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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 June 30, 2004
---------------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934.
For the transition period from to
------------------------ ----------------------
Commission File Number: 0-26330
---------
ASTEA INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Delaware 23-2119058
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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, 2004, 2,953,877 shares of the registrant's Common Stock, par
value $.01 per share, were outstanding.
ASTEA INTERNATIONAL INC.
FORM 10-Q
QUARTERLY REPORT
INDEX
Page No.
--------
Facing Sheet 1
Index 2
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets (Unaudited) 3
Consolidated Statements of Operations (Unaudited) 4
Consolidated Statements of Cash Flows (Unaudited) 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosure About Market Risk 13
Item 4. Controls and Procedures 14
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
2
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
ASTEA INTERNATIONAL INC.
------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
June 30, December 31,
2004 2003
(Unaudited)
---------------------- ----------------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,763,000 $ 3,480,000
Restricted cash 300,000 300,000
Receivables, net of reserves of $708,000 and $810,000 4,774,000 3,943,000
Prepaid expenses and other 518,000 601,000
---------------------- ----------------------
Total current assets 10,355,000 8,324,000
Property and equipment, net 397,000 509,000
Capitalized software, net 1,328,000 1,229,000
Other assets 36,000 34,000
---------------------- ----------------------
Total assets $ 12,116,000 $ 10,096,000
====================== ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,653,000 $ 3,003,000
Deferred revenues 3,789,000 3,359,000
---------------------- ----------------------
Total current liabilities 6,442,000 6,362,000
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued - -
Common stock, $.01 par value, 5,000,000 shares
authorized, 2,954,000 issued 30,000 30,000
Additional paid-in capital 22,977,000 22,792,000
Cumulative translation adjustment (814,000) (776,000)
Accumulated deficit (16,309,000) (18,100,000)
Less: treasury stock at cost, 42,000 and 43,000 shares (210,000) (212,000)
---------------------- --------------------
Total stockholders' equity 5,674,000 3,734,000
---------------------- --------------------
Total liabilities and stockholders' equity $ 12,116,000 $ 10,096,000
====================== ====================
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,
------------------------------------- -----------------------------------
2004 2003 2004 2003
--------------- ------------------ -------------- ---------------
Revenues:
Software license fees $ 1,606,000 $ 312,000 $ 4,502,000 $ 1,334,000
Services and maintenance 2,810,000 2,826,000 5,798,000 5,792,000
--------------------------------------------------------------------------------
Total revenues 4,416,000 3,138,000 10,300,000 7,126,000
--------------------------------------------------------------------------------
Costs and expenses:
Cost of software license fees 335,000 181,000 745,000 410,000
Cost of services and maintenance 1,588,000 1,830,000 3,138,000 3,474,000
Product development 316,000 587,000 721,000 1,094,000
Sales and marketing 1,433,000 1,524,000 2,922,000 3,098,000
General and administrative 445,000 531,000 1,001,000 1,049,000
--------------------------------------------------------------------------------
Total costs and expenses 4,117,000 4,653,000 8,527,000 9,125,000
--------------------------------------------------------------------------------
Income (loss) from operations 299,000 (1,515,000) 1,773,000 (1,999,000)
Interest income, net 10,000 12,000 19,000 29,000
--------------------------------------------------------------------------------
Income (loss) before income taxes 309,000 (1,503,000) 1,792,000 (1,970,000)
Income tax expense - - - -
--------------------------------------------------------------------------------
Net income (loss) $ 309,000 $ (1,503,000) $ 1,792,000 $ (1,970,000)
================================================================================
Basic net income (loss) per share $ 0.11 $ (0.51) $ 0.61 $ (0.67)
================================================================================
