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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q/A
(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, 2003
----------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934.
For the transition period from to
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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.)
240 Gibraltar Road, Horsham, Pa 19044
--------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 682-2500
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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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
As of November 04, 2003, 2,921,901 shares of the registrant's Common Stock, par
value $.01 per share, were outstanding.
ASTEA INTERNATIONAL INC.
FORM 10-Q/A
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 15
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
2
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
ASTEA INTERNATIONAL INC.
------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
September 30, December 31,
2003 2002
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ............................. $ 3,749,000 $ 4,967,000
Restricted cash ....................................... 300,000 300,000
Receivables, net of reserves of $656,000 and $1,018,000 3,874,000 7,936,000
Prepaid expenses and other ............................ 862,000 691,000
------------------------------
Total current assets .......................... 8,785,000 13,894,000
Property and equipment, net ............................. 556,000 586,000
Capitalized software development costs, net ............. 1,259,000 1,349,000
Other assets ............................................ 616,000 614,000
------------------------------
Total assets .................................. $ 11,216,000 $ 16,443,000
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ................. $ 2,559,000 $ 3,418,000
Deferred revenues ..................................... 3,012,000 4,027,000
------------------------------
Total current liabilities ..................... 5,571,000 7,445,000
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares .... - -
authorized, none issued
Common stock, $.01 par value, 5,000,000 shares
authorized, 2,965,000 issued ....................... 30,000 30,000
Additional paid-in capital ........................... 22,792,000 22,792,000
Cumulative currency translation adjustment ........... (845,000) (1,039,000)
Accumulated deficit .................................. (16,120,000) (12,568,000)
Less treasury stock, at cost, 43,000 and 44,000 common
shares ............................................ (212,000) (217,000)
------------------------------
Total stockholders' equity .................... 5,645,000 8,998,000
------------------------------
Total liabilities and stockholders' equity .... $ 11,216,000 $ 16,443,000
==============================
See accompanying notes to the consolidated financial statements.
3
ASTEA INTERNATIONAL INC.
------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------------------------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues:
Software license fees ....................... $ 353,000 $ 2,386,000 $ 1,687,000 $ 4,563,000
Services and maintenance .................... 2,491,000 2,460,000 8,283,000 7,539,000
------------------------------------------------------------------
Total revenues ......................... 2,844,000 4,846,000 9,970,000 12,102,000
------------------------------------------------------------------
Costs and expenses:
Cost of software license fees ............... 170,000 352,000 580,000 948,000
Cost of services and maintenance ............ 1,691,000 1,619,000 5,165,000 4,938,000
Product development ......................... 622,000 568,000 1,715,000 1,511,000
Sales and marketing ......................... 1,388,000 1,562,000 4,486,000 4,393,000
General and administrative .................. 564,000 535,000 1,613,000 1,822,000
------------------------------------------------------------------
Total costs and expenses ............... 4,435,000 4,636,000 13,559,000 13,612,000
------------------------------------------------------------------
Operating (loss) income before interest and taxes (1,591,000) 210,000 (3,589,000) (1,510,000)
------------------------------------------------------------------
Interest income, net ............................ 11,000 19,000 40,000 83,000
------------------------------------------------------------------
(Loss) income before income tax expense ......... (1,580,000) 229,000 (3,549,000) (1,427,000)
Income tax expense .............................. - - - (200,000)
------------------------------------------------------------------
Net (loss) income ............................... $ (1,580,000) $ 229,000 $ (3,549,000) $ (1,627,000)
==================================================================
Basic and diluted (loss) earnings per share ..... $ (0.54) $ 0.08 $ (1.21) $ (0.56)
==================================================================
Share outstanding used in computing basic (loss)
earnings per share 2,922,000 2,921,000 2,922,000 2,920,000
==================================================================
See accompanying notes to the consolidated financial statements.
