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,
2007
|
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, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check One):
Large
accelerated filer __
|
Accelerated
filer __
|
Non-accelerated
filer 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 1, 2007, 3,591,185 shares of the registrant’s Common Stock, par value
$.01 per share, were outstanding.
FORM
10-Q
QUARTERLY
REPORT
INDEX
|
|
Page
No.
|
|
|
|
Facing
Sheet
|
|
|
|
|
Index
|
|
|
|
|
PART
I - FINANCIAL INFORMATION
|
|
|
|
|
Item
1.
|
Consolidated
Financial Statements
|
|
|
|
|
|
Consolidated
Balance Sheets
|
|
|
|
|
|
Consolidated
Statements of Operations (Unaudited)
|
|
|
|
|
|
Consolidated
Statements of Cash Flows (Unaudited)
|
|
|
|
|
|
Notes
to Unaudited Consolidated Financial Statements
|
|
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial
|
|
|
Condition
and Results of Operations
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosure About Market Risk
|
|
|
|
|
Item
4T.
|
Controls
and Procedures
|
|
|
|
|
PART
II - OTHER INFORMATION
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
|
|
|
|
Item
1A.
|
Risk
Factors
|
|
|
|
|
Item
6.
|
Exhibits
and Reports on Form 8-K
|
|
|
|
|
|
Signatures
|
|
Item
1. CONSOLIDATED FINANCIAL STATEMENTS
ASTEA
INTERNATIONAL INC.
CONSOLIDATED
BALANCE SHEETS
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2007
(Unaudited)
|
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
2,825,000
|
|
|
$ |
3,120,000
|
|
Restricted
cash
|
|
|
150,000
|
|
|
|
225,000
|
|
Investments
for sale
|
|
|
500,000
|
|
|
|
-
|
|
Receivables,
net of reserves of $262,000 (unaudited) and
$163,000
|
|
|
6,252,000
|
|
|
|
6,860,000
|
|
Prepaid
expenses and other
|
|
|
556,000
|
|
|
|
423,000
|
|
Total
current assets
|
|
|
10,283,000
|
|
|
|
10,628,000
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
568,000
|
|
|
|
648,000
|
|
Intangibles,
net
|
|
|
1,579,000
|
|
|
|
1,719,000
|
|
Capitalized
software, net
|
|
|
3,594,000
|
|
|
|
3,636,000
|
|
Goodwill
|
|
|
1,540,000
|
|
|
|
1,253,000
|
|
Other
assets
|
|
|
166,000
|
|
|
|
175,000
|
|
|
|
$ |
17,730,000
|
|
|
$ |
18,059,000
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$ |
4,014,000
|
|
|
$ |
3,930,000
|
|
Deferred
revenues
|
|
|
6,844,000
|
|
|
|
7,987,000
|
|
Total
current liabilities
|
|
|
10,858,000
|
|
|
|
11,917,000
|
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
|
Deferred
tax liability
|
|
|
36,000
|
|
|
|
36,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $.01 par value, 5,000,000 shares
authorized,
none issued
|
|
|
-
|
|
|
|
-
|
|
Common
stock, $.01 par value, 25,000,000 shares
Authorized
issued 3,591,000 (unaudited) and
3,591,000
|
|
|
36,000
|
|
|
|
36,000
|
|
Additional
paid-in capital
|
|
|
27,855,000
|
|
|
|
27,532,000
|
|
Cumulative
translation adjustment
|
|
|
(866,000 |
) |
|
|
(911,000 |
) |
Accumulated
deficit
|
|
|
(19,981,000 |
) |
|
|
(20,343,000 |
) |
Less: treasury
stock at cost, 42,000 shares
|
|
|
(208,000 |
) |
|
|
(208,000 |
) |
Total
stockholders’ equity
|
|
|
6,836,000
|
|
|
|
6,106,000
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
17,730,000
|
|
|
$ |
18,059,000
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to the consolidated financial
statements.
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE NET (LOSS)
INCOME
(Unaudited)
|
|
Three
Months
|
|
|
Six
Months
|
|
|
|
Ended
June 30,
|
|
|
Ended
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
license fees
|
|
$ |
989,000
|
|
|
$ |
997,000
|
|
|
$ |
2,706,000
|
|
|
$ |
1,122,000
|
|
Services
and maintenance
|
|
|
5,265,000
|
|
|
|
3,402,000
|
|
|
|
11,397,000
|
|
|
|
7,120,000
|
|
Total
revenues
|
|
|
6,254,000
|
|
|
|
4,399,000
|
|
|
|
14,103,000
|
|
|
|
8,242,000
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of software license fees
|
|
|
645,000
|
|
|
|
434,000
|
|
|
|
1,106,000
|
|
|
|
750,000
|
|
Cost
of services and maintenance
|
|
|
2,984,000
|
|
|
|
2,468,000
|
|
|
|
5,631,000
|
|
|
|
5,303,000
|
|
Product
development
|
|
|
1,281,000
|
|
|
|
972,000
|
|
|
|
2,541,000
|
|
|
|
1,865,000
|
|
Sales
and marketing
|
|
|
1,270,000
|
|
|
|
1,367,000
|
|
|
|
2,583,000
|
|
|
|
2,615,000
|
|
General
and administrative
|
|
|
1,035,000
|
|
|
|
1,251,000
|
|
|
|
1,945,000
|
|
|
|
2,158,000
|
|
Total
costs and expenses
|
|
|
7,215,000
|
|
|
|
6,492,000
|
|
|
|
13,806,000
|
|
|
|
12,691,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from operations
|
|
|
(961,000 |
) |
|
|
(2,093,000 |
) |
|
|
297,000
|
|
|
|
(4,449,000 |
) |
Interest
income, net
|
|
|
39,000
|
|
|
|
58,000
|
|
|
|
65,000
|
|
|
|
135,000
|
|
(Loss)
income before income taxes
|
|
|
(922,000 |
) |
|
|
(2,035,000 |
) |
|
|
362,000
|
|
|
|
(4,314,000 |
) |
Income
tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net
(loss) income
|
|
$ |
(922,000 |
) |
|
$ |
(2,035,000 |
) |
|
$ |
362,000
|
|
|
$ |
(4,314,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
net (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(922,000 |
) |
|
$ |
(2,035,000 |
) |
|
$ |
362,000
|
|
|
$ |
(4,314,000 |
) |
Cumulative
translation adjustment
|
|
|
20,000
|
|
|
|
(51,000 |
) |
|
|
45,000
|
|
|
|
60,000
|
|
