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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, 2002
---------------------------
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
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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
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(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 04, 2002, 14,604,030 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 7
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 15
Signatures 16
Certifications 17
2
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
ASTEA INTERNATIONAL INC.
------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
September 30, December 31,
2002 2001
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 4,706,000 $ 4,071,000
Investments available for sale - 2,987,000
Restricted cash 300,000 -
Receivables, net of reserves of $788,000 and $955,000 7,598,000 7,343,000
Prepaid expenses and other 799,000 822,000
-----------------------------------
Total current assets 13,403,000 15,223,000
Property and equipment, net 522,000 617,000
Capitalized software development costs, net 1,222,000 1,412,000
Other assets 615,000 763,000
-----------------------------------
Total assets $ 15,762,000 $ 18,015,000
===================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ - $ 34,000
Accounts payable and accrued expenses 3,245,000 3,627,000
Deferred revenues 3,893,000 4,249,000
-----------------------------------
Total current liabilities 7,138,000 7,910,000
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares - -
authorized, none issued
Common stock, $.01 par value, 25,000,000 shares
authorized, 14,825,000 issued 148,000 148,000
Additional paid-in capital 22,674,000 22,674,000
Cumulative currency translation adjustment (1,256,000)
(1,113,000)
Accumulated deficit (12,868,000) (11,239,000)
Less treasury stock, at cost, 221,000 and 227,000 common
shares (217,000) (222,000)
-----------------------------------
Total stockholders' equity 8,624,000 10,105,000
-----------------------------------
Total liabilities and stockholders' equity $ 15,762,000 $ 18,015,000
===================================
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,
--------------------------------------------------------------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues:
Software license fees $ 2,386,000 $ 777,000 $ 4,563,000 $ 4,546,000
Services and maintenance 2,460,000 2,673,000 7,539,000 8,289,000
--------------------------------------------------------------------
Total revenues 4,846,000 3,450,000 12,102,000 12,835,000
--------------------------------------------------------------------
Costs and expenses:
Cost of software license fees 352,000 245,000 948,000 847,000
Cost of services and maintenance 1,619,000 1,414,000 4,938,000 4,915,000
Product development 568,000 779,000 1,511,000 2,032,000
Sales and marketing 1,562,000 1,206,000 4,393,000 4,027,000
General and administrative 535,000 439,000 1,822,000 1,863,000
--------------------------------------------------------------------
Total costs and expenses 4,636,000 4,083,000 13,612,000 13,684,000
--------------------------------------------------------------------
Operating income (loss) from continuing
operations 210,000 (633,000) (1,510,000) (849,000)
Interest income, net 19,000 73,000 83,000 262,000
--------------------------------------------------------------------
Income (loss) from continuing operations 229,000 (560,000) (1,427,000) (587,000)
Income tax expense - - (200,000) -
--------------------------------------------------------------------
Net income (loss) $ 229,000 $ (560,000) $ (1,627,000) $ (587,000)
====================================================================
Basic and diluted earnings (loss) per share $ 0.02 $ (0.04) $ (0.11) $ (0.04)
====================================================================
Share outstanding used in computing basic earnings
(loss) per share
14,604,000 14,612,000 14,602,000 14,640,000
====================================================================
See accompanying notes to the consolidated financial statements.
4
ASTEA INTERNATIONAL INC.