4
ASTEA INTERNATIONAL INC.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
For the Nine Months
Ended September 30,
----------------------------
2003 2002
----------- -----------
Cash flows from operating activities:
Net loss ...................................................................... $(3,549,000) $(1,627,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ........................................ 693,000 943,000
Changes in operating assets and liabilities:
Receivables .......................................................... 4,300,000 (152,000)
Prepaid expenses and other ........................................... (172,000) 222,000
Other assets ......................................................... (1,000) 148,000
Accounts payable and accrued expenses ................................ (832,000) (636,000)
Deferred revenues .................................................... (1,002,000) (186,000)
----------------------------
Net cash used in operating activities ......................................... (563,000) (1,288,000)
----------------------------
Cash flows from investing activities:
(Purchases) sales of investments available for sale ................... - 2,987,000
Purchases of restricted investments ................................... - (300,000)
Purchases of property and equipment ................................... (198,000) (262,000)
Capitalized software development costs ................................ (360,000) (428,000)
----------------------------
Net cash (used in) provided by investing activities ........................... (558,000) 1,997,000
----------------------------
Cash flows from financing activities:
Proceeds from exercise of stock options and employee stock purchase plan 4,000 3,000
Net repayments of long-term debt ....................................... - (34,000)
----------------------------
Net cash provided by (used in) financing activities ........................... 4,000 (31,000)
----------------------------
Effect of exchange rate changes on cash and cash equivalents .................. (101,000) (43,000)
----------------------------
Net (decrease) increase in cash and cash equivalents .......................... (1,218,000) 635,000
Cash and cash equivalents balance, beginning of period ........................ 4,967,000 4,071,000
----------------------------
Cash and cash equivalents balance, end of period .............................. $ 3,749,000 $ 4,706,000
============================
See accompanying notes to the consolidated financial statements.
5
Item 1. CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- -------------------------------------------------------
ASTEA INTERNATIONAL INC.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
1. BASIS OF PRESENTATION
---------------------
The consolidated financial statements at September 30, 2003 and for the three
and nine month periods ended September 30, 2003 and 2002 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 2002 Annual
Report on Form 10-K which are hereby incorporated by reference in this quarterly
report on Form 10-Q/A. Results of operations and cash flows for the nine months
ended September 30, 2003 are not necessarily indicative of the results that may
be expected for the full year.
2. INCOME TAX EXPENSE
------------------
The Company accounts for income taxes in accordance with SFAS No. 109
"Accounting for Income Taxes" which requires that deferred tax assets and
liabilities be recognized using enacted tax rates for the effect of temporary
differences between the book and tax basis of recorded assets and liabilities.
SFAS No. 109 also requires that deferred tax assets be reduced by a valuation
allowance if it is more likely than not that some portion or all of the deferred
tax asset will not be realized.
The realizability of the deferred tax assets is evaluated quarterly by assessing
the valuation allowance and by adjusting the amount of the allowance, if
necessary. The factors used to assess the likelihood of realization are the
forecast of future taxable income and available tax planning strategies that
could be implemented to realize the net deferred tax asset. During the nine
months ended September 30, 2002, the Company recorded a tax expense of $200,000
to increase its valuation allowance related to its net deferred tax asset based
on an assessment of what portion of the asset is more likely than not to be
realized, in accordance with FSAS No. 109. The Company will review the provision
periodically in the future as circumstances change.
3. RESTRICTED CASH
---------------
On September 11, 2002, $300,000 of cash was pledged as collateral on an
outstanding letter of credit related to a lease obligation and was classified as
restricted cash on the balance sheet. Unless canceled in writing by the Company,
the letter of credit will automatically renew for six-month terms until
September 2004.
4. REVERSE STOCK SPLIT
-------------------
On September 2, 2003, the Company implemented a 1:5 reverse stock split of the
Company's outstanding common stock. The par value of all post reverse split
shares remained unchanged at $0.01. All fractional shares that resulted from the
reverse split were redeemed by the Company. As a result of the reverse split,
the number of authorized shares was reduced from 25,000,000 to 5,000,000.
Prior year results have been restated to reflect the results of the reverse
stock split, which includes the common stock and additional paid-in capital
accounts on the balance sheet as well as the shares used in computing earnings
per share.