Diluted net income (loss) per share 0.11 (0.51) 0.61 (0.67)
Shares outstanding used in
computing basic income
(loss) per share 2,932,000 2,921,000 2,927,000 2,921,000
--------------------------------------------------------------------------------
Shares outstanding used in
computing diluted income (loss)
per share 2,972,000 2,921,000 2,942,000 2,921,000
================================================================================
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,
2004 2003
----------------- -----------------
Cash flows from operating activities:
Net income (loss) $ 1,792,000 $ (1,970,000)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 601,000 469,000
Bad debt expense 76,000 248,000
Changes in operating assets and liabilities:
Receivables (985,000) 3,367,000
Prepaid expenses and other 86,000 (241,000)
Other assets (2,000) (2,000)
Accounts payable and accrued expenses (275,000) (584,000)
Deferred revenues 432,000 (515,000)
----------------- -----------------
Net cash provided by operating activities 1,725,000 772,000
----------------- -----------------
Cash flows from investing activities:
Purchases of property and equipment (34,000) (153,000)
Capitalized software development costs (560,000) (240,000)
----------------- -----------------
Net cash used in investing activities (594,000) (393,000)
----------------- -----------------
Cash flows from financing activities:
Proceeds from exercise of stock options and employee stock purchase plan
111,000 2,000
----------------- -----------------
Effect of exchange rate changes on cash 41,000 (98,000)
----------------- -----------------
Net increase in cash and cash equivalents 1,283,000 283,000
Cash, beginning of period 3,480,000 4,967,000
----------------- -----------------
Cash, end of period $ 4,763,000 $ 5,250,000
================= =================
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, 2004 and for the three and six
month periods ended June 30, 2004 and 2003 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 2003 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, 2004 are not necessarily indicative of the results that may be
expected for the full year.
2. STOCKHOLDERS' EQUITY/COMPREHENSIVE LOSS
- ------------------------------------------
The reconciliation of stockholders' equity and comprehensive loss from December
31, 2003 to June 30, 2004 is summarized as follows:
Cumulative
Currency
Common Additional Translation Accumulated Treasury Comprehensive
Stock Paid-In Capital Adjustment Deficit Stock Income (Loss)
----- --------------- ---------- ------- ----- -------------
Balance at December 31, 2003 $30,000 $ 22,792,000 $ (776,000) $ (18,100,000) $ (212,000) $ -
Issuance of common stock
under Employee Stock
Purchase Plan - - (1,000) 2,000 -
Exercise of stock options - 111,000 - - -
Stock issued for
satisfaction of liability - 74,000 - - - -
Cumulative translation
adjustment - - (38,000) - - (37,000)
Net income for the period - - - 1,792,000 - 1,792,000
----------- --------------- --------------- --------------- ------------ ----------------
Balance at June 30, 2004 $30,000 $ 22,977,000 $ (814,000) (16,309,000) $(210,000) $ 1,755,000
=========== =============== =============== =============== ============ ================
3. CHANGE IN ACCOUNTING ESTIMATE
- --------------------------------
During the first quarter of 2004, the Company re-evaluated the estimated lives
of its capitalized software assets related to licenses and determined that the
estimated life of 3 years currently used should be reduced to 2 years, based on
the rate of product release and the current sales trend. The impact of the
change in the estimated life resulted in an increase in amortization, and
reduction in net income, of $83,000, or $0.03 per diluted share for the three
months ended June 30, 2004 and $166,000 or $0.06 per diluted share for the six
months ended June 30, 2004.
4. INCOME TAX EXPENSE
- ---------------------------
The Company has utilized a portion of its net operating loss carry forwards for
the three months and six months ended June 30, 2004 to reduce any tax provisions
on its pre-tax income. At June 30, 2004, the Company maintains a 100% valuation
allowance for its remaining net deferred tax assets based on the uncertainty of
the realization of future taxable income.
6
5. STOCK BASED COMPENSATION
- ---------------------------
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.