Comprehensive
net (loss) income
|
|
$ |
(902,000 |
) |
|
$ |
(2,086,000 |
) |
|
$ |
407,000
|
|
|
$ |
(4,254,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(loss) income per share
|
|
$ |
(0.26 |
) |
|
$ |
(0.57 |
) |
|
$ |
0.10
|
|
|
$ |
(1.22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
(loss) income per share
|
|
$ |
(0.26 |
) |
|
$ |
(0.57 |
) |
|
$ |
0.10
|
|
|
$ |
(1.22 |
) |
Shares
outstanding used in
computing
basic (loss) income
per
share
|
|
|
3,549,000
|
|
|
|
3,547,000
|
|
|
|
3,549,000
|
|
|
|
3,545,000
|
|
Shares
outstanding used in
computing
diluted (loss) income
per
share
|
|
|
3,549,000
|
|
|
|
3,547,000
|
|
|
|
3,576,000
|
|
|
|
3,545,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to the consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
For
the Six Months
Ended
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
362,000
|
|
|
$ |
(4,314,000 |
) |
Adjustments
to reconcile net income (loss) to net cash provided by (used
in)
operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,299,000
|
|
|
|
1,194,000
|
|
Increase
in allowance for doubtful accounts
|
|
|
121,000
|
|
|
|
189,000
|
|
Stock
based compensation
|
|
|
323,000
|
|
|
|
125,000
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
557,000
|
|
|
|
(28,000 |
) |
Prepaid
expenses and other
|
|
|
(128,000 |
) |
|
|
(65,000 |
) |
Accounts
payable and accrued expenses
|
|
|
105,000
|
|
|
|
(477,000 |
) |
Deferred
revenues
|
|
|
(1,098,000 |
) |
|
|
1,565,000
|
|
Other
long term assets
|
|
|
9,000
|
|
|
|
(5,000 |
) |
Net
cash provided by (used in) operating activities
|
|
|
1,550,000
|
|
|
|
(1,816,000 |
) |
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Release
of restricted cash
|
|
|
75,000
|
|
|
|
-
|
|
Purchase
of short term investments
|
|
|
(500,000 |
) |
|
|
|
|
Purchases
of property and equipment
|
|
|
(88,000 |
) |
|
|
(66,000 |
) |
Capitalized
software development costs
|
|
|
(923,000 |
) |
|
|
(1,402,000 |
) |
Earnout
payment
|
|
|
(334,000 |
) |
|
|
(47,000 |
) |
Net
cash used in investing activities
|
|
|
(1,770,000 |
) |
|
|
(1,515,000 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from exercise of stock options
|
|
|
-
|
|
|
|
19,000
|
|
Cash
flows provided by financing activities
|
|
|
-
|
|
|
|
19,000
|
|
Effect
of exchange rate changes on cash
|
|
|
(75,000 |
) |
|
|
(90,000 |
) |
Net
decrease in cash and cash equivalents
|
|
|
(295,000 |
) |
|
|
(3,402,000 |
) |
Cash,
beginning of period
|
|
|
3,120,000
|
|
|
|
9,484,000
|
|
Cash,
end of period
|
|
$ |
2,825,000
|
|
|
$ |
6,082,000
|
|
See
accompanying notes to the consolidated financial
statements.
|
|
ASTEA
INTERNATIONAL INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS
OF PRESENTATION
The
consolidated financial statements at June 30, 2007 and for the three and six
month periods ended June 30, 2007 and 2006 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. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to
those
rules and regulations, although the Company believes that these disclosures
made
are adequate to make the information not misleading. It
suggests that these condensed financial statements be read in conjunction with
the financial statements and the notes thereto, included in the Company’s latest
shareholders’ annual report (Form 10-K) and our restated Form 10-QA’s for the
quarters ended March 31, 2006, June 30, 2006 and September 30, 2006 which
reflect the revisions to revenue recognition in connection with a 2004 contract
during fiscal year 2006 (see Note 6). Results of operations and cash
flows for the six months ended June 30, 2007 are not necessarily indicative
of
the results that may be expected for the full year.
2. RECENT
ACCOUNTING STANDARDS OR ACCOUNTING PRONOUNCEMENTS
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements.” SFAS No. 157 clarifies the principle that
fair value should be based on the assumptions that market participants would
use
when pricing an asset or liability. It establishes a fair-value
hierarchy that prioritizes the information used to develop those
assumptions. Under SFAS No. 157, fair-value measurements would be
separately disclosed by level within the fair-value hierarchy. SFAS
No. 157 is effective for fiscal years beginning after November 15,
2007. We do not believe that the adoption of SFAS will have a
material impact on our consolidated financial position, results of operations
or
cash flows.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.” SFAS No. 159
provides an option to irrevocably elect to report recognized financial assets
and liabilities at fair value, on an instrument by instrument
basis. It is applied to an entire financial instrument, not only to
specific risks, cash flows or portions of the instrument. Subsequent
to the initial adoption, an entity may elect the fair value option only in
limited circumstances. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. Earlier application is permitted,
but requires concurrent adoption of SFAS No. 157, “Fair Value
Measurements.” We do not believe that the adoption of
SFAS will have a material impact on our consolidated financial position, results
of operations or cash flows.