6
5. STOCKHOLDERS' EQUITY/COMPREHENSIVE LOSS
---------------------------------------
The reconciliation of stockholders' equity and comprehensive loss from December
31, 2002 to September 30, 2003 is summarized as follows:
Cumulative
Additional Currency
Common Paid-In Translation Accumulated Treasury Comprehensive
Stock Capital Adjustment Deficit Stock Loss
----- ------- ---------- ------- ----- ----
Balance at December 31, 2002 $ 30,000 $ 22,792,000 $ (1,039,000) $(12,568,000) $ (217,000) $ -
Issuance of common stock
under employee stock
purchase plan ............ - - - (3,000) 5,000 -
Cumulative translation
adjustment ............... - - 194,000 - - 194,000
Net loss for the period ..... - - - (3,549,000) - (3,549,000)
-----------------------------------------------------------------------------------------------
Balance at September 30, 2003 $ 30,000 $ 22,792,000 $ (845,000) $(16,120,000) $ (212,000) $ (3,355,000)
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6. RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS 150"). SFAS 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. SFAS 150 is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The adoption of SFAS 150 is not expected to have a material
impact on the Company's financial position or results of operation.
In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure," an amendment of FASB Statement No. 123
("SFAS 148"). SFAS 148 amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of that
Statement to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock-based
employee compensation. Finally, this Statement amends Accounting Principles
Board ("APB") Opinion No. 28, Interim Financial Reporting, to require disclosure
about those effects in interim financial information. SFAS 148 is effective for
financial statements for fiscal years ending after December 15, 2002. The
Company plans to continue to use the intrinsic valuation method for stock
compensation.
7
Stock Compensation
The Company accounts for options and the employee stock purchase plan under the
recognition and measurement principles of Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees." No stock-based
employee compensation cost is reflected in net income, as all options granted
under those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. Had compensation cost for the
Company's stock options and employee stock purchase plan been determined
consistent with SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net loss and basic and diluted net loss per share would have been:
Three months ended Nine months ended
September 30, September 30,
---------------------------- ---------------------------
2003 2002 2003 2002
-----------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net (loss) income - as reported .... $(1,580,000) $ 229,000 $(3,549,000) $(1,627,000)
Add: Stock-based compensation
included in net income as
reported, net or related tax
effects ......................... - - - -
Deduct stock-based compensation
determined under fair value based
methods for all awards, net of
related tax effects ............. (109,000) (106,000) (318,000) (174,000)
Net (loss) income - pro forma ...... $(1,689,000) $ 123,000 $(3,867,000) $(1,801,000)
Basic and diluted (loss) income per
share - as reported ............. $ (0.54) $ 0.08 $ (1.21) $ (0.56)
Basic and diluted (loss) income per
share - pro forma ............... $ (0.58) $ 0.04 $ (1.32) $ (0.62)
There were no options granted during the quarter ended September 30, 2003. The
weighted average fair value of those options granted during the quarter ended
September 30, 2002 was estimated at $3.34. The weighted average fair value of
those options granted during the nine months ended September 30, 2003 and 2002
was estimated at $3.15 and $3.69. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions: risk-free interest rate of 3.61% and
4.30% for 2003 and 2002 grants, respectively; an expected life of six years;
volatility of 134% and 138%; and a dividend yield of zero for 2003 and 2002
grants, respectively.
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,
2002.
8
The Company develops, markets and supports Customer Relationship Management
(CRM) software solutions for companies that sell and service capital equipment.
Clients include Fortune 500 to mid-size companies that automate equipment sales
and service business processes to increase competitive advantages, top-line
revenue growth, profitability, and customer loyalty. The Company supports a
global client base with a worldwide sales and service network that conducts
business through Company facilities in the United States, United Kingdom,
Australia, the Netherlands, and Israel.
Over the past year, the Company has continued the process of making the
transition from a field service software provider to a provider of a
comprehensive suite of CRM solutions. In addition to field service, the CRM
suite also streamlines and automates processes for managing sales and marketing,
multi-channel customer contact centers and professional services. The Company
continues to focus on companies in industries that sell and service equipment.
The Company has invested heavily to modernize the product and to move it from
PowerBuilder and client server technology to cutting edge thin client internet
technology and completely Microsoft and XML coding. The new technology is highly
scalable, which allows the Company to pursue large opportunities, and enables
the Company to offer a replacement product to a legacy base of large-scale
customers.