------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
For the Nine Months
Ended September 30,
-----------------------------
2002 2001
-----------------------------
Cash flows from operating activities:
Net loss $(1,627,000) $ (587,000)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation and amortization 943,000 1,087,000
Changes in operating assets and liabilities:
Receivables (152,000) 2,883,000
Prepaid expenses and other 222,000 415,000
Other assets 148,000 -
Accounts payable and accrued expenses (636,000) (1,340,000)
Deferred revenues (186,000) (1,867,000)
-----------------------------
Net cash (used in) provided by operating activities (1,288,000) 591,000
-----------------------------
Cash flows from investing activities:
Sales of investments available for sale 2,987,000 528,000
Purchases of restricted investments (300,000) -
Purchases of property and equipment (262,000) (230,000)
Capitalized software development costs (428,000) (450,000)
-----------------------------
Net cash provided (used in) by investing activities 1,997,000 (152,000)
-----------------------------
Cash flows from financing activities:
Proceeds from exercise of stock options and employee stock
purchase plan 3,000 3,000
Net repayments of long-term debt (34,000) (97,000)
Purchases of treasury stock - (228,000)
-----------------------------
Net cash used in financing activities (31,000) (322,000)
-----------------------------
Effect of exchange rate changes on cash and cash equivalents (43,000) 42,000
-----------------------------
Net increase in cash and cash equivalents 635,000 159,000
Cash and cash equivalents balance, beginning of period 4,071,000 5,208,000
-----------------------------
Cash and cash equivalents balance, end of period $ 4,706,000 $ 5,367,000
=============================
See accompanying notes to the consolidated financial 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, 2002 and for the three
and nine month periods ended September 30, 2002 and 2001 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 2001 Annual
Report on Form 10-K which are hereby incorporated by reference in this quarterly
report on Form 10-Q. Results of operations and cash flows for the nine months
ended September 30, 2002 are not necessarily indicative of the results that may
be expected for the full year.
2. RESTRUCTURING CHARGES
---------------------
During the fourth quarter of 2001, the Company recorded a restructuring charge
of $409,000 in connection with severance costs to downsize the Company's
employment rolls ($211,000) and eliminate excess office space ($198,000). During
the first nine months of 2002, the Company made payments of $297,000 related to
the 2001 Restructuring Plan, including severance obligations of $139,000 and
lease obligations of $158,000. During the second quarter of 2002, the Company
evaluated its restructuring accrual based on the then current facts and
determined that $55,000 related to severance costs was not needed for the
purposes of the 2001 plan and, accordingly, the accrual was reversed. As of
September 30, 2002, $57,000 of restructuring charges remains unpaid.
3. 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.
4. RESTRICTED CASH
---------------
On September 11, 2002, $300,00 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. The letter of credit is due to expire on
September 11, 2003, but may be extended until September, 2004.
6
5. STOCKHOLDERS' EQUITY/COMPREHENSIVE LOSS
---------------------------------------
The reconciliation of stockholders' equity and comprehensive loss from December
31, 2001 to September 30, 2002 is summarized as follows:
Cumulative
Additional Currency
Common Paid-In Translation Accumulated Treasury Comprehensive
Stock Capital Adjustment Deficit Stock Loss
----- ------- ---------- ------- ----- ----
Balance at December 31, 2001 $ 148,000 $ 22,674,000 $ (1,256,000) $(11,239,000) $ (222,000) $ -
Issuance of common stock
under employee stock
purchase plan - - - (2,000) 5,000 -
Cumulative translation
adjustment - - 143,000 - - 143,000
Net loss for the period - - - (1,627,000) - (1,627,000)
------------------------------------------------------------------------------------------
Balance at September 30, 2002 $ 148,000 $ 22,674,000 $ (1,113,000) $(12,868,000) $ (217,000) $ (1,484,000)
==========================================================================================
6. MAJOR CUSTOMERS
---------------
In the third quarter of 2002, the Company had two customers that accounted for
more than 10% of its total revenues. In the third quarter of 2001, the Company
did not have any customers that accounted for 10% or more of its total revenues.
For the first nine months of 2002 and 2001, the Company did not have any
customers that accounted for 10% or more of its total revenues.
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,
2001.
The Company develops, markets and supports Service Lifecycle Management
solutions for companies that market, sell, service and support capital
equipment. The applications extend traditional Customer Relationship Management
(CRM) to encompass supply chain and logistics functionality, all honed to
service-oriented businesses. Clients include Fortune 500 to mid-size companies
in diverse industries such as Medical Technology, Instrumentation and Controls,
Information Technology Services Imaging Equipment, Telecommunications, Point Of
Sale (POS) and Building (HVAC) Systems. The Company supports a global client
base with a worldwide sales and service network.
Over the past few years, the Company has been making the transition from a
traditional field service automation provider to a provider of broader
applications spanning the Service Lifecycle. The suite now includes
functionality for the market, sales, service delivery, and support of field
services. This extension allows the Company to provide a broader footprint to
organizations that may derive a significant portion of their sales and/or
revenues from the support of aftermarket industries.
