astea10q.htm
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,
2008
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 a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definition of “accelerated filer”, “large accelerated
filer”, “non-accelerated filer” and “smaller reporting company” in Rule 12b-2 of
the Exchange act.
Large
Accelerated filer __ Accelerated Filer
__ Non-accelerated
Filer Smaller Reporting Company X
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes No X
As of
August 6, 2008, 3,596,185 shares of the registrant’s Common Stock, par value
$.01 per share, were outstanding.
ASTEA
INTERNATIONAL INC.
FORM
10-Q
QUARTERLY
REPORT
INDEX
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Page
No.
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Facing
Sheet
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1
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Index
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2
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PART I - FINANCIAL
INFORMATION
|
|
|
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Item
1.
|
Consolidated
Financial Statements
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|
| |
|
|
|
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Consolidated
Balance Sheets
|
3
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|
|
|
|
|
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Consolidated
Statements of Operations (Unaudited)
|
4
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|
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Consolidated
Statements of Cash Flows (Unaudited)
|
5
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Notes
to Unaudited Consolidated Financial Statements
|
6
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Item
2.
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Management's
Discussion and Analysis of Financial
|
|
|
|
Condition
and Results of Operations
|
10
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|
|
|
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|
Item
3.
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Quantitative
and Qualitative Disclosure About Market Risk
|
19
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Item
4T.
|
Controls
and Procedures
|
20
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PART II - OTHER
INFORMATION
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|
|
|
|
|
|
Item
1A.
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Risk
Factors
|
21
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|
|
|
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|
Item
6.
|
Exhibits
|
21
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|
|
|
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Signatures
|
22
|
PART I - FINANCIAL
INFORMATION
Item
1. CONSOLIDATED FINANCIAL STATEMENTS
ASTEA INTERNATIONAL INC. AND
SUBSIDIARIES
CONSOLIDATED BALANCE
SHEETS
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
2008
(Unaudited)
|
|
|
2007
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
2,472,000 |
|
|
$ |
1,615,000 |
|
|
Restricted
cash
|
|
|
150,000 |
|
|
|
150,000 |
|
|
Receivables,
net of reserves of $149,000 (unaudited) and
$206,000
|
|
|
5,278,000 |
|
|
|
8,517,000 |
|
|
Prepaid
expenses and other
|
|
|
319,000 |
|
|
|
416,000 |
|
|
Total
current assets
|
|
|
8,219,000 |
|
|
|
10,698,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
371,000 |
|
|
|
418,000 |
|
|
Intangibles,
net
|
|
|
1,299,000 |
|
|
|
1,439,000 |
|
|
Capitalized
software, net
|
|
|
2,683,000 |
|
|
|
3,238,000 |
|
|
Goodwill
|
|
|
1,538,000 |
|
|
|
1,540,000 |
|
|
Other
long-term restricted cash
|
|
|
183,000 |
|
|
|
163,000 |
|
|
Other
assets
|
|
|
72,000 |
|
|
|
64,000 |
|
|
Total
assets
|
|
$ |
14,365,000 |
|
|
$ |
17,560,000 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$ |
3,742,000 |
|
|
$ |
3,632,000 |
|
|
Deferred
revenues
|
|
|
5,806,000 |
|
|
|
6,743,000 |
|
|
Total
current liabilities
|
|
|
9,548,000 |
|
|
|
10,375,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
|
|
Deferred
tax liability
|
|
|
97,000 |
|
|
|
77,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Stockholders’
equity:
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $.01 par value, 5,000,000 shares
authorized,
none issued
|
|
|
- |
|
|
|
- |
|
|
Common
stock, $.01 par value, 25,000,000 shares
Authorized
issued 3,591,000 (unaudited) and
3,591,000
|
|
|
36,000 |
|
|
|
36,000 |
|
|
Additional
paid-in capital
|
|
|
28,011,000 |
|
|
|
27,852,000 |
|
|
Cumulative
translation adjustment
|
|
|
(690,000 |
) |
|
|
(703,000 |
) |
|
Accumulated
deficit
|
|
|
(22,429,000 |
) |
|
|
(19,869,000 |
) |
|
Less: treasury
stock at cost, 42,000 shares
|
|
|
(208,000 |
) |
|
|
(208,000 |
) |
|
Total
stockholders’ equity
|
|
|
4,720,000 |
|
|
|
7,108,000 |
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
14,365,000 |
|
|
$ |
17,560,000 |
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to the consolidated financial
statements.
|
|
ASTEA INTERNATIONAL INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(Unaudited)
| |
|
Three
Months
|
|
|
Six
Months
|
|
| |
|
Ended
June 30,
|
|
|
Ended
June 30,
|
|
| |
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
license fees
|
|
$ |
422,000 |
|
|
$ |
1,323,000 |
|
|
$ |
1,853,000 |
|
|
$ |
4,128,000 |
|
|
Services
and maintenance
|
|
|
5,049,000 |
|
|
|
5,554,000 |
|
|
|
10,644,000 |
|
|
|
12,266,000 |
|
|
Total
revenues
|
|
|
5,471,000 |
|
|
|
6,877,000 |
|
|
|
12,497,000 |
|
|
|
16,394,000 |
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of software license fees
|
|
|
699,000 |
|
|
|
645,000 |
|
|
|
1,460,000 |
|
|
|
1,106,000 |
|
|
Cost
of services and maintenance
|
|
|
3,275,000 |
|
|
|
2,984,000 |
|
|
|
6,584,000 |
|
|
|
5,631,000 |
|
|
Product
development
|
|
|
1,382,000 |
|
|
|
1,281,000 |
|
|
|
2,730,000 |
|
|
|
2,541,000 |
|
|
Sales
and marketing
|
|
|
1,355,000 |
|
|
|
1,270,000 |
|
|
|
2,596,000 |
|
|
|
2,583,000 |
|
|
General
and administrative
|
|
|
889,000 |
|
|
|
1,035,000 |
|
|
|
1,700,000 |
|
|
|
1,945,000 |
|
|
Total
costs and expenses
|
|
|
7,600,000 |
|
|
|
7,215,000 |
|
|
|
15,070,000 |
|
|
|
13,806,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from operations
|
|
|
(2,129,000 |
) |
|
|
(338,000 |
) |
|
|
(2,573,000 |
) |
|
|
2,588,000 |
|
|
Interest
income, net
|
|
|
14,000 |
|
|
|
39,000 |
|
|
|
33,000 |
|
|
|
65,000 |
|
|
(Loss)
income before income taxes
|
|
|
(2,115,000 |
) |
|
|
(299,000 |
) |
|
|
(2,540,000 |
) |
|
|
2,653,000 |
|
|
Income
tax expense
|
|
|
20,000 |
|
|
|
- |
|
|
|
20,000 |
|
|
|
- |
|
|
Net
(loss) income
|
|
$ |
(2,135,000 |
) |
|
$ |
(299,000 |
) |
|
$ |
(2,560,000 |
) |
|
$ |
2,653,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
(loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(2,135,000 |
) |
|
$ |
(299,000 |
) |
|
$ |
(2,560,000 |
) |
|
$ |
2,653,000 |
|
|
Cumulative
translation adjustment
|
|
|
(56,000 |
) |
|
|
21,000 |
|
|
|
13,000 |
|
|
|
45,000 |
|
|
Comprehensive
(loss) income
|
|
$ |
(2,191,000 |
) |
|
$ |
(278,000 |
) |
|
$ |
(2,547,000 |
) |
|
$ |
2,698,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(loss) income per share
|
|
$ |
(0.60 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.72 |
) |
|
$ |
0.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
(loss) income per share
|
|
$ |
(0.60 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.72 |
) |
|
$ |
0.74 |
|
|
Shares
outstanding used in
computing
basic (loss) income
per
share
|
|
|
3,554,000 |
|
|
|
3,549,000 |
|
|
|
3,554,000 |
|
|
|
3,549,000 |
|
|
Shares
outstanding used in
computing
diluted (loss) income
per
share
|
|
|
3,554,000 |
|
|
|
3,549,000 |
|
|
|
3,554,000 |
|
|
|
3,576,000 |
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to the consolidated financial
statements.
