astea10q.htm
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
___________________________________________
FORM
10-Q
(Mark
One)
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[X]
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Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
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For the
quarterly period ended March
31, 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)
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Delaware
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23-2119058
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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240
Gibraltar Road, Horsham, PA
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19044
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (215)
682-2500
(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 or a smaller reporting
company. See definition of “accelerated filer”, “large accelerated
filer” and a “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check One):
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 May
9, 2008, 3,596,185 shares of the registrant’s Common Stock, par value $.01 per
share, were outstanding.
ASTEA
INTERNATIONAL INC.
FORM
10-Q
QUARTERLY
REPORT
INDEX
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Page
No. |
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| Facing
Sheet |
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1
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| Index |
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2 |
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| PART I - FINANCIAL
INFORMATION |
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Item
1.
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Unaudited
Consolidated Financial Statements
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Item
2.
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Item
3.
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Item
4T.
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PART II - OTHER
INFORMATION
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Item
1A.
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Item
6.
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Item
1. CONSOLIDATED FINANCIAL STATEMENTS
ASTEA
INTERNATIONAL INC.
CONSOLIDATED
BALANCE SHEETS
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March
31,
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December
31,
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2008
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2007
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(Unaudited)
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ASSETS
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Current
assets:
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Cash
and cash equivalents
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$ |
2,602,000 |
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$ |
1,615,000 |
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Restricted
cash
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150,000 |
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150,000 |
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Receivables,
net of reserves of $143,000 and $206,000
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7,259,000 |
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8,517,000 |
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Prepaid
expenses and other
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456,000 |
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416,000 |
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Total
current assets
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10,467,000 |
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10,698,000 |
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Property
and equipment, net
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429,000 |
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418,000 |
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Intangibles,
net
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1,369,000 |
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1,439,000 |
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Capitalized
software, net
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3,014,000 |
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3,238,000 |
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Goodwill
Other
long-term restricted cash
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1,540,000
183,000 |
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1,540,000
163,000 |
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Other
assets
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67,000 |
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64,000 |
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Total
assets
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$ |
17,069,000 |
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$ |
17,560,000 |
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
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Current
liabilities:
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Accounts
payable and accrued expenses
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$ |
3,579,000 |
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$ |
3,632,000 |
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Deferred
revenues
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6,573,000 |
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6,743,000 |
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Total
current liabilities
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10,152,000 |
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10,375,000 |
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Long-term
liabilities:
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Deferred
tax liability
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77,000 |
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77,000 |
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Commitments
and Contingencies
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Stockholders’
equity:
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Preferred
stock, $.01 par value, 5,000,000 shares
authorized,
none issued
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- |
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- |
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Common
stock, $.01 par value, 25,000,000 shares
authorized
issued 3,591,000 and 3,591,000.
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36,000 |
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36,000 |
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Additional
paid-in capital
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27,940,000 |
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27,852,000 |
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Cumulative
translation adjustment
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(634,000 |
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(703,000 |
) |
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Accumulated
deficit
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(20,294,000 |
) |
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(19,869,000 |
) |
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Less: treasury
stock at cost, 42,000 shares
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(208,000 |
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(208,000 |
) |
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Total
stockholders’ equity
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6,840,000 |
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7,108,000 |
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Total
liabilities and stockholders’ equity
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$ |
17,069,000 |
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$ |
17,560,000 |
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See
accompanying notes to the consolidated financial
statements.