3. INCOME
TAX
The
Company adopted the provisions of Financial Standards Board (“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 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 2006, 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 six
months ended June 30, 2007 and 2006 there were no interest or penalties related
to the settlement of audits.
At
June
30, 2007, the Company maintains 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) using the modified prospective transition
method. Under this method, compensation costs recognized in the
six months ended June 30, 2007 and 2006 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 had a choice of two attribution methods of allocating compensation
costs
under SFAS No. 123(R): the “straight-line” method, which allocates expense on a
straight-line basis over the requisite service period of the last separately
vesting portion of an award, or the “graded vesting attribution method”, an
accelerated amortization method, which allocates expense on a straight-line
basis over the requisite service period for each separately vesting portion
of
the award as if the award was in-substance, multiple awards. We chose
the graded vesting attribution method and accordingly, amortized the fair value
of each option tranche over the respective tranche’s requisite service
period.
The
Company estimates the fair value of stock options granted using the
Black-Scholes-Merton (Black-Scholes) 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 U.S. Securities and Exchange Commission’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, 2007, the total unrecognized compensation cost related to non-vested
options amounted to $574,000, which is expected to be recognized over the
options’ average remaining vesting period of 1.54 years. No income
tax benefit was realized by the Company in the period ended June 30,
2007. As of June 30, 2007, 260,000 shares were available for
grant.
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 amortized on a straight-line basis over the
option’s vesting period. 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 six months ended June 30, 2007
and 2006.
|
|
Three
Months
Ended
June 30,
|
|
Six
Months
Ended
June
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Risk
free interest rate
|
|
4.57%
|
|
5.04%
|
|
4.86%
|
|
5.04%
|
|
Expected
life (in years)
|
|
6.15
|
|
6.00
|
|
6.15
|
|
6.00
|
|
Volatility
|
|
102%
|
|
116%
|
|
102%
|
|
116%
|
|
Expected
dividends
|
|
-
|
|
-
|
|
-
|
|
-
|
|
The
weighted-average fair value of options granted during the six months ended
June
30, 2007 and 2006 is estimated at $6.50 and $9.48 respectively. For
the three months ended June 30, 2007 and 2006, the weighted-average fair value
of options granted is estimated at $7.24 and $3.87 respectively.
Activity
under the Company’s stock option plans for the six months ended June 30, 2007 is
as follows:
|
|
OPTIONS
OUTSTANDING
|
|
|
Shares
|
|
|
Wtd.
Avg. Exercise Price
|
|
Balance,
December 31, 2006
|
|
|
427,000
|
|
|
$ |
6.71
|
|
Authorized
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
43,000
|
|
|
|
6.50
|
|
Cancelled
|
|
|
(97,000 |
) |
|
|
7.41
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
(2,000 |
) |
|
|
6.90
|
|
Balance,
June 30, 2007
|
|
|
371,000
|
|
|
$ |
6.57
|
|
As
of
June 30, 2007, the Company had 260,000 shares available for grant compared
to
242,000 at of December 31, 2006.
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,
2007.
|
Number
of Shares
|
Weighted
Average Exercise Price Per Share
|
Weighted
Average Remaining Contractual Term (in years)
|
Aggregate
Intrinsic Value
|
Outstanding
Options
|
371,000
|
$6.57
|
7.63
|
$276,000
|
|
|
|
|
|
Ending
Vested and Expected to Vest
|
299,000
|
$6.55
|
7.32
|
$241,000
|
|
|
|
|
|
Options
Exercisable
|
142,000
|
$6.61
|
5.75
|
$152,000
|
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 income available to the common
shareholders for the six months ended
June
30,
2007 and a net loss for the six months ended June 30, 2006. Income
(loss) per share is computed as follows:
|
|
Six
Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
Numerator:
|
|
|
|
|
|
|
Net
income (loss) available to common shareholders
|
|
$ |
362,000
|
|
|
$ |
(4,314,000 |
) |
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted
average shares used to compute net income
available
to common shareholders per common share-basic
|
|
|
3,549,000
|
|
|
|
3,545,000
|
|
Effect
of dilutive stock options
|
|
|
27,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used to compute net income available to common shareholders
per common share-dilutive
|
|
|
3,576,000
|
|
|
|
3,545,000
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per share to common shareholder
|
|
$ |
.10
|
|
|
$ |
(1.22 |
) |
|
|
|
|
|
|
|
|
|
Dilutive
net income (loss) per share to common shareholder
|
|
$ |
.10
|
|
|
$ |
(1.22 |
) |
6. MAJOR
CUSTOMERS
In
the
three months ended June 30, 2007, one customer accounted for more than 17% of
total revenues. In the three months ended June 30, 2006 no customer
accounted for 10% of total revenue. For the first six months of 2007,
one customer accounted for more than 12% of total revenues, however during
the
same period of 2006, no customer accounted for at least 10% of total
revenues.
7. RECOGNITION
OF DEFERRED REVENUE
For
the
quarter ended March 31, 2007, the Company recognized $1,591,000 of revenue
which
had been deferred due to correcting an error in the recording of such revenue,
from a transaction that occurred with a customer in the U.K. in the fourth
quarter of 2004 and continued through the end of 2006. The $1,591,000
revenue is comprised of $384,000 of license revenue and $1,207,000 in services
and maintenance revenue. All costs related to generating these
revenues were expensed in the periods in which they were
incurred. The results from operations for the current quarter include
all of the revenue discussed, but no related costs.
8. 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, specifically the license, implementation and support of
its
software.
