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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934. For The Fiscal Year Ended: December 31, 2003
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities \
Exchange Act of 1934. For the transition period from to
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Commission File Number: 0-26330
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ASTEA INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Delaware 23-2119058
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
240 Gibraltar Road, Horsham, Pennsylvania 19044
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 682-2500
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ _ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes___ No X
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of June 30, 2003 (based on the closing price of $3.10 as quoted by
Nasdaq National Market as of such date) was approximately $4,981,010.
As of March 24, 2004, 2,964,972 shares of the registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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TABLE OF CONTENTS
Page
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PART I
Item 1. Business 3
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II
Item 5. Market for Registrant's Common Equity and Related 16
Stockholder Matters
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial 18
Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 35
Item 8. Financial Statements and Supplementary Data 36
Item 9. Changes in and Disagreements with Accountants on 54
Accounting and Financial Disclosure
Item 9A. Controls and Procedures 54
PART III
Item 10. Directors and Officers of the Registrant 55
Item 11. Executive Compensation 58
Item 12. Security Ownership of Certain Beneficial Owners and 61
Management
Item 13. Certain Relationships and Related Transactions 62
Item 14. Principal Accountant Fees and Services 62
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports 63
on Form 8-K
Signature Page 66
Consent of Independent Certified Public Accountant 67
2
PART I
Item 1. Business.
General
Astea International Inc. and subsidiaries (collectively "Astea" or the
"Company") develops, markets and supports service management solutions which are
licensed to companies that sell and service equipment, and/or sell and deliver
professional services. Companies invest in Astea's software and services to
automate enterprise business processes for purposes of revenue enhancement, cost
containment, operational efficiency and improving management's awareness of
operational performance through analytical reporting. Customers' return on
investment from Astea solutions is achieved through improved management of
information, people and cash flows, thereby increasing competitive advantages,
top-line revenue and profitability.
Astea solutions are used in industries such as information technology,
medical devices and diagnostic systems, industrial controls and instrumentation,
retail systems, office automation, imaging systems, facilities management,
telecommunications and other industries with equipment sales and service
requirements. Astea's focus on enterprise solutions for organizations that sell
and deliver services is a unique industry differentiator that draws upon the
Company's industry experience and core expertise.
Founded in 1979, Astea is known throughout the industry, largely from
its history as a dominant provider of software solutions for field service
management and depot repair. Astea has since expanded its product portfolio to
also include integrated management applications for sales and marketing,
multi-channel customer contact centers, and professional services automation.
In 2002, Astea began commercial release of its latest Astea Alliance
service management suite version 6 products ("Astea Alliance 6") that adapt the
Company's domain expertise and integrated business process functionality to the
Microsoft.NET Web Services framework. Astea solutions include a variety of Web
portal and wireless remote-access capabilities to integrate mobile employees,
contractors, business partners and customers into an enterprise's consolidated,
real-time management of workforce, assets and business relationships.
Astea's software has been licensed to approximately 580 companies
worldwide. Customers range from mid-size organizations to large, multinational
corporations with geographically dispersed locations around the globe. The
Company markets and supports its products through a worldwide network of direct
and indirect sales and services offices with corporate headquarters in the
United States and regional headquarters in the United Kingdom and Australia.
Sales partners include distributors (value-added resellers, system integrators
and sales agents) and OEM partners.
In addition to its own product development that is conducted at Company
facilities in the United States and Israel, Astea participates in partnerships
with complementary technology companies in order to reduce time-to-market with
new product capabilities and continually increase its value proposition to
customers. The Company's product strategies are developed from the collective
feedback from customers, industry consultants, technology partners and sales
partners, in addition to its internal product management and development. Astea
also works with its active user community who closely advises and participates
in ongoing product development efforts.
Astea provides customers with an array of professional consulting,
training and customer support services to implement its products and integrate
them with other corporate systems such as back-office financial and ERP
applications. Astea also maintains and supports its software over its installed
life cycle. The Company's experience and domain expertise in service and sales
management, distribution, logistics, finance,
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mobile technologies, internet applications and enterprise systems integration
are made available to customers during their assessments of where and how their
business processes can be improved.
The Company's sales and marketing efforts are almost exclusively
focused on new software licensing and support services for its latest generation
of Astea Alliance products. Marketing and sales of licenses and services related
to the Company's legacy system DISPATCH-1(R) products are limited to existing
DISPATCH-1 customers.
Current Product Offerings
Astea Alliance
[GRAPHIC OMMITTED]
Astea Alliance is a service management offering consisting of software
applications and services. The software product consists of a series of
applications. The offering has been developed as a global solution from the
ground up with multi-lingual and multi-currency capabilities.
Astea Alliance has been designed to address 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 & Marketing. Astea extends its application
suite with portal, analytics and mobile solutions. In order to ensure customer
satisfaction and quick return on investment, Astea also offers infrastructure
tools and services.
Astea Alliance is licensed to companies that sell and/or service
capital equipment or mission critical assets. Companies invest in Astea's
software and services to automate service processes for cost containment,
operational efficiency, and management visibility. Customers' return on
investment is achieved through improved management of customer information,
people and cash flows, thereby increasing competitive advantage, top-line
revenues and profitability. Astea solutions are used in industries such as
information technology, medical devices and diagnostics systems, industrial
controls and instrumentation, retail systems, office automation, imaging
systems, facilities management, telecommunications and related industries with
equipments sales and service requirements.
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The latest version software, Astea Alliance 6.7, is engineered with a
new system architecture for Web-based deployment using the Microsoft.NET
development platform. Prior to this, products were engineered for Windows
client/server technology and marketed as AllianceEnterprise. AllianceEnterprise
products included re-engineered and enhanced versions of service modules that
were initially introduced as ServiceAlliance(R) in 1997, and a re-engineered and
enhanced version of the Company's sales force automation product that was
initially introduced as SalesAlliance in 1999.
ServiceAlliance and SalesAlliance, the earliest versions of Astea
Alliance solutions, were the Company's initial new technology offerings
following a long and highly successful history with its DISPATCH-1 legacy system
solutions. Astea Alliance solutions have been licensed to over 200 customers
worldwide. Market acceptance of Astea Alliance by global and regional companies
increased in 2002 and the Company is aggressively pursuing opportunities for
larger system implementations with mid-size to large enterprises on a worldwide
basis.
The current Astea Alliance offering consists of:
o 7 Applications
o Application Extensions
o Tools
o Services
Astea Alliance Applications:
Alliance Contact Center
Alliance Depot Repair
Alliance Field Service
Alliance Logistics
Alliance Marketing
Alliance Professional Services
Alliance Sales
Astea Alliance Application Extensions:
Alliance Reports
Alliance Analytics
Alliance Customer Portal
Alliance Mobile
Astea Alliance Tools:
Alliance Global Database
Alliance Studio
Alliance Links
Astea Alliance Services:
Alliance Consulting
Alliance Customer Support
Alliance Education & Training
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Alliance Contact Center
The Contact Center application supports call centers, information
desks, service hotlines, inside sales and telemarketing activities. Integrated,
multi-channel, inbound/outbound capabilities enable customer service
representatives to serve prospects and customers in their media of choice,
including phone, fax, e-mail or Internet. Integrated customer self-service
portals with automated email response, automated call escalation, and interface
to Computer Telephony Integration (CTI) systems help streamline customer
interaction processes. Work scheduling and demand balancing optimize staff
utilization. Employee personal portals with access to comprehensive real-time
customer data and decision support tools including intelligent knowledge
management and scripting for problem resolution and inside sales drive higher
staff productivity. Aside from more efficient customer service and higher levels
of customer satisfaction, the objectives of Astea Contact Center software are to
reduce overhead through improved first-call resolution rates and shorter
service-call handling times.
Alliance Depot Repair
Depot Repair automates tracking of assets through equipment calibration
and repair chains, including merchandise ownership, location, repair status and
warranty coverage. Objectives are to gain real-time visibility of all repair
chain activities, ensure compliance with warranty and contractual agreements,
respond to customer inquiries with up-to-the-minute repair status, collect and
analyze repair statistics for product design improvement, and reduce overhead
such as inventory carrying costs. Applications support in-house, subcontractor
and vendor calibration and repair; customer and vendor exchanges and advance
exchanges; equipment on loan; change of ownership; merchandise shipments, cross
shipments and pickups; consolidated repair orders; and, storage and
refurbishment programs. Integration with other Astea Alliance modules allows
repair orders and repair status queries to be initiated from customer contact
centers, field service, field sales and warehouses as well as the repair depot.
Alliance Field Service
Astea Field Service delivers a robust set of automated capabilities to
improve management of field service activities and for field service
representatives to more efficiently complete and document assignments, manage
vehicle assets, capture expenses and generate revenue through add-on sales
during a customer contact. Applications alert dispatchers to contractual minimum
response times and expedite coordination of field force skills matching,
scheduling, dispatch and repair parts logistics. Mobile tools enable field
forces to work electronically for receiving, documenting and reporting
assignments, eliminating manual procedures, service delays and paper reporting.
The software supports all field service categories including equipment
installations, break/fix, planned maintenance and meter reading. Applications
can also be integrated with equipment diagnostic systems for fully automated
solutions that initiate and prioritize service requests and dispatch assignments
to field employees' PDAs without human intervention.
Alliance Logistics
Logistics enables equipment service organizations to control inventory
costs, manage assets and implement proactive service management strategies.
Logistics eliminates overstocking and dramatically reduces costs associated with
storing, depreciating, and insuring inventory. It allows for parts and tools
management for effective field service delivery and SLA compliance. Improved
cost management improves cash flow by streamlining and shortening the cycles
from inventory to usage to billing. Lower logistics costs open opportunities to
recognize higher margins on products and services. Key areas to apply Alliance
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Logistics include asset management, field service parts/tools management, demand
fulfillment, and sales fulfilment.
Alliance Marketing
Campaigns coordinates the planning, execution and analysis of marketing
campaigns. The software supports budgeting and tracking complete multi-channel
campaigns that integrate advertising, direct mail, email marketing,
telemarketing, etc. Electronic campaigns such as email and telemarketing are
further supported with list management, script development and user interfaces
for campaign execution. Marketing managers can define campaign offerings such as
products and services to be sold, pricing and discount tolerances; assign
campaign attributes; attach campaign documentation such as descriptive text,
images, slogans and lead conversion literature; and monitor response. The big
picture view enables managers to assess synergies each channel delivers to an
overall campaign and adjust channel details such as prospect lists, scripts,
budgets or offering incentives to elicit best results. Integration with other
Astea Alliance modules enables equipment and service organizations to leverage
abundant customer information for identifying new potential revenue sources and
marketing to maximize customer loyalty and base sales opportunities.
Alliance Professional Services
Professional Services supports management of knowledge workers, such as
deployed by professional services organizations and internal service departments
of large organizations. Functionality focuses on planning, deploying and billing
service engagements that can extend for days, weeks, months and years.
Applications improve resource planning and allocation, workflow management,
consultant time and expense reporting, subcontractor and vendor invoice
processing, customer billing, and visibility of service engagements. Integration
with other Astea Alliance modules delivers an end-to-end solution to market,
sell, manage and bill professional services. Capabilities to share sales,
service, project, and post-project field service data across the enterprise
enable professional services organizations to operate with less overhead,
improved cash flow, higher profitability, and more competitive bidding.
Alliance Sales
Sales consolidates and streamlines enterprise sales processes, from
quote generation through order processing, at all points of customer contact
including field sales, inside sales, contact center sales and field service
sales. Lead-to-close sales process capabilities include integration with Astea
Alliance marketing, customer support and field service applications, leveraging
all enterprise knowledge pools to increase sales opportunities, margins and
close rates. Consolidated views of sales and service data also provide a clearer
understanding of enterprise operations to drive strategic business decisions.
Sales force automation application automates business rules and practices such
as enterprise-defined sales methodologies, sales pipeline management, territory
management, contact and opportunity management, forecasting, collaborative team
selling and literature fulfillment. Other applications prompt customer support
and service staff to up-sell and cross-sell during contact with customers.
Astea Alliance Application Extensions
Alliance Analytics
For proactive service management, Alliance Analytics provides highly
visual, real-time analysis of business performance, focusing on Key Performance
Indicators - a tool that ensures businesses truly understand customer behavior.
Alliance Analytics enables the viewing of information for the entire enterprise,
increasing revenues and identifying new business opportunities. It helps 'drill
down' and focus on the true value of the captured customer information, with
views of actionable data at both departmental and enterprise-
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wide levels. The graphical representation of individual data is available for
Field Service, Contact Center, Depot Repair, and Sales and Marketing. This
affords businesses the opportunity to focus on critical information that is
fundamental to the ongoing attainment of outstanding customer service
management. Alliance Analytics has been designed to ensure that users of all
kinds have immediate access to crucial information whenever it's needed. In the
boardroom, at agent level, or even for your customers, this tool effortlessly
allows the viewing of performance data such as performance against service level
agreements, contract profitability, product failure rate, repair turn around
times, customer satisfaction and engineer efficiency. Reports allow businesses
to see how many orders have met their contractual service ETA and how many
failed, which will help to understand customer satisfaction. Workloads show the
available working hours at a specific location in contrast with the demand for
workforce planning and optimization.
Alliance Customer Portal
The customer portal supports unattended e-business transactions for
customer self-service and self-sales. Alliance Customer Portal empowers
customers and lessens dependence on sales and service staff to conduct
transactions that can be performed over the Internet. It reduces routine voice
and fax calls to customer contact centers, freeing lines for customers whose
critical needs do require assistance from a service representative. It also
provides another channel to promote and sell more products and services to an
existing customer base. The customer portal can delay or eliminate needs for
contact center expansion and associated increases in facility, equipment and
staffing costs.
Alliance Mobile
Alliance Mobile enables customers to match Astea Alliance mobile access
to field sales and service needs. Untethered wireless applications with
synchronized client databases are provided for laptops and Pocket PC handheld
devices. Direct-connect, real-time wireless text messaging is provided for
two-way pagers and capable mobile smart phones. The mobile connectivity
integrates field sales and service activity with automated front-office
processes and eliminates the time, costs, procedural delays and errors of paper
reporting. Benefits include reduced field administration costs; electronic data
sharing among field and in-house personnel; improved speed, accuracy content and
compliance of field reporting; faster sales order processing and customer
service invoicing; and other operational efficiencies. The solution also
supports two-way paging and SMS.
Astea Alliance Tools
Alliance Global Database
Alliance Global Database is the system's enterprise database capable of
data translation for multi-national organizations to collaborate across country
lines, including support for double-byte character data sets such as for Asian
languages. Each user can interact with the system in their preferred language
and currency. Alliance Global Database also provides translation between time
zones, taxation methods, and other unit-of-measure implications of a global
enterprise.
Alliance Studio
Alliance Studio is a toolset for easily adapting system behavior and
user interfaces to specific business environments without expensive custom
programming. A customer can control how Astea Alliance automates workflows as
well as the system's intuitiveness and "look and feel" to employees, which
thereby maximizes the system's usability, effectiveness and benefits. Alliance
Studio reduces system implementation time and cost, and subsequently enables
customers to update system performance as their business needs change--all of
which contributes to the system's low cost of ownership.
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Alliance Links
Alliance Links are a family of enterprise application integration
products that interface Astea Alliance to other enterprise systems, such as
back-office financial and ERP applications, remote equipment monitoring and
diagnostic software, and wireless data transmission services. Alliance Links
extend Astea Alliance's return on investment for customers by making all
Alliance modules accessible to external software through open, well defined,
synchronous and asynchronous application programming interfaces (APIs) that are
XML based.
Alliance Consulting
Professional Services
Astea's typical professional services engagement does not include
customizations, but rather includes planning, prototyping and implementation of
Astea's products within the client's organization.
During the initial planning phase of the engagement, Astea's
professional services personnel work closely with representatives of the
customer to prepare a detailed project plan that includes a timetable, resource
requirements, milestones, in-house training programs, onsite business process
training and demonstrations of Astea's product capabilities within the
customer's organization.
The next most critical phase of the Astea professional services
engagement is the prototyping phase, in which Astea works closely with
representatives of the customer to configure Astea's software functionality to
the customer's specific business process requirements.
The next integral phase in the professional services engagement is the
implementation phase, in which Astea's professional services personnel work with
the client to develop detailed data mapping, conversions, interfaces and other
technical and business processes necessary to integrate Astea's software into
the customer's computing environment. Ultimately, education plans are developed
and executed to provide the customer with the process and system knowledge
necessary to effectively utilize the software and fully implement the Astea
solution. Professional services are charged on an hourly or per diem basis.
The last phase of the engagement utilizes Astea's professional services
personnel to assist in Go Live planning and the Go Live effort.
Astea will assist in the planning for installation, initialization,
data preparation, operational procedures, schedules and required resources. The
initialization and creation of the production database is planned and prepared
for the data history, open orders and all required data for go live processing.
During the cut-over to the Astea solution, Astea business resources are best
utilized to assist new users with functionality/processes while Astea technical
resources support customer IT staff.
Following the Go Live, Astea professional services engages the customer
in the Assessment Phase. During this effort, the delivered system is assessed to
validate benefits, analyze the process to measure key performance indicators,
document and understand lessons learned. To perform these assessments we collect
and analyze the planned benefits, processes used to capture and report on the
key performance indicators, and document the lessons learned from all phases of
the implementation. An action plan is developed from the lessons learned and key
performance indicators for use in future phases and/or releases.
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Key Performance Indicators are charted to allow baseline analysis of
the business performance and savings. These KPI's are divided into the various
areas of the system.
o Staffing Total staff required presently and after system
install
o Productivity Overtime reduction anticipated
Reduced Travel times
o Inventory Reduced Obsolescence
Reduced Inventory
o Revenues Vendor Warranty Claims
Increased Contract Profit
Time Of Records Delay Reduced
o Expense Reduced emergency shipments
Technical Services
Astea's technical services team provides services related to
installation, data verification, functional design, technical design, system
infrastructure setup or changes, customizations, QA activities, testing and
go-live support.
Initially, software and database installation resources are available
to prepare the environment for the prototyping phase.
Data verification and feedback services can be provided for initial
data verification analysis. These efforts are conducted to determine present
state of information as far as type, conversions, data manipulation, location,
frequency, method of interface (initial load, ongoing load, data export or data
import,) and data integrity. Findings are documented and shared with the project
team.
During the implementation phase, Astea's technical services team is
often engaged to assist with the functional and/or technical design as related
to customer desired system personalization, customization and interfaces, often
referred to as `gaps'. Gap solutions are assessed and categorized into system,
studio, customization or interface. Utilizing the services of the customer
project team, Astea professional services and Astea technical services Business
Requirement Documents (BRDs) are created for all customizations and interfaces.