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CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
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Three
Months Ended
March
31,
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2008
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2007
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Revenues:
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Software license
fees
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$ |
1,431,000 |
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$ |
2,805,000 |
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Services and
maintenance
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5,595,000 |
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6,712,000 |
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Total
revenues
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7,026,000 |
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9,517,000 |
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Costs
and expenses:
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Cost
of software license fees
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761,000 |
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461,000 |
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Cost of services and
maintenance
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3,309,000 |
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2,647,000 |
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Product
development
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1,348,000 |
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1,260,000 |
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Sales
and marketing
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1,241,000 |
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1,313,000 |
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General
and administrative
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811,000 |
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910,000 |
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Total
costs and expenses
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7,470,000 |
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6,591,000 |
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(Loss)
income from operations
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(444,000 |
) |
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2,926,000 |
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Interest
income, net
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19,000 |
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26,000 |
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(Loss)
income before income taxes
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(425,000 |
) |
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2,952,000 |
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Income
tax expense
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- |
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- |
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Net
(loss) income
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$ |
(425,000 |
) |
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$ |
2,952,000 |
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Comprehensive
(loss) income:
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Net
(loss) income
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$ |
(425,000 |
) |
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$ |
2,952,000 |
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Cumulative
translation adjustment
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69,000 |
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25,000 |
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Comprehensive
(loss) income
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$ |
(356,000 |
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$ |
2,977,000 |
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Basic
and diluted (loss) income per share
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$ |
(0.12 |
) |
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$ |
0.83 |
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Shares
outstanding used in computing basic
(loss)
income per share
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3,554,000 |
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3,549,000 |
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Shares
outstanding used in computing diluted
(loss)
income per share
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3,554,000 |
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3,576,000 |
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See
accompanying notes to the consolidated financial
statements.
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CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
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Three
Months Ended
March
31,
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2008
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Cash
flows from operating activities:
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Net
(loss) income
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$ |
(425,000 |
) |
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$ |
2,952,000 |
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Adjustments
to reconcile net (loss) income to net cash provided by
operating
activities:
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Depreciation
and amortization
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870,000 |
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533,000 |
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(Decrease)
increase in allowance for doubtful accounts
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(10,000 |
) |
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60,000 |
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Stock-based
compensation
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88,000 |
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204,000 |
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Changes
in operating assets and liabilities:
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Receivables
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1,333,000 |
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277,000 |
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Prepaid
expenses and other
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(41,000 |
) |
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(123,000 |
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Accounts
payable and accrued expenses
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(3,000 |
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254,000 |
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Deferred
revenues
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(171,000 |
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(2,391,000 |
) |
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Other
long term assets
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(2,000 |
) |
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5,000 |
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Net
cash provided by operating activities
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1,639,000 |
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1,771,000 |
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Cash
flows from investing activities:
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Purchases
of property and equipment
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(134,000 |
) |
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(56,000 |
) |
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Capitalized software
development costs
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(479,000 |
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(539,000 |
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Earnout
payment
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-
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(26,000 |
) |
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Increase
in restricted cash
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(20,000) |
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- |
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Net
cash used in investing activities
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(633,000 |
) |
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(621,000 |
) |
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Effect
of exchange rate changes on cash
|
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(19,000 |
) |
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(22,000 |
) |
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Net
increase in cash and cash equivalents
|
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|
987,000 |
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|
|
1,128,000 |
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Cash,
beginning of period
|
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|
1,615,000 |
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|
3,120,000 |
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Cash,
end of period
|
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$ |
2,602,000 |
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$ |
4,248,000 |
|
|
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|
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|
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See
accompanying notes to the consolidated financial
statements.
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Item
1. CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1.
BASIS OF
PRESENTATION
The
consolidated financial statements at March 31, 2008 and for the three month
periods ended March 31, 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. 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 latest
shareholders’ annual report (Form 10-K) and our restated Form 10-QA’s for the
quarters ended March 31, 2007, June 30, 2007 and September 30,
2007. The interim financial information presented is not necessarily
indicative of results expected for the entire year ended December 31,
2008.
2. RECENT ACCOUNTING STANDARDS
OR ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued FAS
No 157, Fair Value Measurement (“FAS 157”). FAS 157 defines fair
value, establishes a framework for measuring fair value in accordance with
generally accepted accounting principles, and expands disclosure about fair
value measurements. In February 2008, the FASB issued FASB Staff
Position (“FSP”) 157-2, Effective Date of
FASB Statement No. 157,
which delays the effective date of SFAS No. 157 for all nonfinancial assets and
nonfinancial liabilities, except for items that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least
annually). SFAS No. 157 is effective beginning January 1, 2008; FSP
157-2 delays the effective date for certain items to July 1, 2009. We
are currently assessing the potential impact that adoption of this statement may
have on our financial statements.
