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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, 2004
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
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, 2004 (based on the closing price of $8.92 as quoted
by Nasdaq National Market as of such date) was approximately $14,614,082.
As of March 15, 2005, 3,002,398 shares of the registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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TABLE OF CONTENTS
Page
PART I ----
Item 1. Business 3
Item 2. Properties 14
Item 3. Legal Proceedings 15
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 55
Accounting and Financial Disclosure
Item 9A. Controls and Procedures 55
Item 9B. Other Information 55
PART III
Item 10. Directors and Officers of the Registrant 56
Item 10A. Departure of Directors or Principal Officers; Election of Directors;
Appointment of Principal Officers 58
Item 11. Executive Compensation 59
Item 12. Security Ownership of Certain Beneficial Owners and 62
Management
Item 13. Certain Relationships and Related Transactions 63
Item 14. Principal Accountant Fees and Services 63
PART IV
Item 15. Exhibits and Financial Statement Schedules. 64
Signature Page 67
Consent of Independent Certified Public Accountant 68
Certificates 69
2
PART I
Item 1. Business.
General
Astea International Inc. and subsidiaries (collectively "Astea" or the
"Company") develops, markets and supports service management software 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
and customer satisfaction, 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 strong 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 integrating 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 600 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
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Company's experience and domain expertise in service and sales management,
distribution, logistics, finance, 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 OMITTED]
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 Campaigns, Call Center, Depot Repair, Field Service, Logistics,
Projects and Sales and Order Processing. Astea extends its application suite
with mobile, portals, analytics, tools and services 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 and customer
satisfaction, 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.
The latest version software, Astea Alliance 6.8, is designed and built
with a new system architecture for Web-based deployment using the Microsoft.NET
development architecture. 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
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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 225 customers
worldwide. Market acceptance of Astea Alliance by global and regional companies
has continually increased since 2002 and the Company has aggressively pursued
opportunities for larger system implementations with mid-size to large
enterprises on a worldwide basis.
The current Astea Alliance offering consists of:
o 8 Core Applications
o Mobile Applications
o Extended Portals
o Reporting and Analytical Tools
o Services
o Tools
Astea Alliance Core Applications:
Alliance Contact Center
Alliance Depot Repair
Alliance Field Service
Alliance Logistics
Alliance Marketing Campaigns
Alliance Order Processing
Alliance Professional Services
Alliance Sales
Astea Alliance Mobile Applications:
Alliance Notebook for Service
Alliance Notebook for Sales
Alliance PocketPC for Service
Alliance 2-way Paging
Astea Alliance Extended Portals:
Customer Self-Service
Remote Technician
Astea Alliance Reporting and Analytical Tools:
Analytics Framework
Analytical Reports - Field ServiceCore Applications Standard Reports
Mobile Applications Standard Reports
Astea Alliance Services:
Alliance Consulting
Alliance Customer Support
Alliance Education & Training
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Astea Alliance Tools:
Alliance BizTalk Connector
Alliance Financial Link
Alliance Global Database
Alliance Knowledge Base
Alliance Links
Alliance Studio
Astea Alliance Core Applications
Alliance Contact Center
The Alliance 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's Alliance Contact Center
software are to reduce overhead through improved first-call resolution rates and
shorter service-call handling times. A powerful, third-party knowledge base is
integrated into this application to further enhance and extend the diagnostic
tools available to contact center agents. This optional module is also available
for Depot Repair and Field Service applications.
Alliance Depot Repair
Alliance 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 analyse 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
The Alliance Field Service core application delivers a robust set of
automated capabilities to streamline and improve management of field service
activities. By automating workflow field service representatives can 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. The Remote Technician portal allows site-based field
engineers and other off-site agents secure access to the core system. Mobile
tools deliver rich functionality on notebook and PDA platforms that 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.
