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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 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
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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
-------------------------------- ----------
(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
---- ---
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 August 12, 2003, 14,606,530 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 (Unaudited)
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk 14
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 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
2
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
ASTEA INTERNATIONAL INC.
------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
June 30, December 31,
2003 2002
(Unaudited)
---------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,250,000 $ 4,967,000
Restricted cash 300,000 300,000
Receivables, net of reserves of $715,000 and $1,018,000 4,533,000 7,936,000
Prepaid expenses and other 943,000 691,000
---------------------------------------
Total current assets 11,026,000 13,894,000
Property and equipment, net 614,000 586,000
Capitalized software, net 1,289,000 1,349,000
Other assets 616,000 614,000
---------------------------------------
Total assets $ 13,545,000 $ 16,443,000
=======================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,837,000 $ 3,418,000
Deferred revenues 3,477,000 4,027,000
---------------------------------------
Total current liabilities 6,314,000 7,445,000
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 translation adjustment (836,000) (1,039,000)
Accumulated deficit (14,540,000) (12,568,000)
Less: treasury stock at cost, 218,000 and 221,000 shares (215,000) (217,000)
---------------------------------------
Total stockholders' equity 7,231,000 8,998,000
---------------------------------------
Total liabilities and stockholders' equity $ 13,545,000 $ 16,443,000
=======================================
See accompanying notes to the consolidated financial statements.
3
ASTEA INTERNATIONAL INC.
------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
---------------------------------------------------------------------
2003 2002 2003 2002
--------------- ----------------- -------------- ---------------
Revenues:
Software license fees 312,000 710,000 1,334,000 2,177,000
Services and maintenance 2,826,000 2,592,000 5,792,000 5,079,000
---------------------------------------------------------------------
Total revenues 3,138,000 3,302,000 7,126,000 7,256,000
---------------------------------------------------------------------
Costs and expenses:
Cost of software license fees 181,000 320,000 410,000 596,000
Cost of services and
maintenance 1,830,000 1,687,000 3,474,000 3,319,000
Product development 587,000 502,000 1,094,000 942,000
Sales and marketing 1,524,000 1,572,000 3,098,000 2,831,000
General and administrative 531,000 659,000 1,049,000 1,288,000
---------------------------------------------------------------------
Total costs and expenses 4,653,000 4,740,000 9,125,000 8,976,000
---------------------------------------------------------------------
Loss from operations
before interest and taxes (1,515,000) (1,438,000) (1,999,000) (1,720,000)
Net interest income 12,000 26,000 29,000 64,000
---------------------------------------------------------------------
Loss before income tax (1,503,000) (1,412,000) (1,970,000) (1,656,000)
Income tax expense - (150,000) - (200,000)
---------------------------------------------------------------------
Net loss (1,503,000) (1,562,000) (1,970,000) (1,856,000)
=====================================================================
Basic and diluted net loss per share (0.10) (0.11) (0.13) (0.13)
=====================================================================
Shares outstanding used in
computing basic and diluted net
loss per share 14,607,000 14,602,000 14,607,000 14,602,000
=====================================================================
See accompanying notes to the consolidated financial statements.
4
ASTEA INTERNATIONAL INC.
------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
For the Six Months
Ended June 30,
2003 2002
-----------------------------------
Cash flows from operating activities:
Net loss $(1,970,000) $(1,856,000)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 469,000 621,000
Changes in operating assets and liabilities:
Receivables 3,615,000 736,000
Prepaid expenses and other (241,000) 37,000
Other assets (2,000) 165,000
Accounts payable and accrued expenses (584,000) (427,000)
Deferred revenues (515,000) (315,000)
-----------------------------------
Net cash provided by (used in) operating activities 772,000 (1,039,000)
-----------------------------------
Cash flows from investing activities:
(Purchases) sales of short-term investments - 1,988,000
Purchases of property and equipment (153,000) (113,000)
Capitalized software development costs (240,000) (308,000)
-----------------------------------
Net cash (used in) provided by investing activities (393,000) 1,567,000
-----------------------------------
Cash flows from financing activities:
Proceeds from exercise of stock options and employee stock purchase plan 2,000 3,000
Net repayments of long-term debt - (34,000)
-----------------------------------
Net cash provided by (used in) financing activities 2,000 (31,000)
-----------------------------------
Effect of exchange rate changes on cash and cash equivalents (98,000) (21,000)
-----------------------------------
Net increase in cash and cash equivalents 283,000 476,000
Cash and cash equivalents balance, beginning of period 4,967,000 4,071,000
-----------------------------------
Cash and cash equivalents balance, end of period $ 5,250,000 $ 4,547,000
====================================
See accompanying notes to the consolidated financial statements.