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities," ("SFAS No. 159"). SFAS No. 159
provides companies with an option to report selected financial assets and
liabilities at fair value and to provide additional information that will help
investors and other users of financial statements to understand more easily the
effect on earnings of a company's choice to use fair value. It also requires
companies to display the fair value of those assets and liabilities for which
the company has chosen to use fair value on the face of the balance sheet. We
adopted SFAS No. 159 on January 1, 2008. The adoption of this
Statement did not have a material effect on the Company’s consolidated Financial
Statements.
In
December 2007, the FASB issued Statement of Financial Accounting Standards
("FAS") No. 141 (revised 2007), Business Combinations ("FAS 141(R)") which
replaces FAS No.141, Business Combinations. FAS 141(R) retains the underlying
concepts of FAS 141 in that all business combinations are still required to be
accounted for at fair value under the acquisition method of accounting, but FAS
141(R) changed the method of applying the acquisition method in a number of
significant aspects. Changes prescribed by FAS 141(R) include, but are not
limited to, requirements to expense transaction costs and costs to restructure
acquired entities; record earn-outs and other forms of contingent consideration
at fair value on the acquisition date; record 100% of the net assets acquired
even if less than a 100% controlling interest is acquired; and to recognize any
excess of the fair value of net assets acquired over the purchase consideration
as a gain to the acquirer. FAS 141(R) is effective on a prospective basis for
all business combinations for which the acquisition date is on or after the
beginning of the first annual period subsequent to December 15, 2008, with the
exception of the accounting for valuation allowances on deferred taxes and
acquired tax contingencies. FAS 141(R) amends FAS 109 such that adjustments made
to valuation allowances on deferred taxes and acquired tax contingencies
associated with acquisitions that closed prior to the effective date of FAS
141(R) would also apply the provisions of FAS 141(R). Early adoption is not
allowed. We are currently evaluating the effects, if any, that FAS 141(R) may
have on our consolidated financial statements.
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160, Noncontrolling Interests in Consolidated Financial Statements ("FAS
160"). FAS 160 amends Accounting Research Bulletin 51,
Consolidated Financial Statements, to establish accounting and reporting
standards for the noncontrolling (minority) interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in
a subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements and requires
consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the noncontrolling interest. FAS 160 also
clarifies that all of those transactions resulting in a change in ownership of a
subsidiary are equity transactions if the parent retains its controlling
financial interest in the subsidiary. FAS 160 requires expanded disclosures in
the consolidated financial statements that clearly identify and distinguish
between the interests of the parent's owners and the interests of the
noncontrolling owners of a subsidiary. FAS 160 is effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. Earlier adoption is prohibited. FAS 160 shall be
applied prospectively as of the beginning of the fiscal year in which this
Statement is initially applied, except for the presentation and disclosure
requirements. The presentation and disclosure requirements shall be applied
retrospectively for all periods presented. We are currently evaluating the
effects, if any, that FAS 160 may have on our consolidated financial
statements.
3. INCOME
TAX
The
Company has 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 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 first
quarter 2008, there were no interest or penalties related to the settlement of
audits.
At March
31, 2008, 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), “Share Based Payments”, using the modified prospective transition
method. Under this method, compensation costs recognized in the
first quarter of 2007 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
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
March 31, 2008, the total unrecognized compensation cost related to non-vested
options amounted to $768,000, which is expected to be recognized over the
options’ average remaining vesting period of 1.69 years. No income
tax benefit was realized by the Company in the year quarter ended March 31,
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 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 quarters ended March 31, 2008 and
2007.
|
|
Three
Months Ended
|
|
|
March
31, 2007
|
|
Risk-free
interest rate
|
4.51%
|
|
Expected
life (in years)
|
6.15
|
|
Volatility
|
106%
|
|
Expected
dividends
|
-
|
|
Forfeiture
rate
|
19.45%
|
There
were no options granted during the period ended March 31, 2008. The
weighted-average fair value of options granted during the period ended March 31,
2007 was estimated as $4.42.