|
ASTEA INTERNATIONAL INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
CASH FLOWS
(Unaudited)
|
|
|
For
the Six Months
Ended
June 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(2,560,000 |
) |
|
$ |
2,653,000 |
|
|
Adjustments
to reconcile net (loss) income to net cash provided by
operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,668,000 |
|
|
|
1,299,000 |
|
|
Increase
in allowance for doubtful accounts
|
|
|
- |
|
|
|
121,000 |
|
|
Stock
based compensation
|
|
|
159,000 |
|
|
|
323,000 |
|
|
Deferred
tax expense
|
|
|
20,000 |
|
|
|
- |
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
2,879,000 |
|
|
|
557,000 |
|
|
Prepaid
expenses and other
|
|
|
85,000 |
|
|
|
(128,000 |
) |
|
Accounts
payable and accrued expenses
|
|
|
386,000 |
|
|
|
105,000 |
|
|
Deferred
revenues
|
|
|
(732,000 |
) |
|
|
(3,389,000 |
) |
|
Other
long term assets
|
|
|
(8,000 |
) |
|
|
9,000 |
|
|
Net
cash provided by operating activities
|
|
|
1,897,000 |
|
|
|
1,550,000 |
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Release
of restricted cash
|
|
|
(20,000 |
) |
|
|
75,000 |
|
|
Purchase
of short term investments
|
|
|
- |
|
|
|
(500,000 |
) |
|
Purchases
of property and equipment
|
|
|
(156,000 |
) |
|
|
(88,000 |
) |
|
Capitalized
software development costs
|
|
|
(787,000 |
) |
|
|
(923,000 |
) |
|
Earnout
payment
|
|
|
- |
|
|
|
(334,000 |
) |
|
Net
cash used in investing activities
|
|
|
(963,000 |
) |
|
|
(1,770,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
(77,000 |
) |
|
|
(75,000 |
) |
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
857,000 |
|
|
|
(295,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents beginning of period
|
|
|
1,615,000 |
|
|
|
3,120,000 |
|
|
Cash
and cash equivalents end of period
|
|
$ |
2,472,000 |
|
|
$ |
2,825,000 |
|
| |
|
| |
|
|
Supplemental
disclosure for non-cash operating and investing
activities:
|
|
|
|
|
|
|
|
|
|
Adjustment
to earnout provision related to previous agreement
|
|
$ |
2,000 |
|
|
$ |
- |
|
| |
|
| |
|
|
See
accompanying notes to the consolidated financial
statements.
|
|
Item
1. CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
ASTEA INTERNATIONAL INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
The
consolidated financial statements at June 30, 2008 and for the three and six
month periods ended June 30, 2008 and 2007 of Astea International Inc. and
subsidiaries (“Astea” or 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 following
unaudited condensed financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission
(“SEC”). Certain information and note disclosures normally included
in annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to those rules and
regulations, although the Company believes that the disclosures made are
adequate to make the information not misleading. It is suggested that
these condensed financial statements be read in conjunction with the financial
statements and the notes thereto, included in the Company’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2007 and our restated Form
10-Q/A’s for the quarters ended March 31, 2007, June 30, 2007 and September 30,
2007. The interim financial information presented herein is not
necessarily indicative of results expected for the entire year ended December
31, 2008.
2. RECENT ACCOUNTING STANDARDS
OR ACCOUNTING PRONOUNCEMENTS
In March
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS No. 161”), Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133
(“SFAS No.161”),
which requires additional disclosures about the objectives of the
derivative instruments and hedging activities, the method of accounting for such
instruments under SFAS No. 133 and its related interpretations, and a
tabular disclosure of the effects of such instruments and related hedged items
on our financial position, financial performance, and cash flows. SFAS
No. 161 is effective for us beginning January 1, 2009. We are
currently assessing the potential impact, if any, that adoption of SFAS
No. 161 may have on our financial statements.
In May
2008, the FASB issued Financial Accounting Standard (“FAS”) No. 162, “The
Hierarchy of Generally Accepted Accounting Principles” (“FAS
162”). FAS 162 identifies the sources of accounting principles and
the framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with generally accepted accounting principles in the United
States. FAS 162 is effective sixty days following the SEC’s approval
of the Public Company Accounting Oversight Board amendments to AU
Section 411, “The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles”. We are currently assessing the
potential impact, if any, that the adoption of FAS 162 may have on our financial
statements.
3. INCOME
TAX
The
Company adopted the provisions of FASB Interpretation No. 48, “Accounting for
Uncertainty in Income taxes – an interpretation of FASB Statement 109” (“FIN
48”), on January 1, 2007. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise’s financial statements
in accordance with FASB Statement 109, “Accounting for Income Taxes,” and
prescribes a recognition threshold and measurement process for financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
period, disclosure and transition.
The
Company has identified its federal tax return and its state returns in
Pennsylvania and California as “major” tax jurisdictions, as
defined. Based on the Company’s evaluation, it has been concluded
that there are no significant uncertain tax positions requiring recognition in
the Company’s financial statements. The Company’s evaluation was
performed for tax years ended 2002 through 2007, the only periods subject to
examination. The Company believes that its income tax positions
and deductions will be sustained on audit and does not anticipate any
adjustments that will result in a material change to its financial
position. Accordingly, the Company did not record a cumulative effect
adjustment related to the adoption of FIN 48.
The
Company’s policy for recording interest and penalties associated with audits is
to record such items as a component of income before income
taxes. Penalties are recorded in general and administrative expenses
and interest paid or received is recorded in interest expense or interest
income, respectively, in the statement of operations. For the second
quarter 2008, there were no interest or penalties related to the settlement of
audits.