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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
The Alliance Logistics core application is divided into 3 functional
portals. These are Supply Chain, Inventory Management and Reverse Supply Chain,
reflecting the diversity of needs in this area. Seamlessly integrated with sales
and service applications, Alliance Logistics enables equipment service
organizations to control inventory costs, manage assets and implement proactive
service management strategies. Automated calculation of stock profiles based on
usage eliminates overstocking and dramatically reduces costs associated with
storing, depreciating, and insuring inventory. The application supports 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 Logistics include asset management, field service parts/tools
management, demand fulfillment, and sales fulfilment.
Alliance Marketing Campaigns
This core application 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
and measure 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 sales
opportunities.
Alliance Order Processing
The Alliance Order Processing module provides straightforward
functionality for the management of quotations and order fulfillment. Quotations
can be created for the sale of products and the provision of field services.
Integration with the Approvals process and the Logisitcs and Field Service
modules ensure good management control and sustainable promises for delivery.
This application is ideally suited to the sale of "consumable products" in
association with the provision of equipment-based services, but can be equally
applied to the supply of finished products resulting from up-sell and cross-sell
opportunities.
Alliance Professional Services
Alliance 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.
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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. The same functionality is delivered to
mobile resources via the notebook application - with full two-way data
synchronization with the central database, via wired and wireless networks.
Other applications prompt customer support and service staff to up-sell and
cross-sell during contact with customers.
Astea Alliance Mobile Applications
Astea provides a family of mobility applications for use away from the
base office. These enable customers to match mobile access to field sales and
service needs. Untethered wireless applications with synchronized client
databases are provided for notebooks 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.
Astea Alliance Extended Portals
The Alliance Customer Portal is a secure, multi-level entry point that
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. The pre-defined Entry-Level, Standard and
Enterprise profiles in connection with a flexible and powerful security utility
ensure tight control on access to sensitive data and a range of features that
can be enabled. 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.
The Remote Technician Portal provides secure connectivity to the
enterprise system from customer sites, technician's homes or other non-corporate
locations. The available functionality covers the needs of a mobile service
resource in the areas of work and inventory management - equivalent to that
available with Alliance Notebook for Service.
Astea Alliance Reporting and Analytics
For proactive service management, Alliance Analytics provides highly
visual, real-time analysis of business performance, focusing on Key Performance
Indicators - a tool that facilitates businesses understanding customer behavior.
Alliance Analytics enables the viewing of information for the entire
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enterprise, increasing revenues and identifying new business opportunities.
Utilizing a DataMart built with Microsoft's SQL Server 2000 Analysis Services,
it helps 'drill down' and `drill across' to focus on the true value of the
captured customer information, with views of actionable data at both
departmental and enterprise-wide levels. The graphical representation of
individual data is available for Field Service, with additional deliveries of
Analytical Reports that cover Contact Center, Depot Repair, and Sales and
Marketing planned for 2005. 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 helping organizations
understand customer satisfaction. Workloads show the available working hours at
a specific location in contrast with the demand for workforce planning and
optimization.
Astea Alliance Services
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
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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.
Technical Services:
-------------------
Astea's technical services teams provide 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 can provide 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 support and help desk services, as well as software service packs
and release upgrades.
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.
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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.
Astea Alliance Tools
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 web services and open,
well defined, synchronous and asynchronous application programming interfaces
(APIs) that are XML based.
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.
Customers
The Company estimates that it has sold approximately 600 licenses to
customers ranging from small, rapidly growing companies to large, multinational
corporations with geographically dispersed operations and remote offices. More
than 225 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 2004 there was one major customer that accounted for 15% of
total revenues. In 2003 and 2002, no single customer accounted for more than 10%
of the Company's revenues.
Sales and Marketing
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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 (Europe, Middle
East and Africa 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 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 39% of the Company's revenues
in 2004, 34% of the Company's revenues in 2003 and 31% in 2002. 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 utilize n-tier, distributed,
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 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 and 2003 Servers, SQL Server and
BizTalk Server.
