================================================================================
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, 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 November 15, 2004, 2,954,077 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 15
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
September 30, December 31,
2004 2003
(Unaudited)
--------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,871,000 $ 3,480,000
Restricted cash 300,000 300,000
Receivables, net of reserves of $566,788 and $810,000 5,211,000 3,943,000
Prepaid expenses and other 496,000 601,000
--------------------------------------------
Total current assets 9,878,000 8,324,000
Property and equipment, net 416,000 509,000
Capitalized software, net 1,446,000 1,229,000
Other assets 44,000 34,000
--------------------------------------------
Total assets $ 11,784,000 $ 10,096,000
============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,491,000 $ 3,003,000
Deferred revenues 3,438,000 3,359,000
--------------------------------------------
Total current liabilities 5,929,000 6,362,000
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued - -
Common stock, $.01 par value, 25,000,000 shares
authorized, 2,996,548 issued 30,000 30,000
Additional paid-in capital 22,977,000 22,792,000
Cumulative translation adjustment (788,000) (776,000)
Accumulated deficit (16,154,000) (18,100,000)
Less: treasury stock at cost, 42,000 and 43,000 shares (210,000) (212,000)
--------------------------------------------
Total stockholders' equity 5,855,000 3,734,000
--------------------------------------------
Total liabilities and stockholders' equity $ 11,784,000 $ 10,096,000
============================================
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,
-------------------------------------- -- -----------------------------------
2004 2003 2004 2003
---------------- ------------------ -------------- ----------------
Revenues:
Software license fees $ 1,184,000 $ 353,000 $ 5,686,000 $ 1,687,000
Services and maintenance 2,820,000 2,491,000 8,619,000 8,283,000
--------------------------------------------------------------------------------
Total revenues 4,004,000 2,844,000 14,305,000 9,970,000
--------------------------------------------------------------------------------
Costs and expenses:
Cost of software license fees 328,000 170,000 1,073,000 580,000
Cost of services and maintenance 1,590,000 1,691,000 4,728,000 5,165,000
Product development 290,000 622,000 1,012,000 1,715,000
Sales and marketing 1,192,000 1,388,000 4,114,000 4,486,000
General and administrative 467,000 564,000 1,467,000 1,613,000
--------------------------------------------------------------------------------
Total costs and expenses 3,867,000 4,435,000 12,394,000 13,559,000
--------------------------------------------------------------------------------
Income (loss) from operations 137,000 (1,591,000) 1,911,000 (3,589,000)
Interest income, net 18,000 11,000 36,000 40,000
--------------------------------------------------------------------------------
Income (loss) before income taxes 155,000 (1,580,000) 1,947,000 (3,549,000)
Income tax expense - - - -
--------------------------------------------------------------------------------
Net income (loss) $ 155,000 $ (1,580,000) $ 1,947,000 $ (3,549,000)
================================================================================
Basic net income (loss) per share $ 0.05 $ (0.54) $ 0.66 $ (1.21)
================================================================================
Diluted net income (loss) per share 0.05 (0.54) 0.66 (1.21)
Shares outstanding used in
computing basic income
(loss) per share 2,954,000 2,922,000 2,940,000 2,922,000
--------------------------------------------------------------------------------
Shares outstanding used in
computing diluted income (loss)
per share 2,992,000 2,922,000 2,964,000 2,922,000
================================================================================
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,
2004 2003
-----------------------------------
Cash flows from operating activities:
Net income (loss) $ 1,947,000 $ (3,549,000)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 961,000 693,000
Provision for doubtful accounts - 215,078
Changes in operating assets and liabilities:
Receivables (1,312,000) 4,084,922
Prepaid expenses and other 105,000 (172,000)
Other assets (10,000) (1,000)
Accounts payable and accrued expenses (438,000) (832,000)
Deferred revenues 78,000 (1,002,000)
----------------- -----------------
Net cash provided by operating activities 1,331,000 (563,000)
----------------- -----------------
Cash flows from investing activities:
Purchases of property and equipment (123,000) (198,000)
Capitalized software development costs (969,000) (360,000)
----------------- -----------------
Net cash used in investing activities (1,092,000) (558,000)
----------------- -----------------
Cash flows from financing activities:
Proceeds from exercise of stock options and employee stock purchase plan 113,000 4,000
----------------- -----------------
Effect of exchange rate changes on cash 39,000 (101,000)
----------------- -----------------
Net increase in cash and cash equivalents 391,000 (1,218,000)
Cash, beginning of period
3,480,000 4,967,000
----------------- -----------------
Cash and cash equivalents balance, end of period $ 3,871,000 $ 3,749,000
================= =================
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 September 30, 2004 and for the three
and nine month periods ended September 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 nine months
ended September 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 September 30, 2004 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, 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 - - (12,000) - - (12,000)
Net income for the period - - - 1,947,000 - 1,947,000
---------- --------------- --------------- --------------- ------------ ----------------
Balance at September 30,
2004 $30,000 $ 22,977,000 $ (788,000) $(16,154,000) $(210,000) $ 1,935,000
========== =============== =============== =============== ============ ================
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 three years currently used should be reduced to two 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 $129,000, or $0.04 per diluted share for the three
months ended September, 2004 and $295,000 or $0.10 per diluted share for the
nine months ended September 30, 2004.