At June
30, 2008, the Company maintained a 100% valuation allowance for its remaining
deferred tax assets, based on the uncertainty of the realization of future
taxable income.
4. STOCK BASED
COMPENSATION
On
January 1, 2006, the Company adopted the fair value recognition provisions of
SFAS 123(R), “Share Based Payments,” using the modified prospective transition
method. Under this method, compensation costs recognized
include (a) compensation costs for all share-based payments granted to employees
and directors prior to, but not yet vested as of January 1, 2006, based on the
grant date value estimated in accordance with the original provisions of FAS 123
and (b) compensation cost for all share-based payments granted subsequent to
January 1, 2006, based on the grant date fair value estimated in accordance with
the provisions of FAS 123(R).
The
Company estimates the fair value of stock options granted using the
Black-Scholes-Merton option-pricing formula and amortizes the estimated option
value using an accelerated amortization method where each option grant is split
into tranches based on vesting periods. The Company’s expected
term represents the period that the Company’s share-based awards are
expected to be outstanding and was determined based on historical experience
regarding similar awards, giving consideration to the contractual terms of the
share-based awards and employee termination data and guidance provided by the
SEC’s Staff Accounting Bulletin 107 (“SAB 107”). Executive
level employees who hold a majority of options outstanding, and non-executive
level employees were each found to have similar historical option exercise and
termination behavior and thus were grouped for valuation
purposes. The Company’s expected volatility is based on the
historical volatility of its traded common stock in accordance with the guidance
provided by SAB 107 to place exclusive reliance on historical volatilities to
estimate our stock volatility over the expected term of its
awards. The Company has historically not paid dividends and has no
foreseeable plans to issue dividends. The risk-free interest rate is
based on the yield from the U.S. Treasury zero-coupon bonds with an equivalent
term. Results for prior periods have not been restated.
As of
June 30, 2008, the total unrecognized compensation cost related to non-vested
options amounted to $685,000, which is expected to be recognized over the
options’ average remaining vesting period of 1.58 years. No income
tax benefit was realized by the Company in the six months ended June 30,
2008.
Under the
Company’s stock option plans, option awards generally vest over a four year
period of continuous service and have a 10 year contractual term. The
fair value of each option is estimated on the date of grant using the
Black-Scholes option valuation model and the following weighted average
assumptions for the quarters ended June 30, 2008 and 2007.
|
|
Three
Months Ended June 30,
|
Six
Months Ended June 30,
|
|
|
2008
|
2007
|
2008
|
2007
|
|
Risk-free
interest rate
|
2.26%
|
4.57%
|
2.26%
|
4.76%
|
|
Expected
life (in years)
|
3.87
|
6.15
|
3.87
|
6.15
|
|
Volatility
|
87%
|
102%
|
87%
|
102%
|
|
Expected
dividends
|
-
|
-
|
-
|
-
|
The
weighted-average fair value of options granted during the six months ended June
30, 2008 and 2007 is estimated at $4.10 and $6.50 respectively. For
the three months ended June 30, 2008 and 2007, the weighted-average fair value
of options granted is estimated at $4.10 and $7.24 respectively.
Activity
under the Company’s stock option plans for the six months ended June 30, 2008 is
as follows:
| |
|
OPTIONS
OUTSTANDING
|
|
|
|
Shares
|
|
|
Wtd.
Avg.
Exercise
Price
|
|
Balance,
December 31, 2007
|
|
|
484,000 |
|
|
$ |
5.91 |
|
|
Authorized
|
|
|
- |
|
|
|
- |
|
|
Granted
|
|
|
25,000 |
|
|
|
4.10 |
|
|
Cancelled
|
|
|
(36,000
|
) |
|
|
7.48 |
|
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
Expired
|
|
|
- |
|
|
|
- |
|
|
Balance,
June 30, 2008
|
|
|
473,000 |
|
|
$ |
5.69 |
|
The
following table summarizes outstanding options that are vested and expected to
vest and options under the Company’s stock options plans as of June 30,
2008.
|
|
Number
of
Shares
|
Weighted
Average
Exercise
Price
Per Share
|
Weighted
Average
Remaining
Contractual
Term
(in years)
|
Aggregate
Intrinsic
Value
|
|
Outstanding
Options
|
473,000
|
$5.69
|
7.38
|
$16,000
|
|
|
|
|
|
|
|
Ending
Vested and Expected to Vest
|
347,000
|
$5.86
|
6.87
|
$16,000
|
|
|
|
|
|
|
|
Options
Exercisable
|
185,000
|
$6.53
|
5.16
|
$15,000
|
|
|
|
|
|
|
5. EARNINGS PER
SHARE
The
Company follows SFAS 128 “Earnings Per Share” Under SFAS 128, companies that are
publicly held or have complex capital structures are required to present basic
and diluted earnings per share on the face of the statement of
operations. Earnings per share are based on the weighted average
number of shares and common stock equivalents outstanding during the
period. In the calculation of diluted earnings per share, shares
outstanding are adjusted to assume conversion of the Company’s non-interest
bearing convertible stock and exercise of options as if they were
dilutive. In the calculation of basic earnings per share, weighted
average numbers of shares outstanding are used as the
denominator. The Company had a net loss available to the common
shareholders for the three months ended June 30, 2008 and June 30,
2007. The Company had a net loss available to the common shareholders
for the six months ended June 30, 2008 and net income for the six months ended
June 30, 2007. (Loss) income per share is computed as
follows:
|
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income available to common shareholders
|
|
$ |
(2,135,000 |
) |
|
$ |
(
299,000 |
) |
|
$ |
(2,
560,000 |
) |
|
$ |
2,653,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used to compute net (loss) income
available
to common shareholders per common share-basic
|
|
|
3,554,000 |
|
|
|
3,549,000 |
|
|
|
3,554,000 |
|
|
|
3,549,000 |
|
|
Effect
of dilutive stock options
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
27,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used to compute net income available to
shareholders
per common share-dilutive
|
|
|
3,554,000 |
|
|
|
3,549,000 |
|
|
|
3,554,000 |
|
|
|
3,576,000 |
|
|
Basic
net (loss) income per share to common shareholder
|
|
$ |
(0.60 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.72 |
) |
|
$ |
0.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive
net (loss) income per share to common shareholder
|
|
$ |
(0.60 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.72 |
) |
|
$ |
0.74 |
|
6. MAJOR
CUSTOMERS
In the
three months ended June 30, 2008, no customer accounted for more than 10% of
total revenues. In the three months ended June 30, 2007 one customer
accounted for 15% of total revenues. For the six months ended June
30, 2008 and 2007, one customer accounted for 10% of total revenues in each
period.