Activity
under the Company’s stock option plans is as follows:
| |
|
OPTIONS
OUTSTANDING
|
| |
|
Shares
|
|
Wtd.
Avg.
Exercise
Price
|
|
Balance,
December 31, 2007
|
|
484,000
|
|
$
5.91
|
|
Authorized
|
|
-
|
|
-
|
|
Granted
|
|
-
|
|
-
|
|
Cancelled
|
|
(3,000)
|
|
6.91
|
|
Exercised
|
|
-
|
|
-
|
|
Expired
|
|
(6,000)
|
|
8.16
|
|
Balance,
March 31, 2008
|
|
475,000
|
|
$
5.88
|
The
following table summarizes outstanding options that are vested and expected to
vest and options under the Company’s stock option plans as of March 31,
2008.
|
|
Number
of Shares
|
Weighted
Average
Exercise
Price Per
Share
|
Weighted
Average
Remaining
Contractual
Term
(in years)
|
Aggregate
Intrinsic
Value
|
|
Outstanding
Options
|
475,000
|
$5.88
|
7.73
|
$25,350
|
|
|
|
|
|
|
|
Ending
Vested and Expected to Vest
|
350,000
|
$5.99
|
7.30
|
$24,975
|
|
|
|
|
|
|
|
Options
Exercisable
|
181,000
|
$6.49
|
5.76
|
$23,790
|
|
|
|
|
|
|
5. (LOSS) 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 March 31, 2008 and a net income for the
three months ended March 31, 2007. Income (loss) per share is
computed as follows:
|
|
|
Three
Months Ended March 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net
(loss) income available to common shareholders
|
|
$ |
(425,000 |
) |
|
$ |
2,952,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used to compute net income
available
to common shareholders per common share-basic
|
|
|
3,554,000 |
|
|
|
3,545,000 |
|
|
Effect
of dilutive stock options
|
|
|
- |
|
|
|
31,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used to compute net income available
to
common shareholders per common share-dilutive
|
|
|
3,554,000 |
|
|
|
3,576,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net (loss) income per share to common shareholder
|
|
$ |
(.12 |
) |
|
$ |
0.83 |
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive
net (loss) income per share to common shareholder
|
|
$ |
(.12 |
) |
|
$ |
0.83 |
|
6. MAJOR
CUSTOMERS
In the
first quarter of 2008, one customer accounted for 14% of the Company’s revenue
and another accounted for 12% of the Company’s revenue. In the first
quarter of 2007, one customer represented 13% of the Company’s revenues due to
the revenue recognition of a contract deferred from the years ended
December 31, 2006 and 2005 and a second customer
represented 17% of the Company’s revenues due to the recognition of revenue
deferred from the years ended December 31, 2006, 2005 and 2004 as disclosed in
our Form 10K for the year ended December 31, 2007 and additionally, from
revenues generated from the same customers in the first quarter of
2007.