12
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's total expenses for product development for the years
ended December 31, 2004, 2003 and 2002, were $1,431,00, $2,490,000 and
$1,781,000 respectively; and these expenses amounted to 7%, 19% and 11% of total
revenues for 2004, 2003, and 2002, respectively. In addition, the Company
incurred capitalized software development costs of $1,380,000, $480,000 and
$807,000 in 2004, 2003 and 2002, respectively. During 2004 the Company wrote off
$1,155,000 of fully amortized capitalized software for versions that had been
deemed no longer useful or functional. Additionally, the Company anticipates
that it will continue its consistent and substantial resources on its
development effort towards the upgrade of the Astea Alliance suite of products.
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 via FTP.
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"), acquired by
Oracle, 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 framework
source code, the framework source code for the
13
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."
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, 2004, the Company, including its subsidiaries, had a
total of 139 full time employees worldwide, 57 in the United States, 21 in the
United Kingdom, 5 in the Netherlands, 44 in Israel, 11 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 its product
functionality for Web-based applications and in August 2003 introduced Astea
Alliance 6. The Company released a new system architecture based on
Microsoft.NET during the third quarter 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 Culemborg, Netherlands, and
Tefen, Israel, and for sales and customer support activities in Cranfield,
England and St.
14
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 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
service requirement that were not anticipated at the commencement of the
project. 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:
2004 High Low
---------------------------------------------------------------
First quarter $4.31 $2.41
Second quarter 13.75 3.15
Third quarter 9.62 5.13
Fourth quarter 8.74 6.31
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
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, 2005, there were approximately 35 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, 2005, the last reported sale price of the Common Stock on the Nasdaq
SmallCap Market was $6.91 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, 2004 2003 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Statement of Income Data: (3)
Revenues:
Software license fees $ 7,992 $ 1,935 $ 6,504 $ 6,384 $ 6,554
Services and maintenance 11,325 10,906 10,294 10,973 13,763
----------------------------------------------------------
Total revenues 19,317 12,841 16,798 17,357 20,317
----------------------------------------------------------
Cost and Expenses:
Cost of software license fees 1,838 898 1,262 1,224 1,199
Cost of services and maintenance 6,356 6,963 6,345 6,808 10,928
Product development 1,431 2,490 1,781 2,590 2,744
Sales and marketing 5,565 5,875 6,218 5,396 6,857
General and administrative (1) 2,051 2,198 2,426 2,837 4,066
Restructuring charge (2) -- -- -- 333 1,101
----------------------------------------------------------
Total costs and expenses 17,241 18,424 18,032 19,188 26,895
----------------------------------------------------------
Income(loss) from continuing operations
before interest and taxes 2,076 (5,583) (1,234) (1,831) (6,578)
Net interest income 58 54 106 309 1,496
----------------------------------------------------------
Income(loss) from continuing
operations before income taxes 2,134 (5,529) (1,128) (1,522)
Income tax expense -- -- 200 -- --
----------------------------------------------------------
Profit/(Loss) from continuing operations 2,134 (5,529) (1,328) (1,522) (5,082)
Gain on sale of discontinued operations,
Net of taxes (4) -- -- -- -- 293
----------------------------------------------------------
Net Profit/(Loss) $ 2,134 $ (5,529) $ (1,328) $ (1,522) $ (4,789)
----------------------------------------------------------
Basic income (loss) per share:
Continuing operations $ .72 $ (1.89) $ (0.09) $ (0.10) $ (0.35)
Gain on sale of discontinued operations -- -- -- -- 0.02
----------------------------------------------------------
$ .72 $ (1.89) $ (0.09) $ (0.10) $ (0.33)
==========================================================
Diluted income (loss) per share $ .71 $ (1.89) $ (0.09) $ (0.10) $ (0.33)
==========================================================
Shares used in computing basic income (loss)
per share 2,960 2,922 2,921 2,926 2,914
Shares used in computing diluted income (loss)
per share 3,001 2,922 2,921 2,926 2,914
Balance Sheet Data:
Working capital $ 3,969 $ 1,820 $ 6,449 $ 7,313 $ 9,668
Total assets 13,754 10,096 16,443 18,015 21,653
Long-term debt, less current portion -- -- -- -- 23
Accumulated deficit (15,967) (18,100) (12,568) (11,239) (9,716)
Total stockholders' equity 6,071 3,734 8,998 10,105 11,955
(1) 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. See Note 4 of the
Notes to the Consolidated Financial Statements.