7. GEOGRAPHIC SEGMENT
DATA
The
Company and its subsidiaries are engaged in the design, development, marketing
and support of its service management software
solutions. Substantially all revenues result from the license of the
Company’s software products and related professional services and customer
support services. The Company’s chief executive officer reviews
financial information presented on a consolidated basis, accompanied by
disaggregated information about revenues by geographic region for purposes of
making operating decisions and assessing financial
performance. Accordingly, the Company considers itself to have three
reporting segments as follows:
| |
|
Three
Months
Ended June
30,
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software license fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$ |
91,000 |
|
|
$ |
933,000 |
|
|
$ |
1,522,000 |
|
|
$ |
3,163,000 |
|
|
Total
United States
software
license fees
|
|
|
91,000 |
|
|
|
933,000 |
|
|
|
1
,522,000 |
|
|
|
3,163,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
|
- |
|
|
|
185,000 |
|
|
|
- |
|
|
|
711,000 |
|
|
Asia
Pacific
|
|
|
331,000 |
|
|
|
205,000 |
|
|
|
331,000 |
|
|
|
254,000 |
|
|
Total
foreign software
license
fees
|
|
|
331,000 |
|
|
|
390,000 |
|
|
|
331,000 |
|
|
|
965,000 |
|
|
Total
software license fees
|
|
|
422,000 |
|
|
|
1,323,000 |
|
|
|
1,853,000 |
|
|
|
4,128,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
and maintenance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
3,849,000 |
|
|
|
3,599,000 |
|
|
|
7,874,000 |
|
|
|
7,569,000 |
|
|
Export
|
|
|
94,000 |
|
|
|
49,000 |
|
|
|
155,000 |
|
|
|
101,000 |
|
|
Total
United States service
and
maintenance revenue
|
|
|
3,943,000 |
|
|
|
3,648,000 |
|
|
|
8,029,000 |
|
|
|
7,670,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
|
660,000 |
|
|
|
1,531,000 |
|
|
|
1,566,000 |
|
|
|
3,845,000 |
|
|
Asia
Pacific
|
|
|
446,000 |
|
|
|
375,000 |
|
|
|
1,049,000 |
|
|
|
751,000 |
|
|
Total
foreign service and
maintenance
revenue
|
|
|
1,106,000 |
|
|
|
1,906,000 |
|
|
|
2,615,000 |
|
|
|
4,596,000 |
|
|
Total
service and
maintenance
revenue
|
|
|
5,049,000 |
|
|
|
5,554,000 |
|
|
|
10,644,000 |
|
|
|
12,266,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$ |
5,471,000 |
|
|
$ |
6,877,000 |
|
|
$ |
12,497,000 |
|
|
$ |
16,394,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
(1,471,000 |
) |
|
$ |
(879,000 |
) |
|
$ |
(1,775,000 |
) |
|
$ |
326,000 |
|
|
Europe
|
|
|
(757,000 |
) |
|
|
393,000 |
|
|
|
(870,000 |
) |
|
|
2,114,000 |
|
|
Asia
Pacific
|
|
|
93,000 |
|
|
|
187,000 |
|
|
|
85,000 |
|
|
|
213,000 |
|
|
Net
(loss) income
|
|
$ |
(2,135,000 |
) |
|
$ |
(299,000 |
) |
|
$ |
(2,560,000 |
) |
|
$ |
2,653,000 |
|
|
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 Astea International
Inc.’s (“Astea or the Company”) Annual Report on Form 10-K for the fiscal year
ended December 31, 2007.
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 include Fortune 500 to mid-size companies which
Astea services through company facilities in the United States, United Kingdom,
Australia, the Netherlands and Israel. 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.
Astea
Alliance, the Company’s service management suite of solutions, 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 application 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.
Marketing
and sales of licenses, service and maintenance related to the Company’s legacy
system DISPATCH-1® products are limited to existing DISPATCH-1
customers.
FieldCentrix
On
September 21, 2005, the Company, through a wholly owned subsidiary, FC
Acquisition Corp., acquired substantially all of the assets of FieldCentrix Inc,
the industry’s leading mobile field force automation
company. FieldCentrix develops and markets mobile field service
automation (FSA) systems, which include the wireless dispatch and support of
mobile field technicians using portable, hand-held computing
devices. The FieldCentrix offering has evolved into a leading
complementary service management solution that runs on a wide range of mobile
devices (handheld computers, laptops and PC’s, and Pocket PC devices), and
integrates seamlessly with popular CRM and ERP
applications. FieldCentrix has licensed applications to Fortune 500
and mid-size companies in a wide range of sectors including HVAC, building and
real estate services, manufacturing, process instruments and controls, and
medical equipment.
Critical Accounting Policies
and Estimates
The
Company’s significant accounting policies are more fully described in its
Summary of Accounting Policies, Note 3, in the Company’s 2007 Annual Report on
Form 10-K for the fiscal year ended December 31, 2007. 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
Astea’s
revenue is recognized principally from two sources: (i) licensing arrangements
and (ii) services and maintenance.
The
Company markets its products primarily through its direct sales force and
resellers. License agreements do not provide for a right of return,
and historically, product returns have not been significant.
Astea
recognizes revenue on its software products in accordance
with American Institute of Certified Public Accountants Statement of
Position (“SOP”) 97-2, Software Revenue Recognition,
SOP 98-9, Modification of SOP
97-2, Software Revenue
Recognition with Respect to Certain Transactions, AICPA SOP 81-1, Accounting for
Performance of Construction-Type and Certain Production-Type Contracts;
and Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”)
104, Revenue
Recognition.
Astea
recognizes revenue from license sales when all of the following criteria are
met: persuasive evidence of an arrangement exists, delivery has occurred, the
license fee is fixed and determinable and the collection of the fee is
probable. We utilize written contracts as a means to establish the
terms and conditions by which our products, support and services are sold to our
customers. Delivery is considered to have occurred when title and
risk of loss have been transferred to the customer, which generally occurs after
a license key has been delivered electronically to the
customer. Revenue for arrangements with extended payment terms in
excess of one year is recognized when the payments become due, provided all
other recognition criteria are satisfied. If collectibility is not
considered probable, revenue is recognized when the fee is
collected. Our typical end user license agreements do not contain
acceptance clauses. However, if acceptance criteria is required,
revenues are deferred until customer acceptance has occurred.
Astea
allocates revenue to each element in a multiple-element arrangement based on the
elements’ respective fair value, determined by the price charged when the
element is sold separately. Specifically, Astea determines the fair
value of the maintenance portion of the arrangement based on the price, at the
date of sale, if sold separately, which is generally a fixed percentage of the
software license selling price. The professional services portion of
the arrangement is based on hourly rates which the Company charges for those
services when sold separately from software. If evidence of fair
value of all undelivered elements exists, but evidence does not exist for one or
more delivered elements, then revenue is recognized using the residual
method. If an undelivered element for which evidence of fair value
does not exist, all revenue in an arrangement is deferred until the undelivered
element is delivered or fair value can be determined. Under the
residual method, the fair value of the undelivered elements is deferred and the
remaining portion of the arrangement fee is recognized as
revenue. The residual value, after allocation of the fee to the
undelivered elements based on vendor-specific objective evidence (“VSOE”) of
fair value, is then allocated to the perpetual software license for the software
products being sold. The proportion of the revenue recognized upon
delivery can vary from quarter-to-quarter depending upon the determination of
VSOE of the fair value of undelivered elements.