The Company has made a conscious decision to cleanse its pipeline of smaller
deals. The Company is now focused on going after large enterprises that will
roll out its application in multiple divisions and locations, including
worldwide in some instances. This newly exclusive focus has caused some
short-term shortfalls in revenue, since the smaller deals did tend to close
quicker. The new enterprise level deals require approval from many more
departments and levels within the organization, resulting in lengthier sales
cycles. The roster of recent signings such as United Technologies, Circuit City,
Johnson & Johnson and Thales reflects the growing acceptance by major
corporations of the Company's Astea Alliance Suite offering.
As economic conditions throughout the world continue to deteriorate, the Company
diligently monitors costs and aggressively manages them. The Company believes
that its investment in development along with its continued commitment to
marketing its CRM suite will favorably position the Company when economic
conditions improve in the future.
Critical Accounting Policies
- ----------------------------
The Company's significant accounting policies are more fully described in Note 2
of the Notes to the Consolidated Financial Statements in the Company's Annual
Report on Form 10-K. The preparation of financial statements in conformity with
accounting principles generally accepted within the United States requires
management to make estimates and assumptions in certain circumstances that
affect amounts reported in the accompanying financial statements and related
notes. In preparing these financial statements, management has made its best
estimates and judgments of certain amounts included in the financial statements,
giving due consideration to materiality. The Company does not believe there is a
great likelihood that materially different amounts would be reported related to
the accounting policies described below; however, application of these
accounting policies involves the exercise of judgments and the use of
assumptions as to future uncertainties and, as a result, actual results could
differ from these estimates.
Revenues
The Company generates its revenues primarily by licensing software, providing
software support and maintenance and providing professional services to its
customers. The Company's software arrangements typically include: (i) an end
user license that provides for an initial fee in exchange for a customer's use
of the Company's products in perpetuity based on a specified number of users;
(ii) a maintenance arrangement that provides for technical support and product
updates over a period of 12 months; and (iii) a professional services
arrangement on a time and materials basis.
The Company recognizes software revenue using the residual method pursuant to
the requirements of Statement of Position No. 97-2 "Software Revenue
Recognition" ("SOP 97-2"), as amended by Statement of Position No. 98-9
"Software Revenue Recognition with Respect to Certain Arrangements." Under the
residual method, revenue is recognized when Company-specific objective evidence
of fair value exists for all of the undelivered elements in the arrangement
9
(i.e., professional services and maintenance), but does not exist for one or
more of the delivered elements in the arrangement (i.e., the software product).
Each license arrangement requires careful analysis to ensure that all of the
individual elements in the license transaction have been identified, along with
the fair value of each element.
The Company allocates revenue to each undelivered element based on its
respective fair value, with the fair value determined by the price charged when
that element is sold separately. The Company determines the fair value of the
maintenance portion of the arrangement based on the renewal price of the
maintenance charged to the customer based on full deployment of the licensed
software products and the fair value of the professional services portion of the
arrangement based on the hourly rates that the Company charges for these
services when sold independently from a software license. If evidence of fair
value cannot be established for the undelivered elements of a license agreement,
the entire amount of revenue from the arrangement is deferred and recognized
over the period that these elements are delivered.
For substantially all of the Company's software arrangements, the Company defers
revenue for the fair value of the maintenance and professional services to be
provided to the customer and recognizes revenue for the software license when
persuasive evidence of an arrangement exists and delivery has occurred, provided
the fee is fixed or determinable and collection is deemed probable.
A customer typically prepays maintenance for the first 12 months, and the
related revenue is deferred and recognized over the term of the initial
maintenance contract. Maintenance is renewable by the customer on an annual
basis thereafter. Rates for maintenance, including subsequent renewal rates, are
typically established based upon a specified percentage of net license fees as
set forth in the arrangement. Professional services revenue primarily consists
of implementation services related to the installation of the Company's products
and training revenues. The Company's software is ready to use by the customer
upon receipt. While many of the Company's customers may choose to tailor the
software to fit their specific needs, the Company's implementation services do
not involve significant customization to or development of the underlying
software code. Substantially all of the Company's professional services
arrangements are on a time and materials basis and, accordingly, are recognized
as the services are performed, which is typically over a three- to six-month
period subsequent to licensing of the Company's software. On those occasions
when a customer requests significant customization of the licensed software, the
entire arrangement is accounted for using contract accounting in conformity with
Accounting Research Bulletin No. 45 "Long-Term Construction-Type Contracts"
("ARB 45") using relevant guidance in Statement of Position 81-1 "Accounting for
Performance of Construction-Type and Certain Production-Type Contracts" ("SOP
81-1").