Astea technical services will provide specifications and a quote for the
customization. The Customer and Astea agree on the outcome of the customization
and all expected outputs prior to the actual development customization.
Following acceptance of the BRDs, code will be written as per design. QA of the
code with test data sets will complete these efforts.
Astea's technical services team will also provide testing and go-live
support, as required.
Alliance Customer Support
Astea's customer support organization provides customers with telephone
and online technical support, as well as product enhancements, updates and new
software releases. The company provides 24X7 "follow-the-sun" support through
its global support network. Local representatives support all regions of Astea's
worldwide operations. Astea personnel or a distributor's personnel familiar with
local business customs and practices provide support in real-time and usually
spoken in native languages. Typically, customer support fees are established as
a fixed percentage of license fees and are invoiced to customers on an annual
basis. Astea's customer support representatives are located in the United
States, Europe, Israel and Australia. In addition, Astea provides customer
support 24X7 with its self-service portal. The maintenance offering provides
customers with 24X7 support and help desk services, as well as software service
packs and release upgrades.
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Alliance Education & Training
Application Training
Key business owners responsible for the implementation of the core
components will receive in-depth training designed to present the features,
functionality and terminology of the Astea solution. The objective of this
training is to provide the audience with a working knowledge of the Astea
solution. This exposure to the system will enable project communication and add
insight into specific business processes.
End-user training plans and documents are created during the
implementation phase. These plans and documentation are utilized to conduct
end-user training sessions prior to go-live.
Technical Training
Software and database installation/creation training is provided, as
required and/or recommended.
System Administration training provides the customer IT staff
pre-requisite knowledge to manipulate and manage administrative tasks associated
with the Astea solution. Included within these tasks are: Security, Batch
Applications, Escalation, Import, etc.
Many customers are interested in performing their own personalization
and customization to the system. Training sessions are available to enhance
customer understanding of available options for personalization and how to
perform customizations.
Customers
The Company estimates that it has sold approximately 580 licenses to
customers ranging from small, rapidly growing companies to large, multinational
corporations with geographically dispersed operations and remote offices. More
than 210 licenses have been sold for Astea Alliance and the remainder for
DISPATCH-1. The broad applicability of the Company's products is demonstrated by
the wide range of companies across many markets and industries that use one or
more of Astea's products, including customers in information technology, medical
devices and diagnostic systems, industrial controls and instrumentation, retail
systems, office automation, imaging systems, facilities management,
telecommunications, and other industries with equipment sales and service
requirements. In 2003 and 2002, no single customer accounted for more than 10%
of the Company's revenues. In 2001, one customer accounted for 11% of the
Company's revenues.
Sales and Marketing
The Company markets its products through a worldwide network of direct
and indirect sales and services offices with corporate headquarters in the
United States and regional headquarters in the United Kingdom (European
Operations) and Australia (Asia Pacific Operations). Sales partners include
distributors (value-added resellers, system integrators and sales agents) and
OEM partners. The Company actively seeks to expand its reseller network and
establish an international indirect distribution channel targeted at the
mid-market tier. See "Certain Factors that May Affect Future Results-- Need to
Expand Indirect Sales."
Astea's direct sales force employs a consultative approach to selling,
working closely with prospective clients to understand and define their needs
and determine how such needs can be addressed by the Company's products. These
clients typically represent the mid- to high-end of the market. A prospect
development organization comprised of telemarketing representatives, who are
engaged in outbound telemarketing and inbound inquiry response to a variety of
marketing vehicles, develops
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and qualifies sales leads prior to referral to the direct sales staff.
Additional prospects are identified and qualified through the networking of
direct sales staff and the Company's management as part of daily business
activities.
The modular structure of Astea's software and its ongoing product
development efforts provide opportunities for incremental sales of product
modules and consulting services to existing accounts. See "Certain Factors that
May Affect Future Results-- Continued Dependence on Large Contracts May Result
in Lengthy Sales and Implementation Cycles and Impact Revenue Recognition and
Cash Flow."
Astea's corporate marketing department is responsible for product
marketing, lead generation and marketing communications, including the Company's
corporate website, dialogue with high-tech industry analysts, trade conferences,
advertising, e-marketing, on-line and traditional seminars, direct mail, product
collateral and public relations. Based on feedback from customers, analysts,
business partners and market data, the marketing department provides input and
direction for the Company's ongoing product development efforts and
opportunities for professional services. Leads developed from the variety of
marketing communications vehicles are routed through the Company's Astea
Alliance sales and marketing automation system. The Company also participates in
an annual conference for users of Astea's DISPATCH-1 and Astea Alliance
products. Conference participants attend training sessions, workshops and
presentations, and interact with other Astea product users, Astea management and
staff, and technology partners, providing important input for future product
direction.
Astea's international sales accounted for 34% of the Company's revenues
in 2003, 31% of the Company's revenues in 2002 and 33% in 2001. See "Certain
Factors that May Affect Future Results--Risks Associated with International
Sales."
Product Development
Astea's product development strategy is to provide products that
perform with exceptional depth and breadth of functionality and are easy to
implement, use and maintain. Products are designed to be flexible, modular and
scalable, so that they can be implemented incrementally in phases and expanded
to satisfy the evolving information requirements of Astea's clients and their
customers. Each product is also designed to be as hardware-platform-independent
as possible for client/server, thin-client and Web environments that can be
powered by multiple hardware platforms and operating systems. To accomplish
these goals, the Company uses widely accepted, commercially available
application development tools from Microsoft Corporation and Sybase, Inc. for
Astea Alliance and Progress Software Corporation for DISPATCH-1. These software
tools provide the Company's customers with the flexibility to deploy Astea's
products across a variety of hardware platforms, operating systems and
relational database management systems. The latest Astea Alliance products are
currently being engineered for existing and emerging Microsoft technologies such
as COM+, Microsoft ComPlus Transactions, Microsoft Message Queuing (MSMQ),
Internet Information Server (IIS) and Microsoft.NET Enterprise Servers including
Windows 2000 Server, SQL Server and BizTalk Server.
In addition to product development that is conducted at Company
facilities in the United States and Israel, Astea participates in partnerships
with complementary technology companies to reduce time-to-market with new
product capabilities and continually increase its value proposition to
customers. The Company also works with OEM partners who can integrate
AllianceEnterprise modules to complement and expand the capabilities of their
product offerings.
The Company's total expenses for product development for the years
ended December 31, 2003, 2002 and 2001, were $2,490,000, $1,781,000 and
$2,590,000, respectively; and these expenses amounted to 19%, 11% and 15% of
total revenues for 2003, 2002, and 2001,
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respectively. In addition, the Company incurred capitalized software development
costs of $479,000, $807,000 and $600,000 in 2003, 2002 and 2001, respectively.
The Company anticipates that it will continue to commit substantial resources to
product development in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Certain Factors that May
Affect Future Results--Need for Development of New Products."
Manufacturing
The Company's software products are distributed on CD ROMs and by
e-mail. Included with the software products are security keys (a software piracy
protection) and documentation available on CD ROM and hard copy. Historically,
the Company has purchased media and duplicating and printing services for its
product packaging from outside vendors.
Competition
The service management software market is intensely competitive and
subject to rapid change. To maintain or increase its position in the industry,
the Company will need to continually enhance its current product offerings,
introduce new products and features and maintain its professional services
capabilities. The Company currently competes on the basis of the depth and
breadth of its integrated product features and functions, including the
adaptability and scalability of its products to specific customer environments;
the ability to deploy complex systems locally, regionally, nationally and
internationally; product quality; ease-of-use; reliability and performance;
breadth of professional services; integration of Astea's offerings with other
enterprise applications; price; and the availability of Astea's products on
popular operating systems, relational databases, Internet and communications
platforms.
Competitors vary in size, scope and breadth of the products and
services offered. The Company encounters competition generally from a number of
sources, including other software companies, third-party professional services
organizations that develop custom software, and information systems departments
of potential customers developing proprietary, custom software. In the service
management marketplace, the Company competes against publicly held companies and
numerous smaller, privately held companies. The Company's competitors include
Siebel Systems, Inc. ("Siebel"), PeopleSoft Inc. ("PeopleSoft"), SAP AG ("SAP"),
Oracle Corporation ("Oracle"), Great Plains Software which was acquired by
Microsoft ("Microsoft Great Plains"), Clarify which was acquired by Amdocs
Limited ("Amdocs Clarify"), Viryanet Ltd. ("Viryanet") and a number of smaller
privately held companies. See "Certain Factors that May Affect Future
Results--Competition in the Customer Relationship Management Software Market is
Intense."
Licenses and Intellectual Property
Astea considers its software proprietary and licenses its products to
its customers under written license agreements. The Company also employs an
encryption system that restricts a user's access to source code to further
protect the Company's intellectual property. Because the Company's products
allow customers to customize their applications without altering the source
code, the source code for the Company's products is typically neither licensed
nor provided to customers. The Company does, however, license source code from
time to time and maintains certain third-party source code escrow arrangements.
See "Customers" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
The Company seeks to protect its products through a combination of
copyright, trademark, trade secret and fair business practice laws. The Company
also requires employees, consultants and third parties to sign nondisclosure
agreements. Despite these precautions, it may be possible for unauthorized
parties to copy certain portions of the Company's products or reverse engineer
or obtain and use information that the Company regards as proprietary. The
Company presently has no patents or patent applications pending. See "Certain
Factors that May Affect Future Results--Risks of Dependence on Proprietary
Technology."
13
Because the software development industry is characterized by rapid
technological change, Astea believes that factors such as the technological and
creative skills of its personnel, new product developments, frequent product
enhancements, and reliable product maintenance are more important to
establishing and maintaining a technology leadership position than current legal
protections.
Employees
As of December 31, 2003, the Company, including its subsidiaries, had a
total of 136 full time employees worldwide, 61 in the United States, 15 in the
United Kingdom, 5 in the Netherlands, 40 in Israel, 14 in Australia, and 1 in
Japan. The Company's future performance depends, in significant part, upon the
continued service of its key technical and management personnel and its
continuing ability to attract and retain highly qualified and motivated
personnel in all areas of its operations. See "Certain Factors that May Affect
Future Results--Dependence on Key Personnel; Competition for Employees." None of
the Company's employees is represented by a labor union. The Company has not
experienced any work stoppages and considers its relations with its employees to
be good.
Corporate History
The Company was incorporated in Pennsylvania in 1979 under the name
Applied System Technologies, Inc. In 1992, the Company changed its name to Astea
International Inc. Until 1986, the Company operated principally as a software
consulting firm, providing professional software consulting services on a fee
for service and on a project basis. In 1986, the Company introduced its
DISPATCH-1 product. In November 1991, the Company's sole stockholder acquired
the outstanding stock of The DATA Group Corporation ("Data Group"), a provider
of field service software and related professional services for the mainframe
computing environment. Data Group was merged into the Company in January 1994.
In February 1995, the Company and its sole stockholder acquired the outstanding
stock of Astea Service & Distribution Systems BV ("Astea BV"), the Company's
distributor of DISPATCH-1 and related services in Europe. In May 1995, the
Company reincorporated in Delaware. In July 1995, the Company completed its
initial public offering of Common Stock. In February 1996, the Company merged
with Bendata, Inc. In June 1996, the Company acquired Abalon AB. In September
1998 (effective July 1, 1998), the Company sold Bendata, Inc. In December 1998,
the Company sold Abalon AB. In December 1997, the Company introduced
ServiceAlliance and in October 1999, SalesAlliance, which were subsequently
re-engineered into components of the AllianceEnterprise suite introduced in
2001. Through 2001 and into 2002, the Company rebuilt is product functionality
for Web-based applications and in August 2002 introduced Astea Alliance 6. The
Company will be rolling out a new system architecture based on Microsoft.NET
towards the end of 2004.
Item 2. Properties.
The Company's headquarters are located in a leased facility of
approximately 22,000 square feet in Horsham, Pennsylvania. The Company also
leases facilities for operational activities in Houten, Netherlands, and Tefen,
Israel, and for sales and customer support activities in Cranfield, England and
St. Leonards, Australia. The Company believes that suitable additional or
alternative office space will be available in the future on commercially
reasonable terms as needed.
Item 3. Legal Proceedings.
From time to time, the Company is involved in litigation relating to
claims arising out of its operations in the normal course of business. In
addition, since the Company enters into a number of large contracts requiring
the complex installation of software products and the implementation of
considerable professional services over several quarterly periods, the Company
is from time to time engaged in discussions and
14
deliberations with customers regarding the adequacy and timeliness of the
installation or service, product functionality and features desired by the
customer and additional work and product requirements that were not anticipated
at the commencement of the project. These deliberations sometimes result in
changes in services required, upward or downward price adjustments, or reworking
of contract terms. The Company from time to time will reserve funds for
contingencies under contract deliberations. The Company is currently not a party
to any material legal proceedings, the adverse outcome of which, in management's
opinion, would have a material adverse effect on the Company's business,
financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report, through the
solicitation of proxies or otherwise.
15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Common Stock is traded on the Nasdaq National Market
under the symbol "ATEA." The following table sets forth the high and low closing
sale prices for the Common Stock as reported by the Nasdaq National Market for
the past two fiscal years:
2003 High Low
------------------------------------ ------------- -----------------
First quarter $3.10 $2.55
Second quarter 4.35 2.65
Third quarter 4.40 2.81
Fourth quarter 3.50 2.10
2002 High Low
------------------------------------ ------------- -----------------
First quarter $5.00 $3.60
Second quarter 5.00 3.80
Third quarter 4.85 2.55
Fourth quarter 3.75 2.25
In September 2003, the Company affected a 1:5 reverse stock split. All
prices reported for periods prior to the reverse stock split have been adjusted
for the reverse stock split.
As of March 15, 2004, there were approximately 37 holders of record of
the Company's Common Stock. (Because "holders of record" include only
stockholders listed with the Company's transfer agent and exclude stockholders
listed separately with financial nominees, this number does not accurately
reflect the actual number of beneficial owners of the Company's Common Stock, of
which the Company estimates there were more than 2,700 on such date.) On March
15, 2004, the last reported sale price of the Common Stock on the Nasdaq
SmallCap Market was $3.45 per share.
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. On June 30, 2000, the Company
paid its only dividend since its initial public offering. The dividend was $2.05
per share.
16
Item 6. Selected Financial Data.
Years ended December 31, 2003 2002 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Statement of Income Data: (3)
Revenues:
Software license fees $ 1,935 $ 6,504 $ 6,384 $ 6,554 $ 11,312
Services and maintenance 10,906 10,294 10,973 13,763 22,509
---------------------------------------------------------------------
Total revenues 12,841 16,798 17,357 20,317 821
---------------------------------------------------------------------
Cost and Expenses:
Cost of software license fees 898 1,262 1,224 1,199 2,240
Cost of services and maintenance 6,963 6,345 6,808 10,928 17,849
Product development 2,490 1,781 2,590 2,744 4,900
Sales and marketing 5,875 6,218 5,396 6,857 8,463
General and administrative (1) 2,198 2,426 2,837 4,066 4,478
Restructuring charge (2) - - 333 1,101 1,630
---------------------------------------------------------------------
Total costs and expenses 18,424 18,032 19,188 26,895 560
---------------------------------------------------------------------
Loss from continuing operations
before interest and taxes (5,583) (1,234) (1,831) (6,578) (5,739)
Net interest income 54 106 309 1,496 2,163
---------------------------------------------------------------------
Loss from continuing
operations before income taxes (5,529) (1,128) (1,522) 1,496) (3,576)
Income tax expense - 200 -
- -
---------------------------------------------------------------------
Loss from continuing operations (5,529) (1,328) (1,522) (5,082) (3,576)
Gain on sale of discontinued operations,
net of taxes (4) - - - 293
-
---------------------------------------------------------------------
Net loss $ (5,529) $ (1,328) $ (1,522) $ (4,789) $ (3,576)
=====================================================================
Basic and diluted loss per share:
Continuing operations $ (1.89) $ (0.09) $ (0.10) $ (0.35) $ (0.26)
Gain on sale of discontinued operations - - - 0.02
-
---------------------------------------------------------------------
$ (1.89) $ (0.09) $ (0.10) $ (0.33) $ (0.26)
=====================================================================
Shares used in computing basic and diluted loss
per share 2,922 2,921 2,926 2,914 2,780
Balance Sheet Data:
Working capital $ 1,820 $ 6,449 $ 7,313 $ 9,668 $ 44,170
Total assets 10,096 16,443 18,015 21,653 58,634
Long-term debt, less current portion - - -
23 49
Accumulated deficit (18,100) (12,568) (11,239) (9,716) (4,927)
Total stockholders' equity 3,734 8,998 10,105 11,955 46,617
(1) A one-time accrual for consulting fees of $304,000 is included in the
fourth quarter of 1999 general and administrative expense.
(2) Included in the fourth quarter of 2001 is a restructuring charge of
$409,000, which includes cost of consolidating office space and severance
of certain personnel. The second quarter of 2000 contains a restructuring
charge of $1,101,000, which includes severance costs, an office closing,
and other actions aimed at reducing operating expenses. The fourth quarter
of 1999 contains a restructuring charge of $1,630,000 due to reduced
DISPATCH-1 development and billable service activity and includes severance
payments, the write-off of capitalized software for certain DISPATCH-1
modules which will no longer be sold and reserves to settle DISPATCH-1
contractual obligations. See Note 4 of the Notes to the Consolidated
Financial Statements.
(3) Certain reclassifications have been made in prior years due to the
implementation of EITF 01-14 (See Note 2 of the Notes to the Consolidated
Financial Statements) and the 1:5 reverse stock split which occurred in
September 2003 (See Note 3 of the Notes to the Consolidated Financial
Statements).
(4) During 2000, the Company reversed $149,000 of excess reserves and received
a distribution of unused escrow balance totaling $144,000 related to the
1998 sales of two of its subsidiaries, Bendata Inc. and Abalon AB.
17
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Overview
This document contains various forward-looking statements and
information that are based on management's beliefs as well as assumptions made
by 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 in this Annual Report on
Form 10-K.
The Company develops, markets and supports service management software
solutions, which are licensed to companies that sell and service equipment, or
sell and deliver professional services. The Company's principal product
offering, the Astea Alliance suite, integrates and automates sales and service
business processes and thereby increases competitive advantages, top-line
revenue growth and profitability through better management of information,
people, assets and cash flows. Astea Alliance offers substantially broader and
far superior capabilities over the Company's predecessor product, DISPATCH-1,
which was designed for only field service and customer support management
applications.