4. INCOME TAX EXPENSE
- ---------------------
The Company has utilized a portion of its net operating loss carry forwards for
the three months and nine months ended September 30, 2004 to reduce any tax
provisions on its pre-tax income. At September 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 Nine months ended
September 30, September 30,
--------------------------------- ----------------------------------
2004 2003 2004 2003
--------------- -- -------------- ---- -------------- -- ----------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net income (loss) - as reported $ 155,000 $ (1,580,000) $ 1,947,000 $ (3,549,000)
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 (76,000) (109,000) (180,000) (318,000)
Net income (loss) - pro forma $ 79,000 $ (1,689,000) $ 1,767,000 $ (3,867,000)
Basic income per share -
as reported $ 0.05 $ (0.54) $ 0.66 $ (1.21)
Diluted income (loss) per share as
reported $ 0.05 $ (0.54) $ 0.66 $ (1.21)
Basic income (loss) per share -
pro forma $ 0.03 $ (0.58) $ 0.60 $ (1.32)
Diluted income (loss) per share pro
forma $ 0.03 $ (0.58) $ 0.60 $ (1.32)
The weighted average fair value of those options granted during the quarters
ended September 30, 2004 was estimated at $7.61. There were no options granted
during the third quarter of 2003. The weighted average fair value of those
options granted during the nine months ended September 30, 2004 and 2003 was
estimated at $5.06 and $3.15. 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 4.11% and
3.61% for 2004 and 2003 grants, respectively; an expected life of six years;
volatility of 131% and 134%; and a dividend yield of zero for 2004 and 2003
grants, respectively.
7
6. MAJOR CUSTOMERS
- ------------------
In the third quarter of 2004, there was one major customer that accounted for
11% of total revenues. In the third quarter of 2003, the Company had no
customers that accounted for 10% of its total revenue. For the first nine months
of 2004 there was one major customer that accounted for 18% of total revenues
and for the first nine 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.
Astea is a global provider of service management software that addresses the
unique needs of companies who manage capital equipment, mission critical assets
and human capital. Clients included Fortune 500 to mid-size companies which
Astea services through company facilities in the United States, United Kingdom,
Australia, The Netherlands and Israel. Astea Alliance supports the complete
service lifecycle, from lead generation and project quotation to service and
billing through asset retirement. It integrates and optimizes critical business
processes for Contact Center, Field Service, Depot Repair, Logistics,
Professional Services, and Sales and Marketing. Astea extends its applications
with portal, analytics and mobile solutions. Astea Alliance provides service
organizations with technology-enabled business solutions that improve
profitability, stabilize cash-flows and reduce operational costs through
automating and integrating key service, sales and marketing processes. Since its
inception in 1979, Astea has licensed applications to companies in a wide range
of sectors including information technology, telecommunications, instruments and
controls, business systems, and medical devices.
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 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
8
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,"
under which the Company is required to capitalize software development costs
between the time technological feasibility is established and the product is
ready for general release. Costs that do not qualify for capitalization are
charged to research and development expense when incurred. Accordingly, all
costs incurred subsequent to attaining technological feasibility are capitalized
and amortized over a period not to exceed three years. 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 September 30, 2004 and 2003
- ------------------------------------------------------------
Revenues
- --------
Revenues increased $1,160,000, or 41%, to $4,004,000 for the three months ended
September 30, 2004 from $2,844,000 for the three months ended September 30,
2003. Software license fee revenues increased $831,000, or 235%, from the same
period last year. Services and maintenance fees for the three months ended
September 30, 2004 amounted to $2,820,000, a 13% increase from the same quarter
in 2003.
The Company's international operations contributed $1,542,000 of revenues in the
third quarter of 2004 which was a 54% increase over revenues generated during
the third quarter of 2003. The Company's revenues from international operations
amounted to 39% of the total revenue for the third quarter in 2004 compared to
35% of total
9
revenues for the same quarter in 2003. The increase in revenues is due to the
increase in sales from the Company's operations in Europe.