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,
--------------------------------- ----------------------------------
2004 2003 2004 2003
--------------- -------------- -------------- ----------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net income (loss) - as reported $ 309,000 $ (1,503,000) $ 1,792,000 (1,970,000)
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 (78,000) (120,000) (110,000) $ (205,000)
Net income (loss) - pro forma $ 231,000 $ (1,623,000) $ 1,682,000 $ (2,174,000)
Basic income per share -
as reported $ 0.11 $ (0.51) $ 0.62 $ (0.67)
Diluted income (loss) per share as
reported $ 0.10 $ (0.51) $ 0.61 $ (0.67)
Basic income (loss) per share -
pro forma $ 0.08 $ (0.56) $ 0.57 $ (0.74)
Diluted income (loss) per share pro
forma $ 0.07 $ (0.56) $ 0.56 $ 0.74
The weighted average fair value of those options granted during the quarters
ended June 30, 2004 and 2003 was estimated at $3.23 and $0.76, respectively. The
weighted average fair value of those options granted during the six months ended
June 30, 2004 and 2003 was estimated at $3.12 and $0.63. 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 4.61% and 3.38% for 2004 and 2003 grants, respectively; an
expected life of six years; volatility of 132% and 144%; and a dividend yield of
zero for 2004 and 2003 grants, respectively.
7
6. MAJOR CUSTOMERS
- ------------------
In the second quarter of 2004, there was one major customer that accounted for
14% of total revenues. In the second quarter of 2003, the Company had no
customers that accounted for 10% of its total revenue. For the first six months
of 2004 there was one major customer that accounted for 22% of total revenues
and for the first six months of 2003, there were no customers that accounted for
10% of 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,
2003.
The Company develops, markets and supports service management 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 been in the process of making the transition
from a pure field service software provider to a provider of a comprehensive
suite of service management solutions. In addition to field service, the 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 continues to make a significant investment in product development in
support of the transition. The Company believes that its investment in
development along with its continued commitment to marketing its service
management suite will favorably position the Company as economic conditions
continue to improve.
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 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
8
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 unbundled and 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 judgment, 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 judgment 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 judgment by management with respect to
certain external factors, including, but not limited to, anticipated future
revenues, estimated economic life and changes in software and hardware
technologies. Upon the general release of the software product to customers,
capitalization ceases and such costs are amortized, using the straight-line
method, on a product-by-product basis over the estimated life. During the first
quarter of 2004, the Company revised the estimated life for its capitalized
software products from three years to two years based on current sales trends
and the rate of product releases. All research and development expenditures are
charged to research and development expense in the period incurred.
Results of Operations
- ---------------------
Comparison of Three Months Ended June 30, 2004 and 2003
- -------------------------------------------------------
Revenues
- --------
Revenues increased $1,278,000, or 41%, to $4,416,000 for the three months ended
June 30, 2004 from $3,138,000 for the three months ended June 30, 2003. Software
license fee revenues increased $1,294,000, or 415%, from the same period last
year. Services and maintenance fees for the three months ended June 30, 2004
amounted to $2,810,000, a .6% decrease from the same quarter in 2003.
9
The Company's international operations contributed $1,752,000 of revenues in the
second quarter of 2004 which was a 42% increase over revenues generated during
the second quarter of 2003. The Company's revenues from international operations
amounted to 40% of the total revenue for the second quarter in 2004 compared to
39% of total revenues for the same quarter in 2003. The increase in revenues is
due to the increase in sales from the Company's operations in Japan and from
operations in Europe.
Software license fee revenues increased 415% to $1,606,000 in the second quarter
of 2004 from $312,000 in the second quarter of 2003. Astea Alliance license
revenues increased $1,078,000 or 346%, to $1,390,000 in the second quarter of
2004 from $312,000 in the second quarter of 2003. The increase is primarily
attributable to one major customer that accounted for 14% of total revenue in
the second quarter of 2004. The Company also sold $217,000 of additional
DISPATCH-1 licenses to an existing customer in the second quarter of 2004. There
were no license sales of DISPATCH-1 in the second quarter of 2003. The Company
does not anticipate future license sales of DISPATCH-1.