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:
|
For
the Three Months Ended,
|
|
2008
|
|
2007
|
|
Revenues:
|
|
|
|
|
|
Software license fees
|
|
|
|
|
|
United States
|
|
|
|
|
|
Domestic
|
|
$ |
1,431,000 |
|
$ |
2,231,000 |
|
Export
|
|
|
- |
|
|
- |
|
Total United States
|
|
|
|
|
|
|
|
software
license fees
|
|
|
1,431,000 |
|
|
2,231,000 |
|
|
|
|
|
|
|
|
|
United Kingdom
|
|
|
- |
|
|
525,000 |
|
Other foreign
|
|
|
- |
|
|
49,000 |
|
Total foreign software
|
|
|
|
|
|
|
|
license fees
|
|
|
- |
|
|
574,000 |
|
Total software license fees
|
|
|
1,431,000 |
|
|
2,805,000 |
|
|
|
|
|
|
|
|
|
Services
and maintenance
|
|
|
|
|
|
|
|
United States
|
|
|
|
|
|
|
|
Domestic
|
|
|
4,025,000 |
|
|
3,934,000 |
|
Export
|
|
|
61,000 |
|
|
89,000 |
|
Total United States service
|
|
|
|
|
|
|
|
and maintenance revenue
|
|
|
4,086,000 |
|
|
4,023,000 |
|
|
|
|
|
|
|
|
|
United Kingdom
|
|
|
906,000 |
|
|
2,080,000 |
|
Other foreign
|
|
|
603,000 |
|
|
609,000 |
|
Total foreign service and
|
|
|
|
|
|
|
|
maintenance revenue
|
|
|
1,509,000 |
|
|
2,689,000 |
|
Total service and
|
|
|
|
|
|
|
|
maintenance revenue
|
|
|
5,595,000 |
|
|
6,712,000 |
|
Total
revenue
|
|
$ |
7,026,000 |
|
$ |
9,517,000 |
|
Net
(loss)income from operations
|
|
|
|
|
|
|
|
United States
|
|
$ |
(304,000 |
)
|
$ |
1,206,000 |
|
United Kingdom
|
|
|
(113,000 |
)
|
|
1,686,000 |
|
Other foreign
|
|
|
(8,000 |
) |
|
60,000 |
|
Net
(loss) income
|
|
$ |
(425,000 |
)
|
$ |
2,952,000 |
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, 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. 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 principally recognized 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 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.
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 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.
For the
three months ended March 31, 2008 and 2007, the Company recognized $7,026,000
and $9,517,000, respectively, of revenue related to software license fees and
service and maintenance. Included in revenue for three months ended
March 31, 2008 and 2007 was $802,000 and $1,668,000, 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 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.
Income
Taxes
On
January 1, 2007, the Company implemented the provisions of 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 months ended
March 31, 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,” 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 March 31, 2008 and a net income for the
three months ended March 31, 2007. (Loss) income per share is
computed as follows:
|
|
|
Three
Months Ended March 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net
(loss) income available to common shareholders
|
|
$ |
(425,000 |
) |
|
$ |
2,952,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used to compute net income
available
to common shareholders per common share-basic
|
|
|
3,554,000 |
|
|
|
3,545,000 |
|
|
Effect
of dilutive stock options
|
|
|
- |
|
|
|
31,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used to compute net income available
to
common shareholders per common share-dilutive
|
|
|
3,554,000 |
|
|
|
3,576,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net (loss) income per share to common
shareholder
|
|
$ |
(.12 |
) |
|
$ |
0.83 |
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive
net (loss) income per share to common shareholder
|
|
$ |
(.12 |
) |
|
$ |
0.83 |
|
Results of
Operations
Comparison
of Three Months Ended March 31, 2008 and 2007
Revenues
Revenues
decreased $2,491,000, or 26%, to $7,026,000 for the three months ended March 31,
2008 from $9,517,000 for the three months ended March 31, 2007. The
decrease in revenue is the net result of recognizing $3,259,000 of revenue in
the quarter ending March 31, 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
quarter. Partially offsetting this decrease was the recognition of
$802,000 in license, service and maintenance revenues in the quarter ended March
31, 2008 that had been deferred from a contract in the third quarter of 2007 due
to a specified upgrade right contained in an implementation
agreement. The recognition of previously deferred revenue consists of
license revenue of $674,000 in March 31, 2008 and $1,472,000 in the quarter
March 31, 2007. The recognition of previously deferred service and
maintenance revenues of $128,000 in the quarter ended March 31, 2008 and
$1,787,000 in the quarter ended March 31, 2007. Software license fee
revenues decreased 49%, from the same period last year. Services and
maintenance fees for the three months ended March 31, 2008 amounted to
$5,595,000, a 17% decrease from the same quarter in 2007. Excluding
the recognition of previously deferred service and maintenance revenue in the
quarter ended March 31, 2007, the increase in service and maintenance revenue
over the same quarter in 2007 was $670,000 or 14%.