Software license fee revenues increased 235% to $1,184,000 in the third quarter
of 2004 from $353,000 in the third quarter of 2003. Astea Alliance license
revenues increased $628,000 or 178%, to $981,000 in the third quarter of 2004
from $353,000 in the third quarter of 2003. The increase, in part, is
attributable to one major customer that accounted for 11% of total revenue in
the third quarter of 2004. The Company also sold $200,000 of additional
DISPATCH-1 licenses to an existing customer. There were no license sales of
DISPATCH-1 in the third quarter of 2003. Additionally, sales improved as a
result of greater acceptance of our vision and an improving economy.
Services and maintenance revenues increased to $2,820,000 in the third quarter
of 2004 from $2,491,000 in the third quarter of 2003. The Astea Alliance service
and maintenance revenues increased by $514,000 or 27% compared to the third
quarter of 2003. This increase was offset by a $183,000 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 93% to $328,000 in the third quarter of
2004 from $170,000 in the third 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 $291,000 as compared to $150,000 in the
third 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 72% in the third quarter of 2004 compared to 52% in the third
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 6% to $1,590,000 in the third quarter
of 2004 from $1,691,000 in the third 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
44% in the third quarter of 2004 compared to 32% in the third 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 53% to $290,000 in the third quarter of
2004 from $622,000 in the third quarter of 2003. Gross development expense
before capitalization of software costs was $699,000 in the third quarter of
2004 compared to $742,000 during the same period in 2003. The Company includes
the capitalization of software costs in product development. Capitalized
software totaled $409,000 in the third 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, as well as development
costs associated with a new version anticipated to be released at year end.
Product development expense as a percentage of revenues decreased to 7% in the
third quarter of 2004 compared with 22% in the third quarter of 2003.
Sales and Marketing
- -------------------
Sales and marketing expense decreased 14% to $1,192,000 in the third quarter of
2004 from $1,388,000 in the third quarter of 2003. The decrease in sales and
marketing is attributable to a reduction in sales staffing costs, as well as
lower expenses related to the timing of marketing initiatives. As a percentage
of revenues, sales and marketing expenses decreased to 30% in 2004 from 49% in
the third quarter of 2003.
General and Administrative
- --------------------------
General and administrative expenses decreased 17% to $467,000 during the third
quarter of 2004 from $564,000 in the third quarter of 2003. As a percentage of
revenue, general and administrative expenses decreased to 12% in the
10
third quarter of 2004 from 20% in the third 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 increased $7,000 to $18,000 in the third quarter of 2004
from $11,000 in the third quarter of 2003. The increase of interest income is
generally attributable to more cash on hand than in 2003, as well as an overall
rise in interest rates paid on invested cash.
International Operations
- ------------------------
Total revenue from the Company's international operations increased during the
third quarter of 2004 to $1,542,000 compared to $998,000 for the third quarter
of 2003. The increase in revenue from international operations was primarily
attributable to the increase in revenues from European operations. International
operations generated net income of $67,000 for the third quarter ended September
30, 2004 compared to a net loss of $287,000 in the same quarter in 2003.
Comparison of Nine Months Ended September 30, 2004 and 2003
- -----------------------------------------------------------
Revenues
- --------
Revenues increased $4,335,000, or 43%, to $14,305,000 for the nine months ended
September 30, 2004 from $9,970,000 for the nine months ended September 30, 2003.
Software license fee revenues increased $3,999,000, or 237%, from the same
period last year. Services and maintenance fees for the nine months ended
September 30, 2004 amounted to $8,619,000, a 4% increase from the same quarter
in 2003.
The Company's international operations contributed $4,780,000 of revenues in the
first nine months of 2004 compared to $3,599,000 in the first nine months of
2003. This represents a 33% increase from the same period last year and 33% of
total revenues in the first nine 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 $5,686,000 in the first nine
months of 2004 from $1,687,000 in the first nine months of 2003. The increase is
primarily attributable to a number of larger sales that closed during the first
nine months of the year. Astea Alliance license revenues increased $3,414,000 or
202% in the first nine months of 2004 from $1,687,000 in the first nine months
of 2003. There were no license sales of the DISPATCH-1 product during the first
nine months of 2003 as compared to $585,000 during the same period in 2004.
Additionally, sales improved as a result of greater acceptance of our vision and
an improving economy.
Services and maintenance revenues increased 4% to $8,619,000 in the first nine
months of 2004 from $8,283,000 in the first nine months of 2003. The increase
primarily relates to service and maintenance revenues from Astea Alliance which
increased $775,000, or 12%, to $7,065,000 from $6,290,000 in the first nine
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 $439,000 in DISPATCH-1 service and maintenance revenues, which
resulted from an expected decrease in demand.