5
Item 1. CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- -------------------------------------------------------
ASTEA INTERNATIONAL INC.
------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. BASIS OF PRESENTATION
---------------------
The consolidated financial statements at June 30, 2003 and for the three and six
month periods ended June 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. Results of operations and cash flows for the six months
ended June 30, 2003 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 six months of 2002, the Company made payments of $229,000 related to
the 2001 Restructuring Plan, including severance obligations of $139,000 and
lease obligations of $90,000. 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.
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 six
months ended June 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 this
provision periodically in the future as circumstances change.
6
4. STOCKHOLDERS' EQUITY/COMPREHENSIVE LOSS
---------------------------------------
The reconciliation of stockholders' equity and comprehensive loss from December
31, 2002 to June 30, 2003 is summarized as follows:
Cumulative
Additional Currency
Common Paid-In Translation Accumulated Treasury Comprehensive
Stock Capital Adjustment Deficit Stock Income (Loss)
----- ------- ---------- ------- ----- -------------
Balance at December 31, 2002 $148,000 $22,674,000 $(1,039,000) $(12,568,000) $(217,000) $
-
Issuance of common stock
Under employee stock
Purchase plan - - (2,000) 2,000 -
Cumulative translation
Adjustment - - 203,000 - - 203,000
Net loss for the period - - - (1,970,000) - (1,970,000)
----------------------------------------------------------------------------------------------
Balance at June 30, 2003 $148,000 $22,674,000 $(836,000) $(14,540,000) $(215,000) $ (1,767,000)
===============================================================================================
5. MAJOR CUSTOMERS
---------------
In the second quarter of 2003, the there were no customers that accounted for
10% of total revenues. In the second quarter of 2002, the Company had one
customer that accounted for 11% of its total revenue. For the first six months
of 2003 and 2002, there were no customers that accounted for 10% of total
revenues.
6. RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
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 Six months ended
June 30, June 30,
--------------------------------- ----------------------------------
2003 2002 2003 2002
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net loss - as reported $ (1,503,000) $ (1,562,000) $ (1,970,000) (1,856,000)
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 (120,000) 53,000 (205,000) (67,000)
Net loss - pro forma $ (1,623,000) $ (1,509,000) $ (2,174,000) $ (1,923,000)
Basic and diluted loss per share -
as reported $ (0.10) $ (0.11) $ (0.13) $ (0.13)
Basic and diluted loss per share -
pro forma $ (0.11) $ (0.10) $ (0.15) $ (0.13)
The weighted average fair value of those options granted during the quarters
ended June 30, 2003 and 2002 was estimated at $0.76 and $0.86, respectively. The
weighted average fair value of those options granted during the six months ended
June 30, 2003 and 2002 was estimated at $0.63 and $0.86. 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 3.38% and 5.02% for 2003 and 2002 grants, respectively; an
expected life of six years; volatility of 144% and 147%; and a dividend yield of
zero for 2003 and 2002 grants, respectively.
8
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.
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 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,
Carrier, 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 and Estimates
- ------------------------------------------
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
9
judgments and the use of assumptions as to future uncertainties and, as a
result, actual results could differ from these estimates.
Revenue Recognition
Revenues are 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,
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.
Accounts Receivable
The Company evaluates the adequacy of its allowance for doubtful accounts at the
end of each quarter. In performing this evaluation, the Company analyzes the
payment history of its significant past due accounts, subsequent cash
collections on these accounts and comparative accounts receivable aging
statistics. Based on this information, along with consideration of the general
strength of the economy, the Company develops what it considers to be a
reasonable estimate of the uncollectible amounts included in accounts
receivable. This estimate involves significant judgement by the management of
the Company. Actual uncollectible amounts may differ from the Company's
estimate.