The
Company’s international operations contributed $1,509,000 of revenues in the
first quarter of 2008 compared to $3,263,000 in the first quarter of
2007. This represents a 54% decrease from the same period last year
and 21% of total revenues in the first quarter 2008. The decrease in
international revenues is principally due to the recognition of a total of
$1,591,000 in license, service and maintenance revenue from the U.K. in the
quarter ended March 31, 2007 that had been deferred in the years ended December
31, 2006, 2005 and 2004. Excluding that revenue, international
revenues declined 10% in the quarter ended March 31, 2008 from the same quarter
in 2007. The principal reason is the lack of license sales in
2008.
Software
license fee revenues decreased $1,374,000 to $1,431,000 in the first quarter of
2008 from $2,805,000 in the first quarter of 2007. Astea Alliance
license revenues decreased $1,199,000 to $1,039,000 in the first quarter of 2008
from $2,238,000 in the first quarter of 2007. The decrease in Astea
Alliance license revenue includes the recognition of $1,472,000 during the
quarter ending March 31, 2007 from the deferral of license revenues from prior
years. The Company sold $392,000 of software licenses from its’
FieldCentrix subsidiary compared to $567,000 in the same period of
2007. The were no license revenues from DISPATCH-1 sales in either
year.
Services
and maintenance revenues decreased $1,117,000 to $5,595,000 in the first quarter
of 2008 from $6,712,000 in the first quarter of 2007. Astea Alliance
service and maintenance revenues decreased $1,028,000 to $4,252,000 compared to
$5,280,000 in the first quarter of 2007. The decrease in Astea
Alliance revenues is the result of recognizing $1,787,000 in service and
maintenance revenue in the quarter ending March 31, 2007 that had been deferred
from the years 2006, 2005 and 2004. Excluding that revenue, service
and maintenance revenue from Astea Alliance increased $759,000 or 22% from the
same quarter last year. This was primarily due to increased demand
for services in the U.S. Service and maintenance revenues from our
FieldCentrix subsidiary was essentially flat compared to the same quarter last
year, increasing by only $7,000 or 1%. Service and maintenance
revenue from DISPATCH-1 declined by $99,000 to $106,000 for the quarter ending
March 31, 2008. The decline in service and maintenance revenue for
DISPATCH-1 was expected as the Company had discontinued development of
DISPATCH-1 at the end of 1999.
Costs
of Revenues
Cost of
software license fees increased 65% to $761,000 in the first quarter of 2008
from $461,000 in the first quarter of 2007. Included in the cost of
software license fees is the fixed cost of capitalized software amortization and
the amortization of software acquired from FieldCentrix. Contributing
to the increase in cost of license fees is an increase of $341,000 in
amortization of capitalized software. The increase in cost of
revenues results from the release of version 8.0 during the first quarter of
2007 and the release of subsequent enhancements which are all part of
amortization for the period. The resultant amortization was the
result of 2 years of development effort and was not included in 2007 cost of
software license fees. The software licenses gross margin percentage
was 47% in the first quarter of 2008 compared to 84% in the first quarter of
2007. The large decrease in gross margin was attributable to both the increased
amortization of capitalized software costs and the decrease in license revenue
in the quarter ending March 31, 2008 compared to the same quarter in
2007.
Cost of
services and maintenance increased 25% to $3,309,000 in the first quarter of
2008 from $2,647,000 in the first quarter of 2007. The increase is
principally attributable to an increase in headcount in the U.S. which is needed
to meet the growing demand for professional services. Increases in
the Company’s cost of services for foreign operations are the result of
translating strengthening currencies relative to the U.S. dollar. The
services and maintenance gross margin percentage was 41% in the first quarter of
2008 compared to 61% in the first quarter of 2007. The decrease in
service and maintenance gross margin results from the recognition of $1,787,000
in revenue in the quarter ending March 31 2007, that had been deferred from the
years ended December 31, 2006, 2005 and 2004, with the related costs charged
against operations in the years they were incurred. Excluding the
revenues which were recognized from prior year deferrals, the gross profit
margin for the quarter ending March 31, 2007 would have been 46%.