The Company's products and services are primarily used in industries
such as information technology, medical devices and diagnostic systems,
industrial controls and instrumentation, retail systems, office automation,
imaging systems, facilities management and telecommunications. An eclectic group
of other industries, all with equipment sales and service requirements, are also
represented in Astea's customer base. The Company maintains offices in the
United States, United Kingdom, Australia, Israel and the Netherlands.
The Company generates revenues from two sources: software license fees
for its software products, and services and maintenance revenues from
professional services, which includes consulting, implementation, training and
maintenance related to those products.
Software license fees accounted for 15% of the Company's total revenues
in 2003 which was comprised entirely of sales of Astea Alliance. Software
license fee revenues also include some fees from the sublicensing of third-party
software, primarily relational database licenses. Typically, customers pay a
license fee for the software based on the number of licensed users. Depending on
the contract terms and conditions, software license fees are recognized as
revenue upon delivery of the product if no significant vendor obligations remain
and collection of the resulting receivable is deemed probable. If significant
vendor obligations exist at the time of delivery or if the product is subject to
uncertain customer acceptance, revenue is deferred until no significant
obligations remain or acceptance has occurred.
The remaining component of the Company's revenues consists principally
of fees derived from professional services associated with the implementation
and deployment of the Company's software products and maintenance fees for
ongoing customer support, primarily external customer technical support services
and product enhancements. Professional services (including training) are charged
on an hourly or daily basis and billed on a regular basis pursuant to customer
work orders. Training services may also be charged on a per-attendee basis with
a minimum daily charge. Out-of-pocket expenses incurred by company personnel
performing professional services are typically reimbursed by the customer. The
Company recognizes revenue from professional services as the services are
performed. Maintenance fees are typically paid to the Company under agreements
entered into at the time of the initial software license. Maintenance revenue,
which is
18
invoiced annually upon the expiration of the warranty period, is recognized
ratably over the term of the agreement, which is usually twelve months.
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 consolidated
financial statements. The preparation of financial statements in conformity with
accounting principles generally accepted within the United States requires
management to make estimates and assumptions in certain circumstances that
affect amounts reported in the accompanying financial statements and related
notes. In preparing these financial statements, management has made its best
estimates and judgments of certain amounts included in the financial statements,
giving due consideration to materiality. The Company does not believe there is a
great likelihood that materially different amounts would be reported related to
the accounting policies described below; however, application of these
accounting policies involves the exercise of judgments and the use of
assumptions as to future uncertainties and, as a result, actual results could
differ from these estimates.
Revenue Recognition
Revenues are recognized in accordance with Statement of Operations
Procedures (SOP) 97-2, which provides guidelines on the recognition of software
license fee revenue. Principally, revenue may be recognized when persuasive
evidence of an arrangement exists, delivery has occurred, the license fee is
fixed and determinable and the collection of the fee is probable. The Company
allocates a portion of its software revenue to post-contract support activities
or to other services or products provided to the customer free of charge or at
non-standard discounts when provided in conjunction with the licensing
arrangement. Amounts allocated are based upon standard prices charged for those
services or products. Software license fees for resellers or other members of
the indirect sales channel are based on a fixed percentage of the Company's
standard prices. The Company recognizes software license revenue for such
contracts based upon the terms and conditions provided by the reseller to its
customer.
Revenue from post-contract support is recognized ratably over the term
of the contract on a straight-line basis. Consulting and training service
revenue is generally 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. Fees
from the service component in these types of contracts are recognized as the
services are performed. In instances where the aforementioned criteria have not
been met, both the license and the consulting fees are recognized under the
percentage of completion method of contract accounting.
In limited instances, the Company will enter into contracts for which
revenue is recognized under contract accounting. The accounting for such
arrangements requires judgement, which impacts the timing of revenue recognition
and provision for estimated losses, if applicable.
Accounts Receivable
The Company evaluates the adequacy of its allowance for doubtful
accounts at the end of each quarter. In performing this evaluation, the Company
analyzes the payment history of its significant past due accounts, subsequent
cash collections on these accounts and comparative accounts receivable aging
statistics. Based on this information, along with consideration of the general
strength of the economy, the Company develops what it considers to be a
reasonable estimate of the uncollectible amounts included in accounts
receivable. This estimate involves significant judgement by the management of
the Company. Actual uncollectible amounts may differ from the Company's
estimate.
19
Capitalized Software Research and Development Costs
The Company accounts for its internal software development costs in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed." Accordingly, all costs incurred subsequent to attaining technological
feasibility are capitalized and amortized over a period not to exceed three
years. Technological feasibility is attained when software products reach Beta
release. Costs incurred prior to the establishment of technological feasibility
are charged to product development expense. The establishment of technological
feasibility and the ongoing assessment of recoverability of capitalized software
development costs require considerable judgment by management with respect to
certain external factors, including, but not limited to, anticipated future
revenues, estimated economic life and changes in software and hardware
technologies. Upon the general release of the software product to customers,
capitalization ceases and such costs are amortized, using the straight-line
method, on a product-by-product basis over the estimated life, which is
generally three years. All research and development expenditures are charged to
research and development expense in the period incurred.
Recent Accounting Pronouncements
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantees of Indebtedness of Others" ("Interpretation No. 45"). This
Interpretation elaborates on the existing disclosure requirements for most
guarantees, including loan guarantees such as standby letters of credit. It also
clarifies that at the time a company issues a guarantee, the company must
recognize an initial liability for the fair market value of the obligations it
assumes under that guarantee and must disclose that information in its interim
and annual financial statements. The initial recognition and measurement
provisions of Interpretation No. 45 apply on a prospective basis to guarantees
issued or modified after December 31, 2002. The adoption of FIN 45 did not have
a material impact on our consolidated results of operations, financial position
or cash flows.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure, an amendment of FASB
Statement No. 123 ("SFAS 148"). SFAS 148 amends FASB Statement No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based employee compensation. It also amends the
disclosure provisions of that Statement to require prominent disclosure about
the effects on reported net income of an entity's accounting policy decisions
with respect to stock-based employee compensation. Finally, this Statement
amends Accounting Principles Board ("APB") Opinion No. 28, Interim Financial
Reporting, to require disclosure about those effects in interim financial
information. SFAS 148 is effective for financial statements for fiscal years
ending after December 15, 2002. The Company expects to continue to utilize the
intrinsic valuation method for recording employee stock based compensation.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities, clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 is applicable immediately for variable
interest entities created after January 31, 2003. For variable interest entities
created prior to January 31, 2003, the provisions of FIN 46 have been deferred
to the first quarter of 2004. The adoption of FIN 46 is not expected to have a
material effect on the consolidated financial statements.
20
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS 150"). SFAS 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. SFAS 150 is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The adoption of SFAS 150 did not have an impact on the
Company's financial position or results of operation.
Results of Continuing Operations
The following table sets forth, for the periods indicated, selected
financial data and the percentages of the Company's total revenues represented
by each line item presented for the periods presented:
Years ended December 31, 2003 2002 2001
- --------------------------------------------------------------------------------
Revenues:
Software license fees 15.1 % 38.7 % 36.8 %
Services and maintenance 84.9 61.3 63.2
----------------------------------------
Total revenues 100.0 % 100.0 % 100.0 %
----------------------------------------
Costs and expenses:
Cost of software license fees 6.0 % 7.5 % 7.1 %
Cost of services and maintenance 55.2 37.8 39.2
Product development 19.4 10.6 14.9
Sales and marketing 45.8 37.0 31.1
General and administrative 17.1 14.4 16.3
Restructuring charge - - 1.9
----------------------------------------
Total costs and expenses 143.5 % 107.3 % 110.5 %
----------------------------------------
Comparison of Years Ended December 31, 2003 and 2002
Revenues. Total revenues decreased $3,957,000, or 24%, to $12,841,000
for the year ended December 31, 2003 from $16,798,000 for the year ended
December 31, 2002. Software license revenues decreased by 70% in 2003, compared
to 2002. Services and maintenance fees for 2003 amounted to $10,906,000, a 6%
increase from 2002.
Software license fee revenues decreased $4,569,000 or 70% to $1,935,000
in 2003 from $6,504,000 in 2002. Astea Alliance license fee revenues decreased
to $1,935,000 in 2003 from $6,221,000 in 2002, a decrease of 69%. There were no
license sales DISPATCH-1 in 2003 as compared to sales totaling $283,000 in 2002
primarily due to the Company's planned movement from its legacy software to the
Astea Alliance suite. The decrease in license revenue is primarily the result of
delayed investment in information technology on the part of our target customers
due to the slowly improving economy.
Total services and maintenance revenues increased $612,000 or 6% to
$10,906,000 in 2003 from $10,294,000 in 2002. The increase in service and
maintenance revenues is attributable to an increase of $1,705,000 in Astea
Alliance revenues partially offset by a decrease in DISPATCH-1 revenues of
$1,093,000. Astea Alliance service and maintenance revenues increased to
$8,244,000 in 2003 from $6,540,000 in 2002 due to the growing Astea Alliance
customer base. DISPATCH-1 service and maintenance revenues decreased 29% to
$2,661,000 in 2003 from $3,754,000 in 2002 due to an ongoing decrease in the
number of customers under service and maintenance contracts. As a result of the
decreasing demand for DISPATCH-1, the decrease in service and maintenance
revenue is expected to continue in 2004.
21
In 2003 and 2002, no customer accounted for more than 10% of the
Company's revenues.
Costs of Revenues. Costs of software license fee revenues decreased
39%, or $496,000, to $766,000 in 2003 from $1,262,000 in 2002. Included in the
cost of software license fees is the amortization of capitalized software.
Capitalized software amortization decreased to $600,000 in 2003 from $870,000 in
2002. The decrease in amortization of capitalized software is due to the
decrease in the amount of unamortized capitalized software. The gross margin
percentage on software license sales decreased to 60% in 2003 from 81% in 2002.
This decrease is primarily attributable to the significant fixed cost of
software amortization.
The costs of services and maintenance revenues increased 12%, or
$750,000, to $7,095,000 in 2003 from $6,345,000 in 2002. The service and
maintenance gross margin percentage decreased to 35% in 2003 from 38% in 2002.
The decreased margin is primarily attributable to the increase in third party
costs as a result of upgrades.
Product Development. Product development expenses increased 40%, or
$709,000, to $2,490,000 in 2003 from $1,781,000 in 2002. Product development as
a percentage of total revenue increased to 19% in 2003 compared to 11% in 2002.
The Company's total product development costs, including capitalized software
development costs were $2,970,000 or 23% of revenues in 2003 compared to
$2,588,000, which was 15% of revenues in 2002, an increase of $382,000 or 15%.
The increase in product development expenses is primarily attributable to the
increased effort to convert the Company's product to .NET, a new Microsoft
operating system platform. In doing so, the Company increased its development
staff headcount to 40 employees in 2003 from 33 in 2002. Additionally, during
2003 the U.S. dollar weakened against the Israel shekel, which is where the
Company performs most of its development, thereby resulting in increased
expenses upon translation into U.S. currency. The Company has focused its
development effort exclusively on the upgrade of the Astea Alliance suite of
products.
Sales and Marketing. Sales and marketing expenses decreased 6%, or
$343,000, to $5,875,000 in 2003 from $6,218,000 in 2002. The decrease is
primarily the result of lower commissions due to lower sales. Despite actual
performance, the Company continued to focus on improving its market presence
through intensified marketing efforts to increase awareness of the Company's
products. This occurred through the use of Webinars focused in the vertical
industries in which the Company operates, attendance at selected trade shows and
increased investment in lead generation for its sales force. Sales and marketing
expense as a percentage of total revenues increased to 46% in 2003 from 37% in
2002.
General and Administrative. General and administrative expenses consist
of salaries, benefits and related costs for the Company's finance,
administrative and executive management personnel, legal costs, accounting
costs, bad debt write-offs and various costs associated with the Company's
status as a public company. The Company's general and administrative expenses
were $2,198,000 in 2003 and $2,426,000 in 2002 representing a 9% decrease. This
decrease is primarily due to lower costs related to legal and investor relations
activity and other taxes. Partially offsetting this decrease, the Company
experienced an increase in bad debt expense of $277,000 which is attributable to
the reserve of license and service revenues related to a customer (See Note 5).
As a percentage of total revenues, general and administrative expenses increased
to 18% in 2003 compared to 14% in 2002. The increase in expenses relative to
revenues primarily results from the decrease in total revenues generated during
2003.
Restructuring Charge. At the end of December, 2001, the Company
recorded a restructuring charge of $409,000 in connection with severance costs
to downsize the Company's employment roles and eliminate excess office space.
Additionally, the Company reversed $76,000 of restructuring costs relating to
the 2000 restructuring plan determined to be no longer needed (See Note 4 in the
Notes to the Consolidated Financial Statements). In the fourth quarter of 2002,
the Company determined that it had over-accrued $24,000 from its
22
2001 restructuring charge and, therefore, reversed it. The expense reversal is
included in general and administrative expenses.
Net Interest Income. Net interest income decreased $52,000, to $54,000
in 2003 from $106,000 in 2002. This decrease was primarily attributable to
significantly lower interest rates paid in 2003 on invested cash and the
reduction in cash balances which were used to fund operations.
Income Tax Expense. The Company accounts for income taxes in accordance
with SFAS No. 109 "Accounting for Income Taxes" which requires that deferred tax
assets and liabilities be recognized using enacted tax rates for the effect of
temporary differences between the book and tax basis of recorded assets and
liabilities. SFAS No. 109 also requires that deferred tax assets be reduced by a
valuation allowance if it is more likely than not that some portion or all of
the deferred tax asset will not be realized.
The realizability of the deferred tax assets is evaluated quarterly by
assessing the valuation allowance and by adjusting the amount of the allowance,
if necessary. The factors used to assess the likelihood of realization are the
forecast of future taxable income and available tax planning strategies that
could be implemented to realize the net deferred tax asset. During the year
ended December 31, 2002, the Company recorded a tax expense of $200,000 to
increase its valuation allowance related to its net deferred tax asset based on
an assessment of what portion of the asset is more likely than not to be
realized, in accordance with FSAS No. 109. The Company will review this
provision periodically in the future as circumstances change.
International Operations. Total revenue from the Company's
international operations declined by $830,000, or 16% to $4,311,000 in 2003 from
$5,141,000 in 2002. The decrease in revenue from international operations was
primarily attributable to the reductions in license revenues from the Astea
Alliance suite. The economic slowdown in both Europe and the Pacific Rim
severely impacted the operating results of the Company. International revenues
from professional services and maintenance increased 17% to $3,527,000 in 2003
from $3,005,000 in 2002. Overall, international operations resulted in net loss
of $1,772,000 for 2003 compared to net income of $4,000 in 2002. Combined with
the decrease in revenues, the decrease in income resulted in part from an
increase in reserves against doubtful accounts. Additionally, the weakening of
the U.S. dollar against the foreign currencies in Europe, the Pacific Rim and
Israel, contributed to increased expenses upon translation into U.S. currency.
Comparison of Years Ended December 31, 2002 and 2001
Revenues. Total revenues decreased $559,000, or 3%, to $16,798,000 for
the year ended December 31, 2002 from $17,357,000 for the year ended December
31, 2001. Software license revenues increased by 2% in 2002, compared to 2001.
Services and maintenance fees for 2002 amounted to $10,294,000, a 6% decrease
from 2001.
Software license fee revenues increased $120,000 or 2% to $6,504,000 in
2002 from $6,384,000 in 2001. Astea Alliance license fee revenues increased to
$6,220,000 in 2002 from $5,888,000 in 2001, an increase of 6% which reflects the
growing acceptance of the Astea Alliance suite of software products. License fee
revenues for DISPATCH-1 decreased $213,000 or 43% from $496,000 in 2001 to
$283,000 in 2002 primarily due to the Company's planned movement from its legacy
software to the Astea Alliance suite.
Total services and maintenance revenues decreased $679,000 or 6% to
$10,294,000 in 2002 from $10,973,000 in 2001. The decrease in service and
maintenance revenues is attributable to a decrease of $1,760,000 in DISPATCH-1
revenues partially offset by an increase in Astea Alliance revenues of
$1,081,000. Astea Alliance service and maintenance revenues increased to
$6,540,000 in 2002 from $5,459,000 in 2001 due to the growing Astea Alliance
customer base. DISPATCH-1 service and maintenance revenues decreased
23
32% to $3,754,000 in 2002 from $5,514,000 in 2001 due to an ongoing decrease in
the number of customers under service and maintenance contracts. As a result of
the DISPATCH-1 source code sales, which enables the users to customize the
software, and decreasing demand for DISPATCH-1, the decrease in service and
maintenance revenue is expected to continue in 2003.
In 2002, no customer accounted for more than 10% of its revenues. In
2001, the Company had one significant customer that accounted for 11% of its
revenues.
Costs of Revenues. Costs of software license fee revenues increased 3%,
or $38,000, to $1,262,000 in 2002 from $1,224,000 in 2001. Included in the cost
of software license fees is the fixed cost of capitalized software amortization.
Capitalized software amortization increased to $870,000 in 2002 from $800,000 in
2001. The increase in amortization of capitalized software is due to the
increase in software capitalized. The software licenses gross margin percentage
remained unchanged in 2002 at 81%, as compared to 2001.
The costs of services and maintenance revenues decreased 7%, or
$463,000, to $6,345,000 in 2002 from $6,808,000 in 2001. The service and
maintenance gross margin percentage remained unchanged at 38% in 2002, as
compared to 2001.
Product Development. Product development expenses decreased 31%, or
$809,000, to $1,781,000 in 2002 from $2,590,000 in 2001. Product development as
a percentage of total revenue decreased to 11% in 2002 compared to 15% in 2001.
The Company's total product development costs, including capitalized software
development costs were $2,588,000 or 15% of revenues in 2002 compared to
$3,190,000, which was 19% of revenues in 2001, a decrease of $602,000 or 19%.
The decrease in product development expenses is primarily attributable to the
strengthening of the U.S. dollar against the Israel shekel, which is where the
Company performs most of its development. Despite this decrease, development
employee headcount remained unchanged. The Company has focused its development
effort exclusively on the upgrade of the Astea Alliance suite of products. In
2003, the Company expects to slightly increase its development costs relative to
the amount spent in 2002.