When
appropriate, the Company may allocate 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 rates when provided in
conjunction with the licensing arrangement. Amounts allocated are
based upon standard prices charged for those services or products which, in the
Company’s opinion, approximate fair value. 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,
which is generally twelve months 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.
For the
three months ended June 30, 2008 and 2007, the Company recognized $5,471,000 and
$6,877,000, respectively, of revenue related to software license fees and
service and maintenance. For the six months ended June 30, 2008 and
2007, the Company recognized $12,497,000 and $16,394,000, respectively of
revenue related to software license fees and service and
maintenance. Included in revenue for the six months ended June 30,
2008 and 2007 was $802,000 and $3,882,000, respectively from contracts that
previously did not meet the Company’s revenue recognition policy.
Deferred
Revenue
Deferred
revenue includes amounts billed to or received from customers for which revenue
has not been recognized. This generally results from post-contract
support, software installation, consulting and training services not yet
rendered or license revenue which has been deferred until all revenue
requirements have been met or as services are performed. Unbilled
receivables are established when revenue is deemed to be recognized based on the
Company’s revenue recognition policy, but due to contractual restraints, the
Company does not have the right to invoice the customer.
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." The
Company capitalizes software development costs subsequent to the establishment
of technological feasibility through the product’s availability for general
release. Costs incurred prior to the establishment of technological feasibility
and subsequent to general release are charged to product development expense.
Product development expense includes payroll, employee benefits, and other
headcount-related costs associated with product development.
Software
development costs are amortized on a product-by-product basis over the greater
of the ratio of current revenues to total anticipated revenues or on a
straight-line basis over the estimated useful lives of the products (usually two
years), beginning with the initial release to customers. The Company
continually evaluates whether events or circumstances had occurred that indicate
that the remaining useful life of the capitalized software development costs
should be revised or that the remaining balance of such assets may not be
recoverable. The Company evaluates the recoverability of capitalized software
based on the estimated future revenues of each product.
Goodwill
On
September 21, 2005, the Company acquired the assets and certain liabilities of
FieldCentrix, Inc. through its wholly-owned subsidiary, FC Acquisition
Corp. Included in the allocation of the purchase price was goodwill
valued at $1,100,000 at December 31, 2005. The Company tests goodwill
for impairment annually during the first day of the fourth quarter of each
fiscal year at the reporting unit level using a fair value approach, in
accordance with the provision SFAS No. 142, Goodwill and Other Intangible
Assets. If an event occurs or circumstances change that would
more likely than not reduce the fair value of a reporting unit below its
carrying value, goodwill will be evaluated for impairment between annual
tests. For the three months ended June 30, 2008, goodwill decreased
$2,000 to $1,538,000 due to an adjustment made to the expired earnout provision
that originated from the purchase agreement.
Income
Taxes
On
January 1, 2007, the Company implemented the provisions of Financial Accounting
Standards (“FAS”) interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of FASB statement 109 (“FIN 48”). FIN
48 clarifies the accounting for uncertainty in income taxes and prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. Estimated interest is recorded as a component of interest
expense and penalties are recorded as a component of general and administrative
expense. Such amounts were not material for the three and six months
ended June 30, 2008. The adoption of FIN 48 did not have a material
impact on our financial position.
Income
taxes are accounted for in accordance with SFAS No. 109, Accounting for Income
Taxes, under the asset-and-liability method. Under this method,
deferred tax assets and liabilities are determined based on the difference
between the financial statement carrying amounts and the tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amounts
expected to be realized.
(Loss)
Earnings Per Share
The
Company follows SFAS 128 “Earnings Per Share” (“SFAS 128”). Under SFAS 128,
companies that are publicly held or have complex capital structures are required
to present basic and diluted earnings per share on the face of the statement of
operations. Earnings per share are based on the weighted average
number of shares and common stock equivalents outstanding during the
period. In the calculation of diluted earnings per share, shares
outstanding are adjusted to assume conversion of the Company’s non-interest
bearing convertible stock and exercise of options as if they were
dilutive. In the calculation of basic earnings per share, weighted
average numbers of shares outstanding are used as the
denominator. The Company had a net loss available to the common
shareholders for the three months ended June 30, 2008 and June 30,
2007. The Company had a net loss available to the common shareholders
for the six months ended June 30, 2008 and net income for the six months ended
June 30, 2007. (Loss) income per share is computed as
follows:
|
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income available to common shareholders
|
|
$ |
(2,135,000 |
) |
|
$ |
(
299,000 |
) |
|
$ |
(2,
560,000 |
) |
|
$ |
2,653,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used to compute net (loss) income
available
to common shareholders per common share-basic
|
|
|
3,554,000 |
|
|
|
3,549,000 |
|
|
|
3,554,000 |
|
|
|
3,549,000 |
|
|
Effect
of dilutive stock options
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
27,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used to compute net income
available
to shareholders per common share-dilutive
|
|
|
3,554,000 |
|
|
|
3,549,000 |
|
|
|
3,554,000 |
|
|
|
3,576,000 |
|
|
Basic
net (loss) income per share to common shareholder
|
|
$ |
(0.60 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.72 |
) |
|
$ |
0.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive
net (loss) income per share to common shareholder
|
|
$ |
(0.60 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.72 |
) |
|
$ |
0.74 |
|
Results of
Operations
Comparison
of Three Months Ended June 30, 2008 and 2007
Revenues
decreased $1,406,000 or 20%, to $5,471,000 for the three months ended June 30,
2008 from $6,877,000 for the three months ended June 30,
2007. Software license fee revenues decreased $901,000, or 68%, from
the same period last year. Services and maintenance fees for the
three months ended June 30, 2008 amounted to $5,049,000, a 9% decrease from the
same quarter in 2007.
The
Company’s international operations contributed $1,437,000 of revenues in the
second quarter of 2008, which is a 37% decrease compared to revenues generated
during the second quarter of 2007. The Company’s revenues from
international operations amounted to 26% of the total revenue for the second
quarter in 2008, compared to 33% of total revenues for the same quarter in
2007.
Software
license fee revenues decreased 68% to $422,000 in the second quarter of 2008
from $1,323,000 in the second quarter of 2007. Astea Alliance license
revenues decreased $555,000 or 58%, to $394,000 in the second quarter of 2008
from $949,000 in the second quarter of 2007. The overall decrease in
license revenue is attributable primarily to lower than expected sales in the
United States and Europe during the second quarter due to extended sales cycles
resulting from the overall economic slowdown. The Company sold $28,000 of
software licenses from its FieldCentrix subsidiary in the second quarter of
2008, a decrease of 91% over the same quarter of 2007. Additionally,
the company did not sell any DISPATCH-1 licenses during the three months ended
June 30, 2008, compared to $77,000 of DISPATCH-1 licenses to existing customers
during the same period in 2007.