(2) 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).
(3) 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
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 41% of the Company's total revenues
in 2004, which was mostly comprised 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 invoiced annually, is recognized ratably over the term of the
agreement, which is usually twelve months.
18
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, license 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 judgment, which impacts the timing of revenue recognition
and provision for estimated losses, if applicable.
Accounts Receivable
The Company evaluates the adequacy of its allowance for doubtful
accounts at the end of each quarter. In performing this evaluation, the Company
analyzes the payment history of its significant past due accounts, subsequent
cash collections on these accounts and comparative accounts receivable aging
statistics. Based on this information, along with consideration of the general
strength of the economy, the Company develops what it considers to be a
reasonable estimate of the uncollectible amounts included in accounts
receivable. This estimate involves significant judgment by the management of the
Company. Actual uncollectible amounts may differ from the Company's estimate.
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." 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 (usually two years), beginning with
the initial release to customers. During the first quarter of 2004, the Company
revised the estimated life for its capitalized software products from three
years to two years based on current sales trends and the rate of product
release. 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, 2004, management believes that no revisions to the remaining
useful lives or write-downs of capitalized software development costs are
required.
Recent Accounting Pronouncements
In December 2004, the FASB issued FAS No. 123( R) , "Share-Based
Payment," an amendment of FASB Statements 123 and 95. FAS No, 123( R) replaced
FAS No. 123, "Accounting for Stock-Based Compensation," and supercedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees." This statement
requires companies to recognize the fair value of stock options and other
stock-based compensation to employees prospectively beginning with fiscal
periods beginning after June 15, 2005. This means that the Company will be
required to implement FAS No, 123( R) no later than the quarter beginning July
1, 2005. The Company currently measures stock-based compensation in accordance
with APB Opinion No. 25, as discussed above. The Company anticipates adopting
the modified prospective method of FAS No. 123( R) on July 1, 2005. The impact
on the company's financial condition or results of operations will depend on the
number and terms of stock options outstanding on the date of change, as well as
future options that may be granted.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities" was issued. FIN 46 provides
guidance on consolidating variable interest entities and applies immediately to
variable interests created after January 31, 2003. In December 31, 2003, the
FASB revised and superceded FIN 46 with the issuance of FIN 46R in order to
address certain implementation issues that were adopted the first reporting
period ending after March 15, 2004. The interpretation requires variable
interest entities to be consolidated if the equity investment at risk is not
sufficient to permit an entity to finance its activities without support from
other parties or the equity investors lack certain specified characteristics.
The adoption of FIN 46 did not have an impact on the Company's financial
position or result of operation.
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
20
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, 2004 2003 2002
- --------------------------------------------------------------------------------
Revenues:
Software license fees 41.4 % 15.1 % 38.7 %
Services and maintenance 58.6 84.9 61.3
---------------------------------------
Total revenues 100.0 % 100.0 % 100.0 %
---------------------------------------
Costs and expenses:
Cost of software license fees 9.6 % 6.0 % 7.5 %
Cost of services and maintenance 32.9 55.2 37.8
Product development 7.6 19.4 10.6
Sales and marketing 28.8 45.8 37.0
General and administrative 10.6 17.1 14.4
---------------------------------------
Total costs and expenses 89.5 % 143.5 % 107.3 %
---------------------------------------
Comparison of Years Ended December 31, 2004 and 2003
Revenues. Total revenues increased $6,476,000, or 50%, to $19,317,000
for the year ended December 31, 2004 from $12,841,000 for the year ended
December 31, 2003. Software license revenues increased by 313% in 2004, compared
to 2003. Services and maintenance fees for 2004 amounted to $11,325,000, a 4%
increase from 2003.