Sales and Marketing. Sales and marketing expenses increased 15%, or
$822,000, to $6,218,000 in 2002 from $5,396,000 in 2001. The increase supports
newly released versions of its Astea Alliance suite of software products. The
Company is focused on improving its market presence through intensified
marketing efforts to increase awareness of the Company's products. This occurred
through the use of Webinars focused in the vertical industries in which the
Company operates, attendance at selected trade shows and increased investment in
lead generation for its sales force. Sales and marketing expense as a percentage
of total revenues increased to 37% in 2002 from 31% in 2001.
General and Administrative. General and administrative expenses
decreased 14%, or $411,000, to $2,426,000 in 2002 from $2,837,000 in 2001. As a
percentage of total revenues, general and administrative expenses decreased to
14% in 2002 compared to 16% in 2001. This decrease primarily results from the
restructuring that occurred in 2001, as well as ongoing efforts to control all
operating costs.
Restructuring Charge. At the end of December, 2001, the Company
recorded a restructuring charge of $409,000 in connection with severance costs
to downsize the Company's employment roles and eliminate excess office space.
Additionally, the Company reversed $76,000 of restructuring costs relating to
the 2000 restructuring plan determined to be no longer needed (See Note 4 in the
Notes to the Consolidated Financial Statements). In the fourth quarter of 2002,
the Company determined that it had over accrued $24,000 from its 2001
restructuring charge. This was reversed in the last quarter of 2002 and included
in general and administrative expenses.
24
Net Interest Income. Net interest income decreased $203000, to $106,000
in 2002 from $309,000 in 2001. This decrease was primarily attributable to
significantly lower interest rates paid in 2002 on invested cash and the
reduction in cash balances which are used to fund operations.
Income Tax Expense. The Company accounts for income taxes in accordance
with SFAS No. 109 "Accounting for Income Taxes" which requires that deferred tax
assets and liabilities be recognized using enacted tax rates for the effect of
temporary differences between the book and tax basis of recorded assets and
liabilities. SFAS no. 109 also requires that deferred tax assets be reduced by a
valuation allowance if it is more likely than not that some portion or all of
the deferred tax asset will not be realized.
The realizability of the deferred tax assets is evaluated quarterly by
assessing the valuation allowance and by adjusting the amount of the allowance,
if necessary. The factors used to assess the likelihood of realization are the
forecast of future taxable income and available tax planning strategies that
could be implemented to realize the net deferred tax asset. During the year
ended December 31, 2002, the Company recorded a tax expense of $200,000 to
increase its valuation allowance related to its net deferred tax asset based on
an assessment of what portion of the asset is more likely than not to be
realized, in accordance with FSAS No. 109. The Company will review this
provision periodically in the future as circumstances change.
International Operations. Total revenue from the Company's
international operations declined by $486,000, or 8.6% to $5,141,000 in 2002
from $5,627,000 in 2001. The decrease in revenue from international operations
was primarily attributable to the reductions in license revenues from the Astea
Alliance suite. The economic slowdown in both Europe and the Pacific Rim
severely impacted the operating results of the Company. International revenues
from professional services and maintenance were similar to those in 2001.
International operations resulted in net income of $4,000 for 2002 compared to a
net income of $226,000 in 2001. The decrease in income resulted primarily from
the decline in license sales resulting from depressed worldwide operating
conditions in both Europe and the Pacific Rim.
Liquidity and Capital Resources
Net cash used in operating activities was $1,200,000 for the year ended
December 31, 2003 compared to $455,000 for the year ended December 31, 2002. The
increase in cash used in operations was primarily attributable to the net loss
generated during the year of $5,529,000. Contributing to the use of cash, the
Company realized a decline in deferred revenues of $688,000 in 2003 compared to
a decline of $203,000 for the year ended December 31, 2002. The Company
experienced a greater decline in deferred revenues during 2003 due to a higher
non-renewal rate on maintenance contracts primarily from DISPATCH-1 customers.
Cash used in operations was partially offset by a higher level of collections
which decreased accounts receivable by $4,952,000 in 2003, compared to a $39,000
increase in 2002.
The Company used $64,000 of cash for investing activities in 2003
compared to generating $1,476,000 in 2002. The change from last year was
primarily attributable to the sale of $2,998,000 of investments in 2002 compared
to no sales of investments in 2003. Capital expenditures were $216,000 in 2003
compared to $404,000 in 2002. Capitalized software costs were $480,000 in 2003
compared to $807,000 in 2002. The Company also purchased a certificate of
deposit in 2002, which is security for a letter of credit, for $300,000.
Offsetting cash used, in October 2003, the Company terminated a life insurance
policy it held on behalf of its Chief Executive Officer and received payment of
$632,000 on the cash surrender value of the policy.
The Company generated $2,000 in financing activities for the year ended
December 31, 2003 compared to using $30,000 for the year ended December 31,
2002. The decrease in cash used for financing activities was principally
attributable to the elimination of all outstanding debt during 2002.
25
At December 31, 2003, the Company had a working capital ratio of
approximately 1.3:1, with total cash of $3,780,000. The Company has projected
revenues for 2004 that will generate enough funds to sustain its continuing
operations. However, if current projections trail expectations, the Company has
plans in place to reduce operating expenditures appropriately in order to
continue to fund all required expenditures. 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 plan any significant capital expenditures in 2004. In
addition, it does not anticipate that its operations or financial condition will
be affected materially by inflation.
Contractual Obligations and Commercial Commitments
The following tables summarize our contractual and commercial
obligation as of December 31, 2003:
Payment Due By Period
2004 2005-2006 2007-2008 2009 and after Total
---- --------- --------- -------------- -----
Contractual Cash
Obligations:
Long-term Debt $ -- $ -- $ -- $ -- $ --
Capital Leases
Operating Leases 858,000 1,127,000 996,000 424,000 3,405,000
Amounts of Commitment Expiration Per Period
2004 2005-2006 2007-2008 2009 and after Total
----- --------- --------- -------------- -----
Other Commercial
Commitments:
Letters of Credit $300,000 $-- $ -- $-- $300,000
Certain Factors That May Affect Future Results
The Company does not provide forecasts of its future financial
performance. From time to time, however, information provided by the Company or
statements made by its employees may contain "forward looking" information that
involves risks and uncertainties. In particular, statements contained in this
Annual Report on Form 10-K that are not historical fact may constitute forward
looking statements and are made under the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. The Company's actual results of
operations and financial condition have varied and may in the future vary
significantly from those stated in any forward looking statements. Factors that
may cause such differences include, but are not limited to, the risks,
uncertainties and other information discussed within this Annual Report on Form
10-K, as well as the accuracy of the Company's internal estimates of revenue and
operating expense levels.
The following discussion of the Company's risk factors should be read
in conjunction with the financial statements and related notes thereto set forth
elsewhere in this report. The following factors, among others, could cause
actual results to differ materially from those set forth in forward looking
statements contained or incorporated by reference in this report and presented
by management from time to time. Such factors, among others, may have a material
adverse effect upon the Company's business, results of operations and financial
conditions:
Recent History of Net Losses
The Company has a history of net losses. In particular, the Company
incurred net losses of approximately $5.5 million in fiscal 2003, $1.3 million
in fiscal 2002 and $1.5 million in fiscal 2001. As of
26
December 31, 2003, stockholders' equity is approximately $3.7 million, which is
net of an accumulated deficit of approximately $18.1 million. Moreover, the
Company expects to continue to incur additional operating expenses for research
and development. As a result, the Company will need to generate significant
revenues to achieve and maintain profitability. The Company may not be able to
achieve the necessary revenue growth or profitability in the future. If the
Company does not attain or sustain profitability or raise additional equity or
debt in the future, the Company may be unable to continue its operations.
Uncertain Market Acceptance of Astea Alliance; Decreased Revenues from
DISPATCH-1
In each of 2003, 2002, and 2001, 21%, 24% and 35%, respectively, of the
Company's total revenues was derived from the licensing of DISPATCH-1 and the
providing of professional services in connection with the implementation,
deployment and maintenance of DISPATCH-1 installations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
Company originally introduced Astea Alliance in August 1997 in order to target a
market segment in which DISPATCH-1 was not cost-effective or attractive.
Subsequent, rapid changes in technology have now positioned the Astea Alliance
suite, introduced in 2001 and which includes the Astea Alliance functionality,
to supercede DISPATCH-1 as the company's flagship product. As a result, there
are no license sales planned or anticipated for DISPATCH-1 to new customers.
Sales to existing customers comprised 100% of DISPATCH-1 license revenue in
2002. There were no license sales of DISPATCH-1 during 2003. DISPATCH-1 revenues
have declined in each of the last three fiscal years and that trend is expected
to continue and accelerate.
While the Company has licensed Astea Alliance to over 210 companies
worldwide in 1998 through 2003, revenues from sales of Astea Alliance alone are
not yet sufficient to support the expenses of the Company. The Company's future
success will depend mainly on its ability to increase licenses of the Astea
Alliance suite offerings, on developing new products and product enhancements to
complement its existing product offerings, on its ability to continue support
and maintenance revenues from DISPATCH-1, and on its ability to control its
operating expenses. Any failure of the Company's products to achieve or sustain
market acceptance, or of the Company to sustain its current position in the
Customer Relationship Management software market, would have a material adverse
effect on the Company's business and results of operations. There can be no
assurance that the Company will be able to increase demand for Astea Alliance,
obtain an acceptable level of support and maintenance revenues from DISPATCH-1,
or to lower its expenses, thereby avoiding future losses.
Need for Development of New Products
The Company's future success will depend upon its ability to enhance
its current products and develop and introduce new products on a timely basis
that keep pace with technological developments, industry standards and the
increasingly sophisticated needs of its customers, including developments within
the client/server, thin-client and object-oriented computing environments. Such
developments may require, from time to time, substantial capital investments by
the Company in product development and testing. The Company intends to continue
its commitment to research and development and its efforts to develop new
products and product enhancements. There can be no assurance that the Company
will not experience difficulties that could delay or prevent the successful
development, introduction and marketing of new products and product
enhancements; that new products and product enhancements will meet the
requirements of the marketplace and achieve market acceptance; or that the
Company's current or future products will conform to industry requirements.
Furthermore, reallocation of resources by the Company, such as the diversion of
research and development personnel to development of a particular feature for a
potential or existing customer, can delay new products and certain product
enhancements. Some of our customers adopted our software on an incremental
basis. These customers may not expand usage of our software on an
enterprise-wide basis or implement new software products introduced by the
Company. The failure of the software to perform to customer expectations or
otherwise to be deployed on an enterprise-wide basis could
27
have a material adverse effect on the Company's ability to collect revenues or
to increase revenues from new as well as existing customers. If the Company is
unable to develop and market new products or enhancements of existing products
successfully, the Company's ability to remain competitive in the industry will
be materially adversely effected.
Rapid Technological Change
In this industry there is a continual emergence of new technologies and
continual change in customer requirements. Because of the rapid pace of
technological change in the application software industry, the Company's current
market position could be eroded rapidly by product advancements. In order to
remain competitive, the Company must introduce new products or product
enhancements that meet customers' requirements in a timely manner. If the
Company is unable to do this, it may lose current and prospective customers to
competitors.
The Company's application environment relies primarily on software
development tools from Microsoft Corporation and PowerSoft Corporation, a
subsidiary of Sybase, Inc., in the case of Astea Alliance, and Progress Software
Corporation, in the case of DISPATCH-1. If alternative software development
tools were to be designed and generally accepted by the marketplace, we could be
at a competitive disadvantage relative to companies employing such alternative
developmental tools.
Burdens of Customization
Certain of the Company's clients request customization of DISPATCH-1 or
Astea Alliance products to address unique characteristics of their businesses or
computing environments. In these situations, the Company applies contract
accounting to determine the recognition of license revenues. The Company's
commitment to customization could place a burden on its client support resources
or delay the delivery or installation of products which, in turn, could
materially adversely affect its relationship with significant clients or
otherwise adversely affect business and results of operations. In addition, the
Company could incur penalties or reductions in revenues for failures to develop
or timely deliver new products or product enhancements under development
agreements and other arrangements with customers. If customers are not able to
customize or deploy the Company's products successfully, the customer may not
complete expected product deployment, which would prevent recognition of
revenues and collection of amounts due, and could result in claims against the
Company.
Risk of Product Defects; Failure to Meet Performance Criteria
The Company's software is intended for use in enterprise-wide
applications that may be critical to its customer's business. As a result,
customers and potential customers typically demand strict requirements for
installation and deployment. The Company's software products are complex and may
contain undetected errors or failures, particularly when software must be
customized for a particular customer, when first introduced or when new versions
are released. Although the Company conducts extensive product testing during
product development, the Company has at times delayed commercial release of
software until problems were corrected and, in some cases, has provided
enhancements to correct errors in released software. The Company could, in the
future, lose revenues as a result of software errors or defects. Despite testing
by the Company and by current and potential customers, errors in the software,
customizations or releases might not be detected until after initiating
commercial shipments, which could result in additional costs, delays, possible
damage to the Company's reputation and could cause diminished demand for the
Company's products. This could lead to customer dissatisfaction and reduce the
opportunity to renew maintenance contracts or sell new licenses.
28
Continued Dependence on Large Contracts May Result in Lengthy Sales and
Implementation Cycles and Impact Revenue Recognition and Cash Flow
The sale and implementation of the Company's products generally involve
a significant commitment of resources by prospective customers. As a result, the
Company's sales process often is subject to delays associated with lengthy
approval processes attendant to significant capital expenditures, definition of
special customer implementation requirements, and extensive contract
negotiations with the customer. Therefore, the sales cycle varies substantially
from customer to customer and typically lasts between four and nine months.
During this time the Company may devote significant time and resources to a
prospective customer, including costs associated with multiple site visits,
product demonstrations and feasibility studies. The Company may experience a
number of significant delays over which the Company has no control. Because the
costs associated with the sale of the product are fixed in current periods,
timing differences between incurring costs and recognizing of revenue associated
with a particular project may result. Moreover, in the event of any downturn in
any existing or potential customer's business or the economy in general,
purchases of the Company's products may be deferred or canceled.
Furthermore, the implementation of the Company's products typically
takes several months of integration of the product with the customer's other
existing systems and customer training. A successful implementation requires a
close working relationship between the customer and members of the Company's
professional service organization. These issues make it difficult to predict the
quarter in which expected orders will occur. Delays in implementation of
products could cause some or all of the revenues from those licenses to be
shifted from the expected quarter to a subsequent quarter or quarters. In these
situations, the Company applies contract accounting to determine the recognition
of license revenue.
When the Company has provided consulting services to implement certain
larger projects, some customers have in the past delayed payment of a portion of
license fees until implementation was complete and in some cases have disputed
the consulting fees charged for implementation. There can be no assurance the
Company will not experience additional delays or disputes regarding payment in
the future, particularly if the Company receives orders for large, complex
installations. Additionally, as a result of the application of the revenue
recognition rules applicable to the Company's licenses under generally accepted
accounting principles, license revenues may be recognized in periods after those
in which the respective licenses were signed. The Company believes that
period-to-period comparisons of its results of operations should not be relied
upon as any indication of future performance.
Fluctuations in Quarterly Operating Results May Be Significant
The Company's quarterly operating results have in the past and may in
the future vary or decrease significantly depending on factors such as:
o Revenue from software sales;
o the timing of new product releases;
o market acceptance of new and enhanced versions of the Company's
products;
o customer order deferrals in anticipation of enhancements or new
products;
o the size and timing of significant orders, the recognition of
revenue from such orders;
o changes in pricing policies by the Company and its competitors;
o the introduction of alternative technologies;
o changes in operating expenses;
o changes in the Company's strategy;
o personnel changes;
o the effect of potential acquisitions by the Company and its
competitors; and general domestic and international economic and
political factors.
29
The Company has limited or no control over many of these factors. Due
to all these factors, it is possible that in some future quarter the Company's
operating results will be materially adversely affected.
Fluctuations in Quarterly Operating Results Due to Seasonal Factors
The Company expects to experience fluctuations in the sale of licenses
for its products due to seasonal factors. The Company has experienced and
anticipates that it will continue to experience relatively lower sales in the
first fiscal quarter due to patterns in capital budgeting and purchasing cycles
of current and prospective customers. The Company also expects that sales may
decline during the summer months of its third quarter, particularly in the
European markets. Moreover, the Company generally records most of its total
quarterly license revenues in the third month of the quarter, with a
concentration of these revenues in the last half of that third month. This
concentration of license revenues is influenced by customer tendencies to make
significant capital expenditures at the end of a fiscal quarter. The Company
expects these revenue patterns to continue for the foreseeable future. Thus, its
results of operations may vary seasonally in accordance with licensing activity,
and will also depend upon recognition of revenue from such licenses from time to
time. The Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as an
indication of future performance.
General Economic Conditions May Affect Operations
As business has grown, the Company has become increasingly subject to
the risks arising from adverse changes in domestic and global economic
conditions. Because of the recent economic slowdown in the United States and in
other parts of the world, many companies are delaying or reducing technology
purchases and investments. Similarly, the Company's customers may delay payment
for Company products causing accounts receivable to increase. In addition,
terrorist attacks could further contribute to the slowdown in the economies of
North America, Europe and Asia. The overall impact to the Company of this
slowdown is difficult to predict, however, revenues could decline, which would
have an adverse effect on the Company's results of operations and on its
financial condition, as well as on its ability to sustain profitability.
Competition in the Customer Relationship Management Software Market is Intense
The Company competes in the CRM software market. This market is highly
competitive and the Company expects competition in the market to increase. The
Company's competitors include large public companies such as Oracle, PeopleSoft
and Siebel, as well as traditional enterprise resource planning (ERP) software
providers such as SAP that are developing CRM capabilities. In addition, a
number of smaller privately held companies generally focus only on discrete
areas of the CRM software marketplace. Because the barriers to entry in the CRM
software market are relatively low, new competitors may emerge with products
that are superior to the Company's products or that achieve greater market
acceptance. Moreover, the CRM industry is currently experiencing significant
consolidation, as larger public companies seek to enter the CRM market through
acquisitions or establish other cooperative relationships among themselves,
thereby enhancing their ability to compete in this market with their combined
resources. Some of the Company's existing and potential competitors have greater
financial, technical, marketing and distribution resources than the Company.
These and other competitors pose business risks to the Company because:
o they compete for the same customers that the Company tries to
attract;
o if the Company loses customers to its competitors, it may be
difficult or impossible to win them back;
o lower prices and a smaller market share could limit the Company's
revenue generating ability, reduce its gross margins and restrict
its ability to become profitable or sustain profitability; and
30
o competitors may be able to devote greater resources to more
quickly respond to emerging technologies and changes in customer
requirements or to the development, promotion and sales of their
products.