For
the Six Months Ended,
|
|
|
|
|
2006
|
|
Revenues:
|
|
|
|
|
|
|
Software license fees
|
|
|
|
|
|
|
United States
|
|
|
|
|
|
|
Domestic
|
|
$ |
1,741,000
|
|
|
$ |
660,000
|
|
Export
|
|
|
-
|
|
|
|
-
|
|
Total United States
|
|
|
|
|
|
|
|
|
software
license fees
|
|
|
1,741,000
|
|
|
|
660,000
|
|
|
|
|
|
|
|
|
|
|
United Kingdom
|
|
|
711,000
|
|
|
|
85,000
|
|
Other foreign
|
|
|
254,000
|
|
|
|
377,000
|
|
Total foreign software
|
|
|
|
|
|
|
|
|
license fees
|
|
|
965,000
|
|
|
|
462,000
|
|
Total software license fees
|
|
|
2,706,000
|
|
|
|
1,122,000
|
|
|
|
|
|
|
|
|
|
|
Services
and maintenance
|
|
|
|
|
|
|
|
|
United States
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
6,700,000
|
|
|
|
4,696,000
|
|
Export
|
|
|
101,000
|
|
|
|
351,000
|
|
Total United States service
|
|
|
|
|
|
|
|
|
and maintenance revenue
|
|
|
6,801,000
|
|
|
|
5,047,000
|
|
|
|
|
|
|
|
|
|
|
United Kingdom
|
|
|
3,845,000
|
|
|
|
1,409,000
|
|
Other foreign
|
|
|
751,000
|
|
|
|
664,000
|
|
Total foreign service and
|
|
|
|
|
|
|
|
|
maintenance revenue
|
|
|
4,596,000
|
|
|
|
2,073,000
|
|
Total service and
|
|
|
|
|
|
|
|
|
maintenance revenue
|
|
|
11,397,000
|
|
|
|
7,120,000
|
|
Total
revenue
|
|
$ |
14,103,000
|
|
|
$ |
8,242,000
|
|
Net
income(loss) from operations
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
(1,965,000 |
) |
|
$ |
(3,515,000 |
) |
United Kingdom
|
|
|
2,114,000
|
|
|
|
(994,000 |
) |
Other foreign
|
|
|
213,000
|
|
|
|
195,000
|
|
Net income(loss) from
operations
|
|
$ |
362,000
|
|
|
$ |
(4,314,000 |
) |
9. LEGAL
PROCEEDINGS
On
and
shortly after April 6, 2006, certain purported shareholder class action and
derivative lawsuits were filed in the United States District Court for the
Eastern District of Pennsylvania against the Company and certain of its
directors and officers. The lawsuits, alleging that the Company and
certain of its officers and directors violated federal securities laws and
state
laws, related to the Company’s March 31, 2006 announcement of the accounting
restatement for overcapitalized software development costs during the first
two
quarters of 2005 and the undercapitalized software development costs during
the
third quarter of 2005. Pursuant to a Stipulation and Order of the Court
entered July 12, 2006, the putative class actions were consolidated, certain
persons were appointed as lead plaintiffs, and a consolidated amended complaint
was filed on September 11, 2006. On September 14, 2006, the Court
consolidated the putative derivative actions, appointed certain persons to
serve
as co-lead plaintiffs, and ordered co-lead plaintiffs to file a consolidated
amended derivative complaint within thirty (30) days after a decision is
rendered on defendants’ motion to dismiss the consolidated class action. The
defendants filed the motion to dismiss the consolidated amended class action
complaint on October 26, 2006 and the initial briefings for the motion were
completed January 24, 2007. Supplemental letter briefs were completed
on July 23, 2007. On August 9, 2007,
the
court
dismissed the Consolidated Amended Complaint, without prejudice, and granted
plaintiffs leave to file an amended Consolidated Amended Complaint by September
9, 2007. The Company has no information as to whether the plaintiffs
plan to file an amended complaint with the court. The Company
believes these lawsuits are without merit and intends to continue to defend
them vigorously.
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, 2006.
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-sized 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 2 to the Company’s year-end consolidated
financial statements. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
of
America 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 principally recognized from two sources: (i) software licensing
arrangements and (ii) services and maintenance.
The
Company markets its products primarily through its direct sales force and
resellers. Software license agreements do not provide for a right of return,
and
historically, product returns have not been significant.
The
Company recognizes revenue on its software products in accordance with AICPA
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,Accounting for Performance of
Construction-Type and Certain Production-Type Contracts; and SEC Staff
Accounting Bulletin (“SAB”) 104, Revenue Recognition.
The
Company 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. The Company utilizes 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 proportion of the revenue recognized upon delivery can
vary from quarter-to-quarter depending upon the determination of vendor-specific
objective evidence (“VSOE”) of fair value of undelivered
elements. The residual value, after allocation of the fee to the
undelivered elements based on VSOE of fair value, is then allocated to the
perpetual software license for the software products being sold.
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.
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 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. During the
first quarter of 2004, the Company reduced the estimated life for its
capitalized software products from three years to two years based on current
sales trends and the rate of product release. 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.
The
purchase agreement to acquire the assets of FieldCentrix includes earnout
provisions to pay the sellers a percentage of certain future license sales
and
professional service revenue through June 30, 2007. In the quarter
ended June 30, 2007, goodwill was increased $17,500 to $1,540,000 for certain
revenues recognized in the quarter which are payable to the sellers of the
assets of FieldCentrix, Inc. For the six months ended June 30, 2007,
goodwill was increased $287,000 to $1,540,000 from $1,253,000 at December 31,
2006 for certain revenues recognized in the first six months of the year which
are payable to the sellers of the assets of FieldCentrix, Inc.