The Company continues to make a significant investment in product development in
support of the transition. The Company diligently monitors costs and manages
them aggressively, in part by remaining focused on key core competencies and
markets for which it can demonstrate clear potential Return on Investment.
7
Critical Accounting Policies
- ----------------------------
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
its financial statements. The significant accounting policies of Astea
International Inc. are described in Note 2 of the Notes to the Consolidated
Financial Statement of Operations Procedures in the Company's Annual Report on
Form 10-K. The significant accounting policies that the Company believes are the
most critical to aid in fully understanding its reported financial results
include the following:
Revenues
Revenue is recognized in accordance with Statement of Position (SOP) 97-2, which
provides guidelines on the recognition of software license fee revenue.
Principally, revenue may be recognized when persuasive evidence of an
arrangement exists, delivery has occurred, the license fee is fixed and
determinable and the collection of the fee is probable. The Company allocates a
portion of its software revenue to post-contract support activities or to other
services or products provided to the customer free of charge or at non-standard
discounts when provided in conjunction with the licensing arrangement. Amounts
allocated are based upon standard prices charged for those services or products.
Software license fees for resellers or other members of the indirect sales
channel are based on a fixed percentage of the Company's standard prices. The
Company recognizes software license revenue for such contracts based upon the
terms and conditions provided by the reseller to its customer.
Revenue from post-contract support is recognized ratably over the term of the
contract on a straight-line basis. Consulting and training service revenue is
generally recognized at the time the service is performed. Fees from licenses
sold together with consulting services are generally recognized upon shipment,
with the consulting fee recognized as the services are performed, provided that
the contract has been executed, delivery of the software has occurred, fees are
fixed and determinable and collection is probable. In instances where the
aforementioned criteria have not been met, both the license and the consulting
fees are recognized under the percentage of completion method of contract
accounting.
In limited instances, the Company will enter into contracts for which revenue is
recognized under contract accounting. The accounting for such arrangements
requires judgement, which impacts the timing of revenue recognition and
provision for estimated losses, if applicable.
Capitalized Software and Research Development Costs
Our policy on capitalized software costs determines the timing of our
recognition of certain development costs. In addition, this policy determines
whether the cost is classified as development expense or cost of software
license fees. Management is required to use professional judgement in
determining whether development costs meet the criteria for immediate expense or
capitalization.
Recent Accounting Standards
In April 2002, the FASB issued SFAS No. 145, Recession of SFAS Nos. 4, 44 and
64, Amendment of SFAS No. 13 and Technical Corrections. SFAS No. 4 required all
gains and losses from the extinguishment of debt to be reported as extraordinary
items and SFAS No. 64 related to the same matter. SFAS No. 145 requires gains
and losses from certain debt extinguishment not to be reported as extraordinary
items when the use of debt extinguishment is part of a risk management strategy.
SFAS No. 44 was issued to establish transitional requirement for motor carriers.
Those transitions are completed, therefore SFAS No. 145 rescinds SFAS No. 44.
SFAS No. 145 also amends SFAS No. 13 requiring sale-leaseback accounting for
certain lease modifications. SFAS No. 145 is effective for fiscal years
beginning after May 15, 2002. The provisions relating to sale-leaseback
accounting are effective for transactions after May 15, 2002. The adoption of
SFAS No 145 is not expected to have a material impact on the Company's financial
position or results of operations.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination cost and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity.
Previous accounting guidance provided by EITF Issue No. 94-3, "Liability
Recognition of Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)" is replaced by
this Statement. Statement 146 is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. Management does not anticipate
that the adoption of this Statement will have a significant effect on the
Company's financial statements.
8
Results of Operations
- ---------------------
Comparison of Three Months Ended September 30, 2002 and 2001
- ------------------------------------------------------------
Revenues
- --------
Revenues increased $1,396,000, or 40%, to $4,846,000 for the three months ended
September 30, 2002 from $3,450,000 for the three months ended September 30,
2001. Software license fee revenues increased $1,609,000, or 207%, from the same
period last year. Services and maintenance fees for the three months ended
September 30, 2002 amounted to $2,460,000, an 8% decrease from the same quarter
in 2001.