Capitalized Software and Research Development Costs
The Company accounts for its internal software development costs in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed."
Accordingly, all costs incurred subsequent to attaining technological
feasibility are capitalized and amortized over a period not to exceed three
years. Technological feasibility is attained when software products reach Beta
release. Costs incurred prior to the establishment of technological feasibility
are charged to product development expense. The establishment of technological
feasibility and the ongoing assessment of recoverability of capitalized software
development costs require considerable judgment by management with respect to
certain external factors, including, but not limited to, anticipated future
revenues, estimated economic life and changes in software and hardware
technologies. Upon the general release of the software product to customers,
capitalization ceases and such costs are amortized, using the straight-line
method, on a product-by-product basis over the estimated life, which is
generally three years. All research and development expenditures are charged to
research and development expense in the period incurred.
10
Results of Operations
- ---------------------
Comparison of Three Months Ended September 30, 2003 and 2002
- ------------------------------------------------------------
Revenues
- --------
Revenues decreased $2,002,000, or 41%, to $2,844,000 for the three months ended
September 30, 2003 from $4,846,000 for the three months ended September 30,
2002. Software license fee revenues decreased $2,033,000, or 85%, from the same
period last year. Services and maintenance fees for the three months ended
September 30, 2003 amounted to $2,491,000, a slight increase from the same
quarter in 2002.
The Company's international operations contributed $998,000 of revenues in the
third quarter 2003 compared to $1,291,000 in the third quarter of 2002, which
represents a 23% decrease. The decrease is primarily the result of the lack of
capital spending due to the uncertainty in the economy.
Software license fee revenues decreased 85% to $353,000 in the third quarter of
2003 from $2,386,000 in the third quarter of 2002. AllianceEnterprise license
fee revenue decreased $1,990,000 from $2,343,000 in the third quarter of 2002 to
$353,000 in the third quarter of 2003. Additionally, there were no sales of
DISPATCH-1 in the third quarter of 2003 compared to $43,000 in the third quarter
of 2002. The Company believes that overall operations have been significantly
impacted by the generally weak global economy. Although the economy has shown
signs of slow improvement this year, investment in technology requiring
significant capital spending continues to be delayed. However, the Company is
confident that projections for the CRM market will hold true to form allowing
the Company to capitalize on its investment in product development through
increased software license sales in the near future.
Services and maintenance revenues increased slightly to $2,491,000 in the third
quarter of 2003 from $2,460,000 in the third quarter of 2002. The increase
primarily relates to service and maintenance revenues from AllianceEnterprise,
which increased 22% or $342,000 to $1,894,000 from $1,552,000 in the third
quarter of 2002. The increase is attributable to the growing number of customers
using the Company's AllianceEnterprise software. Offsetting the increase in
service and maintenance revenues from AllianceEnterprise, DISPATCH-1 service and
maintenance revenues decreased $311,000 from $908,000 to $597,000, as expected.
The decline in DISPATCH-1 revenue is attributable to the previous sales of
DISPATCH-1 source code to certain customers which enables those customers the
ability to perform all service and maintenance work themselves instead of using
Astea services.
Costs of Revenues
- -----------------
Cost of software license fees decreased 52% to $170,000 in the third quarter of
2003 from $352,000 in the third quarter of 2002. Included in the cost of
software license fees is the fixed cost of capitalized software amortization.
Capitalized software amortization was $150,000 and $200,000 in the third quarter
of 2003 and 2002, respectively. The decrease in the cost of software license
fees reflects the decrease in capitalized software amortization as well as the
decrease in sales volume. The software licenses gross margin percentage was 52%
in the third quarter of 2003 compared to 85% in the third quarter of 2002. The
decrease in gross margin was attributable to the decrease in the mix of products
sold in 2003.
Cost of services and maintenance increased 4% to $1,691,000 in the third quarter
of 2003 from $1,619,000 in the third quarter of 2002. The services and
maintenance gross margin percentage was 32% and 34% in the third quarter of 2003
and 2002, respectively. The decrease in gross margin was attributable to costs
associated with certain non-billable projects undertaken during the quarter.