Capitalized Software Research and 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 judgement 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 June 30, 2003 and 2002
- -------------------------------------------------------
Revenues
- --------
Total revenues decreased $164,000, or 5%, to $3,138,000 for the three months
ended June 30, 2003 from $3,302,000 for the three months ended June 30, 2002.
Software license fee revenues decreased $398,000, or 56%, from the same period
last year. Services and maintenance fees increased by 9% over the same quarter
in 2002 for the three months ended June 30, 2003 to $2,826,000.
The Company's international operations contributed $1,238,000 of revenues in the
second quarter of 2003, which was a 20% increase over total revenues generated
during the second quarter of 2002. The Company's revenues from international
operations amounted to 40% of the total revenue for the second quarter in 2003
as compared to 31% of total revenues for the same quarter in 2002.
Software license fee revenues decreased 56% to $312,000 in the second quarter of
2003 from $710,000 in the second quarter of 2002. The decrease is attributable
to the inability to conclude sales opportunities that the Company had expected
to close this quarter. Continued uncertainty in the economy contributed to
preventing corporate decision makers from committing to large software projects.
Services and maintenance revenues increased 9% to $2,826,000 in the second
quarter of 2003 from $2,592,000 in the second quarter of 2002. The increase
relates to a 31% increase in service and maintenance revenues from
AllianceEnterprise, which increased $509,000 to $2,160,000 from $1,651,000 in
the second quarter of 2002. Partially offsetting this increase was a 29%
decrease in DISPATCH-1 services and maintenance from $941,000 in the second
quarter of 2002 to $666,000 in the second quarter of 2003.
Costs of Revenues
- -----------------
Cost of software license fees decreased 43% to $181,000 in the second quarter of
2003 from $320,000 in the second 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 second
quarter of 2003 and 2002, respectively. The decrease in the cost of software
license fees represents decreased third party software costs attributable to the
mix of products sold in conjunction with the Company's products in the second
quarter of 2003. The decrease is also due to the decrease in license sales. The
software licenses gross margin percentage was 42% in the second quarter of 2003
compared to 55% in the second quarter of 2002. This decrease in gross margin was
primarily attributable to lower software license sales.
Cost of services and maintenance increased 8% to $1,830,000 in the second
quarter of 2003 from $1,687,000 in the second quarter of 2002. The services and
maintenance gross margin percentage was 35% in both the second quarter of 2003
and 2002.
Product Development
- -------------------
Product development expense increased 17% to $587,000 in the second quarter of
2003 from $502,000 in the second quarter of 2002. The increase is primarily due
to the strengthening of the Israel shekel against the U.S. dollar. Product
development as a percentage of revenues increased to 19% in the second quarter
of 2003 as compared to 15% in the second quarter of 2002.
Most of the Company's product development occurs in its office in Tefen, Israel.
In 2003 the Israeli shekel increased in value relative to the U.S. dollar,
increasing the Company's development expenses on a U.S. dollar basis. In
addition, the Company is focusing on completing the transformation of its
products to version 7.0, a completely web-based architect, so the size of the
development staff has increased by 15% since the same time last year.
11
Sales and Marketing
- -------------------
Sales and marketing expense decreased 3% to $1,524,000 in the second quarter of
2003 from $1,572,000 in the second quarter of 2002. This decrease is principally
associated with the cost of hiring sales and marketing personnel in the second
quarter of 2002 as well as increased costs in the second quarter of 2002
associated with the development of an aggressive marketing campaign to introduce
new products which are expected to generate sales in future periods. As a
percentage of revenues, sales and marketing expenses increased to 49% in 2003
from 48% in the second quarter of 2002.
General and Administrative
- --------------------------
General and administrative expenses decreased 19% to $531,000 during the second
quarter of 2003 from $659,000 in the second quarter of 2002. As a percentage of
revenue, general and administrative costs decreased to 17% in the second quarter
of 2003 from 20% in the second quarter of 2002. The decrease is primarily
attributable to the resolution of a collection matter in the Company's favor,
which resulted in a net decrease of $235,000.
Net Interest Income
- -------------------
Net interest income decreased $14,000 to $12,000 in the second quarter of 2003
from $26,000 in the second quarter of 2002. The decrease of interest income 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 during the
second quarter of 2003 to $1,238,000 compared to $1,035,000 for the second
quarter of 2002. International operations generated a net loss of $397,000 for
the second quarter ended June 30, 2003 compared to a net loss of $454,000 in the
same quarter in 2002.