There can be no assurance that the Company will be able to compete successfully
against current and future competitors or that competitive pressures faced by
the Company will not adversely affect its business and results of operations.
Risk of Dependence on Proprietary Technology
The Company depends heavily on proprietary technology for its business
to succeed. The Company licenses its products to customers under license
agreements containing, among other terms, provisions protecting against the
unauthorized use, copying and transfer of the licensed program. In addition, the
Company relies on a combination of trade secrets, copyright and trademark laws
and confidentiality procedures to protect the Company's proprietary rights in
its products and technology. The legal protection is limited, however.
Unauthorized parties may copy aspects of the Company's products and obtain and
use information that the Company believes is proprietary. Other parties may
breach confidentiality agreements or other contracts they have made with the
Company. Policing unauthorized use of the Company's software is difficult and,
while the Company is unable to determine the extent to which piracy of its
software products exists, software piracy can be expected to be a persistent
problem. There can be no assurance that any of the measures taken by the Company
will be adequate to protect its proprietary technology or that its competitors
will not independently develop technologies that are substantially equivalent or
superior to the Company's technologies. If the Company fails to successfully
enforce its proprietary technology, its competitive position may be harmed.
Other software providers could develop similar technology
independently, which may infringe on the Company's proprietary rights. The
Company may not be able to detect infringement and may lose a competitive
position in the market before it does so. In addition, competitors may design
around the Company's technology or develop competing technologies. The laws of
some foreign countries do not protect the Company's proprietary rights to the
same extent as do the laws of the United States. Litigation may be necessary to
enforce the Company's proprietary rights. Such litigation is time-consuming, has
an uncertain outcome and could result in substantial costs and diversion of
management's attention and resources. However, if the Company fails to
successfully enforce its proprietary rights, the Company's competitive position
may be harmed.
Possible Infringement of Third Party Intellectual Property Rights
Substantial litigation and threats of litigation regarding intellectual
property rights are common in this industry. The Company is not aware that its
products and technologies employ technology that infringes any valid, existing
proprietary rights of third parties. While there currently are no pending
lawsuits against the Company regarding infringement of any existing patents or
other intellectual property rights or any notices that it is infringing the
intellectual property rights of others, third parties may assert such claims in
the future. Any claims, with or without merit, could:
o be time consuming to defend;
o result in costly litigation or damage awards;
o divert management's attention and resources;
o cause product shipment delays; or
o require the Company to seek to enter into royalty or licensing
agreements, which may not be available on terms acceptable to the
Company, if at all.
31
A successful claim of intellectual property infringement against the Company or
the Company's failure or inability to license the infringed or similar
technology could seriously harm its business because the Company would not be
able to sell the impacted product without exposing itself to litigation risk and
damages. Furthermore, redevelopment of the product so as to avoid infringement
could cause the Company to incur significant additional expense and delay.
Dependence on Technology from Third Parties
The Company integrates various third-party software products as
components of its software. The Company's business would be disrupted if this
software, or functional equivalents of this software, were either no longer
available to the Company or no longer offered to the Company on commercially
reasonable terms. In either case, the Company would be required to either
redesign its software to function with alternate third-party software or develop
these components itself, which would result in increased costs and could result
in delays in software shipments. Furthermore, the Company might be forced to
limit the features available in its current or future software offerings.
Need to Expand Indirect Sales
The Company has historically sold its products through its direct sales
force and a limited number of distributors (value-added resellers, system
integrators and sales agents). The Company's ability to achieve significant
revenue growth in the future will depend in large part on its success in
establishing relationships with distributors and OEM partners. The Company is
currently investing, and plans to continue to invest, significant resources to
expand its domestic and international direct sales force and develop
distribution relationships. The Company's distributors also sell or can
potentially sell products offered by the Company's competitors. There can be no
assurance that the Company will be able to retain or attract a sufficient number
of its existing or future third party distribution partners or that such
partners will recommend, or continue to recommend, the Company's products. The
inability to establish or maintain successful relationships with distributors
and OEM partners or to train its direct sales force could cause its sales to
decline.
Risks of Future Acquisitions
As part of Astea's growth strategy, it may pursue the acquisition of
businesses, technologies or products that are complementary to its business.
Acquisitions involve a number of special risks that could harm the Company's
business, including the diversion of management's attention, the integration of
the operations and personnel of the acquired companies, and the potential loss
of key employees. In particular, the failure to maintain adequate operating and
financial control systems or unexpected difficulties encountered during
expansion could harm the Company's business. Acquisitions may result in
potentially dilutive issuances of equity securities, and the incurrence of debt
and contingent liabilities, any of which could materially adversely affect the
Company's business and results of operations.
Risks Associated with International Sales
Astea's international sales accounted for 34% of the Company's revenues
in 2003, 31% in 2002, and 33% in 2001. The Company expects that international
sales will continue to be a significant component of its business. In the
Company's efforts to expand its international presence, it will face certain
risks which it may not be successful in addressing. These risks include:
o difficulties in establishing and managing international
distribution channels and in translating products into foreign
languages;
o difficulties finding staff to manage foreign operations and
collect accounts receivable;
o difficulties enforcing intellectual property rights;
o liabilities and financial exposure under foreign laws and
regulatory requirements;
32
o fluctuations in the value of foreign currencies and currency
exchange rates; and
o potentially adverse tax consequences.
Additionally, the current economic difficulties in several Asian countries could
have an adverse impact on the Company's international operations in future
periods. Moreover, the currency unification in Europe may change the market for
the Company's business software. Any of these factors, if not successfully
addressed, could harm the Company's operating results.
Research and Development in Israel; Risks of Potential Political, Economic or
Military Instability
Astea's principal research and development facilities are located in
Israel. Accordingly, political, economic and military conditions in Israel may
directly affect its business. Continued political and economic instability or
armed conflicts in Israel or in the region could directly harm the Company's
business and operations.
Since the establishment of the State of Israel in 1948, a number of
armed conflicts have taken place between Israel and its Arab neighbors, and a
state of hostility has existed in varying degrees and intensity. This state of
hostility has led to security and economic problems for Israel. The future of
peace efforts between Israel and its Arab neighbors, particularly in light of
the recent violence and political unrest in Israel and the rest of the Middle
East, remains uncertain and several countries still restrict business with
Israel and Israeli companies. These restrictive laws and policies may also
materially harm the Company's operating results and financial condition.
Dependence on Key Personnel that are Required to Perform Military Service
Many of the Company's employees in Israel are obligated to perform
annual military reserve duty in the Israeli army and are subject to being called
to active duty at any time, which could adversely affect the Company's ability
to pursue its planned research and development efforts. The Company cannot
assess the full impact of these requirements on its workforce or business and
the Company cannot predict the effect of any expansion or reduction of these
obligations. However, in light of the recent violence and political unrest in
Israel, there is an increased risk that a number of the Company's employees
could be called to active military duty without prior notice. The Company's
operations could be disrupted by the absence for a significant period of time of
one or more of our key employees or a significant number of other employees due
to military service. Any such disruption in the Company's operations could harm
its operations.
Risks Associated with Inflation and Currency Fluctuations
The Company generates most of its revenues in U.S. dollars but all of
its costs associated with the foreign operations located in Europe, the Pacific
Rim and Israel are denominated in the respective local currency and translated
into U.S. dollars for consolidation and reporting. As a result, the Company is
exposed to risks to the extent that the rate of inflation in Europe, the Pacific
Rim or Israel exceeds the rate of devaluation of their related foreign currency
in relation to the U.S. dollar or if the timing of such devaluations lags behind
inflation in Europe, the Pacific Rim or Israel. In that event, the cost of the
Company's operations in Europe, the Pacific Rim and Israel measured in terms of
U.S. dollars will increase and the U.S. dollar-measured results of operations
will suffer. Historically, Israel has experienced periods of high inflation.
Dependence on Key Personnel; Competition for Employees
The continued growth and success largely depends on the managerial and
technical skills of key technical, sales and management personnel. In
particular, the Company's business and operations are substantially dependent of
the performance of Zack B. Bergreen, the founder and chief executive officer. If
33
Mr. Bergreen were to leave or become unable to perform services for the Company,
the business would likely be harmed.
The Company's success also depends, to a substantial degree, upon its
continuing ability to attract, motivate and retain other talented and highly
qualified personnel. Competition for key personnel is intense, particularly so
in recent years. From time to time the Company has experienced difficulty in
recruiting and retaining talented and qualified employees. There can be no
assurance that the Company can retain its key technical, sales and managerial
employees or that it can attract, assimilate or retain other highly qualified
technical, sales and managerial personnel in the future. If the Company fails to
attract or retain enough skilled personnel, its product development efforts may
be delayed, the quality of its customer service may decline and sales may
decline.
Concentration of Ownership
Currently, Zack B. Bergreen, the Company's chief executive officer,
beneficially owns approximately 47% of the outstanding Common Stock of the
Company. As a result, Mr. Bergreen exercises significant control over the
Company through his ability to influence and control the election of directors
and all other matters that require action by the Company's stockholders. Under
certain circumstances, Mr. Bergreen could prevent or delay a change of control
of the Company which may be favored by a significant portion of the Company's
other stockholders, or cause a change of control not favored by the majority of
the Company's other stockholders. Mr. Bergreen's ability under certain
circumstances to influence, cause or delay a change in control of the Company
also may have an adverse effect on the market price of the Company's Common
Stock.
Possible Volatility of Stock Price
The market price of the Common Stock has in the past been, and may
continue to 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, and
adverse earnings or other financial announcements of the Company's customers as
well as other factors. In addition, the stock market can experience extreme
price and volume fluctuations from time to time which may bear no meaningful
relationship to the Company's performance. Broad market fluctuations, as well as
economic conditions generally and in the software industry specifically, may
result in material adverse effects on the market price of the Company's common
stock.
Limitations of the Company Charter Documents
The Company's Certificate of Incorporation and By-Laws contain
provisions that could discourage a proxy contest or make more difficult the
acquisition of a substantial block of the Company's common stock, including
provisions that allow the Board of Directors to take into account a number of
non-economic factors, such as the social, legal and other effects upon
employees, suppliers, customers and creditors, when evaluating offers for the
Company's acquisition. Such provisions could limit the price that investors
might be willing to pay in the future for the Company's shares of common stock.
The Board of Directors is authorized to issue, without stockholder approval, up
to 5,000,000 shares of preferred stock with voting, conversion and other rights
and preferences that may be superior to the Company's common stock and that
could adversely affect the voting power or other rights of our holders of common
stock. The issuance of preferred stock or of rights to purchase preferred stock
could be used to discourage an unsolicited acquisition proposal.
Nasdaq SmallCap Market Compliance Requirements
The Company's common stock trades on The Nasdaq SmallCap Market, which
has certain compliance requirements for continued listing of common stock,
including a series of financial tests relating to shareholder
34
equity, public float, number of market makers and shareholders, and maintaining
a minimum bid price per share for the Company's common stock. The result of
delisting from The Nasdaq SmallCap Market could be a reduction in the liquidity
of any investment in the Company's common stock and a material adverse effect on
the price of its common stock. Delisting could reduce the ability of holders of
the Company's common stock to purchase or sell shares as quickly and as
inexpensively as they could have done in the past. This lack of liquidity would
make it more difficult for the Company to raise capital in the future. Although
the Company is currently in compliance with all continued listing requirements
of Nasdaq SmallCap, there can be no assurance that the Company will be able to
continue to satisfy such requirements unless operating results improve.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
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.
The Company is currently in the process of revamping its investment portfolio.
As a result, as of December 31, 2003, the Company's investments consisted of
commercial paper. The Company does not expect any material loss with respect to
its investment portfolio.
Foreign Currency Risk
The Company does not use foreign currency forward exchange contracts or
purchased currency options to hedge local currency cash flows or for trading
purposes. All sales arrangements with international customers are denominated in
foreign currency. The Company does not expect any material loss with respect to
foreign currency risk.
The Company has reviewed the impact of its subsidiaries dominated in
German deutsche marks, French francs and the Dutch guilder converting into the
Euro beginning January 1, 2002. This conversion has had no material impact on
its systems related to the Company's business activities and financial
reporting. The Company is not aware of any circumstances indicating that the
introduction of the Euro caused or will cause material misstatements in the
Company's accounting records or adversely affects business operations in the
future.
35
Item 8. Financial Statements and Supplementary Data.
Report of Independent Certified Public Accountants
Board of Directors
Astea International Inc. and Subsidiaries
Horsham, Pennsylvania
We have audited the accompanying consolidated balance sheets of Astea
International Inc. and subsidiaries as of December 31, 2002 and 2003, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Astea International
Inc. and subsidiaries as of December 31, 2002 and 2003, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted
in the United States of America.
\s\BDO Seidman, LLP
- -----------------------
BDO Seidman, LLP
Philadelphia, PA
March 5, 2004
36
ASTEA INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2003 2002
---------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,480,000 $ 4,967,000
Restricted cash 300,000 300,000
Receivables, net of reserves of $810,000 and $1,018,000 3,943,000 7,936,000
Prepaid expenses and other 601,000 691,000
-----------------------------------
Total current assets 8,324,000 13,894,000
Property and equipment, net 509,000 586,000
Capitalized software development costs, net 1,229,000 1,349,000
Other assets 34,000 614,000
-----------------------------------
Total assets $ 10,096,000 $16,443,000
===================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $3,003,000 $3,418,000
Deferred revenues 3,359,000 4,027,000
-----------------------------------
Total current liabilities 6,362,000 7,445,000
Commitments and Contingencies (Note 11)
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued - -
Common stock, $.01 par value, 5,000,000 shares
authorized, 2,965,000 shares issued 30,000 30,000
Additional paid-in capital 22,792,000 22,792,000
Accumulated comprehensive loss -
translation adjustment (776,000) (1,039,000)
Accumulated deficit (18,100,000) (12,568,000)
Less: Treasury stock at cost, 43,000 and 44,000 shares (212,000) (217,000)
-----------------------------------
Total stockholders' equity 3,734,000 8,998,000
-----------------------------------
Total liabilities and stockholders' equity $10,096,000 $16,443,000
===================================
See accompanying notes to the consolidated financial statements.
37
ASTEA INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------
Revenues:
Software license fees $ 1,935,000 $ 6,504,000 $ 6,384,000
Services and maintenance 10,906,000 10,294,000 10,973,000
----------------------------------------------------
Total revenues 12,841,000 16,798,000 17,357,000
----------------------------------------------------
Costs and expenses:
Cost of software license fees 766,000 1,262,000 1,224,000
Cost of services and maintenance 7,095,000 6,345,000 6,808,000
Product development 2,490,000 1,781,000 2,590,000
Sales and marketing 5,875,000 6,218,000 5,396,000
General and administrative 2,198,000 2,426,000 2,837,000
Restructuring charges - - 333,000
----------------------------------------------------
Total costs and expenses 18,424,000 18,032,000 19,188,000
----------------------------------------------------
Loss from operations (5,583,000) (1,234,000) (1,831,000)
Interest income 58,000 112,000 318,000
Interest expense (4,000) (6,000) (9,000)
----------------------------------------------------
Loss before income taxes (5,529,000) (1,128,000) (1,522,000)
Income tax expense - 200,000 -
----------------------------------------------------
Net loss $ (5,529,000) $ (1,328,000) $ (1,522,000)
====================================================
Basic and diluted net loss per share $ (1.89) $ (0.45) $ (0.52)
====================================================
Weighted average shares used in computing basic and
diluted net loss per share 2,922,000 2,921,000 2,926,000
====================================================
See accompanying notes to the consolidated financial statements.
38
ASTEA INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional Accumulated Total
Common Paid-in Comprehensive Accumulated Treasury Stockholders' Comprehensive
Stock Capital Loss Deficit Stock Equity Loss
---------------------------------------------------------------------------------------------------
Balance, January 1, 2001 $ 148,000 $ 22,671,000 $ (1,145,000) $ (9,716,000) $ (3,000) $ 11,955,000
Issuance of common stock under
employee stock purchase plan 3,000 (1,000) 4,000 6,000
Purchases of treasury stock (223,000) (223,000)
Comprehensive loss (111,000) -- (111,000) $ (111 ,000)
Net loss (1,522,000) -- (1,522,000) (1,522,000)
---------------------------------------------------------------------------------------------------
Balance, December 31, 2001 148,000 22,674,000 (1,256,000) (11,239,000) (222,000) 10,105,000 $ (1,633,000)
===================
Issuance of common stock under
employee stock purchase plan -- -- -- (1,000) 5,000 4,000
Comprehensive income -- -- 217,000 -- -- 217,000 $ 217,000
Net loss -- -- -- -- (1,328,000) (1,328,000)
(1,328,000)
---------------------------------------------------------------------------------------------------
Balance, December 31, 2002 148,000 22,674,000 (1,039,000) (12,568,000) (217,000) 8,998,000 $ 1,111,000
===================
Reverse stock split (118,000) 118,000 -- -- -- --
Issuance of common stock under
employee stock purchase plan -- -- -- (3,000) 5,000 2,000
Comprehensive income -- -- 263,000 -- -- 263,000 $ 263,000
Net loss -- -- -- -- (5,529,000) (5,529,000) (5,529,000)
---------------------------------------------------------------------------------------------------
Balance, December 31, 2003 $ 30,000 $ 22,792,000 $ (776,000) $(18,100,000) $(212,000) $ 3,734,000 $ (5,266,000)
===================
See accompanying notes to the consolidated financial statements.
Years ended December 31, 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (5,529,000) $ (1,328,000) $ (1,522,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 910,000 1,295,000 1,421,000
Bad debt expense (477,000) (255,000) (648,000)
Officer's life insurance valuation - 59,000 (763,000)
Deferred income taxes - 200,000 370,000
Changes in operating assets and liabilities:
Receivables 4,952,000 (39,000) 1,108,000
Prepaid expenses and other 67,000 125,000 976,000
Accounts payable and accrued expenses (382,000) 186,000 (1,522,000)
Accrued restructuring - (385,000) 409,000
Deferred revenues (688,000) (203,000) (268,000)
Other (53,000) (110,000) -
--------------------------------------------------------
Net cash used in operating activities (1,200,000) (455,000) (439,000)
--------------------------------------------------------
Cash flows from investing activities:
Proceeds from sales of investments - 2,987,000 519,000
Purchases of property and equipment (216,000) (404,000) (244,000)
Capitalized software development costs (480,000) (807,000) (600,000)
Restricted cash - (300,000) -
Proceeds from the termination of life insurance 632,000 - -
policy
--------------------------------------------------------
Net cash (used in) provided by investing activities (64,000) 1,476,000 (325,000)
--------------------------------------------------------
Cash flows from financing activities:
Proceeds from exercise of stock options and
employee 2,000 4,000 6,000
stock purchase plan
Net repayments of long-term debt - (34,000) (126,000)
Purchases of treasury stock - - (223,000)
--------------------------------------------------------
Net cash provided by (used in) financing activities 2,000 (30,000) (343,000)
--------------------------------------------------------
Effect of exchange rate changes on cash and cash
equivalents (225,000) (95,000) (30,000)
--------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (1,487,000) 896,000 (1,137,000)
Cash and cash equivalents balance, beginning of year 4,967,000 4,071,000 5,208,000
--------------------------------------------------------
Cash and cash equivalents balance, end of year $3,480,000 $4,967,000 $4,071,000
========================================================
Supplemental disclosure of cash flow information:
Cash paid for interest expense $4,000 $6,000 $9,000
========================================================
See accompanying notes to the consolidated financial statements.