Product Development
- -------------------
Product development expense increased 10% to $622,000 in the third quarter of
2003 from $568,000 in the third quarter of 2002. As a percentage of revenues,
product development increased from 12% in the third quarter of 2002 to 22% in
the third quarter of 2003. The increased percentage of development expense to
11
sales results from the significant decrease in sales during the third quarter of
2003. The overall increase in development expense compared to 2002 results from
the weakening of the U.S. dollar against the Israeli shekel. The Company
performs most of its development in Israel. The Company maintains its commitment
to expanding and improving the capabilities of its AllianceEnterprise Suite of
CRM software products. The Company is developing its software using Microsoft
and Internet technologies to integrate and automate business processes for
managing equipment sales and service delivery.
Sales and Marketing
- -------------------
Sales and marketing expense decreased 11% to $1,388,000 in the third quarter of
2003 from $1,562,000 in the third quarter of 2002. The decrease is primarily the
result of decreased sales commissions resulting from lower sales volume. As a
percentage of revenues, sales and marketing expenses increased to 49% in 2003
compared to 32% in the third quarter of 2002.
General and Administrative
- --------------------------
General and administrative expense increased 5% to $564,000 in the third quarter
of 2003 from $535,000 in the third quarter of 2002. The increase in general and
administrative expense results from unfavorable foreign exchange comparisons.
Interest Income, net
- --------------------
Net interest income decreased $8,000 to $11,000 in the third quarter of 2003
from $19,000 in the third quarter of 2002. The decrease is generally
attributable to less cash on hand than in 2002 as well as an overall reduction
in interest rates earned on invested cash.
International Operations
- ------------------------
Total revenue from the Company's international operations decreased by $293,000,
or 23%, to $998,000 in third quarter of 2003 from $1,291,000 in the same quarter
in 2002. International Operations generated a $287,000 loss for the 3 months
ended September 30, 2003 compared to a loss of $131,000 for the 3 months ended
September 30, 2002. The decline in performance is primarily due to the general
global economic slowdown.
Comparison of Nine Months Ended September 30, 2003 and 2002
- -----------------------------------------------------------
Revenues
- --------
Revenues decreased $2,132,000, or 18%, to $9,970,000 for the nine months ended
September 30, 2003 from $12,102,000 for the nine months ended September 30,
2002. The global downturn in economic conditions has negatively impacted the
Company due to the worldwide reduction in capital spending for new business
software. Software license fee revenues decreased 63% from $4,563,000 for the
nine months ended September 30, 2002 to $1,687,000 for the same period in 2003.
Services and maintenance fees for the nine months ended September 30, 2003
increased $744,000 from the same nine months in 2002.
The Company's international operations contributed $3,599,000 of revenues in the
first nine months of 2003 compared to $3,527,000 in the first nine months of
2002. This represents a 2% increase from the same period last year and 36% of
total revenues in the first nine months of 2003. The increase in revenues is a
direct result of the service and maintenance revenues generated from the
increasing customer base in the Asia Pacific region.
Software license fee revenues decreased in the first nine months of 2003 to
$1,687,000 from $4,563,000 during the same period in 2002. The decrease in sales
is directly attributable to the reluctance on the part of corporations to make
significant capital investment in information technology in an uncertain
economic environment.
Services and maintenance revenues increased 10% to $8,283,000 in the first nine
months of 2003 from $7,539,000 in the first nine months of 2002. The increase
primarily relates to service and maintenance revenues from AllianceEnterprise,
which increased by 36% to $6,290,000 from $4,628,000 in the first nine months of
2002. Service and maintenance revenues from DISPATCH-1 decreased 32% to
12
$1,992,000 in the first nine months of 2003 from $2,911,000 in the first nine
months of 2002. The Company expects to experience continued declines in revenues
for its legacy product, DISPATCH-1.
Costs of Revenues
- -----------------
Cost of software license fees decreased 39% to $580,000 in the first nine months
of 2003 from $948,000 in the first nine months of 2002. Included in the cost of
software license fees is the fixed cost of capitalized software amortization.