Costs of Revenues
- -----------------
Cost of software license fees increased 85% to $1,073,000 in the first nine
months of 2004 from $580,000 in the first nine months of 2003. Included in the
cost of software license fees is the fixed cost of capitalized software
amortization. Capitalized software amortization was $752,000 and $450,000 in the
first nine months of 2004 and 2003, respectively. The cost of software license
fees also increased due to the greater level of software license sales in the
first nine months of 2004. The software licenses gross margin percentage was 81%
in the first nine months of 2004 compared to 66% in the first nine months of
2003. This increase in gross margin was attributable to the mix of
11
products sold in 2004, as well as the relationship of the fixed cost of
amortized capital software to a lower level of sales in 2003.
Cost of services and maintenance decreased 8% to $4,728,000 in the first nine
months of 2004 from $5,165,000 in the first nine 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 45% in the first nine months of 2004 compared to 38% in the first
nine 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 41% to $1,012,000 in the first nine months
of 2004 from $1,715,000 in the first nine months of 2003. Gross development
expense before capitalization of software costs was $1,979,000 for the first
nine months of 2004 compared to $2,075,000 for the same period in 2003. The
Company includes the capitalization of software costs in product development.
Capitalized software totaled $968,000 in the first nine months of 2004 compared
to $450,000 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, as well
as development cost associated with a new version anticipated to be released at
year end. Product development as a percentage of revenues was 7% in the first
nine months of 2004 compared with 17% in the first nine months of 2003.
Sales and Marketing
- -------------------
Sales and marketing expense decreased 8% to $4,114,000 in the first nine months
of 2004 from $4,486,000 in the first nine months of 2003. The decrease in sales
and marketing is attributable to lower staffing costs. As a percentage of
revenues, sales and marketing expenses decreased to 29% from 45% in the first
nine months of 2003, which is the direct result of increased revenues and lower
costs.
General and Administrative
- --------------------------
General and administrative expenses decreased 9% to $1,467,000 in the first nine
months of 2004 from $1,613,000 in the first nine 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 16% in the first nine months of 2003. The decrease is attributable to
the significant increase in revenues.
Interest Income, Net
- --------------------
Net interest income decreased $4,000 from $40,000 in the first nine months of
2003 to $36,000 in the first nine 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
$1,181,000, or 33%, to $4,780,000 in the first nine months of 2004 from
$3,599,000 in the first nine months in 2003. The increase in revenue from
international operations was primarily attributable to the increase in revenues
from Japan and Europe operations. International operations generated net income
of $211,000 for the first nine months ended September 30, 2004 compared to a
loss of $828,000 in the same period in 2003.
Liquidity and Capital Resources
- -------------------------------
Net cash provided by operating activities was $1,331,000 for the nine months
ended September 30, 2004 compared to net cash used in operating activities of
$563,000 for the nine months ended September 30, 2003. The increase in cash
provided by operations was primarily attributable to a significant increase in
revenues.
12
The Company's investing activities used $1,092,000 for investing activities in
the first nine months of 2004 compared to using $558,000 in the first nine
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 $113,000 of cash from financing activities during the nine
months ended September 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 September 30, 2004, the Company had a working capital ratio of 1.67:1, with
cash, cash equivalents and restricted cash of $4,171,000. 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 September 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
13
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
- ----------------------------------
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 September 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 September
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 September 30,
2004.
Item 3. Defaults Upon Senior Securities
- ------ -------------------------------
There have been no defaults by the Company on any Senior Securities during the
quarter ended September 30, 2004.
Item 4. Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
At the Annual Meeting of Stockholders held on August 19, 2004, pursuant to the
Notice of Annual Meeting of Stockholders dated July 9, 2004, 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 2,675,401 12,768
Adrian A. Peters 2,651,825 36,344
Thomas J. Reilly, Jr. 2,651,545 36,624
Eric S. Siegel 2,651,245 36,924
2. The ratification of the appointment of BDO Seidman, LLP as independent
auditors for the Company for the fiscal year ending December 31, 2004.
Number of Shares
------------------------------------------------------------------------------
Voted For Voted Against Abstained
------------------ ----------------- -----------------
14
------------------
2,674,077 1,307 12,785
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
- ------- ------------------
None.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(A) Exhibits
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 - CEO and Principal Executive Officer
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 - CFO and Principal Financial and Chief Accounting
Officer
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 - President and Principal Executive Officer
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 - CFO and Principal Financial and Chief Accounting
Officer
(B) Reports on Form 8-K
On August 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 six months ended June 30, 2004.
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 15th day of
November 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