The Company's international operations contributed $1,291,000 of revenues in the
third quarter 2002 compared to $1,264,000 in the third quarter of 2001, which
represents a 2% increase. The increase is primarily the result of an increase in
sales in Japan.
Software license fee revenues increased 207% to $2,386,000 in the third quarter
of 2002 from $777,000 in the third quarter of 2001. The increase is attributable
to an increase in AllianceEnterprise revenues of $1,679,000 offset by a decline
in DISPATCH-1 licenses of $70,000. AllianceEnterprise license fee revenue
increased $1,679,000 from $664,000 in the third quarter of 2001 to $2,343,000 in
the third quarter of 2002. As expected, current sales of DISPATCH-1 were not
significant, contributing only 2% of total software license fee revenues in the
third quarter of 2002 compared to 15% of total license fee revenues in the third
quarter of 2001. The Company is confident that projections for the CRM market
will hold true to form allowing the Company to capitalize in the future on its
investment in product development through increased software license sales.
Services and maintenance revenues decreased 8% to $2,460,000 in the third
quarter of 2002 from $2,673,000 in the third quarter of 2001. The decrease
primarily relates to service and maintenance revenues from DISPATCH-1, which
decreased $461,000 to $908,000 from $1,369,000 in the third quarter of 2001.
Most of the decline is attributable to the sale of DISPATCH-1 source code which
provides those customers the ability to perform all service and maintenance work
themselves instead of using Astea staff. Service and maintenance revenues from
ServiceAlliance increased by $248,000 or 19% to $1,552,000 in the third quarter
of 2002 from $1,304,000 in the third quarter of 2001. The increase is
attributable to the growing number of customers using the Company's
AllianceEnterprise software.
Costs of Revenues
- -----------------
Cost of software license fees increased 44% to $352,000 in the third quarter of
2002 from $245,000 in the third quarter of 2001. Included in the cost of
software license fees is the fixed cost of capitalized software amortization.
Capitalized software amortization was $200,000 in both the third quarters of
2002 and 2001. The increase in the cost of software license fees represents
additional third party software costs attributable to certain products sold. The
software licenses gross margin percentage was 85% in the third quarter of 2002
compared to 68% in the third quarter of 2001. The increase in gross margin was
attributable to the increase in license sales in 2002.
Cost of services and maintenance increased 14% to $1,619,000 in the third
quarter of 2002 from $1,414,000 in the third quarter of 2001. The services and
maintenance gross margin percentage was 34% and 47% in the third quarter of 2002
and 2001, respectively. The decrease in gross margin was attributable to costs
associated with certain non-billable projects undertaken during the quarter.
9
Product Development
- -------------------
Product development expense decreased 27% to $568,000 in the third quarter of
2002 from $779,000 in the third quarter of 2001. As a percentage of revenues,
product development decreased from 23% in the third quarter of 2001 to 12% in
the third quarter of 2002. This decrease primarily results from the significant
increase in sales during the third quarter of 2002 as well as the strengthening
of the U.S. dollar against the Israel shekel, which is where the Company
performs most of its development. Despite this decrease, development employee
headcount remained unchanged. Additionally, cost containment measures
implemented at year-end 2001 enabled the Company to realize cost savings during
2002. 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 30% to $1,562,000 in the third quarter of
2002 from $1,206,000 in the third quarter of 2001. The increase is primarily the
result of increased sales commissions resulting from higher sales. In addition,
the Company has implemented an aggressive marketing campaign to introduce its
newest version of AllianceEnterprise. As a percentage of revenues, sales and
marketing expenses decreased to 32% in 2002 compared to 35% in the third quarter
of 2001. This decrease in the percentage reflects the Company's success in
generating new sales from its marketing strategies.
General and Administrative
- --------------------------
General and administrative expenses increased 22% to $535,000 in the third
quarter of 2002 from $439,000 in the third quarter of 2001. The increase in
general and administrative expenses results from unfavorable foreign exchange
comparisons.