Services
and maintenance revenues decreased to $5,049,000 in the second quarter of 2008
from $5,554,000 in the second quarter of 2007, a decrease of
9%. Astea Alliance service and maintenance revenues decreased by
$499,000 or 12% compared to the second quarter of 2007. The decrease
resulted from reduced demand from European customers. Service and
maintenance revenue from our FieldCentrix subsidiary increased to $1,309,000 or
6% from $1,230,000 during the same period in 2007. The increase results from an
increase in maintenance revenues from licenses sold within the past twelve
months. DISPATCH-1 service and maintenance revenues decreased $84,000
to $87,000 from $171,000 in the prior year. The decline in service
and maintenance revenue for DISPATCH-1 is expected as the Company discontinued
development of DISPATCH-1 at the end of 1999.
Costs
of Revenues
Cost of
software license fees increased 8% to $698,000 in the second quarter of 2008
from $645,000 in the second quarter of 2007. Included in the cost of
software license fees is the fixed cost of capitalized software amortization,
amortization of software acquired from FieldCentrix and any third party software
embedded in the Company’s software licenses sold to customers. The
principal cause of the increase in cost of software license fees is the
amortization of capitalized software development costs related to version 8.0 of
Astea Alliance, which was released during the first quarter of
2007. The software license gross margin percentage was (66%) in the
second quarter of 2008 compared to 51% in the second quarter of
2007. The significant decline in gross margin was due to very low
software license fees and slightly increased amortization expense.
Cost of
services and maintenance increased 10% to $3,275,000 in the second quarter of
2007 from $2,984,000 in the second quarter of 2007. The increase in
cost of service is due to an increase in headcount which is needed to meet the
growing demand for professional services. The services and
maintenance gross margin percentage was 35% in the second quarter of 2008
compared to 46% in the second quarter of 2007. The decrease in
services and maintenance gross margin was due primarily to the inclusion of
$802,000 in revenue restated from prior years with no corresponding
costs.
Product
Development
Product
development expense increased 8% to $1,382,000 in the second quarter of 2008
from $1,281,000 in the second quarter of 2007. The increase results from the
Company’s ongoing program of improving product
quality. The Company excludes the capitalization of
software costs from product development. Development costs of
$308,000 were capitalized in the second quarter of 2008 compared to $384,000
during the same period in 2007. The majority of product
development occurs in the Company’s subsidiary in Israel. The
exchange rate on the Israeli shekel compared to the U.S. dollar has increased by
16% since the same quarter in 2007. Gross product development
expense was $1,690,000 in the quarter which is 2% more than the same quarter in
2007. Product development expense as a percentage of revenues
increased to 25% in the second quarter of 2008 compared with 19% in the second
quarter of 2007. The increase in costs relative to revenues is due to
both the overall decrease in revenues and increase in product development
expense.
Sales
and Marketing
Sales and
marketing expense increased 7% to $1,355,000 in the second quarter of 2008 from
$1,270,000 in the second quarter of 2007. The increase in sales and marketing
expense is attributable principally to $125,000 in costs related to the
Company’s user’s conference that was held the second quarter of
2008. The user’s conference was not held in 2007. This
increase is partially offset by a decrease in headcount in the current period
over the same period in 2007. As a percentage of revenues, sales and
marketing expense increased to 25% in 2007 from 18% in the second quarter of
2007. The increased percentage results from both the decrease
in total revenues and an increase in salary and marketing expense.
General
and Administrative
General
and administrative expenses decreased 14% to $889,000 during the second quarter
of 2008 from $1,035,000 in the second quarter of 2007. The decrease
in general and administrative expenses is attributable principally to a
reimbursement of $112,000 in legal fees received from a settlement between the
Company and a third party. As a percentage of revenue, general and
administrative expenses increased slightly to 16% in the three months ended June
30, 2008 compared to 15% in the same period of 2007.
Interest
Income, Net
Net
interest income decreased $25,000 to $14,000 in the second quarter of 2008 from
the second quarter of 2007. The decrease resulted primarily from a
decline in interest rates and the level of investments.
Income
Tax Expense
The
Company made a provision of $20,000 for the three months ended June 30, 2008
compared to $0 for the same period in 2007 for income taxes which resulted from
a difference between an indefinite-lived asset, goodwill, which is amortized for
tax, but not amortized for financial reporting.
International
Operations
Total
revenue from the Company’s international operations decreased by 37% during the
second quarter of 2008 to $1,437,000 compared to $2,296,000 for the second
quarter of 2007. The decrease in revenue from international
operations was attributable primarily to a decrease in license and service
revenue in the Europe region. International operations generated a
net loss of $664,000 for the second quarter ended June 30, 2008 compared to a
net profit of $580,000 in the same period in 2007.
Net loss
for the three months ended June 30, 2008 was $2,135,000 compared to net loss of
$299,000 for the three months ended June 30, 2007. The increased loss
results from a 20% decrease in revenues of $1,406,000 and an increase in expense
of $385,000 or 5% during the three months ended June 30, 2008 compared to the
same period in 2007.
Comparison
of Six Months Ended June 30, 2008 and 2007
For the
six months ended June 30, 2008, the Company recognized $802,000 in licenses and
service and maintenance fees from contracts that previously did not meet the
Company revenue recognition policy. For the six months ended
June 30, 2007, the Company recognized $3,882,000 in license and service and
maintenance revenues from contracts that previously did not meet the Company’s
revenue recognition policy. All costs related to generating these
revenues were expensed in the periods in which they were
incurred. The results from operations for the periods include all of
the revenue discussed, but no related costs. Therefore, the gross
profit on revenue in these periods may appear higher than other
periods. Such operating results are not typical for the Company and
are not expected to recur.
Revenues
decreased $3,897,000, or 24%, to $12,497,000 for the six months ended June 30,
2008 from $16,394,000 for the six months ended June 30, 2007. The
decrease in revenues is principally the net result of recognizing $3,882,000 of
revenue in the six months ended June 30, 2007 from sales which had been deferred
from 2004, 2005 and 2006 due to undelivered elements contained in the original
contract which were delivered in that period. Partially
offsetting this decrease was the recognition of $802,000 in license, service and
maintenance revenues in the six months ended June 30, 2008 that had been
deferred from a contract in the third quarter of 2007 due to a specific upgrade
right contained in an implementation agreement. The recognition of
previously deferred revenues includes license revenue of $674,000 in the six
months ended June 30, 2008 and $1,806,000 in the six months ended June 30,
2007. The remainder of the recognized revenue that had previously
been deferred consists of service and maintenance revenue.
Software
license fee revenues decreased $2,275,000, or 55%, from the same period last
year. Services and maintenance revenues for the six months ended June
30, 2008 amounted to $10,644,000, a 13% decrease from the same period in
2007. Excluding the recognition of $2,706,000 of previously deferred
service and maintenance revenue in the six months ended June 30, 2007, service
and maintenance revenues increased 3%.