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 income available to the common
shareholders for the six months ended June 30, 2007 and a net loss for the
six
months ended June 30, 2006. Income (loss) per share is computed as
follows:
|
|
Six
Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
Numerator:
|
|
|
|
|
|
|
Net
income (loss) available to common shareholders
|
|
$ |
362,000
|
|
|
$ |
(4,314,000 |
) |
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted
average shares used to compute net income
available
to common shareholders per common share-basic
|
|
|
3,549,000
|
|
|
|
3,545,000
|
|
Effect
of dilutive stock options
|
|
|
27,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used to compute net income available to common shareholders
per common share-dilutive
|
|
|
3,576,000
|
|
|
|
3,545,000
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per share to common shareholder
|
|
$ |
.10
|
|
|
$ |
(1.22 |
) |
|
|
|
|
|
|
|
|
|
Dilutive
net income (loss) per share to common shareholder
|
|
$ |
.10
|
|
|
$ |
(1.22 |
) |
Results
of Operations
Comparison
of Three Months Ended June 30, 2007 and 2006
Revenues
Revenues
increased $1,855,000 or 42%, to $6,254,000 for the three months ended June
30,
2007 from $4,399,000 for the three months ended June 30,
2006. Software license fee revenues decreased $8,000, or 1%, from the
same period last year. Services and maintenance fees for the three
months ended June 30, 2007 amounted to $5,265,000, a 55% increase from the
same
quarter in 2006.
The
Company’s international operations contributed $2,298,000 of revenues in the
second quarter of 2007, which is an 82% increase compared to revenues generated
during the second quarter of 2006. The Company’s revenues from
international operations amounted to 37% of the total revenue for the second
quarter in 2007, compared to 29% of total revenues for the same quarter in
2006.
Software
license fee revenues decreased 1% to $989,000 in the second quarter of 2007
from
$997,000 in the second quarter of 2006. Astea Alliance license
revenues decreased $154,000 or 20%, to $615,000 in the second quarter of 2007
from $769,000 in the second quarter of 2006. The slight decrease is
primarily attributable to lower than expected sales in the United States and
Europe during the second quarter. The Company sold $297,000 of software licenses
from its FieldCentrix subsidiary in the second quarter of 2007, an increase
of
30% over the same quarter of 2006. Additionally, the company sold
$77,000 of DISPATCH-1 licenses to existing customers.
Services
and maintenance revenues increased to $5,265,000 in the second quarter of 2007
from $3,402,000 in the second quarter of 2006, an increase of
55%. Astea Alliance service and maintenance revenues increased by
$1,385,000
or 57% compared to the second quarter of 2006. The increase resulted
from increased demand for professional services in Europe, as well as expected
overall improvement due to the investment in quality, which the Company
performed in the second quarter of 2006. Furthermore, service and
maintenance revenue from our FieldCentrix subsidiary increased to $1,230,000
or
71% from $721,000 during the same period in 2006. The increase results from
projects connected to implementation services for recent license sales and
pilot
projects for new potential customers. Partially offsetting these
increases, DISPATCH-1 service and maintenance revenues decreased $71,000 to
$171,000 from $242,000 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 49% to $645,000 in the second quarter of 2007
from $434,000 in the second quarter of 2006. 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 is the amortization of capitalized software
development costs related to our most recently released version of Astea
Alliance, version 8.0, which was released during the first quarter of
2007. The software license gross margin percentage was 35% in the
second quarter of 2007 compared to 56% in the second quarter of
2006. The decline in margin resulted primarily from the increase in
costs of license as well as the small decline in license revenue.
Cost
of
services and maintenance increased 21% to $2,984,000 in the second quarter
of
2006 from $2,468,000 in the second quarter of 2006 The increase in
cost of service is due to a 9% increase in headcount compared to the same
quarter in 2006 as well as subcontracting costs in Europe. The
services and maintenance gross margin percentage was 43% in the second quarter
of 2007 compared to 27% in the second quarter of 2006. The increase
in services and maintenance gross margin was primarily due to revenues
increasing at a faster rate than costs and higher staff
utilization.
Product
Development
Product
development expense increased 32% to $1,281,000 in the second quarter of 2007
from $972,000 in the second quarter of 2006. 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
$385,000 were capitalized in the second quarter of 2007 compared to $751,000
during the same period in 2006. The decrease in capitalized software
development costs results from the release of version 8.0 of Astea Alliance
in
the first quarter of 2007, in which a greater percentage of development costs
were capitalized. Subsequent to the release, there has been an
increased effort dedicated to quality improvement, in which costs are directly
expensed instead of capitalized. Gross product development expense
was $1,666,000 in the quarter which is 3% less than the same quarter in
2006. Product development expense as a percentage of revenues
decreased to 20% in the second quarter of 2007 compared with 22% in the second
quarter of 2006. The decrease in costs relative to revenues is due to
both the overall increase in revenues and reductions in the Company’s gross
development expense compared to the same quarter in 2006.
Sales
and Marketing
Sales
and
marketing expense decreased 7% to $1,270,000 in the second quarter of 2007
from
$1,367,000 in the second quarter of 2006. The slight decrease in sales and
marketing is attributable to a reduction in payroll due to reduced
headcount. As a percentage of revenues, sales and marketing expenses
decreased to 20% in 2006 from 31% in the second quarter of
2006. The reduction results from both the increase in total
revenue and the decrease in expense.
General
and Administrative
General
and administrative expenses decreased 17% to $1,035,000 during the second
quarter of 2007 from $1,251,000 in the second quarter of 2006. The
decrease in general and administrative expenses is principally attributable
to
$200,000 associated with the insurance retention in the class action lawsuit
which is included in the 2006 results. As a percentage of revenue,
general and administrative expenses decreased to 17% in the second quarter
of
2007 from 28% in the second quarter of 2006.
Interest
Income, Net
Net
interest income decreased $19,000 to $39,000 in the second quarter of 2007
from
the second quarter of 2006. The decrease resulted primarily from a
decline in the level of investments.