Interest Income, net
- --------------------
Net interest income decreased $54,000 to $19,000 in the third quarter of 2002
from $73,000 in the third quarter of 2001. The decrease is generally
attributable to less cash on hand than in 2001 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 $27,000,
or 2%, to $1,291,000 in third quarter of 2002 from $1,264,000 in the same
quarter in 2001. This increase is due to an increase in sales in Japan.
International Operations generated a $131,000 loss for the 3 months ended
September 30, 2002 compared to generating net income of $130,000 for the 3
months ended September 30, 2001. The decline in performance is primarily due to
the general global economic slowdown.
Comparison of Nine Months Ended September 30, 2002 and 2001
- -----------------------------------------------------------
Revenues
- --------
Revenues decreased $733,000, or 6%, to $12,102,000 for the nine months ended
September 30, 2002 from $12,835,000 for the nine months ended September 30,
2001. 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 remained relatively unchanged from the
same period last year while services and maintenance fees for the nine months
ended September 30, 2002 decreased $750,000 from the same nine months in 2001.
The Company's international operations contributed $3,527,000 of revenues in the
first nine months of 2002 compared to $4,095,000 in the first nine months of
2001. This represents a 14% decrease from the same period last year and 29% of
total revenues in the first nine months of 2002. The decrease in revenues is a
direct result of the continued effects of the downturn in the global economy.
10
Software license fee revenues slightly increased in the first nine months of
2002 to $4,563,000 from $4,546,000 during the same period in 2001.
Services and maintenance revenues decreased 9% to $7,539,000 in the first nine
months of 2002 from $8,289,000 in the first nine months of 2001. The decrease
primarily relates to service and maintenance revenues from DISPATCH-1, which
decreased $1,288,000 to $2,911,000 from $4,199,000 in the first nine months of
2001. Service and maintenance revenues from AllianceEnterprise increased 13% to
$4,628,000 in the first nine months of 2002 from $4,090,000 in the first nine
months of 2001. The Company expects to experience continued declines in revenues
for its legacy product, DISPATCH-1.
Costs of Revenues
- -----------------
Cost of software license fees increased 12% to $948,000 in the first nine months
of 2002 from $847,000 in the first nine months of 2001. The increase in the cost
of software license fees represents higher third party software costs
attributable to the mix of products sold in conjunction with the company's
products in the first nine months of 2002. The software licenses gross margin
percentage was 79% in the first nine months of 2002 compared to 81% in the first
nine months of 2001. This decrease in gross margin was attributable to the mix
of software licenses sold.
Cost of services and maintenance increased slightly to $4,938,000 in the first
nine months of 2002 from $4,915,000 in the first nine months of 2001. The
services and maintenance gross margin percentage was 35% in the first nine
months of 2002 compared to 41% in the first nine months of 2001. The increase in
services and maintenance costs was due to special, extended projects undertaken
during the course of the year to forge new and stronger relationships with our
customers.
Product Development
- -------------------
Product development expense decreased 26% to $1,511,000 in the first nine months
of 2002 from $2,032,000 in the first nine months of 2001. Product development as
a percentage of revenues decreased to 12% in the first nine months of 2002 from
16% in the first nine months of 2001. The decrease is primarily the result of
the strengthening 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. Despite this decrease, development employee headcount remained
unchanged. In addition, the decrease reflects the realization of the benefit
derived from implementing certain cost saving plans at year-end 2001.
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 9% to $4,393,000 in the first nine months
of 2002 from $4,027,000 in the first nine months of 2001. This increase resulted
primarily from an aggressive marketing campaign to transition the
AllianceEnterprise Suite of software products as well as higher commissions
resulting from higher software license sales. As a percentage of revenues, sales
and marketing expenses increased from 31% in 2001 to 36% in 2002, which is a
reflection of the Company's continued effort to focus its marketing effort on
effective means to increase market share and expand its presence through both
direct and indirect channels.
General and Administrative
- --------------------------
General and administrative expense decreased 2% to $1,822,000 in the first nine
months of 2002 from $1,863,000 in the first nine months of 2001. The decrease
resulted from lower legal costs and lower bad debt expense.