ASTEA INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Company Background
Astea International Inc. and Subsidiaries (collectively the
"Company" or "Astea") develops, markets, and supports front-office
solutions for the service management software market. Astea's applications
are designed specifically for organizations for which field service and
customer support are considered mission critical aspects of business
operations. Astea solutions are used in industries such as information
technology, medical devices and diagnostic systems, industrial controls and
instrumentation, retail systems, office automation, imaging systems,
facilities management, telecommunications and other industries with
equipment sales and service requirements.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of
Astea International Inc. and its wholly owned subsidiaries and branches.
All significant intercompany accounts and transactions have been eliminated
upon consolidation.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Revenue Recognition
The Company licenses software under noncancelable perpetual
license agreements. License fee revenues are recognized when a
noncancelable license agreement is executed, the product has been shipped,
the license fee is determined to be fixed or determinable and
collectibility is reasonably assured. If the fee is not fixed or
determinable, revenue is recognized as payments become due from the
customer. If collectibility is not considered probable, revenue is
recognized when the fee is collected. If the payment of the license fee is
coincident to services, which are deemed to be essential to the
functionality of the software, the license fee is deferred and recognized
using contract accounting over the period during which the services are
performed. The Company's software licensing agreements provide for customer
support that begins after the warranty period. The portion of the license
fee associated with customer support during the warranty period is
unbundled from the license fee and is recognized ratably over the warranty
period (generally 90 days) as maintenance revenue. The Company's revenue
recognition policy is in accordance with the American Institute of
Certified Public Accountants' Statement of Position No. 97-2, "Software
Revenue Recognition."
Services revenues, which include consulting, implementation and
training, are recognized as performed. Maintenance revenues are recognized
ratably over the terms of the maintenance agreements.
41
Reimbursable Expenses
The Company charges customers for out-of-pocket expenses incurred
by its employees during the performance of professional services in the
normal course of business. In accordance with EITF 01-14, "Income Statement
Characterization of Reimbursements Received for `Out-of-Pocket' Expenses
Incurred," billings for out-of-pocket expenses that are reimbursed by the
customer are to be included in revenues with the corresponding expense
included in cost of sales. During fiscal years 2003, 2002 and 2001, the
Company billed $326,000, $273,000, and $256,000, respectively, of
reimbursable expenses to customers. During 2002, the Company adopted this
new guidance and restated all prior periods presented to reflect the
appropriate reclassifications.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
an original maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are recorded at cost. Property and
equipment capitalized under capital leases are recorded at the present
value of the minimum lease payments due over the lease term. Depreciation
and amortization are provided using the straight-line method over the
estimated useful lives of the related assets or the lease term, whichever
is shorter. Gains and losses on disposal are recognized in the year of the
disposition. Expenditures for repairs and maintenance are charged to
expense as incurred and significant renewals and betterments are
capitalized.
The Company reviews the carrying values of its long-lived assets
for possible impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable
based on undiscounted estimated future operating cash flows. As of December
31, 2003, the Company has determined that no impairment has occurred.
Capitalized Software Development Costs
The Company capitalizes software development costs in accordance
with 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. Development costs associated with
product enhancements that extend the original product's life or
significantly improve the original product's marketability are also
capitalized once technological feasibility has been established. 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
(three to four years), beginning with the initial release to customers. The
Company continually evaluates whether events or circumstances have 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. As of December 31, 2003, management believes that no revisions to
the remaining useful lives or write-downs of capitalized software
development costs are required.
42
Major Customers
In 2003 and 2002, the Company had no significant customers which
represented 10% of revenues. In 2001, the Company had one customer which
represented 11% of revenue.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
credit risk consist of cash equivalents and accounts receivable. The
Company's policy is to limit the amount of credit exposure to any one
financial institution and place investments with financial institutions
evaluated as being creditworthy, or in short-term money market and tax-free
bond funds which are exposed to minimal interest rate and credit risk.
Concentration of credit risk, with respect to accounts receivable, is
limited due to the Company's credit evaluation process. The Company sells
its products to Original Equipment Manufacturers involved in a variety of
industries including information technology, medical devices and diagnostic
systems, industrial controls and instrumentation and retail systems. While
the Company does not require collateral from its customers, it does perform
continuing credit evaluations of its customer's financial condition.
Senior management reviews accounts receivable on a monthly basis to
determine if any receivables will potentially be uncollectible. The Company
includes any accounts receivable balances that are determined to be
uncollectible in its allowance for doubtful accounts. After all attempts to
collect a receivable have failed, the receivable is written off against the
allowance. Based on all information available, the Company believes its
allowance for doubtful accounts as of December 31, 2003 is adequate.
However, actual write-offs might exceed the recorded allowance.
Fair Value of Financial Instruments
Due to the short term nature of these accounts, the carrying
values of cash, cash equivalents, investments available for sale, accounts
receivable, accounts payable and accrued expenses approximate the
respective fair values.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. 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.
Currency Translation
The accounts of the international subsidiaries and branch
operations are translated in accordance with SFAS No. 52, "Foreign Currency
Translation," which requires that assets and liabilities of international
operations be translated using the exchange rate in effect at the balance
sheet date. The results of operations are translated at average exchange
rates during the year. The effects of exchange rate fluctuations in
translating assets and liabilities of international operations into U.S.
dollars are accumulated and reflected as a currency translation adjustment
in the accompanying consolidated statements of stockholders' equity.
Transaction gains and losses are included in net loss. There are no
material transaction gains or losses in the accompanying consolidated
financial statements for the periods presented.
43
Net Income (Loss) Per Share
The Company presents earnings per share in accordance with SFAS
No. 128, "Earnings per Share." Pursuant to SFAS No. 128, dual presentation
of basic and diluted earnings per share ("EPS") is required for companies
with complex capital structures on the face of the statements of
operations. Basic EPS is computed by dividing net income (loss) by the
weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution from the exercise or conversion
of securities into common stock. Options with an exercise price less than
market at December 31, 2003 to purchase 31,600 and 30,000 shares of common
stock with an average exercise prices per share of $2.81 and $2.75, were
outstanding as of December 31, 2003 and 2002, respectively, but were
excluded from the diluted loss per common share calculation as the
inclusion of these options would have been antidilutive. There were no
options whose exercise price was less than market at December 31, 2001.
Comprehensive Income (Loss)
The Company follows SFAS No. 130 "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income (loss) and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. This
statement also requires that all components of comprehensive income (loss)
be displayed with the same prominence as other financial statements.
Comprehensive income (loss) consists of net income (loss) and foreign
currency translation adjustments. The effects of SFAS No. 130 are presented
in the accompanying Consolidated Statements of Stockholders' Equity.
Stock Compensation
The Company grants stock options for a fixed number of shares to
employees with an exercise price equal to the fair value of the shares at
the date of grant. The Company accounts for stock option grants using the
intrinsic-value method in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related Interpretations. Under the intrinsic-value method, because the
exercise price of the Company's employee stock options is less than or
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
The Company accounts for the employee stock purchase plan under
the recognition and measurement principles of APB 25. No stock-based
employee compensation cost is reflected in net income for options granted,
as all options granted under those plans had an exercise price equal to the
market value of the underlying common stock on the date of grant. However,
there are situations that may occur, such as the accelerated vesting of
options, that require a current charge to income.
44
Had compensation cost for the Company's stock options and employee
stock purchase plan been determined consistent with SFAS No. 123,
"Accounting for Stock-Based Compensation" and SFAS 148, "Accounting for
Stock Based Compensation - Transition and Disclosure," the Company's net
loss and basic and diluted net loss per share would have been:
2003 2002 2001
--------------------------------------------------------------------
Net loss - as reported $ (5,529,000) $ (1,328,000) $ (1,522,000)
Add: Stock based compensation
included in net income as reported,
net or related tax effects - - -
Deduct stock based compensation
determined under fair value based
methods for all awards, net of
related tax effects (329,000) (303,000) (386,000)
--------------------------------------------------------------------
Net loss - pro forma $ (5,858,000) $ (1,631,000) $ (1,908,000)
====================================================================
Basic and diluted loss
per share - as reported $(1.89) $(0.45) $(0.52)
Basic and diluted loss
per share - pro forma $(2.00) $(0.56) $(0.65)
The weighted average fair value of those options granted during
the years ended December 31, 2003, 2002 and 2001 was estimated as $3.15,
$3.52 and $3.55, respectively. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions: risk-free interest rate of
3.97%, 4.30% and 5.45% for 2003, 2002 and 2001 grants, respectively; an
expected life of six years; volatility of 137%, 147% and 85%; and a
dividend yield of zero for 2003, 2002 and 2001 grants, respectively.
Reclassifications
Certain reclassifications of prior years' amounts have been made
to conform to the current year presentation.
45
Recent Accounting Standards or Accounting Pronouncements
In November 2002, the FASB issued Interpretation No. 45 ("FIN
45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
including Indirect Guarantees of Indebtedness of Others" ("Interpretation
No. 45"). This Interpretation elaborates on the existing disclosure
requirements for most guarantees, including loan guarantees such as standby
letters of credit. It also clarifies that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair
market value of the obligations it assumes under that guarantee and must
disclose that information in its interim and annual financial statements.
The initial recognition and measurement provisions of Interpretation No. 45
apply on a prospective basis to guarantees issued or modified after
December 31, 2002. The adoption of FIN 45 did not have a material impact on
our consolidated results of operations, financial position or cash flows.
In December 2002, the FASB issued Statement No. 148, "Accounting
for Stock-Based Compensation-Transition and Disclosure, an amendment of
FASB Statement No. 123 ("SFAS 148"). SFAS 148 amends FASB Statement No.
123, Accounting for Stock-Based Compensation, to provide alternative
methods of transition for an entity that voluntarily changes to the fair
value based method of accounting for stock-based employee compensation. It
also amends the disclosure provisions of that Statement to require
prominent disclosure about the effects on reported net income of an
entity's accounting policy decisions with respect to stock-based employee
compensation. Finally, this Statement amends Accounting Principles Board
("APB") Opinion No. 28, Interim Financial Reporting, to require disclosure
about those effects in interim financial information. SFAS 148 is effective
for financial statements for fiscal years ending after December 15, 2002.
The Company expects to continue to utilize the intrinsic valuation method
for recording employee stock based compensation.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities, clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements,"
to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
applicable immediately for variable interest entities created after January
31, 2003. For variable interest entities created prior to January 31, 2003,
the provisions of FIN 46 have been deferred to the first quarter of 2004.
The adoption of FIN 46 is not expected to have a material effect on the
consolidated financial statements.
In May 2003, the FASB issued Statement no. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity" ("SFAS 150"). SFAS 150 establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics
of both liabilities and equity. It requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset
in some circumstances). Many of those instruments were previously
classified as equity. SFAS 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at
the beginning of the first interim period beginning after June 15, 2003.
The adoption of SFAS 150 did not have an impact on the Company's financial
position or results of operation.
3. Reverse Stock Split
On September 2, 2003, the Company implemented a 1:5 reverse stock
split of the Company's outstanding common stock that was previously
approved at the Annual Meeting of Stockholders. The par value of all post
reverse split shares remained unchanged at $0.01. All fractional shares
that resulted from the reverse split were redeemed by the Company. As a
result of the reverse split, the number of authorized shares was reduced
from 25,000,000 to 5,000,000.
46
Prior years' results have been restated to reflect the results of
the reverse stock split, which includes the common stock and additional
paid-in capital captions on the balance sheet as well as the shares used in
computing earnings per share.
4. Restructuring and Other Charges
During 2001, the Company recorded a restructuring charge of
$409,000 in connection with severance costs to downsize the Company's
employment roles and eliminate office space. For the year ended December
31, 2002, the Company made payments totaling $386,000 and reversed $23,000
that the Company deemed unnecessary for the purposes of the 2001 plan.
5. Receivables
December 31, 2003 2002
------------------------------------------- ----------------- -----------------
Billed receivables $ 3,013,000 $ 5,701,000
Unbilled receivables 930,000 2,235,000
----------------- -----------------
$ 3,943,000 $ 7,936,000
================= =================
Billed receivables represent billings for the Company's products
and services to end users and value added resellers. Billed and unbilled
receivables are shown net of reserves for estimated uncollectible amounts.
Unbilled receivables represent contractual amounts due within one year
under software licenses, which are not yet billable.
For the years ended December 31, 2003, 2002 and 2001, the Company
recorded bad debt expense of $477,000, $255,000 and $648,000, and
write-offs of $687,000, $470,000, and $1,293,000. The increase in activity
from 2002 to 2003 is primarily attributable to the reserve of license and
service revenues related to one customer.
6. Property and Equipment
December 31,
Useful Life 2003 2002
----------- ---- ----
Computers and related
equipment 3 $ 3,484,000 $ 3,564,000
Furniture and fixtures 10 470,000 470,000
Leasehold improvements Lease term 111,000 111,000
Office equipment 3-7 843,000 633,000
---------------- -----------------
4,908,000 4,778,000
Less: Accumulated
depreciation and amortization (4,399,000) (4,192,000)
---------------- -----------------
$ 509,000 $ 586,000
================ =================
Depreciation and amortization expense for the years ended December
31, 2003, 2002 and 2001 was $310,000, $425,000 and $769,000, respectively.
In 2002 and 2003, the Company acquired the equipment under capital
leases, which had a gross asset value of $988,000. The equipment is
included in computers and related equipment.
47
7. Capitalized Software Development Costs
Remaining
Weighted Average
December 31, Life 2003 2002
------------- ---- ---- ----
Capitalized software development costs 1.68 $ 4,984,000 $ 4,505,000
Less: Accumulated amortization (3,755,000) (3,156,000)
-------------------------------------
$ 1,229,000 $ 1,349,000
=====================================
The Company capitalized software development costs for the years
ended December 31, 2003, 2002 and 2001 of $479,000, $807,000 and $600,000,
respectively. Amortization of software development costs for the years
ended December 31, 2003, 2002 and 2001 was $599,000, $870,000 and $800,000,
respectively.
Estimated amortization for the next five years is as follows:
2004 $ 618,000
2005 441,000
2006 161,000
2007 29,000
2008 -
------------------
$ 1,249,000
==================
8. Other Assets
December 31, 2003 2002
---------------------------------------------------------------------------------------------
Cash surrender value of life insurance policies $ - $ 574,000
Security deposit 34,000 40,000
----------------------------------
$ 34,000 $ 614,000
==================================
As of January 1, 2003, the Company ceased making premium payments
on behalf of the Chief Executive Officer for split-dollar life insurance.
In October 2003, the Company terminated this policy and received payment
for the cash surrender value of the policy in the amount of $632,000.
9. Accounts Payable and Accrued Expenses
December 31, 2003 2002
---------------------------------------------------------------------------------------------
Accounts payable $ 656,000 $ 926,000
Accrued compensation and related benefits 1,029,000 1,409,000
Income taxes payable 153,000 153,000
Accrued professional services 241,000 175,000
Sales and payroll taxes 298,000 228,000
Other accrued liabilities 626,000 527,000
---------------------------------------
$ 3,003,000 $ 3,418,000
=======================================
48
10. Income Taxes
The provision (benefit) for income taxes is as follows:
Years ended December 31, 2003 2002 2001
-----------------------------------------------------------------------------------------------------------
Current:
Federal $ - $ - $ (170,000)
State - - -
Foreign - - -
-------------------- -------------------- --------------------
- - (170,000)
Deferred:
Federal - 200,000 170,000
-------------------- -------------------- --------------------
$ - $ 200,000 $ -
==================== ==================== ====================
The approximate income tax effect of each type of temporary
difference is as follows:
December 31, 2003 2002
-------------------------------------------------------- ---------------- -------------------
Deferred income tax assets:
Revenue recognition $ 20,000 $ 27,000
Accruals and reserves not
currently deductible for tax 313,000 461,000
Benefit of net operating loss carryforward 5,377,000 3,693,000
Depreciation 94,000 119,000
Alternative minimum tax 370,000 370,000
Capital loss carryforward 10,000 10,000
-----------------------------------
6,184,000 4,680,000
Deferred income tax liabilities:
Capitalized software development costs (455,000) (499,000)
-----------------------------------
5,729,000 4,181,000
Valuation reserve (5,729,000) (4,181,000)
-----------------------------------
Net deferred income tax asset $ - $ -
===================================
In 2003 and 2002, the Company provided a valuation allowance for
all of its net deferred tax asset based on the uncertainty of the
realization of future taxable income.
In the years ended December 31, 2003 and 2001, there were no
income taxes owed, due to the Company's loss position. During 2002, the
Company increased its valuation allowance to fully offset its deferred tax
asset of $200,000.
The Company has a tax holiday in Israel which expires in 2005. The
net impact on 2002 and 2001 of the tax holiday was a decrease in net loss
and net loss per share by $100,193, $172,938 and $0.01 and $0.01,
respectively. In 2003, the Israeli subsidiary sustained a net loss of
$54,243.
As of December 31, 2003, the Company had a net operating loss
carryforward for United States federal income tax purposes of approximately
$23,600,000. Included in the aggregate net operating loss carryforward is
$7,761,000 of tax deductions related to equity transactions, the benefit of
which will be credited to stockholders' equity, if and when realized after
the other tax deductions in the carryforwards have been realized. The net
operating loss carryforward begins to expire in 2016.