Product
Development
Product
development expense increased 7% to $1,348,000 in the first quarter of 2008 from
$1,260,000 in the first quarter of 2007. The increase results from the Company’s
ongoing program of improving product quality. The Company excludes
the capitalization of software development costs from product
development. Development costs of $479,000 were capitalized in the
first quarter of 2008 compared to $539,000 during the same period in
2007. Gross development expenses were $1,827,000 for the
first quarter of 2008 compared to $1,799,000 for the first quarter of 2007,
essentially unchanged from year to year. Product development as a
percentage of revenues was 19% in the first quarter of 2008 compared with 13% in
the first quarter of 2007. Product development as a percentage of
revenues without the recognition of the $3,259,000 of revenue previously
deferred from contracts with undelivered elements from prior years was 20% in
the first quarter of 2007, similar to the percentage in 2008.
Sales
and Marketing
Sales and
marketing expense decreased by 5% to $1,241,000 in the first quarter of 2008
from $1,313,000 in the first quarter of 2007. The decrease is
attributable to a decrease in commissions due to lower license
revenues. As a percentage of revenues, sales and marketing
expenses increased to 18% from 14% in the first quarter of 2007, due to
significantly higher revenues in 2007. Sales and marketing as a
percentage of revenues without the recognition of the $3,259,000 of revenue
previously deferred from contracts with undelivered elements from prior years
was 21% for the first quarter of 2007.
General
and Administrative
General
and administrative expense of $811,000 in the first quarter of 2008 was $99,000
lower than the same quarter in 2007. The decrease is primarily the
result of lower professional fees. As a percentage of revenues,
general and administrative expenses increased slightly to 12% from 10% in the
first quarter of 2007. General and administrative expenses as a
percentage of revenues without the recognition of $3,259,000 of
revenue previously deferred from contracts with undelivered elements from prior
years was 15% in the first quarter of 2007.
Interest
Income, Net
Net
interest income decreased $7,000 from $26,000 in the first quarter of 2007 to
$19,000 in the first quarter of 2008. The decrease resulted primarily
from a decrease in the level of investments.
Net
(Loss) Income
The
Company generated a net loss of $425,000 for the three months ended March 31,
2008 compared to net income of $2,952,000 in 2007. The decrease in
the net income of $3,377,000 is the result of a decrease in revenues of
$2,491,000 or 26%, and an increase in operating costs of $879,000 or
13%.
International
Operations
Total
revenue from the Company’s international operations decreased by $1,754,000 to
$1,509,000 in the first quarter of 2008 from $3,263,000 in the same quarter in
2007. The decrease
in revenue from international operations is principally due to the recognition
of $1,591,000 in license, service and maintenance revenues in the quarter ending
March 31, 2007 from a particular contract in our U.K. subsidiary that had been
deferred in the years ended December 31, 2006, 2005 and 2004 as well as an
decrease in license revenues. International operations generated a
net loss of $121,000 for the quarter ended March 31, 2008 compared to net income
of $1,746,000 in the same quarter in 2007. Net income for
international operations, excluding the $1,591,000 of license and service and
maintenance revenues previously deferred, would have been $155,000 for the
quarter ended March 31, 2007. The decline in income is principally
due to the lack of international software license sales in the first quarter of
this year compared to the same period in 2007.