Services and maintenance revenues decreased marginally to $2,810,000 in the
second quarter of 2004 from $2,826,000 in the second quarter of 2003. The Astea
Alliance service and maintenance revenues increased by $68,000 or 3% compared to
the second quarter of 2003. More than offsetting this increase was an $84,000
decrease in DISPATCH-1 service and maintenance revenues, which resulted from an
expected decrease in demand.
Costs of Revenues
- -----------------
Cost of software license fees increased 85% to $335,000 in the second quarter of
2004 from $181,000 in the second quarter of 2003. Included in the cost of
software license fees is the fixed cost of capitalized software amortization.
During the first quarter of 2004, the Company revised the estimated useful life
of its capitalized software products from 3 years to 2 years. This revision
increased amortization for the period to $230,000 as compared to $150,000 in the
second quarter of 2003. The cost of software license fees also increased due to
the greater level of software license sales. The software licenses gross margin
percentage was 79% in the second quarter of 2004 compared to 42% in the second
quarter of 2003. The increase in gross margin was attributable to the mix of
products sold in 2004 as well as the relationship of the fixed cost of amortized
capitalized software to a lower level of sales in 2003.
Cost of services and maintenance decreased 13% to $1,588,000 in the second
quarter of 2004 from $1,830,000 in the second quarter of 2003. The decrease in
cost of service and maintenance is primarily attributed to a reduction in
headcount from last year to this year. The services and maintenance gross margin
percentage was 43% in the second quarter of 2004 compared to 35% in the second
quarter of 2003. The increase in services and maintenance gross margin was
primarily due to increased utilization of Astea Alliance service professionals.
Product Development
- -------------------
Product development expense decreased 46% to $316,000 in the second quarter of
2004 from $587,000 in the second quarter of 2003. Gross development expense
before capitalization of software costs was $658,000 in the second quarter of
2004 compared to $707,000 during the same period in 2003. The Company includes
the capitalization of software costs in product development. Capitalized
software totaled $342,000 in the second quarter of 2004 compared to $120,000
during the same period in 2003. The increase in software capitalization is a
result of product development initiatives geared towards the release of Astea
Alliance version 6.7 during the third quarter of 2004. Product development
expense as a percentage of revenues decreased 7% in the second quarter of 2004
compared with 19% in the second quarter of 2003. The decrease in margin is the
result of the increase in software capitalization combined with the increased
license sales volume.
Sales and Marketing
- -------------------
Sales and marketing expense decreased 6% to $1,433,000 in the second quarter of
2004 from $1,524,000 in the second quarter of 2003. The decrease in sales and
marketing is attributable to a reduction in sales staffing costs partially
offset by increased marketing expenses related to the timing of marketing
initiatives. As a percentage of revenues, sales and marketing expenses decreased
to 32% in 2004 from 49% in the second quarter of 2003.
10
General and Administrative
- --------------------------
General and administrative expenses decreased 16% to $444,000 during the second
quarter of 2004 from $531,000 in the second quarter of 2003. As a percentage of
revenue, general and administrative expenses decreased to 10% in the second
quarter of 2004 from 17% in the second quarter of 2003. The decrease is
primarily attributable to the higher level of revenue combined with a reduction
of bad debt expenses associated with improved collection activity.
Interest Income, Net
- --------------------
Net interest income decreased $2,000 to $10,000 in the second quarter of 2004
from $12,000 in the second quarter of 2003. The decrease of interest income is
generally attributable to less cash on hand than in 2003, 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 2004 to $1,752,000 compared to $1,238,000 for the second
quarter of 2003. The increase in revenue from international operations was
primarily attributable to the increase in revenues from Japan and European
operations. International operations generated net income of $223,000 for the
second quarter ended June 30, 2004 compared to a net loss of $432,335 in the
same quarter in 2003.