Capitalized software amortization was $450,000 and $618,000 for the first nine
months of 2003 and 2002, respectively. The decrease in the cost of software
license fees is attributable to the decrease in capitalized software
amortization as well as the decrease in sales volume. The software licenses
gross margin percentage was 66% in the first nine months of 2003 compared to 79%
in the first nine months of 2002. This decrease in gross margin was attributable
to the decrease in the volume of deals to close during the current period.
Cost of services and maintenance increased 5% to $5,165,000 in the first nine
months of 2003 from $4,938,000 in the first nine months of 2002. The services
and maintenance gross margin percentage was 38% in the first nine months of 2003
compared to 35% in the first nine months of 2002. The increase in services and
maintenance gross margin is directly attributable to the increased utilization
of personnel due to certain special projects undertaken during the course of the
year.
Product Development
- -------------------
Product development expense increased 14% to $1,715,000 in the first nine months
of 2003 from $1,511,000 in the first nine months of 2002. Product development as
a percentage of revenues increased to 17% in the first nine months of 2003 from
12% in the first nine months of 2002. The increase in costs is primarily the
result of the weakening of the U.S. dollar relative to the Israel shekel, the
currency used in Israel, which is the location for most of the Company's product
development.
The Company maintains its commitment to expanding and improving the capabilities
of its AllianceEnterprise Suite of CRM software products. The Company is
developing its software using Microsoft and Internet technologies to integrate
and automate business processes for managing equipment sales and service
delivery.
Sales and Marketing
- -------------------
Sales and marketing expense increased 2% to $4,486,000 in the first nine months
of 2003 from $4,393,000 in the first nine months of 2002. As a percentage of
revenues, sales and marketing expenses increased from 36% in 2002 to 45% in
2003. Despite the lower sales volume during the year, sales and marketing
expense remained consistent with the level of activity realized in 2002. The
costs during the course of 2003 were directly related to the extensive training
and marketing efforts undertaken to unify the Company's worldwide marketing
approach and sales strategy.
General and Administrative
- --------------------------
General and administrative expense decreased 11% to $1,613,000 in the first nine
months of 2003 from $1,822,000 in the first nine months of 2002. The reduction
results primarily from reduced rent expense in the US and the overall cost
containment program implemented throughout the Company.
Interest Income, net
- --------------------
Net interest income decreased $43,000 to $40,000 in the first nine months of
2003 from $83,000 in the first nine months of 2002. The decrease is generally
attributable to less cash on hand than in 2002 as well as an overall reduction
in interest rates paid on invested cash.
International Operations
- ------------------------
Total revenue from the Company's international operations increased by $72,000,
or 2%, to $3,599,000 in the first nine months of 2003 from $3,527,000 in the
same nine months of 2002. The increase in revenue from international operations
was primarily attributable to the increasing services and maintenance revenues
13
generated from the growing customer base in the Asia Pacific region.
International operations generated a loss of $828,000 for the nine months ended
September 30, 2003 compared to a loss of $834,000 for the nine months ended
September 30, 2002.
Liquidity and Capital Resources
- -------------------------------
Net cash used in operating activities was $563,000 for the nine months ended
September 30, 2003, compared to $1,288,000 of cash used in operating activities
for the nine months ended September 30, 2002. The decreased use of cash resulted
primarily from better collections mitigated by the year-to-date loss.
The Company's investing activities used $558,000 of cash in the first nine
months of 2003 compared to generating $1,997,000 in the first nine months of
2002. The increase in cash used is directly related to the sale of assets held
for sale during 2002.
The Company generated $4,000 from financing activities during the nine months
ended September 30, 2003 compared to using $31,000 in the first nine months of
2002. All of the cash generated in 2003 were proceeds from the exercise of stock
options through the employee stock purchase plan. For the nine months ended
September 30, 2002, most of the cash used was attributable to the repayment of
debt. This was partially offset by increased proceeds from the exercise of stock
options through the employee stock purchase plan.
At September 30, 2003, the Company had a working capital ratio of 1.6:1, with
cash and investments available for sale of $3,749,000. The Company defines
working capital as the ratio of current assets to current liabilities. 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 next twelve months. The Company does not
anticipate that its operations or financial condition will be affected
materially by inflation.