11
Interest Income, net
- --------------------
Net interest income decreased $179,000 to $83,000 in the first nine months of
2002 from $262,000 in the first nine months of 2001. The decrease is generally
attributable to less cash on hand than in 2001 as well as an overall reduction
in interest rates paid on invested cash.
International Operations
- ------------------------
Total revenue from the Company's international operations decreased by $568,000,
or 14%, to $3,527,000 in the first nine months of 2002 from $4,095,000 in the
same nine months of 2001. The decrease in revenue from international operations
was primarily attributable to decreased license sales due to the general global
economic slowdown. International operations generated a $834,000 loss for the
nine months ended September 30, 2002 compared to generating net income of
$381,000 for the nine months ended September 30, 2001.
Liquidity and Capital Resources
- -------------------------------
Net cash used in operating activities was $1,288,000 for the nine months ended
September 30, 2002, compared to $591,000 of cash provided by operations for the
nine months ended September 30, 2001. The increased use of cash resulted
primarily from the decline in net earnings compared to the same period last
year.
The Company's investing activities generated $1,997,000 of cash in the first
nine months of 2002 compared to using $152,000 in the first nine months of 2001.
The significant difference from last year was the liquidation of investments in
2002 to fund the operations.
The Company used $31,000 for financing activities during the nine months ended
September 30, 2002 compared to using $322,000 in the first nine months of 2001.
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. Most of the financing expenditures for the nine months ended September 30,
2001 was for the purchase of $228,000 of treasury stock as compared to no
purchases of treasury stock during 2002.
At September 30, 2002, the Company had a working capital ratio of 1.9:1, with
cash and investments available for sale of $4,706,000. 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.
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
12
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.
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, 2002, 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.
Item 4. CONTROLS AND PROCEDURES
- ----------------------------------
Within the 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Rule 13a-15 of the Securities
Exchange Act of 1934. Based upon that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective in timely alerting them to material
information relating to the Company required to be disclosed in the Company's
periodic SEC reports. There have been no significant changes in the Company's
internal controls or in other factors which could significantly affect internal
controls subsequent to the date the Company carried out its evaluation.
13
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,
2002.
Item 3. Defaults Upon Senior Securities
- -------------------------------------------------
There have been no defaults by the Company on any Senior Securities during the
quarter ended September 30, 2002.
Item 4. Submission of Matters to a Vote of Security Holders
- ---------------------------------------------------------------------
At the Annual Meeting of Stockholders held on August 21, 2002, pursuant to the
Notice of Annual Meeting of Stockholders dated July 22, 2002, 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 11,679,132 201,072
Adrian A. Peters 11,697,172 183,032
Isidore Sobkowski 11,697,537 182,667
2. The appointment of BDO Seidman, LLP as independent auditors for the Company
for the fiscal year ending December 31, 2002.
Number of Shares
Voted For Voted Against Abstained
--------------- ------- ---------
11,716,992 155,756 7,456
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.
14
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------------------
(A) Exhibits
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 - President and Chief
Executive Officer
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 - Chief Financial
Officer
(B) Reports on Form 8-K
None.
15
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 7th day of November
2002.
ASTEA INTERNATIONAL INC.
By: /s/Zack B. Bergreen
------------------------------------
Zack Bergreen
Chief Executive Officer
(Principal Executive Officer)
By: /s/Fredric Etskovitz
------------------------------------
Fredric Etskovitz
Chief Financial Officer
(Principal Financial and Chief
Accounting Officer)
16
CERTIFICATIONS
I, Zack B. Bergreen, the Chief Executive Officer and Principal Executive Officer
of Astea International Inc. (the "Company"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of Astea International
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. the registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 7, 2002
By: /s/ Zack B. Bergreen
-------------------------
Zack B. Bergreen
Chief Executive Officer
(Principal Executive
Officer)
17
I, Rick Etskovitz, the Chief Financial Officer and Principal Financial and Chief
Accounting Officer of Astea International Inc. (the "Company"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of Astea International
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
11. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
12. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 7, 2002
By: /s/ Rick Etskovitz
-------------------------
Rick Etskovitz
Chief Financial Officer
(Principal Financial and
Chief Accounting Officer)
18