Comparison of Six Months Ended June 30, 2003 and 2002
- -----------------------------------------------------
Revenues
- --------
Revenues decreased $130,000, or 2%, to $7,126,000 for the six months ended June
30, 2003 from $7,256,000 for the six months ended June 30, 2002. Software
license fee revenues decreased $843,000, or 39%, from the same period last year.
Services and maintenance fees for the six months ended June 30, 2003 amounted to
$5,792,000, a 14% increase from the same six months in 2002.
The Company's international operations contributed $2,601,000 of revenues in the
first six months of 2003 compared to $2,236,000 in the first six months of 2002.
This represents a 16% increase from the same period last year and 36% of total
revenues in the first six months of 2003.
Software license fee revenues decreased 39% to $1,334,000 in the first six
months of 2003 from $2,177,000 in the first six months of 2002.
AllianceEnterprise license revenues decreased $665,000, or 33%, to $1,334,000 in
the first six months of 2003 from $1,999,000 in the first six months of 2002.
There were no license sales of the DISPATCH-1 product during the first six
months of 2003 as compared to $178,000 during the same period in 2002. The
decline in DISPATCH-1 license revenues reflects the Company's efforts to
transition to the next generation of software, AllianceEnterprise.
Services and maintenance revenues increased 14% to $5,792,000 in the first six
months of 2003 from $5,079,000 in the six months of 2002. The increase primarily
relates to service and maintenance revenues from AllianceEnterprise, which
increased $1,320,000 to $4,396,000 from $3,076,000 in the first six months of
2002. However, this increase was partially offset by a decrease in service and
maintenance revenue on DISPATCH-1, which decreased by 30% to $1,396,000 during
the first six months of 2003 compared to $2,003,000 for the same period in 2002.
12
Costs of Revenues
- -----------------
Cost of software license fees decreased 31% to $410,000 in the first six months
of 2003 from $596,000 in the first six months of 2002. Included in the cost of
software license fees is the fixed cost of capitalized software amortization.
Capitalized software amortization was $300,000 and $418,000 in the first six
months of 2003 and 2002, respectively. The decrease in the cost of software
license fees represents decreased third party software costs attributable to the
mix of products sold in conjunction with the Company's products in the first six
months of 2003. The software licenses gross margin percentage was 69% in the
first six months of 2003 compared to 73% in the first six months of 2002. This
decrease in gross margin was attributable to the decrease in license sales.
Cost of services and maintenance increased 5% to $3,474,000 in the first six
months of 2003 from $3,319,000 in the first six months of 2002. The services and
maintenance gross margin percentage was 40% and 35% in the first six months of
2003 and 2002, respectively. The increase in gross margin resulted from improved
realization on professional services projects and cost reduction efforts.
Product Development
- -------------------
Product development expense increased 16% to $1,094,000 in the first six months
of 2003 from $942,000 in the first six months of 2002. Product development as a
percentage of revenues was 15% and 13% in the first six months of 2003 and 2002,
respectively. The increase in cost is the result of the strengthening of the
Israel shekel relative to the U.S. dollar. Most of the Company's product
development occurs in its office in Tefen, Israel. In 2003, the Israeli shekel
increased in value relative to the U.S. dollar increasing the Company
development expenses on a U.S. dollar basis. In addition, the Company is
focusing on the transformation of its products to version 7.0, a completely
web-based architect, so the size of the development staff has increased by 15%
since the same time last year.
Sales and Marketing
- -------------------
Sales and marketing expense increased 19% to $3,098,000 in the first six months
of 2003 from $2,831,000 in the first six months of 2002. As a percentage of
revenues, sales and marketing expenses increased to 43% from 39% in the first
six months of 2002 due to lower sales during the first six months of 2003. The
Company continues to improve market awareness of its products through numerous
channels, including webinars, webexs, attendance at trade shows and development
and distribution of white papers. While the results of these efforts are not
expected to draw any short-term benefits, management feels the programs will
build customer awareness of the Company's products and capabilities and
ultimately lead to increased sales.