Software license fee revenues increased $6,057,000 or 313% to
$7,992,000 in 2004 from $1,935,000 in 2003. Astea Alliance license fee revenues
increased to $7,187,000 in 2004 from $1,935,000 in 2003, an increase of 271%.
The Company also sold $805,000 of additional DISPATCH-1 licenses to existing
customers. There were 6 different license sales of DISPATCH-1 in 2004 as
compared to no license sales in 2003. The overall increase in license revenue is
primarily the result of greater acceptance of our vision, which resulted in the
release of version 6.7. This new version is based completely on .Net, a new
Microsoft operating system platform. In addition, there was an overall
improvement in our economy over the past year.
Total services and maintenance revenues increased $419,000 or 4% to
$11,325,000 in 2004 from $10,906,000 in 2003. The increase in service and
maintenance revenues is attributable to an increase of $1,131,000 in Astea
Alliance revenues partially offset by a decrease in DISPATCH-1 revenues of
$712,000. Astea Alliance service and maintenance revenues increased to
$9,375,000 in 2004 from $8,244,000 in 2003 due to the growing Astea Alliance
customer base. DISPATCH-1 service and maintenance revenues decreased 27% to
$1,949,000 in 2004 from $2,661,000 in 2003 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 and the lack of any related product development
by the Company, the decrease in service and maintenance revenue is expected to
continue in 2005 for DISPATCH-1.
In 2004 there was one major customer, Carrier Corporation, which
accounted for 15% of total revenues compared to 2003 when no customer accounted
for more than 10% of the Company's revenues.
21
Costs of Revenues. Costs of software license fee revenues increased
140%, or $1,072,000, to $1,838,000 in 2004 from $766,000 in 2003. The increase
in cost of sales results from increased amortization of capitalized software and
license costs of third party software embedded in the Company's products
resulting from the higher volume of license sales. Included in the cost of
software license fees is the amortization of capitalized software. Capitalized
software amortization increased to $1,088,000 in 2004 from $599,000 in 2003.
During the first quarter of 2004, the Company revised the estimated useful life
of its software products from three years to two years. The shorter amortization
period increased amortization for the year by $489,000 or 81% compared to 2003.
In addition, the Company capitalized $1,338,000 of development costs due to its
concentrated effort to convert its newest version of service Alliance to the
..Net platform. Accordingly, the increase in amortization of capitalized software
is due to both the decrease in amortization period and the increase in
development costs capitalized. The gross margin percentage on software license
sales increased to 77% in 2004 from 60% in 2003.
The costs of services and maintenance revenues decreased 10%, or
$739,000, to $6,356,000 in 2004 from $7,095,000 in 2003. The decrease in cost of
services and maintenance is primarily attributed to a reduction in headcount
from last year to this year. The service and maintenance gross margin percentage
increased to 44% in 2004 from 35% in 2003. The increased margin is primarily
attributable to the decrease in costs and improved utilization of professional
services personnel, which contributed to increased revenues.
Product Development. Product development expenses decreased 41%, or
$1,059,000, to $1,431,000 in 2004 from $2,490,000 in 2003. Product development
as a percentage of total revenue decreased to 7% in 2004 compared to 19% in
2003. This decline is due to both the increase in revenues as well as the
increase in software costs capitalized compared to last year. Gross development
expense before the capitalization of software costs were $2,811,000 in 2004
compared to $2,970,000 in 2003. Additionally in 2004, the Company wrote off
$1,155,000 of fully amortized software for old versions that had been deemed no
longer useful or functional. The Company capitalizes software costs out of
product development. Capitalized software totaled $1,380,000 in 2004 compared to
$480,000 in 2003. The increase in software capitalization is a result of product
development initiatives to convert the Company's product to .NET, a new
Microsoft operating system platform through the release of Astea Alliance
version 6.7 during the third quarter of 2004, as well as development costs
associated with a new version anticipated to be released in the first quarter of
2005.