Liquidity
and Capital Resources
Operating
Activities
Net cash
generated by operating activities was $1,639,000 for the three months ended
March 31, 2008 compared to cash generated by operations of $1,771,000 for the
three months ended March 31, 2007, a net decrease of $132,000. The
decrease in cash generated by operations was primarily attributable to the
decline of $3,377,000 in net loss for the period compared to the net income for
the same period last year, a decrease in accounts payable of $3,000 compared to
an increase of $254,000 for the same period in 2007, offset by an increase of
$151,000 in the non cash charges, a reduction in accounts receivable of
$1,056,000 more than in the same period last year and a reduction of deferred
revenues of only $171,000 compared to $2,391,000 for the same period last
year. The large decrease in deferred revenue in the quarter ending
March 31, 2007 resulted from the recognition of $3,259,000 in deferred revenue
from the years ended December 31, 2006, 2005 and 2004.
Investing
Activities
The
Company used $632,000 for investing activities in the first three months of 2008
compared to using $621,000 in the first three months of 2007. The
slight increase in cash used is attributable to increased capital expenditures
partially offset by reduced capitalized software development costs in the first
quarter of 2008.
Financing
Activities
The
Company generated no cash from financing activities for the first three 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
three months ended March 31, 2008 and repaid the amount within 10
days. At March 31, 2008 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 March
31, 2008, the Company had a working capital ratio of 1.03:1, with cash and
restricted cash of $2,752,000. 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 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:
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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.
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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.
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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 March 31, 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.
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 March 31, 2008, approximately 21% 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, 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
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, 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”).
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Under the supervision and with the
participation of our management, including our chief executive officer and chief
financial officer, we evaluated the effectiveness and design and operation of
our internal control over financial reporting based on the framework in Internal
Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”).
In
connection with management’s assessment of our internal control over financial
reporting described above, management has identified that as of March 31, 2008,
our disclosure controls and procedures did not adequately provide for effective
controls over the accounting for revenue recognition and stock based
compensation. Specifically, our disclosure controls and procedures
did not adequately provide for effective control over the review and monitoring
of revenue recognition for certain license sale contracts that included
undelivered elements. As a result of this material weakness, the
Company restated its Form 10-K for the years ending December 31, 2006 and
2005. In addition, the Company must restate its quarterly
consolidated financial statements for the quarters ended March 31, 2006, June
30, 2006, September 30, 2006, December 31, 2006, March 31, 2007, June 30, 2007
and September 30, 2007.
In
addition, our disclosure controls and procedures did not adequately provide for
effective controls over the accounting for stock based
compensation. Specifically, the Company did not correctly estimate
certain variables related to the calculation of options in accordance with SFAS
123R, which resulted in a significant deficiency. Accounting
adjustments were recorded in the Company’s financial results for 2007 to correct
for the improper estimate. A similar significant deficiency was also
identified during 2006. According to the rules of COSO, if the same
item is identified as a significant deficiency in two consecutive years, it must
be considered as a material weakness.
Because of the material weaknesses
identified, management has concluded that our internal control over financial
reporting and procedures did not adequately provide for effective internal
control over financial reporting as of December 31, 2007, based on criteria in
the COSO framework.
The
Company expanded its internal procedures related to
contracts, proposals sent to customers and implementation plans in
order to correct the material weakness related to revenue
recognition. In addition, the Company implemented internal training
programs for its operations team to fully understand the rules relating to
software revenue recognition. Furthermore, the Company engaged an
outside consulting company to provide assistance in applying the rules related
to software revenue recognition in accordance with generally accepted accounting
principles.
The
Company also expanded its procedures related to accounting for stock based
compensation. Through expanded training in the estimation for the
variables contained in the calculation related to stock based compensation the
Company expects to fully comply with the standards set by FAS 123R.
However,
the Company will need to complete additional future quarterly closings in order
to adequately evaluate the effectiveness of the remediations made to its
material weaknesses in internal controls before it can state that the identified
weaknesses have been corrected.
PART II - OTHER
INFORMATION
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.
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 this 15th
day of May 2008.
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ASTEA
INTERNATIONAL INC. |
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By: |
/s/Zack B. Bergreen
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Zack
B. Bergreen
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Chief
Executive Officer
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(Principal
Executive Officer)
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By: |
/s/Rick Etskovitz
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Rick
Etskovitz
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Chief
Financial Officer
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(Principal
Financial and Chief
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Accounting
Officer)
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