended September 30, 1998
------------------------ ------------------------
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)
------------ -------------
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
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:
Cumulative
Additional Currency
Common Paid-In Deferred Translation Accumulated Comprehensive
Stock Capital Compensation Adjustment Deficit Income (Loss)
------ ---------- ------------ ----------- ----------- -------------
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
==============================================================================
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
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
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
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
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
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
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
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
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