Comparison of Six Months Ended June 30, 2004 and 2003
- -----------------------------------------------------
Revenues
- --------
Revenues increased $3,174,000, or 45%, to $10,300,000 for the six months ended
June 30, 2004 from $7,126,000 for the six months ended June 30, 2003. Software
license fee revenues increased $3,168,000, or 237%, from the same period last
year. Services and maintenance fees for the six months ended June 30, 2004
amounted to $5,798,000, a .1% increase from the same quarter in 2003.
The Company's international operations contributed $3,238,000 of revenues in the
first six months of 2004 compared to $2,601,000 in the first six months of 2003.
This represents a 24% increase from the same period last year and 31% of total
revenues in the first six months of 2004. The increase in revenues is due to the
increase in sales from the Company's operations in Japan and Europe partially
offset by a slight decrease in sales from operations in Australia.
Software license fee revenues increased 237% to $4,502,000 in the first six
months of 2004 from $1,334,000 in the first six months of 2003. The increase is
primarily attributable to a number of larger sales that closed during the first
half of the year. Astea Alliance license revenues increased $2,786,000 or 209%
in the first six months of 2004 from $1,334,000 in the first six months of 2003.
There were no license sales of the DISPATCH-1 product during the first six
months of 2003 as compared to $383,000 during the same period in 2004.
Services and maintenance revenues increased marginally to $5,798,000 in the
first six months of 2004 from $5,792,000 in the first six months of 2003. The
increase primarily relates to service and maintenance revenues from Astea
Alliance which increased $263,000, or 6%, to $4,659,000 from $4,396,000 in the
first six months of 2003. The increase in Astea Alliance service and maintenance
revenues is a direct result of the growth of the Astea Alliance customer base.
Partially offsetting the increase in Astea Alliance service and maintenance
revenues was a decrease of $256,000 in DISPATCH-1 service and maintenance
revenues, which resulted from an expected decrease in demand.
Costs of Revenues
- -----------------
Cost of software license fees increased 82% to $745,000 in the first six months
of 2004 from $410,000 in the first six months of 2003. Included in the cost of
software license fees is the fixed cost of capitalized software amortization.
Capitalized software amortization was $460,000 and $300,000 in the first six
months of 2004 and
11
2003, respectively. The cost of software license fees also increased due to the
greater level of software license sales in the first six months of 2004. The
software licenses gross margin percentage was 83% in the first six months of
2004 compared to 69% in the first six months of 2003. This increase in gross
margin was attributable to the increase in license sales.
Cost of services and maintenance decreased 10% to $3,138,000 in the first six
months of 2004 from $3,474,000 in the first six months of 2003. The decrease in
cost of service and maintenance is primarily attributed to a reduction in
headcount from last year to this year. The services and maintenance gross margin
percentage was 46% in the first six months of 2004 compared to 40% in the first
six months of 2003. The increase in services and maintenance gross margin was
primarily due to increased utilization of Astea Alliance service professionals.
Product Development
- -------------------
Product development expense decreased 34% to $721,000 in the first six months of
2004 from $1,094,000 in the first six months of 2003. Gross development expense
before capitalization of software costs was $1,281,000 for the first six months
of 2004 compared to $1,334,000 for the same period in 2003. The Company includes
the capitalization of software costs in product development. Capitalized
software totaled $560,000 in the first six months of 2004 compared to $240,000
during the same period in 2003. The increase in software capitalization is a
result of product development initiatives geared towards the release of Astea
Alliance version 6.7 during the third quarter of 2004. Product development as a
percentage of revenues was 7% in the first six months of 2004 compared with 15%
in the first six months of 2003. The decrease in margin is the result of the
increase in software capitalization combined with the increased sales volume.
Sales and Marketing
- -------------------
Sales and marketing expense decreased 6% to $2,922,000 in the first six months
of 2004 from $3,098,000 in the first six months of 2003. The decrease in sales
and marketing is attributable to a reduction in sales staffing costs partially
offset by increased marketing costs related to the increase in marketing
initiatives. As a percentage of revenues, sales and marketing expenses decreased
to 28% from 43% in the first six months of 2003, which is the direct result of
increased revenues and lower costs.