International
Operations
Total
revenue from the Company’s international operations increased by 82% during the
second quarter of 2007 to $2,298,000 compared to $1,260,000 for the second
quarter of 2006. The increase in revenue from international
operations was primarily attributable to an increase in license revenue in
the
Asia/Pacific region and an increase in professional services revenue in
Europe. International operations generated a net profit of $580,000
for the second quarter ended June 30, 2007 compared to a net loss of $347,000
in
the same period in 2006.
Net
(loss)
Net
loss
for the three months ended June 30, 2007 was $922,000 compared to net loss
of
$2,035,000 for the six months ended June 30, 2006. The improvement
results from an increase in revenues of $1,855,000 slightly offset by an
increase in expense of $723,000 during the three months ended June 30, 2007
compared to the same period in 2006.
Comparison
of Six Months Ended June 30, 2007 and 2006
Recognition
of Deferred Revenue:
For
the
six months ended June 30, 2007, the Company recognized $1,591,000 of revenue
which had been deferred from a transaction that occurred with a customer in
the
U.K. in the fourth quarter of 2004 and continued through the end of
2006. This revenue is comprised of $384,000 of license revenue and
$1,207,000 in services and maintenance revenue. All costs related to
generating these revenues were expensed in the periods in which they were
incurred. The results from operations for the period include all of
the revenue discussed, but no related costs. Therefore, the gross
profit on revenue this period appears higher than other periods. Such
operating results are not typical for the Company and are not expected to
recur.
Revenues
Revenues
increased $5,861,000, or 71%, to $14,103,000 for the six months ended June
30,
2007 from $8,242,000 for the six months ended June 30, 2006. The
increase in revenues includes recognition of $384,000 of license and $1,207,000
of service and maintenance revenues that had been deferred from the years ended
December 31, 2006, 2005, and 2004 as disclosed in our Form 10K for year ended
December 31, 2006. Excluding the revenue recognized from the
U.K. customer that had been previously deferred, total revenue for the six
month
period ended June 30, 2007 would be $12,512,000, an increase of 52% over the
same period in 2006. Software license fee revenues increased
$1,584,000, or 141%, from the same period last year. Excluding the
license revenue from the customer in the U.K. which was recognized in 2007,
license revenue would be $2,322,000, an increase of 107% over the same period
in
2006. Services and maintenance revenues for the six months ended June
30, 2007 amounted to $11,397,000, a 60% increase from the same period in
2006. Excluding the service and maintenance revenue recognized from
the U.K. customer in 2007, total service and maintenance revenue is $10,190,000,
an increase of 43% over the same period in 2006.
The
Company’s international operations contributed $5,561,000 of revenues in the
first six months of 2007 compared to $2,534,000 in the first six months of
2006. This represents a 119% increase from the same period last year
and 39% of total Company revenues in the first six months of
2007. Excluding the revenue recognized in 2007 from the U.K. customer
that had been deferred from previous years, total revenue from international
operations is $3,970,000, which is an increase of 57% over the same period
in
2006. The increase in revenues is due to the increase in professional
services in Europe and increases in licenses sales in Asia Pacific.
Software
license revenues increased 141% to $2,706,000 in the first six months of 2007
from $1,122,000 in the first six months of 2006. Included in 2007
license sales is the license revenue recognized from a U.K. customer of
$384,000
that was deferred from 2004. Excluding that sale, license revenue was
$2,322,000, an increase of 107% over the first six months of
2006. The increase is primarily attributable to improved sales
execution in 2007. Astea Alliance license revenues increased $936,000
to $1,764,000 or 113% in the first six months of 2007 from $828,000 in the
first
six months of 2006. In addition, license revenue from the
FieldCentrix subsidiary increased by $571,000 or 194% to $865,000. In
addition, there were sales of $77,000 of DISPATCH-1 licenses to existing
customers. There were no DISPATCH-1 license sales during the first
six months of 2006.
Services
and maintenance revenues increased 60% to $11,397,000 in the first six months
of
2007 from $7,120,000 in the first six months of 2006. Astea Alliance service
and
maintenance revenue was $8,523,000, an increase of 65%, or $3,360,000 over
the
six months ended June 30, 2006. Part of the increase in Astea
Alliance revenues is the result of recognizing $1,207,000 in service and
maintenance revenue that had been deferred from the years 2006, 2005 and 2004
as
well as an increase in the demand for professional services in Europe. Also
contributing to the revenue increase is an additional $981,000 of revenue from
FieldCentrix which contributed $2,417,000 in the first six months of 2007
compared to $1,436,000 for the first six months of 2006. The
additional service and maintenance revenue is partially offset by a decrease
of
$144,000 in DISPATCH-1 service and maintenance revenues, which decreased to
$377,000 from $521,000 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 47% to $1,106,000 in the first six months of
2007 from $750,000 in the first six months of 2006. 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 59% in the first six months of 2007 compared to 33% in the first
six months of 2006. The improvement in gross margin was attributable to the
increase in license sales including the recognition of $384,000 of license
revenue from the deferred contract at December 31, 2004. Excluding
that contract, gross margin on license sales was 52% for the six months ended
June 30, 2007.
Cost
of
services and maintenance increased 6% to $5,631,000 in the first six months
of
2007 from $5,303,000 in the first six months of 2006. The increase in
cost of service and maintenance is primarily attributed to an increase in
headcount from last year to this year. The services and maintenance
gross margin percentage was 51% in the first six months of 2007 compared to
26%
in the first six months of 2006. The increase in services and
maintenance gross margin was primarily an increase utilization of Astea Alliance
service professionals during the first six months of 2007.