The Company does not provide for federal income taxes or tax
benefits on the undistributed earnings or losses of its international
subsidiaries because earnings are reinvested and, in the opinion of
49
management, will continue to be reinvested indefinitely. At December 31,
2003, the Company had not provided federal income taxes on cumulative
earnings of individual international subsidiaries of $1,244,000. Should
these earnings be distributed in the form of dividends or otherwise, the
Company would be subject to both U.S. income taxes and withholding taxes in
various international jurisdictions. Determination of the related amount of
unrecognized deferred U.S. income tax liability is not practicable because
of the complexities associated with its hypothetical calculation. As noted
above, the Company has significant net operating loss carryforwards for
U.S. federal income taxes purposes which are available to offset the
potential tax liability if the earnings were to be distributed.
The extent to which the loss carryforward can be used to offset
future taxable income and tax liabilities, respectively, may be limited,
depending on the extent of ownership changes within any three-year period.
11. Commitments and Contingencies
The Company leases facilities and equipment under noncancelable
operating leases.Rent expense under all operating leases for the years
ended December 31, 2003, 2002 and 2001 was $867,000, $970,000 and
$1,002,000, respectively.
Future minimum lease payments under the Company's leases as of
December 31, 2003 are as follows:
Operating Leases
2004 $ 858,000
2005 622,000
2006 505,000
2007 497,000
2008 499,000
Thereafter 424,000
---------------------
Total minimum lease payments $ 3,405,000
=====================
On September 11, 2002, $300,000 of cash was pledged as collateral
on an outstanding letter of credit related to a lease obligation and was
classified as restricted cash on the balance sheet. The certificate of
deposit, which represents the collateral on the letter of credit,
automatically renews every six months. The letter of credit is due to
expire in February 2009.
The Company is from time to time involved in certain legal actions
and customer disputes arising in the ordinary course of business. In the
Company's opinion, the outcome of such actions will not have a material
adverse effect on the Company's financial position or results of
operations.
12. Profit Sharing Plan/Savings Plan
The Company maintains a voluntary profit sharing plan, including a
Section 401(k) feature, covering all qualified and eligible employees.
Company contributions to the profit sharing plan are determined at the
discretion of the Board of Directors. The Company matches 25% of eligible
employees' contributions to the 401(k) plan up to a maximum of 1.5% of each
employee's compensation. The Company contributed approximately $61,000,
$57,000 and $33,000 for the years ended December 31, 2003, 2002 and 2001,
respectively.
50
13. Equity Plans
Stock Option Plans
The Company has Stock Option Plans (the "Plans") under which
incentive and non-qualified stock options may be granted to its employees,
officers, directors and others. Generally, incentive stock options are
granted at fair value, become exercisable over a four-year period, and are
subject to the employee's continued employment. Non-qualified options are
granted at exercise prices determined by the Board of Directors and vest
over varying periods. A summary of the status of the Company's stock
options as of December 31, 2003, 2002 and 2001 and changes during the years
then ended is as follows:
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
------------------- -----------
Shares Wtd. Avg. Wtd. Avg.
Available Exercise Exercise
for Grant Shares Price Shares Price
---------------------------------------------------------------------------------
Balance, January 1, 2001 368,000 230,000 $13.79 55,000 $23.13
Granted at market (150,000) 150,000
Cancelled 35,000 (35,000)
Expired (3,000) -
---------------------------------------------------------------------------------
Balance, December 31, 2001 250,000 345,000 $ 8.38 101,000 $10.78
Granted at market (174,000) 174,000
Cancelled 72,000 (72,000)
Expired (1,000) - -
---------------------------------------------------------------------------------
Balance, December 31, 2002 147,000 447,000 $ 6.24 138,000 $8.96
Granted at market (127,000) 127,000
Cancelled 96,000 (96,000)
---------------------------------------------------------------------------------
Balance, December 31, 2003 116,000 478,000 $ 6.05 213,000 $7.91
=================================================================================
The following table summarizes information about stock options
outstanding at December 31, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- --------------------------------
Weighted
Average
Range of Remaining Weighted Weighted
Exercise Number Contract Average Number Average
Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price
------ ----------- ------------ -------------- ----------- --------------
$ 2.75 - $ 4.85 348,000 6.99 $ 3.99 125,000 $ 4.38
$ 5.31 - $ 8.45 80,000 6.56 $ 7.15 51,000 $ 7.43
$ 12.50 - $ 31.25 41,000 4.51 $ 21.26 37,000 $ 20.29
-------- ------- ------ ------
$ 2.75 - $ 31.25 478,000 6.70 $ 6.05 213,000 $ 7.91
Employee Stock Purchase Plan
In May 1995, the Company adopted an employee stock purchase plan
(the "ESPP") which allows full-time employees with one year of service the
opportunity to purchase shares of the Company's common stock through
payroll deductions at the end of bi-annual purchase periods. The purchase
price is the lower of 85% of the average market price on the first or last
day of the purchase periods. An employee may purchase up to a maximum of
100 shares or 10% of the employee's base salary, whichever is less,
provided that the employee's ownership of the Company's stock is less than
5% as defined in the ESPP. Pursuant to the ESPP, 50,000 shares of common
stock were reserved for issuance. During 2003, 2002 and 2001, shares
purchased were 1,100, 1,200 and 1,629, respectively. At December 31, 2003,
there were 30,021 shares available for future purchases.
51
14. Related Party Transactions
In 2002 and 2001, the Company paid premiums on behalf of the
majority stockholder and his wife of $69,600 under split dollar life
insurance policies. During 2003, the Company terminated these policies and
received $632,000 on the cash surrender value of the policies.
In November 2001, the Company entered into a five year development
and license agreement with a third party owned in part by a Director of the
Company. The agreement requires the third party to design, develop and
deliver a product to be re-sold by the Company in exchange for a royalty
fee. In accordance with the agreement, the Company paid royalty fees
totaling $22,500, $37,500 and $7,500 in 2003, 2002 and 2001, respectively.
During 2003, the owner of the third party terminated his relationship with
the Company as a Director and was engaged as a sales consultant. In this
capacity, the Company made payments totaling $17,000 in 2003. In January
2004, this relationship was terminated.
52
15. Geographic Segment Data
The Company operates in one business segment. The following table
presents information about the Company's operations by geographic area:
Year ended December 31, 2003 2002 2001
-------------------------------------------------------------------------------------------------------------------
Revenues:
Software license fees
United States
Domestic $ 1,151,000 $ 4,296,000 $ 3,470,000
Export - 72,000 209,000
--------------------------------------------------------------
Total United States
software license fees 1,151,000 4,368,000 3,679,000
Europe 337,000 1,151,000 1,625,000
Other foreign 447,000 985,000 1,080,000
--------------------------------------------------------------
Total foreign software
license fees 784,000 2,136,000 2,705,000
--------------------------------------------------------------
Total software license fees 1,935,000 6,504,000 6,384,000
Services and maintenance
United States
Domestic 6,239,000 7,037,000 7,700,000
Export 1,140,000 252,000 351,000
--------------------------------------------------------------
Total United States
service and
maintenance revenue 7,379,000 7,289,000 8,051,000
--------------------------------------------------------------
Europe 2,300,000 2,126,000 2,104,000
Other foreign 1,227,000 879,000 818,000
--------------------------------------------------------------
Total foreign service and
maintenance revenue 3,527,000 3,005,000 2,922,000
--------------------------------------------------------------
Total service and
maintenance revenue 10,906,000 10,294,000 10,973,000
--------------------------------------------------------------
Total revenue $ 12,841,000 $ 16,798,000 $ 17,357,000
==============================================================
Loss from continuing operations
United States $ (3,757,000) $ (1,332,000) $ 1,748,000
Europe (1,361,000) (454,000) (908,000)
Other foreign (411,000) 458,000 1,134,000
--------------------------------------------------------------
Total loss from
continuing operations $ (5,529,000) $ (1,328,000) $ (1,522,000)
==============================================================
Identifiable assets
United States $ 6,493,000 $ 11,786,000 $ 13,274,000
Europe 2,404,000 2,753,000 3,240,000
Other foreign 1,199,000 1,904,000 1,501,000
--------------------------------------------------------------
Total assets $ 10,096,000 $ 16,443,000 $ 18,015,000
==============================================================
53
16. Selected Consolidated Quarterly Financial Data (Unaudited)
2003 Quarter Ended Dec 31, Sep 30, Jun 30, Mar 31,
--------------------------------------------------------------------------------------------------------------------
Revenues $2,871,000 $2,844,000 $ 3,138,000 $ 3,988,000
Gross profit 755,000 983,000 1,127,000 2,114,000
Net loss (1,979,000) (1,580,000) (1,503,000) (467,000)
Basic and diluted net loss per share (0.68) (0.54) (0.51) (0.16)
Shares used in computing basic
and diluted net loss per share
(in thousands) 2,922 2,922 2,921 2,921
2002 Quarter Ended Dec 31, Sep 30, Jun 30, Mar 31,
--------------------------------------------------------------------------------------------------------------------
Revenues $ 4,697,000 $ 4,846,000 $ 3,302,000 $ 3,953,000
Gross profit 2,975,000 2,875,000 1,295,000 2,046,000
Net income (loss) 299,000 229,000 (1,562,000) (294,000)
Basic and diluted net income (loss) 0.10 0.08 (0.53) (0.10)
per share
Shares used in computing basic
and diluted net income (loss)
per share (in thousands) 2,921 2,921 2,920 2,920
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Our management, under the supervision and with the participation of the
Chief Executive Officer and Chief Financial Officer, have evaluated the
effectiveness of our controls and procedures related to our reporting and
disclosure obligations as of December 31, 2003, which is the end of the period
covered by this Annual Report on Form 10-K. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures are sufficient to provide that (a) material information
relating to us, including our consolidated subsidiaries, is made known to these
officers by our and our consolidated subsidiaries other employees, particularly
material information related to the period for which this periodic report is
being prepared; and (b) this information is recorded, processed, summarized,
evaluated and reported, as applicable, within the time periods specified in the
rules and forms promulgated by the Securities and Exchange Commission.
There were no changes that occurred during the fiscal quarter ended
December 31, 2003 that have materially affected, or are reasonable likely to
materially affect, our internal controls over financial reporting.
54
PART III
Item 10. Directors and Executive Officers of the Registrant.
The Directors and the executive officers of the Company, their ages,
business experience and the positions currently held by each such person with
the Company are listed below.
Zack B. Bergreen, 58, founded the Company in November 1979. From
November 1979 to January 1998, he served as President, Treasurer and Director of
the Company. In April 1995, he was elected Chief Executive Officer and Chairman
of the Board of Directors. From January 1998 through August 1999 Mr. Bergreen
served as Chairman of the Board and Chief Executive Officer. Mr. Bergreen has
served as Chairman of the Board since August 1999, when Bruce R. Rusch was
elected President and Chief Executive Officer. Following the resignation of Mr.
Rusch on May 30, 2000, Mr. Bergreen resumed the positions of President and Chief
Executive Officer, and on June 27, 2000, was elected as Secretary. Mr. Bergreen
holds Bachelor of Science and Master of Science degrees in Electrical
Engineering from the University of Maryland.
Adrian A. Peters, 54, joined the Company's Board of Directors in June
2000 and is a member of the Audit Committee. He is the President and founder of
Tellstone (previously Boston Partners), a firm that specializes in providing
strategic advice to high-tech firms. From 1986 through 1995, he held various
positions as President and CEO of Siemens AG companies. Prior to that he held
senior positions at Federale, an investment firm, Arthur Andersen Consulting and
IBM. Mr. Peters studied science and engineering at the University of
Stellenbosch in South Africa as well as management at Harvard Business School.
Thomas J. Reilly, Jr., 64, joined Astea's Board in September 2003. He
is also Chairman of the Audit Committee. A thirty-one year veteran of Arthur
Andersen, he brings extensive experience auditing both public and private
corporations in the manufacturing, professional services, construction and
distribution industries to the Company. He was partner in charge of the
Philadelphia Audit Division of Arthur Andersen for seven years and participated
in Quality Control reviews of several U.S. and International offices before
retiring in 1996.
Eric Siegel, 47, joined the Astea Board of Directors in September 2002.
In 1983, he founded Siegel Management Company, a strategy consulting and
investment banking advisory for a diverse client base, principally middle market
firms. His expertise and experience has been utilized by growth companies,
public market and acquisition candidates, industry consolidators and turnarounds
alike. He also serves on the Board of NCO Group (NASDAQ: NCOG) and PSCInfoGroup.
An established author, he has been a lecturer in management at the Wharton
School for over twenty years. Mr. Siegel is a magna cum laude graduate of the
University of Pennsylvania and received an MBA from the Wharton School with
honors.
Rick Etskovitz, 49, joined the Company in June 2000 when he was elected
Chief Financial Officer and Treasurer. He is a certified public accountant and
shareholder of a local accounting firm. From 1986 through 1993, he worked with
the Company as the engagement partner with its independent accounting firm. Mr.
Etskovitz received his Bachelor of Science degree from the Pennsylvania State
University in 1976 and his Masters of Business Administration Degree from the
Wharton Graduate School at the University of Pennsylvania in 1980.
John Tobin, 38, joined the Company in June 2000 and serves as Vice
President and General Counsel. Mr. Tobin is responsible for handling the legal
affairs of the Company, along with various corporate development and business
development initiatives. Prior to joining Astea, John worked at the Philadelphia
55
law firms of Pepper Hamilton and Wolf Block, specializing in corporate
transactions and intellectual property. Prior to returning to the Philadelphia
area in 1998, he worked as a corporate and entertainment lawyer in Los Angeles,
specializing in motion picture, television and music transactions and licensing,
most recently with PolyGram Filmed Entertainment. Mr. Tobin holds a B.S. in
Economics from the Wharton School of the University of Pennsylvania in 1987, and
received his law degree from the University Of Pennsylvania in 1992.
Kenneth Roy, 44, Vice President of Sales, is chartered with leading the
Company's sales operations to drive revenue and market share. A seasoned and
successful sales executive with over 17 years' experience, Ken has directed and
developed multiple sales organizations focused on value-based selling within the
manufacturing and supply chain domains. Most recently, Ken came from PTC where
he was responsible for global accounts in the Aerospace and Defense sector.
Prior to that, Ken was a Regional V.P. for VerticalNet Solutions where he led
the sales force and architected their go to market strategy. He has also served
as a global account manager at Oracle and has enjoyed successful achievements at
Sybase and Lotus Development Corp. He is a graduate of Eastern College and a
veteran of the Marine Corps.
Marikit Klein-Smith, 37, brings to Astea over 14 years of experience in
high-tech marketing, with progressive management experience at leading
enterprise software and service companies including eOnline, SAP America and
Deloitte Consulting. She is responsible for the Company's branding initiatives
and oversees product marketing, lead generation, PR and analyst relation
efforts. At eOnline, Inc., Marikit supported the company's start-up growth as
Vice President of Marketing Communications. She was a member of the executive
management team, established the company's branding and marketing communications
programs, participated in its IPO as well as international expansion process,
and provided internal communications strategies for an acquisition. She has held
marketing management positions at SAP America and Deloitte Consulting with North
American and Global responsibilities. Marikit holds a Bachelor of Science in
Economics from Ursinus College.
Sami Quazi, 36, is responsible for managing the North American
consulting services and staff at Astea. He brings to Astea extensive experience
in leading large software development and support teams. He has worked in
various management roles managing multiple projects across multiple verticals,
while maintaining P&L responsibility, strategic planning, employee management,
hiring, solution design, software development, software and IT support,
training, and management consulting. He is technology agnostic and client
centric in his approach. Sami graduated from the University of Pennsylvania with
a BA and an MA in Philosophy.
Mark L. Kent, 52, is responsible for growing Astea's business in the
European, middle Eastern and African ("EMEA") regions. He brings tremendous
drive, energy and substantial operational and commercial experience to Astea,
having run a variety of UK/EMEA operations as either CEO, Managing Director or
General Manager for Information Builders inc., Bachman Information Systems Inc.,
Bluestone Software/HP, Aonix Europe/THALES and eGrail Inc./FILENET. More
recently he has acted as an advising and business consultant to a variety of
Venture Capital firms and "angel" investors, assisting them in the restructure
of data management/database vendors, real-time data management providers and
multi-media/telecommunications enterprises. Mark is a qualified Accountant and
studied business and computer management at Southampton University.
Paul Buzby, 46, is responsible for growing Astea International's
overall Asia Pacific business with direct responsibility for sales, service,
marketing, finance and administrative teams. Paul brings to Astea his extensive
sales experience in the IT industry in Australia, having previously held senior
sales executive positions at Onyx, Saleslogix, Sun Microsystems and Computer
Associates. The Philadelphia native has been living in Australia for the last 18
years. He holds a BS in Mechanical Engineering and a MS in Electrical
Engineering, both from Drexel University.
56
Danny Klein, 44, is Vice President of Development. Mr. Klein is
responsible for managing the development center in Israel which brings to market
value-driven solutions. In this capacity, he executes new product lines and
provides second-level support to Astea offices and customers all over the world.
He is also chartered with enhancing the company's technology infrastructure.
With over 20 years of experience managing the development of market-leading
software, Danny comes to Astea with a strong background in programming and
development methodologies. Previously, he was a software development and project
manager at MLL Jerusalem, a service bureau for banking software solutions.
During his tenure, Danny managed the development of financial applications. He
also led the company's technology upgrade to rapid application development tools
to meet the needs for rapid innovation, scalability and security required in the
industry. Prior to MLL, he managed various systems in the Israeli Defense Forces
(IDF). Danny holds a Bachelors degree in computer programming from C.E.I.E.
Institute and a degree in senior business management from the University of
Haifa.
Section 16(a) of the Exchange Act requires the Company's Directors,
executive officers and holders of more than 10% of the Company's Common Stock
(collectively, "Reporting Persons") to file with the Commission initial reports
of ownership and reports of changes in ownership of Common Stock of the Company.
Such persons are required by regulations of the Commission to furnish the
Company with copies of all such filings. Based on its review of the copies of
such filings received by it with respect to the fiscal year ended December 31,
2003 and written representations from certain Reporting Persons, the Company
believes that all Reporting Persons complied with all Section 16(a) filing
requirements in the fiscal year ended December 31, 2003.
The Company's audit committee includes Adrian A. Peters, Eric Siegel
and Thomas J. Reilly, Jr. Thomas J. Reilly, Jr. serves as the audit committee's
financial expert. In this capacity, Mr. Reilly is independent, pursuant to
Section 10A(m)(3) of the Exchange Act.
The Company has adopted the Code of Ethics for Chief Executive and
Senior Financial Officers ("Code of Ethics"), which the Chief Executive Officer,
Chief Financial Officer and Controller of the Company are expected to comply.