Sales and Marketing. Sales and marketing expenses decreased 5%, or
$310,000, to $5,565,000 in 2004 from $5,875,000 in 2003. The decrease is
primarily the result of a reduction in marketing costs due to the consolidation
of worldwide marketing programs into the United States from the Company's
foreign operations, reduction of redundant sales personnel throughout the world,
partially offset by higher sales commissions on increased software license
revenues. The Company continues 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 decreased to 28% in 2004 from 46% in
2003.
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 $2,051,000 in 2004 and $2,198,000 in 2003 representing a 7% decrease. This
decrease is primarily due to a decrease in bad debt expense, which is
attributable to improvement in customer payment performance and recovery of
legal fees in connection with legal action in Europe. As a percentage of total
revenues, general and administrative expenses decreased to 11% in 2004 compared
to 17% in 2003. The decrease in expenses relative to revenues primarily results
from the increase in total revenues generated during 2004.
22
Net Interest Income. Net interest income increased $4,000, to $58,000
in 2004 from $54,000 in 2003. This increase was primarily attributable to slight
growth in both interest rates and investable funds.
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, 2004, the Company recorded no tax expense or income tax
benefit met and maintained 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 increased by $3,254,000, or 75% to $7,565,000 in 2004
from $4,311,000 in 2003. The increase in revenue from international operations
was primarily attributable to the increases in license revenues from the Astea
Alliance suite. Most of the increase occurred in Europe, where the Company has
focused attention on expanding awareness of the Company's products.
International revenues from professional services and maintenance increased 9%
to $3,857,000 in 2004 from $3,527,000 in 2003. Overall, international operations
resulted in net profit of $1,221,000 for 2004 compared to net loss of $1,772,000
in 2003. Operating costs increased slightly due to higher cost of sales on
licenses and higher sales commissions, both resulting from the increased level
of revenues in 2004 compared to 2003. Accordingly, the increase in international
net income of $2,993,000 is approximately the same as the year-to-year increase
in revenue. Additionally, the weakening of the U.S. dollar against the foreign
currencies in Europe, the Pacific Rim and Israel, contributed to increased
revenues upon translation into U.S. currency.
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
23
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.
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. 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
24
Statements). In the fourth quarter of 2002, the Company determined that it had
over-accrued $24,000 from its 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.
Liquidity and Capital Resources
Net cash provided by operating activities was $2,678,000 for the year
ended December 31, 2004 compared to net cash used in operations of $1,200,000
for the year ended December 31, 2003. The increase in cash provided by
operations of $3,878,000 was primarily attributable to the swing in net income
of $7,663,000 which resulted from a net loss of $5,529,000 in 2003 to net income
of $2,134,000 in 2004 and an increase in depreciation and amortization of
$465,000, primarily the result of reducing the amortization period of
capitalized software from 3 to 2 years. Also contributing to the increase in
cash flow was an increase in accounts payable and accrued expenses of $121,000
compared to a decrease of $382,000 in 2003. This change resulted from an
increase in overall volume of license sales that included royalties payable to
vendors for third party software embedded in the Company's products. In
addition, deferred revenues increase by $1,339,000 in 2004 compared to a
decrease of $688,000 in 2003. This change was also the result of increased
license revenues, which generated new maintenance contracts. Partially
offsetting the net increase in cash flows was the use of cash of $7,224,000,
which resulted from an increase in accounts receivable in 2004 of $2,272,000
compared to a decrease in accounts receivable of $4,952,000 in 2003. This swing
resulted from the increased level of revenues in 2004 compared to 2003.