Product
Development
Product
development expense increased 36% to $2,541,000 in the first six months of
2007
from $1,865,000 in the first six months of 2006. The increase results
from the Company’s ongoing program of improving product quality and increasing
product functionality. The Company excludes the capitalization of
software costs in product development. Software development costs of
$923,000 were capitalized in the first six months of 2007 compared to $1,402,000
during the same period in 2006. The decrease results from the release
of Astea’s current version, 8.0 during the first quarter of
2007. Gross development expense was $3,464,000 during the first six
months of 2007 compared to $3,267,000 during the same period in
2006. Product development as a percentage of revenues was 18% in the
first six months of 2007 compared with 23% in the first six months of
2006. The decrease in percentage of revenues is the result of the
increased development expense.
Sales
and Marketing
Sales
and
marketing expense decreased 1% to $2,583,000 in the first six months of 2007
from $2,615,000 in the first six months of 2006. The decrease in sales and
marketing expense is attributable to a lower headcount in sales offset by a
slight increased investment in marketing programs in order to increase market
awareness of the Company’s products and domain expertise in Service Life Cycle
Management. As a percentage of revenues, sales and marketing expenses
decreased to 18% from 32% in the first six months of 2006.
General
and Administrative
General
and administrative expenses decreased 10% to $1,945,000 in the first six months
of 2007 from $2,158,000 in the first six months of 2007. The
decrease in general and administrative expenses is principally attributable
to
$200,000 associated with the insurance retention in the class action lawsuit
in
2006. As a percentage of revenues, general and administrative
expenses increased to 14% from 26% in the first six months of 2006.
Interest
Income, Net
Net
interest income decreased $70,000 to $65,000 from $135,000 in the first six
months of 2007. The decrease resulted primarily from a decrease in
the amount of the Company’s investments.
International
Operations
Total
revenue from the Company’s international operations increased by $3,027,000, or
119%, to $5,561,000 in the first six months of 2007 compared to $2,534,000
in
the first six months in 2006. This represents 39% of total Company revenues
in
the first six months of 2007. Excluding the revenue recognized in
2007 from the U.K. customer that had been deferred from previous years, total
revenue from international operations is $3,970,000, which is an increase of
57%
over the same period in 2006. The increase in revenues is due to the
increase in professional services in Europe and increases in licenses sales
in
Asia Pacific. International operations generated a net profit
of $2,327,000 for the first six months ended June 30, 2007 compared to net
loss
of $799,000 in the same period in 2006. Excluding the income
recognized from the U.K. customer that had been deferred and has no related
cost, net income from international operations was $736,000 for the six months
ended June 30, 2007, an increase of 16% over the same period last
year.
Net
income (loss)
Net
income for the six months ended June 30, 2007 was $362,000 compared to a loss
of
$4,314,000 for the six months ended June 30, 2006. The improvement in
income of $4,676,000 is a direct result of an increase in revenues of $5,861,000
of which $1,591,000 of license and service and maintenance revenues was
recognized from the U.K. contract that had been deferred for years ended
December 31, 2006, 2005 and 2004.
Liquidity
and Capital Resources
Operating
activities
Net
cash
provided by operating activities was $1,550,000 for the six months ended June
30, 2007 compared to cash used by operations of $1,816,000 for the six months
ended June 30, 2006, an improvement of $3,319,000. The improvement
results from an improvement in net income of $4,676,000 over last year, a
reduction in accounts receivable of $557,000 compared to an increase of $28,000
last year, offset by a reduction of deferred revenue of $1,098,000 compared
to
an increase of $1,565,000 last year. The increase in deferred revenue
in 2006 resulted from a license sale to a customer in which the license revenue
of $1.3 million was deferred over 18 months.
Investing
activities
The
Company used $1,770,000 for investing activities in the first six months of
2007
compared to using $1,515,000 in the first six months of 2006, an increase of
cash used of $255,000. The increase in cash used is primarily
attributable to the purchase of short term investments of $500,000, a $75,000
increase due to a release in restricted cash, a slight increase of $22,000
in
purchases of property and equipment, higher earnout payments and a decrease
of
$479,000 in software capitalization.
Financing
activities
The
Company did not generate any cash from financing activities during the six
months ended June 30, 2007, compared to $19,000 for the same period in
2006. In 2006, the cash was generated by the exercise of stock
options.
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 has not made any loans
through June 30, 2007. At June 30, 2007 the total outstanding loan
under the line of credit agreement was $0. The maturity date on the
line of credit is June 30, 2008.
At
June
30, 2007, the Company had a working capital ratio of .95:1, with cash, cash
equivalents and restricted cash of $2,975,000. 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, including in its annual report
on Form 10-K for fiscal year ended December 31, 2006. 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.
|
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 relate primarily to the Company’s investment
portfolio. The Company does not have any derivative financial
instruments in its portfolio. The Company places its investments in
instruments that meet high credit quality standards. The Company is
adverse to principal loss and ensures the safety and preservation of its
invested funds by limiting default risk, market risk and reinvestment
risk. As of June 30, 2007, 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. In addition,
the Company does not believe that a 10% change in interest rates would have
a
significant effect on its interest income.
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 ending June 30, 2007, approximately 32% 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.
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, March 31, 2007. 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
Securities and Exchange Commission’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 March 31, 2007. 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”).