General and Administrative
- --------------------------
General and administrative expense decreased 19% to $1,049,000 in the first six
months of 2003 from $1,288,000 in the first six months of 2002. The decrease
primarily relates to the Company's ongoing cost containment efforts, principally
using less personnel and less office space. In addition, the Company's European
operations recently resolved a collection matter in the Company's favor, which
resulted in a net decrease of $235,000.
Net Interest Income
- -------------------
Net interest income decreased $35,000 to $29,000 in the first six months of 2003
from $64,000 in the first six months of 2002. This decrease is primarily
attributable to less invested cash during 2003 as well as an overall reduction
in interest rates earned on invested cash and marketable securities.
International Operations
- ------------------------
Total revenue from the Company's international operations increased by $365,000,
or 16%, to $2,601,000 in the first six months of 2003 from $2,236,000 in the
same six months of 2002. The increase in revenue from international operations
was primarily attributable to an increase in service and maintenance revenues of
$356,000.
13
International operations resulted in a $541,000 loss for the six months ended
June 30, 2003 compared to a loss of $703,000 for the six months ended June 30,
2002.
Liquidity and Capital Resources
- -------------------------------
Net cash provided by operating activities was $772,000 for the six months ended
June 30, 2003 compared to $1,039,000 used in operations for the six months ended
June 30, 2002. The increase in cash generated is primarily attributable to the
Company's collection efforts of its accounts receivables.
The Company used $393,000 in investing activities during the first six months of
2003 compared to generating $1,567,000 in the first six months of 2002. The
increase in cash used for investing activities in 2002 resulted from the Company
liquidating almost $2.0 million from its marketable securities. This was not
necessary in 2003 due to the high level of cash generated by the collection of
the Company's accounts receivable balances in 2003.
The Company generated $2,000 for financing activities during the first six
months of 2003 compared to using $31,000 during the six months ended June 30,
2002. In 2002 the Company completed repaying a capital lease obligation. There
was no long-term debt outstanding in 2003.
At June 30, 2003, the Company had a working capital ratio of 1.75:1, with cash
and investments available for sale of $5,250,000. 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 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 peculiar 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 AllianceEnterprise 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 substantial
component of the Company's operations. International sales are subject to a
variety of risks, including difficulties in establishing and managing
international operations and in translating products into foreign
languages.
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 June 30, 2003, the Company's investments consisted of
U.S. government agencies securities and commercial paper. 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 July 23, 2003 the Company received a NASDAQ Staff Determination indicating
the Company has failed to comply with the minimum bid price requirement of $1.00
a share as set forth in Marketplace Rule 4310(c)(4) for continued listing on the
NASDAQ SmallCap Market, and is therefore subject to delisting.
The Company has appealed this determination, and requested a hearing before a
NASDAQ Listing Qualifications Panel. The Company's common stock will remain
listed on the NASDAQ SmallCap Market pending a decision from the NASDAQ Listing
Qualifications Panel. There can be no assurance that the Listing Panel will
grant the Company's request for continued listing.
Item 3. Defaults Upon Senior Securities
- -------------------------------------------------
There have been no defaults by the Company on any Senior Securities during the
quarter ended June 30, 2003.
Item 4. Submission of Matters to a Vote of Security Holders
- ---------------------------------------------------------------------
No matters were submitted to a vote of the Company's stockholders during the
second quarter of the fiscal year covered by this report through the
solicitation of proxies or otherwise. The Annual Meeting of Stockholders of the
Company is scheduled for August 21, 2003.
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.
15
During the quarterly period covered by this filing, the Audit Committee approved
additional engagements of BDO Seidman for the following non-audit services:
general tax services for federal, state and local tax filings.
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 May 13, 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 March 31, 2003.
On July 29, 2003, the Company filed a report on Form 8-K disclosing
that we had received a letter from the Nasdaq Stock Market, Inc.
notifying us that our common stock has failed to meet the minimum
listing requirements. See Part II, Item 2 for additional information
contained in the report.
16
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 14th day of August
2003.
ASTEA INTERNATIONAL INC.
By: /s/Zack Bergreen
--------------------------------
Zack Bergreen
Chief Executive Officer
(Principal Executive Officer)
By: /s/Fredric Etskovitz
--------------------------------
Fredric Etskovitz
Chief Financial Officer
(Principal Financial and
Chief
Accounting Officer)
17