The
Company’s international operations contributed $2,946,000 of revenues in the
first six months of 2008 compared to $5,561,000 in the first six months of
2007. This represents a 47% decrease from the same period last year
and 24% of total Company revenues in the first six months of
2008. The decrease in international revenues is due principally
to the recognition of $1,591,000 in license, service and maintenance revenues
from the U.K. in the six months ended June 30, 2007 that had been deferred in
the years ended December 2006, 2005 and 2004. Excluding that revenue,
international revenues declined 27% in the six months ended June 30, 2008 from
the same quarter in 2007. The principal reason is the lack of license
sales in 2008 and reduced professional services in Europe.
Software
license fee revenues decreased 55% to $1,853,000 in the first six months of 2008
from $4,128,000 in the first six months of 2007. Astea Alliance
license revenues decreased $1,753,000 to $1,433,000 or 55% in the first six
months of 2008 from $3,186,000 in the first six months of
2007. The decrease in Astea Alliance license revenue includes
the recognition of $1,806,000 during the six months ended June 30, 2007 from the
deferral of license revenues from prior years. In addition, license
revenue from the FieldCentrix subsidiary decreased by $445,000 or 51% to
$420,000. There were no sales of DISPATCH-1 during the first six
months of 2008 compared to sales of $77,000 of DISPATCH-1 licenses to existing
customers during the first six months of 2007.
Services
and maintenance revenues decreased 13% to $10,644,000 in the first six months of
2008 from $12,266,000 in the first six months of 2007. Astea Alliance service
and maintenance revenue were $7,851,000, a decrease of 16%, or $1,540,000 over
the six months ended June 30, 2007. The decrease in Astea Alliance
service and maintenance revenues is the result of recognizing $2,076,000 in
service and maintenance revenues in the first six months of 2007 that had been
deferred from the years 2006, 2005 and 2004. Excluding that
revenue, service and maintenance revenue from Astea Alliance increased $536,000
or 7% from the same period in 2007. There was an increase of 4%
or $88,000 of service and maintenance revenues from FieldCentrix in the first
six months of 2008 compared to $2,498,000 for the first six months of
2007. DISPATCH-1 service and maintenance revenues decreased by
$170,000 to $207,000 from $377,000 in the prior year. The decline in
service and maintenance revenue for DISPATCH-1 was expected as the Company
discontinued development of DISPATCH-1 at the end of 1999.
Costs
of Revenues
Cost of
software license fees increased 32% to $1,460,000 in the first six months of
2008 from $1,106,000 in the first six months of 2007. Included in the
cost of software license fees is the fixed cost of capitalized software
amortization. The principal cause of the increase is the additional
amortization of capitalized software resulting from the release of version 8.0
in the first quarter of 2007. The software licenses gross margin
percentage was 21% in the first six months of 2008 compared to 73% in the first
six months of 2007. The decline in gross margin is attributable to the decrease
in license sales and increase in the cost of sales.
Cost of
services and maintenance increased 17% to $6,584,000 in the first six months of
2007 from $5,631,000 in the first six months of 2007. The increase in
cost of service and maintenance is attributed primarily to an increase in
headcount from last year to this year. The services and maintenance
gross margin percentage was 38% in the first six months of 2008 compared to 54%
in the first six months of 2007. Included in 2007 service and maintenance
revenue is $2,410,000 which was all recognized in 2007 resulting from a
restatement with all related costs reported in the year
incurred. This resulted in disproportionately high margins in
the 2007 period and are not expected to reoccur.
Product
Development
Product
development expense increased 7% to $2,730,000 in the first six months of 2008
from $2,541,000 in the first six months of 2007. The increase results
from the decrease in the value of the U.S. dollar compared to the Israeli
shekel, which cost 15% more than the same period last year. Israel is
the principal site for the Company’s development. The Company
excludes the capitalization of software costs in product
development. Software development costs of $787,000 were capitalized
in the first six months of 2008 compared to $923,000 during the same period in
2007. The decrease results from the release of Astea’s current
versions 8.0 during the first quarter of 2007. Gross development
expense was $3,517,000 during the first six months of 2008 compared to
$3,464,000 during the same period in 2007. Product development as a
percentage of revenues was 22% in the first six months of 2008 compared with 15%
in the first six months of 2007. The increase in percentage of
revenues is the result of the increased development expense and significant
decline in total revenues.
Sales
and Marketing
Sales and
marketing expense increased 1% to $2,596,000 in the first six months of 2008
from $2,583,000 in the first six months of 2007. The slight increase in sales
and marketing expense is attributable to costs associated with our users
conference which was held during this period and not held in during the same
period in 2007. As a percentage of revenues, sales and marketing
expenses increased to 21% from 16% in the first six months of 2007.
General
and Administrative
General
and administrative expenses decreased 13% to $1,700,000 in the first six months
of 2008 from $1,945,000 in the first six months of 2007. The
decrease in general and administrative expenses is attributable principally to a
reimbursement of $112,000 in legal fees received from a settlement between the
Company and a third party. As a percentage of revenues, general and
administrative expenses increased to 14% from 12% in the first six months of
2007.
Interest
Income, Net
Net
interest income decreased $32,000 to $33,000 from $65,000 in the first six
months of 2008. The decrease resulted primarily from a decrease in
the amount of the Company’s investments and lower interest rates earned on
invested cash.
Income
Tax Expense
The
Company made a provision of $20,000 for the six months ended June 30, 2008
compared to $0 for the same period in 2007 for income taxes which resulted from
a difference between an indefinite-lived asset, goodwill, which is amortized for
tax, but not amortized for financial reporting.
International
Operations
Total
revenue from the Company’s international operations decreased by $2,615,000, or
47%, to $2,946,000 in the first six months of 2008 compared to $5,561,000 in the
first six months in 2007. This represents 24% of total Company revenues in the
first six months of 2008. Total international revenues decreased 25%
with the exclusion of the revenue recognized in 2007 from the U.K. customer that
had been deferred from previous years. The decrease in revenues is
due to the decrease in license and professional services revenues in
Europe. International operations generated a net loss of
$785,000 for the first six months ended June 30, 2008 compared to net income of
$2,327,000 in the same period in 2007.
Net (Loss)
Income
Net loss
for the six months ended June 30, 2008 was $2,560,000 compared to net income of
$2,653,000 for the six months ended June 30, 2007. The decline in
income of $5,213,000 is a direct result of a decrease in revenues of $3,897,000
or 24% and an increase in operating costs of 9%.
Liquidity
and Capital Resources
Operating
Activities
Net cash
generated by operating activities was $1,897,000 for the six months ended June
30, 2008 compared to cash generated by operations of $1,550,000 for the six
months ended June 30, 2007, an increase of $347,000. The increase in
cash generated by operations was attributable primarily to an increase in
non-cash expense of $84,000, an increase in deferred tax of $20,000, greater
collections of accounts receivable of $2,322,000, a reduction in prepaid expense
of $213,000 compared to last year, an increase in accounts payable and accrued
expenses of $277,000, a decrease in deferred revenues of $2,657,000 offsetting
the improvements in cash flow are a decrease in net income of $5,213,000 and an
increase in other long term assets of $17,000.