In
connection with the preparation of the 2006 Form 10-K, an error in the Company’s
accounting for revenue recognition relating to a particular contract from 2004
was identified. In the fourth quarter of 2004, our U.K. subsidiary
entered into a contract with a new customer. In 2004, the Company
recognized all of the license revenue. In 2005 and the first three
quarters of 2006, the Company recognized services and maintenance revenue based
on work performed for the customer. However, the contract contained a
specified upgrade right, which was delivered in the first quarter of
2005. According to accounting requirements, a specified upgrade right
must be valued using vendor specific objective evidence (VSOE). The
Company uses the residual method for recognizing revenue on its software
licenses. In such instances, the accounting rules state that VSOE for
a specified upgrade right cannot be determined and therefore, revenue must
be
deferred until all elements of the arrangement (which would include the
specified upgrade) are delivered. Although the specified upgrade was
delivered in the first quarter of 2005, changes in the customer’s requirements
and subsequent concessions granted by the Company in October 2005 (which
included an additional specified upgrade right), further delayed our ability
to
establish that delivery and acceptance of the license had
occurred. This additional specified upgrade was delivered in the
first quarter of 2007. Accordingly all revenue, including license,
service and maintenance should have been deferred until the delivery and
acceptance of the final element. Therefore in 2006, the Company
restated its financial statements to defer all license, service and maintenance
revenue recognized in relation to this contract in 2004, 2005 and the first
three quarters of 2006, which was $610,000, $611,000 and $457,000,
respectively.
In connection with
the completion of its audit of and the issuance
of an unqualified report on the Company's consolidated financial
statements for the fiscal year ended December 31, 2006, the Company's
independent registered public accounting firm,
BDO Seidman, LLP ("BDO"), communicated to the Company's Audit Committee that
the
following matter involving the Company's internal controls and operations was
considered to be a material weakness, as defined under standards established
by
the Public Company Accounting Oversight Board:
The
Company does not maintain sufficiently detailed documentation regarding how
modifications to its standard software license terms (and the related accounting
impact, if any) comply with provisions in US GAAP, namely SOP 97-2 Software
Revenue Recognition and SOP 98-9 Modification of SOP 97-2 Software Revenue
Recognition with Respect to Certain Transactions and related practice aids
issued by the American Institute of Certified Public Accountants
(AICPA).
A
material weakness is a significant deficiency, or combination of significant
deficiencies, that results in more than a remote likelihood that a material
misstatement of the financial statements will not be prevented or detected
by
the entity’s internal control.
The
Company expanded its internal contract documentation procedures during the
accounting close of the quarter ended June 30, 2007 and continues to implement
additional documentation procedures, in order to correct the material weakness
identified. However, the Company will need to complete additional quarterly
closings in order to adequately evaluate the effectiveness of the remediations
made to its material weakness in internal controls, before it can state that
the
identified weakness has been corrected.
Item
1. Legal Proceedings
Purported
Shareholder Class Action and Derivative Lawsuit
On
and
shortly after April 6, 2006, certain purported shareholder class action and
derivative lawsuits were filed in the United States District Court for the
Eastern District of Pennsylvania against the Company and certain of its
directors and officers. The lawsuits, alleging that the Company and
certain of its officers and directors violated federal securities laws and
state
laws, related to the Company’s March 31, 2006 announcement of the accounting
restatement for overcapitalized software development costs during the first
two
quarters of 2005 and the undercapitalized software development costs during
the
third quarter of 2005. Pursuant to a Stipulation and Order of the Court
entered July 12, 2006, the putative class actions were consolidated, certain
persons were appointed as lead plaintiffs, and a consolidated amended complaint
was filed on September 11, 2006. On September 14, 2006, the Court
consolidated the putative derivative actions, appointed certain persons to
serve
as co-lead plaintiffs, and ordered co-lead plaintiffs to file a consolidated
amended derivative complaint within thirty (30) days after a decision is
rendered on defendants’ motion to dismiss the consolidated class action. The
defendants filed the motion to dismiss the consolidated amended class action
complaint on October 26, 2006 and the initial briefings for the motion were
completed January 24, 2007. Supplemental letter briefs were completed
on July 23, 2007. On August 9, 2007, the court dismissed the
Consolidated Amended Complaint, without prejudice, and granted plaintiffs leave
to file an amended Consolidated Amended Complaint by September 9,
2007. The Company has no information as to whether the plaintiffs
plan to file an amended complaint with the court. The Company
believes these lawsuits are without merit and intends to continue to defend
them vigorously.
In
addition to the other information set forth in this report, including the risk
factor set forth below, 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, 2006, 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, 2006 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.
We
are
subject to a pending civil litigation action and which, if decided against
us or
as a result of settlement, could require us to pay substantial judgments,
settlements, fines or other penalties, and we cannot predict the timing of
developments in this litigation.
The
Company is currently subject to the purported shareholder class action and
derivative lawsuit as discussed above in Item 1, which may become time
consuming, expensive and distracting from the conduct of the Company’s daily
business. The Company is unable at this time to estimate what its
ultimate liability in this matter may be, and it is possible that it will be
required to pay substantial judgments, settlements, fines or other penalties
and
incur expenses that could have a material adverse effect on the Company’s
business, results of operations and/or financial condition, and such effects
could be very significant. Although the Company maintains certain insurance
coverage, a substantial amount of any such payments may not be covered by
insurance. Expenses incurred in connection with these matters (which include
substantial fees of lawyers and other professional advisors and potential
obligations to indemnify officers and directors who may be parties to such
actions) could adversely affect the Company’s cash position. The Company
recorded a charge to the second quarter 2006 financial results in connection
with the litigation as it related to the Company’s insurance
deductible. The Company has not taken any reserves for any
potential
judgments, settlements, fines or other penalties that may arise from this
litigation. The Company cannot predict the timing of developments in respect
of
this litigation. For additional information related to the litigation, see
the
“Legal Proceedings” section of this report on Form 10-Q.
Pursuant
to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto
duly
authorized this 14th day of August 2007.
ASTEA
INTERNATIONAL INC.
|
|
|
|
|
By:
|
/s/Zack
Bergreen
|
|
Zack
Bergreen
|
|
Chief
Executive Officer
|
|
(Principal
Executive Officer)
|
|
|
By:
|
/s/Rick
Etskovitz
|
|
Rick
Etskovitz
|
|
Chief
Financial Officer
|
|
(Principal
Financial and Chief
|
|
Accounting
Officer)
|
|
|
|
|
Exhibit
Description
24