General and Administrative
- --------------------------
General and administrative expenses decreased 5% to $1,000,000 in the first six
months of 2004 from $1,049,000 in the first six months of 2003. The decrease in
general and administrative expenses is due to a reduction in bad debt expense.
As a percentage of revenues, general and administrative expenses decreased to
10% from 15% in the first six months of 2003. The decrease is attributable to
the significant increase in revenues.
Interest Income, Net
- --------------------
Net interest income decreased $10,000 from $29,000 in the first six months of
2003 to $19,000 in the first six months of 2004. The decrease resulted primarily
from a decrease in the amount of investments.
International Operations
- ------------------------
Total revenue from the Company's international operations increased by $637,000,
or 24%, to $3,238,000 in the first six months of 2004 from $2,601,000 in the
first six months in 2003. The increase in revenue from international operations
was primarily attributable to the increase in revenues from Japan operations.
International operations generated net income of $168,000 for the first six
months ended June 30, 2004 compared to a loss of $541,000 in the same period in
2003.
Liquidity and Capital Resources
- -------------------------------
Net cash provided by operating activities was $1,725,000 for the six months
ended June 30, 2004 compared to cash provided by operations of $772,000 for the
six months ended June 30, 2003. The increase in cash provided by operations was
primarily attributable to a significant increase in revenues.
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The Company's investing activities used $594,000 for investing activities in the
first six of 2004 compared to using $393,000 in the first six months of 2003.
The increase in cash used is attributable to an increase in software
capitalization partially offset by a decrease in purchases of property and
equipment.
The Company generated $111,000 of cash from financing activities during the six
months ended June 30, 2004 and 2003 related to proceeds from the exercise of
stock options and the issuance of stock through the employee stock purchase
plan.
At June 30, 2004, the Company had a working capital ratio of 1.61:1, with cash,
cash equivalents and restricted cash of $5,063,000. 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
next twelve months. The Board of Directors from time to time reviews the
Company's forecasted operations and financial condition to determine whether and
when payment of a dividend or dividends is appropriate. 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, sales automation and customer support offerings.
o The enterprise 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, changes in earnings estimates by analysts,
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 June 30, 2004, the Company's investments consisted of
U.S. government 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.
13
Item 4. CONTROLS AND PROCEDURES
- -------------------------------
Our management, under the supervision and with the participation of the Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of our controls and procedures related to our reporting and disclosure
obligations as of June 30, 2004, which is the end of the period covered by this
Quarterly Report on Form 10-Q. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that our disclosure controls
and procedures are sufficient to provide that (a) material information relating
to us, including our consolidated subsidiaries, is made known to these officers
by our and our consolidated subsidiaries other employees, particularly material
information related to the period for which this periodic report is being
prepared; and (b) this information is recorded, processed, summarized, evaluated
and reported, as applicable, within the time periods specified in the rules and
forms promulgated by the Securities and Exchange Commission.
There were no changes that occurred during the fiscal quarter ended June 30,
2004 that have materially affected, or are reasonable likely to materially
affect, our internal controls over financial reporting.
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 June 30, 2004.
Item 3. Defaults Upon Senior Securities
- -------------------------------------------------
There have been no defaults by the Company on any Senior Securities during the
quarter ended June 30, 2004.
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 19, 2004.
Item 5. Other Information
- -----------------------------------
None.
14
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 12, 2004, 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, 2004. The Company also announced the
appointment of its new Chief Financial Officer, George S. Rapp.
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 12th day of August
2004.
ASTEA INTERNATIONAL INC.
By: /s/Zack Bergreen
--------------------------------
Zack Bergreen
Chief Executive Officer
(Principal Executive Officer)
By: /s/George S. Rapp
--------------------------------
George S. Rapp
Chief Financial Officer
(Principal Financial and Chief
Accounting Officer)
16