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 unique to the
Company on a quarterly basis, and which may vary from quarter to quarter,
include but are not limited to the following:
o 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.
o 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.
o The Customer Relationship Management (CRM) software market is intensely
competitive.
o International sales for the Company's products and services, and the
Company's expenses related to these sales, continue to be a significant
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.
o 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.
14
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, 2003, the Company's investments consisted
of 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
- ---------------------------------------------------
On September 2, 2003, the Company effected a reverse stock split of the
Company's outstanding common stock based upon a 1:5 reverse stock split ratio.
The par value of all post reverse split shares remained unchanged at $0.01. All
partial shares as a result of the reverse split were paid out in full. As a
result of the reverse split, the number of authorized shares was reduced from
25,000,000 to 5,000,000.
Item 3. Defaults Upon Senior Securities
- -----------------------------------------
There have been no defaults by the Company on any Senior Securities during the
quarter ended September 30, 2003.
15
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
At the Annual Meeting of Stockholders held on August 21, 2003, pursuant to the
Notice of Annual Meeting of Stockholders dated July 15, 2003, the following
actions were adopted:
1. The election of a board of directors to hold office until the next annual
stockholders' meeting or until their respective successors have been
elected or appointed.
Number of Shares
Voted For Withheld
--------- --------
Zack B. Bergreen 11,807,885 151,089
Adrian A. Peters 11,807,885 151,089
Eric Siegel 11,807,885 151,089
Isidore Sobkowski 11,707,885 251,089
2. The approval of a proposal to authorize the Board of Directors to amend the
Company's Certificate of Incorporation to effect a reverse split of the
Company's Outstanding Common Stock based upon a 1:5 reverse stock split
ratio.
Number of Shares
Voted For Voted Against Abstained
--------- ------------- ---------
11,606,819 339,755 12,400
3. The appointment of BDO Seidman, LLP as independent auditors for the Company
for the fiscal year ending December 31, 2003.
Number of Shares
Voted For Voted Against Abstained
--------- ------------- ---------
11,896,236 52,731 10,007
No other 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
- ---------------------------
In accord with Section 10A(I)(2) of the Securities Exchange Act of 1934, as
added by Section 202 of the Sarbanes-Oxley Act of 2002, the Company is
responsible for listing the non-audit services approved in the Second Quarter by
the Company's Audit Committee to be performed by BDO Seidman, the Company's
external auditor. Non-audit services are defined in the law as services other
than those provided in connection with an audit or a review of the financial
statements of the Company. The non-audit services approved by the Audit
Committee in the Second Quarter are each considered by the Company to be
audit-related services which are closely related to the financial audit process.
Each of the services has been approved in accord with a pre-approval from the
Committee's Chairman pursuant to delegated authority by the Committee.
During the quarterly period covered by this filing, the Audit Committee approved
additional engagements of BDO Seidman for the following non-audit services: (1)
general tax services for federal, state and local tax filings; and (2) special
tax matter consultations.
16
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(A) Exhibits
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 - CEO and Principal Executive Officer
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 - CFO and Principal Financial and Chief Accounting Officer
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 - President and Principal Executive Officer
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 - CFO and Principal Financial and Chief Accounting Officer
(B) Reports on Form 8-K
On August 14, 2003, the Company filed a report on Form 8-K with respect to
the press release issued as of that date reporting the results for the
three months ended June 30, 2003.
On August 22, 2003, the Company filed a report on Form 8-K announcing that
at the annual stockholders meeting on August 21, 2003, its shareholders
approved a 1-for-5 reverse stock split of all outstanding shares of common
stock. The shares will begin trading on a post-split basis at the beginning
of trading on September 2, 2003.
On September 18, 2003, the Company filed a report on Form 8-K reporting the
receipt of a letter from the NASDAQ Stock Market, Inc. notifying the
Company that the NASDAQ Listing Qualifications Panel had determined to
continue the listing of our common stock on the NASDAQ Small Cap Market.
17
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 12th day of
November 2003.
ASTEA INTERNATIONAL INC.
By: /s/Zack B. Bergreen
-------------------------------
Zack Bergreen
Chief Executive Officer
(Principal Executive Officer)
By: /s/Rick Etskovitz
-------------------------------
Rick Etskovitz
Chief Financial Officer
(Principal Financial and Chief
Accounting Officer)
18