The Code of Ethics is a supplement to the company-wide Code of Conduct and is
available in print upon request. If any substantive amendments are made to the
Code of Ethics or if there is a grant of a waiver, including any implicit
waiver, from a provision of the code to the Company's Chief Executive Officer,
Chief Financial Officer or Controller, the Company will disclose the nature of
such amendment or waiver on the Company's website or in a report on Form 8-K.
57
Item 11. Executive Compensation.
The following table sets forth information concerning the compensation for
services in all capacities to the Company for the fiscal years ended December
31, 2003, 2002, and 2001, of the following persons (i) each person who served as
Chief Executive Officer during the year ended December 31, 2003, and (ii) four
other executive officers of the Company in office at December 31, 2003 who
earned more than $100,000 in salary and bonus in fiscal 2003 (collectively, the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term
Compensation
------------------------------------------- ------------
Securities
Underlying
Options All Other
Name and Principal Position Year Salary ($) Bonus ($) (# of shares) Compensation ($)
--------------------------- ----- ----------- ---------- ------------- ----------------
Zack B. Bergreen 2003 $ 210,000 -- -- --
Chairman of the Board and Chief 2002 130,000 -- -- 69,600 (2)
Executive Officer 2001 130,000 -- 400,000 (1) 69,600 (2)
Rick Etskovitz 2003 $ 129,525 -- 10,000 (3) --
Chief Financial Officer 2002 127,050 -- 10,000 (3) --
2001 119,160 -- 5,000 (3) --
John Tobin (5) 2003 $ 150,306 -- 10,000 (3) --
Vice President and General Counsel 2002 151,033 (4) -- 10,000 (3) --
2001 126,895 (4) -- 5,000 (3) --
Ken Roy (6) 2003 $ 15,865 -- 35,000 (4) --
Vice President, North American Sales
Marikit Klein-Smith (7) 2003 $ 90,192 $ 9,700 10,000 (4) --
Vice President, Marketing
(1) Represents options to purchase shares of Common Stock, which was awarded as
compensation for a decrease taken in salary.
(2) Includes premiums for term, split-dollar life insurance paid by the Company
on behalf of the Named Executive Officer.
(3) Represents options to purchase shares of Common Stock, which was awarded
based on merit.
(4) Compensation paid to Coleman Legal, a third party legal services provider.
(5) Hired as employee effective January 1, 2003.
(6) Ken Roy joined Astea in November 2003.
(7) Marikit Klein-Smith joined Astea in March 2003.
58
Option Grants in Last Fiscal Year
The following table sets forth each grant of stock options made during the
year ended December 31, 2003 to each of the Named Executive Officers:
Individual Grants
-----------------
Percent of
Total Potential Realizable Value at
Number of Options Assumed
Securities Granted to Annual Rates of Stock Price
Underlying Employees Exercise Appreciation for Option
Options In Fiscal Price Expiration Terms(2)
Name Granted (#) Year ($/Share)(1) Date 5%($) 10%($)
---- ----------- ------ ------------ ---- ----- ------
Rick Etskovitz 10,000(3) 9% $3.34 11/12/2013 $54,405 $86,631
John Tobin 10,000(3) 9% $3.34 11/12/2013 $54,405 $86,631
Ken Roy 35,000(3) 30% $3.34 11/12/2013 $190,418 $303,208
Marikit Klein-Smith 10,000(3) 9% $2.90 03/27/2013 $47,238 $75,219
(1) The exercise price per share of each option was fixed by the Board of
Directors.
(2) Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to the expiration of their
term assuming the specified compounded rates of appreciation (5% and 10%)
on the market value of the Company's Common Stock on the date of option
grant over the term of the options. These numbers are calculated based on
rules promulgated by the Commission and do not reflect the Company's
estimate of future stock price growth. Actual gains, if any, on stock
option exercises and Common Stock holdings are dependent on the timing of
such exercise and the future performance of the Company's Common Stock.
There can be no assurance that the rates of appreciation assumed in this
table can be achieved or that the amounts reflected will be received by the
individual.
(3) Options to purchase shares will vest in equal installments on each of the
first four anniversaries of the grant date.
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
The following table sets forth, for each of the Named Executive
Officers, information with respect to the exercise of stock options during the
year ended December 31, 2003 and the year-end value of unexercised options:
Value of Unexercised
Shares Numbers of Unexercised In-the-Money Options
Acquired on Value Options at Year End at Year End
Name Exercise(#) Realized($) Exercisable/Unexercisable Exercisable/Unexercisable
---- ----------- ----------- ------------------------- -------------------------
Zack B. Bergreen -- -- 40,000/40,000 --
Rick Etskovitz -- -- 8,750/21,250 --
John Tobin -- -- 10,000/20,000 --
Ken Roy -- -- --/35,000 --
Marikit Klein-Smith -- -- -- /10,000 --/$29,000
59
Employment Agreements and Severance Arrangements with Executive Officers
The Company has not entered into employment agreements with any of its
current Executive Officers.
Board Interlocks and Insider Participation
No executive officer of the Company served as a member of the Board of
Directors, compensation committee, or other committee performing equivalent
functions, of another entity one of whose executive officers served as a
Director of the Company. Other than Mr. Bergreen, no person who served as a
member of the Board was, during the fiscal year ended December 31, 2003,
simultaneously an officer, employee or consultant of the Company or any of its
subsidiaries. Mr. Bergreen did not participate in any Company determination of
his own personal compensation matters.
Compensation of Directors
Directors who are not employees of the Company receive a $5,000 annual
retainer and a fee of $1,500 for attendance at each regular and special meeting
of the Board of Directors, and are also reimbursed for their reasonable
out-of-pocket expenses incurred in attending meetings. Non-Employee Directors
may elect to receive, in lieu of the foregoing cash compensation, unrestricted
shares of Common Stock of the Company. Shares of Common Stock in lieu of cash
compensation are acquired at the fair market value of the Common Stock on the
last day of the calendar quarter during which the cash compensation was earned
and foregone. Non-employee Directors are also eligible to receive annual stock
option grants under the Company's 1995 Non-Employee Director Stock Option Plan.
Directors who are employees are not compensated for their service on the Board
of Directors or any committee thereof.
60
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth as of March 5, 2004: (i) the name of
each person who, to the knowledge of the Company, owned beneficially more than
5% of the shares of Common Stock of the Company outstanding at such date; (ii)
the name of each Director; and (iii) the name of each current executive officer
of the Company. The following table also sets forth as of March 5, 2004 the
number of shares owned by each of such persons and the percentage of the
outstanding shares represented thereby, and also sets forth such information for
Directors, nominees and executive officers as a group.
Name and Address Of Beneficial Owner Amount of Ownership(1) Percent of Class(2)
- ------------------------------------- ---------------------- -------------------
Zack B. Bergreen(3) 1,398,000 47.2%
c/o Astea International
240 Gibraltar Road
Horsham, Pennsylvania 19044
Adrian Peters (4) 8,500 *
Eric Siegel 4,700 *
Thomas J. Reilly, Jr. 1,000 *
Rick Etskovitz (5) 16,500 *
John Tobin (6) 13,750 *
Ken Roy 0 *
Marikit Klein-Smith 2,500 *
Leviticus Partners, L.P. 224,920 7.7%
All current directors, nominees and executive officers 1,444,950 47.5%
as a group (8 persons)(1)-(8)
* Less than 1% of the outstanding shares of Common Stock.
(1) Except as noted in the footnotes to this table, each person or entity named
in the table has sole voting and investment power with respect to all
shares of Common Stock owned, based upon information provided to the
Company by Directors, officers and principal stockholders. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission (the "Commission") and includes voting and investment
power with respect to shares of Common Stock subject to options currently
exercisable or exercisable within 60 days after the Record Date ("presently
exercisable stock options").
(2) Applicable percentage of ownership as of the Record Date is based upon
2,921,901 shares of Common Stock outstanding as of that date. Beneficial
ownership is determined in accordance with the rules of the Commission and
includes voting and investment power with respect to shares. Presently
exercisable stock options are deemed outstanding for computing the
percentage ownership of the person holding such options, but are not deemed
outstanding for computing the percentage of any other person.
(3) Includes 1,093,203 shares of Common Stock held by trusts of which Mr.
Bergreen and his wife are the only trustees, 209,192 shares held by trusts
with independent trustees, and 55,803 shares of Common Stock held by a
family limited partnership of which Mr. Bergreen is the sole general
partner. Also included are 40,000 options, all of which are currently
exercisable.
(4) Board Of Directors. Represents options to purchase 8,500 shares, all of
which are currently exercisable.
(5) Chief Financial Officer. Represents 4,000 shares of common stock and also
options to purchase 12,500 shares, 8,750 of which are currently
exercisable, and 3,750 of which shall become exercisable within the next 60
days.
(6) Vice President and General Counsel. Represents options to purchase 13,750
shares, 10,000 of which are currently exercisable and 3,750 of which shall
become exercisable within the next 60 days.
61
Item 13. Certain Relationships and Related Transactions.
Over the years, the Company has paid premiums on behalf of the majority
stockholder and his wife under split dollar life insurance policies. During
2003, the Company terminated these policies and received $632,000 on the cash
surrender value of the policies.
Item 14. Principal Accountant Fees and Services
The following table presents fees for professional audit services rendered by
BDO Seidman, LLP for the audit of the Company's consolidated financial
statements for the years ended December 31, 2003 and 2002, and fees billed for
other services rendered by BDO Seidman, LLP during those periods:
2003 2002
----------------- ----------------
Audit Fees (1) $ 145,500 $ 127,800
Audit-related Fees (2) 9,000 8,000
Tax Fees (3) 62,200 67,900
All Other Fees (4) - -
----------------- ----------------
Total (5) $ 216,700 $ 203,700
================= ================
(1) Audit fees consisted of fees for professional services performed by BDO
Seidman, LLP for the audit of the Company's annual consolidated
financial statements and review of consolidated financial statements
included in the Company's 10-Q filings, and services that are normally
provided in connection with statutory and regulatory filings or
engagements.
(2) Audit-related fees consisted of fees for assurance and related services
performed by BDO Seidman, LLP. This includes employee benefit plan
audit and consulting on financial accounting and reporting standards.
(3) Tax fees consisted of fees for tax compliance, tax advice and tax
planning. (4) All other fees include fees for services not included in
the other three categories. (5) The Audit Committee pre-approved 100%
of the fees for 2003.
62
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1)(A) Consolidated Financial Statements.
i) Consolidated Balance Sheets at December 31, 2003 and 2002
ii) Consolidated Statements of Operations for the years ended
December 31, 2003, 2002, and 2001
iii) Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2003, 2002, and 2001
iv) Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002, and 2001
v) Notes to the Consolidated Financial Statements
(a)(1)(B) Report of Independent Public Accountants.
(a)(2) Schedules.
a) Schedule II - Valuation and Qualifying Accounts
Schedule listed above has been omitted because the
information required to be set forth therein is not
applicable or is shown in the accompanying Financial
Statements or notes thereto.
(a)(3) List of Exhibits.
The following exhibits are filed as part of and incorporated by
reference into this Annual Report on Form 10-K:
Exhibit No. Description
2.1 Stock Purchase Agreement, dated August 14, 1998, among
the Company, Ixchange Technology Holdings Limited,
Network Data, Inc., Bendata, Inc., Bendata (Europe)
Limited LLC, and Bendata Holding, Inc. (Incorporated
herein by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K dated September 4, 1998).
2.2 Stock Purchase Agreement, dated December 31, 1998, among
the Company, Network Data, Inc. and Industri-Matematik
International Corporation (Incorporated herein by
reference to Exhibit 2.1 to the Company's Current Report
on Form 8-K dated December 31, 1998).
3(i).1 Certificate of Incorporation of the Company
(Incorporated herein by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-1, as amended
(File No. 33-92778)).
3(ii).1 By-Laws of the Company (Incorporated herein by reference
to Exhibit 3.2 to the Company's Registration Statement
on Form S-1, as amended (File No. 33-92778)).
3.2* Certificate of Amendment of Certificate of Incorporation
of the Company.
4.1 Specimen certificate representing the Common Stock
(Incorporated herein by Reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-1, as amended
(File No. 33-92778)).
63
10.1 1994 Amended Stock Option Plan (Incorporated herein by
reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-1, as amended (File No. 33-92778)).
10.2 Form of Non-Qualified Stock Option Agreement under the
1994 Amended Stock Option Plan (Incorporated herein by
reference to Exhibit 10.2 to the Company's Registration
Statement on Form S-1, as amended (File No. 33-92778)).
10.3 Form of Incentive Stock Option Agreement under the 1994
Amended Stock Option Plan (Incorporated herein by
reference to Exhibit 10.3 to the Company's Registration
Statement on Form S-1, as amended (File No. 33-92778)).
10.4 1991 Amended Non-Qualified Stock Option Plan
(Incorporated herein by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-1, as amended
(File No. 33-92778)).
10.5 Form of Non-Qualified Stock Option Agreement under the
1991 Amended Non- Qualified Stock Option Plan
(Incorporated herein by reference to Exhibit 10.5 to the
Company's Registration Statement on Form S-1, as amended
(File No. 33-92778)).
10.6 1995 Employee Stock Purchase Plan (Incorporated herein
by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-1, as amended (File No.
33-92778)).
10.7 Amendment No. 1 to 1995 Employee Stock Purchase Plan
(Incorporated herein by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1997).
10.8 1995 Employee Stock Purchase Plan
Enrollment/Authorization Form (Incorporated herein by
reference to Exhibit 4.7 to the Company's Registration
Statement on Form S-8, filed on September 19, 1995 (File
No. 33-97064)).
10.9 Amended and Restated 1995 Non-Employee Director Stock
Option Plan (Incorporated herein by reference to Exhibit
10.9 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997).
10.10 Form of Non-Qualified Stock Option Agreement under the
1995 Non-Employee Director Stock Option Plan
(Incorporated herein by reference to Exhibit 4.5 to the
Company's Registration Statement on Form S-8, filed on
September 19, 1995 (File No. 33-97064)).
10.11 1997 Stock Option Plan (Incorporated herein by reference
to Exhibit 10.10 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1996).
10.12 Form of Non-Qualified Stock Option Agreement under the
1997 Stock Option Plan. (Incorporated herein by
reference to Exhibit 10.11 to the Company's Annual
Report on Form 10-K for the fiscal year ended December
31, 1996).
10.13 Form of Incentive Stock Option Agreement under the 1997
Stock Option Plan (Incorporated herein by reference to
Exhibit 10.12 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1996).
10.14 1998 Stock Option Plan (Incorporated herein by reference
to Exhibit 10.14 to the Company's Annual Report on Form
10-K for the year ended December 31, 1997).
10.15 Form of Non-Qualified Stock Option Agreement under the
1998 Stock Option Plan. (Incorporated herein by
reference to Exhibit 10.15 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1997).
10.16 Form of Incentive Stock Option Agreement under the 1998
Stock Option Plan. (Incorporated herein by reference to
Exhibit 10.16 to the Company's Annual Report on Form
10-K for the year ended December 31, 1997).
10.17 Loan and Security Agreement, dated August 1, 1999,
64
between the Company and Silicon Valley Bank
(Incorporated herein by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1999).
10.20 Modification Agreement dated April 30, 1998 by and among
the Company, PNC Bank, National Association and PNC
Leasing Corp. (Incorporated herein by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1998).
10.22 Letter to John G. Phillips regarding severance terms
(Incorporated herein by reference to Exhibit 10.22 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1999).
10.23 Letter to Bruce R. Rusch regarding employment terms.
(Incorporated herein by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999).
10.24 Letter to Howard P. Kamins regarding employment terms
(Incorporated herein by reference to Exhibit 10.24 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1999).
10.25 Consulting Agreement between the Company and Zack B.
Bergreen (Incorporated herein by reference to Exhibit
10.25 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1999).
10.26 Transfer of Rights Agreement regarding PowerHelp
(Incorporated herein by reference to Exhibit 10.26 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1999)
10.27 Guaranty in connection with Transfer of Rights Agreement
regarding PowerHelp (Incorporated herein by reference to
Exhibit 10.27 to the Company's Annual Report on Form
10-K for the year ended December 31, 1999).
10.28 2001 Stock Option Plan (Incorporated herein by reference
to Exhibit 99.1 to the Company's Registration Statement
on Form S-8 (File No. 333-107757)).
21.1* Subsidiaries of the Registrant.
23.1* Consent of BDO Seidman, LLP.
24.1* Powers of Attorney (See the Signature Page).
31.1* Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 - President and Chief
Executive Officer
31.2* Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 - Chief Financial Officer
32.1* Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 - President and Chief Executive Officer
32.2* Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 - Chief Financial Officer
-------------------
* Filed herewith
(b) Reports on Form 8-K.
On November 13, 2003, the Company filed with the SEC a current report
on Form 8-K announcing its issuance of a press release relative to its financial
statements for the third quarter ended September 30, 2003.
(c) Exhibits.
The Company hereby files as part of this Annual Report on Form 10-K the
exhibits listed in Item 14(a)(3) set forth above.
65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized this 29th day of March
2004.
ASTEA INTERNATIONAL INC.
By: /s/Zack Bergreen
----------------------------------------
Zack Bergreen
President and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Zack Bergreen and Rick Etskovitz, jointly
and severally, his attorney-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any amendments to this Report on Form
10-K and to file same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorney-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/Zack Bergreen President and Chief Executive March 29, 2004
--------------------------- Officer (Principal Executive Officer)
Zack Bergreen
/s/Rick Etskovitz. Vice President and Chief March 29, 2004
--------------------------- Financial Officer (Principal
Rick Etskovitz Financial and Accounting
Officer)
/s/Nicolette L. Daniels Controller March 29, 2004
---------------------------
Nicolette L. Daniels
/s/Thomas J. Reilly, Jr. Director March 29, 2004
---------------------------
Thomas J. Reilly, Jr.
/s/Zack Bergreen Director March 29, 2004
---------------------------
Zack Bergreen
/s/Adrian Peters Director March 29, 2004
---------------------------
Adrian Peters
/s/Eric Siegel Director March 29, 2004
---------------------------
Eric Siegel
66
Consent of Independent Certified Public Accountants
Astea International Inc. Subsidiaries
Horsham, Pennsylvania
We hereby consent to the incorporation by reference in the Registration
Statements (Nos. 333-33825, 333-34865, and 333-61981) on Form S-8 and (Nos.
333-11949 and 333-17459) on Form S-3 of Astea International, Inc. and
subsidiaries of our report dated March 5, 2004, relating to the consolidated
financial statements of Astea International, Inc. and subsidiaries appearing in
the Company's Annual Report on Form 10-K for the year ended December 31, 2003.
BDO Seidman, LLP
Philadelphia, PA
March 29, 2004
67