Investing
Activities
The
Company used $963,000 for investing activities in the first six months of 2008
compared to using $1,770,000 in the first six months of 2007, a decrease of cash
used of $807,000. The decrease in cash used is attributable primarily
to an increase in capital expenditures offset by reduced capitalized software
development costs in the first six months of 2008.
Financing
Activities
The
Company generated no cash from financing activities for the six months of 2008
and 2007.
On May
23, 2007 the Company renewed its secured revolving line of credit with a bank to
borrow up to $2.0 million. The line of credit is secured by accounts
receivable. Interest is payable monthly based on the prime rate of
interest charged by the bank. The Company made one loan during the
six months ended June 30, 2008 and repaid the amount within 10
days. At June 30, 2008 the total outstanding loan under the line of
credit agreement was $0. The line of credit was renewed on August 4,
2008 extending the maturity date on the line of credit to June 30,
2009.
At June
30, 2008, the Company had a working capital ratio of .86:1, with cash, cash
equivalents and restricted cash of $2,472,000. The Company is
increasing its focus on expense controls as a result of the impact on its
revenues of the overall economic slowdown. Management believes that
the Company’s existing cash resources and credit facility, together with
expected savings from expense controls, will enable the Company to sustain its
operations for the next 12 months. However, if the Company’s revenues
do not increase or if such expense savings are not realized, the Company may
require additional debt or equity financing, as to the availability of which
there can be no assurances.
Off-Balance
Sheet Arrangements
The
Company is not involved in any off-balance sheet arrangements that have or are
reasonably likely to have a material current or future impact on our financial
condition, changes in financial condition, revenues or expenses, results in
operations, liquidity, capital expenditures or capital resources.
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, including in its Annual Report
on Form 10-K for the fiscal year ended December 31, 2007. 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:
|
·
|
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.
|
|
·
|
The
market price of the Company’s 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
Market
risk represents the risk of loss that may impact the Company’s financial
position due to adverse changes in financial market prices and
rates. The Company’s market risk exposure is primarily a result of
fluctuations in interest rates and foreign currency exchange
rates. The Company does not hold or issue financial instruments for
trading purposes.
Interest Rate Risk. The Company’s exposure
to market risk for changes in interest rates relates 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, 2008, the Company’s
investments consisted of U.S. money market funds. The Company does
not expect any material loss with respect to its investment
portfolio. In addition, the Company does not believe that a 10%
change in interest rates would have a significant effect on its interest
income. The Company is also exposed to market risk for changes in
interest rates as it affects the revolving line of credit. Interest
is charged at the prime rate, which is subject to change. However,
the Company has used the revolving line of credit sparingly.
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. For the
three month period ended June 30, 2008, approximately 23% of the Company’s
overall revenue resulted from sales to customers outside the United
States. A 10% change in the value of the U.S. dollar relative to each
of the currencies of the Company’s non-U.S.-generated sales would not have
resulted in a material change to its results of operations. The
Company does not expect any material loss with respect to foreign currency
risk.
Item
4T. CONTROLS AND
PROCEDURES
The
Company’s management team, under the supervision and with the participation of
the Company’s principal executive officer and principal financial officer,
evaluated the effectiveness of the design and operation of the Company’s
disclosure controls and procedures pursuant to Rule 13a-15(b) of the Securities
Exchange Act of 1934 (“Exchange Act”), as of the last day of the period covered
by this report, June 30, 2008. The term disclosure controls and
procedures means the Company’s controls and other procedures that are designed
to ensure that information required to be disclosed by the Company in the
reports that the Company files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in
the SEC’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by the Company in the reports
that the Company files or submits under the Exchange Act is accumulated and
communicated to management, including the Company’s principal executive and
principal financial officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required
disclosure. Based on this evaluation, the Company’s principal
executive officer and principal financial officer concluded that, because of the
material weaknesses in the Company’s internal control over financial reporting
described below, the Company’s disclosure controls and procedures were not
effective as of June 30, 2008. To address the material weaknesses in the
Company’s internal control over financial reporting described below, we
performed additional manual procedures and analysis and other post-closing
procedures in order to prepare the consolidated financial statements included in
this report. As a result of these expanded procedures, the Company believes that
the condensed consolidated financial statements contained in this report present
fairly, in all material respects, our financial condition, results of operations
and cash flows for the periods covered thereby in conformity with generally
accepted accounting principles in the United States (“GAAP”).
Changes
in Internal Control Over Financial Reporting
During
the second quarter of 2008, the Company strengthened its internal controls over
revenue recognition by engaging an independent consultant with significant
experience in revenue recognition accounting for software, to review the
Company’s accounting for revenue recognition for the quarter.
Although
our remediation efforts are underway, material weaknesses identified as of
December 31, 2007 will not be considered remediated until new internal controls
over financial reporting are fully implemented and operational for a period of
time and are operating effectively.
PART II - OTHER
INFORMATION
Item
1A. Risk
Factors
In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, “Item 1A. Risk Factors” in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2007, which
could materially affect the Company’s business, financial condition or future
results. The risks described in this report and in the Company’s Annual Report
on Form 10-K for the year ended December 31, 2007 are not the only risks facing
the Company. Additional risks and uncertainties not currently known to the
Company or that the Company currently deems to be immaterial also may materially
adversely affect the Company’s business, financial condition and/or operating
results.
Item
4. Submission
of Matters to a Vote of Security Holders
At the
Annual Meeting of Stockholders held on June 11, 2008, 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
|
|
Director
|
Voted
For
|
Withheld
|
|
Zack
Bergreen
|
3,028,518
|
63,529
|
|
Adrian
Peters
|
3,026,187
|
65,860
|
|
Thomas
J. Reilly, Jr.
|
3,027,698
|
64,349
|
|
Eric
Siegel
|
3,027,698
|
64,349
|
|
2.
|
The
appointment of Grant Thorton LLP as independent auditors for the Company
for the fiscal year ending December 31,
2008.
|
|
Number
of Shares
|
|
Voted
for
|
Voted
Against
|
Abstained
|
|
3,049,793
|
39,479
|
2,775
|
No other
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.
Item
6. Exhibits
SIGNATURES
Pursuant to the requirements
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.
|
|
ASTEA
INTERNATIONAL INC.
|
|
|
|
|
Date: August
14, 2008
|
/s/ Zack Bergreen
|
|
|
Zack
Bergreen
|
|
|
Chief
Executive Officer
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
Date: August
14, 2008
|
/s/ Rick Etskovitz
|
|
|
Rick
Etskovitz
|
|
|
Chief
Financial Officer
|
|
|
(Principal
Financial and Chief Accounting
Officer)
|
Exhibit
Index