25
The Company used $1,769,000 of cash for investing activities in 2004
compared to using $64,000 in 2003. Most of the increased use of cash resulted
from an increase in capitalized software of $1,380,000 compared to $480,000 in
2003. The increase in capitalized software results from the concentrated effort
of the Company to convert its software products to the .Net platform as well as
expand the functionality of its product suite. In addition, the Company
purchased $389,000 of property and equipment compared to $216,000 in 2003. In
2003, the Company terminated a life insurance policy it held on behalf of its
Chief Executive Officer and received payment of $632,000 from the cash surrender
value of the policy.
The Company generated $131,000 in financing activities for the year
ended December 31, 2004 compared to generating $2,000 for the year ended
December 31, 2003. The increase in cash generated by financing activities was
principally attributable to the exercise of company stock options in 2004.
At December 31, 2004, the Company had a working capital ratio of
approximately 1.5:1, with total cash of $4,483,000. The Company has projected
revenues for 2005 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 2005. 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, 2005:
Payment Due By Period
2005 2006-2007 2008-2009 2010 and after Total
---------- ---------- ---------- -------------- ----------
Contractual Cash
Obligations:
Long-term Debt $ -- $ -- $ -- $ --
Capital Leases -- -- -- --
Operating Leases $873,000 $1,583,000 $ 1,119,000 $3,575,000
Amounts of Commitment Expiration Per Period
2005 2006-2007 2008-2009 2010 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
26
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. Although the Company generated
net income of $2.1 million in 2004, it 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 December 31, 2004, stockholders' equity is approximately $6.0
million, which is net of an accumulated deficit of approximately $16.0 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 2004, 2003, and 2002 14%, 21%, and 24% 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.
Total license revenues from DISPATCH-1 was $805,000 in 2004. There were no
license revenues of DISPATCH-1 in 2003. Total 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 225 companies
worldwide in 1998 through 2004, 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
27
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 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 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 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
28
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.
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:
29
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.
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 may 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
30
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
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
31
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.
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
32
Astea's international sales accounted for 39% of the Company's revenues
in 2004, 34% in 2003, and 31% in 2002. 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;
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
33
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
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
34
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 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.
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, 2004, 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 Registered Public Accounting Firm
Board of Directors and Stockholders
Astea International Inc.
We have audited the accompanying consolidated balance sheets of Astea
International Inc. and subsidiaries as of December 31, 2004 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, 2004. 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 the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2004, in conformity with accounting principles generally accepted
in the United States of America.
\s\BDO Seidman, LLP
- --------------------
BDO Seidman, LLP
36
Philadelphia, PA
February 25, 2005
37
ASTEA INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2004 2003
---------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,483,000 $ 3,480,000
Restricted cash 300,000 300,000
Receivables, net of reserves of $411,000 and $810,000 6,428,000 3,943,000
Prepaid expenses and other 441,000 601,000
-------------- --------------
Total current assets
11,652,000 8,324,000
-------------- --------------
Property and equipment, net
548,000 509,000
Capitalized software development costs, net
1,520,000 1,229,000
Other assets 34,000 34,000
-------------- --------------
Total assets $13,754,000 $10,096,000
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 3,194,000 $ 3,003,000
Deferred revenues
4,489,000 3,359,000
-------------- --------------
Total current liabilities 7,683,000 6,362,000
-------------- --------------
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued -- --
Common stock, $.01 par value, 25,000,000 shares
authorized, 3,002,000 and 2,965,000 shares issued,
respectfully 30,000 30,000
Additional paid-in capital 22,997,000 22,792,000
Accumulated comprehensive loss -
translation adjustment
(779,000) (776,000)
Accumulated deficit
(15,967,000) (18,100,000)
Less: Treasury stock at cost, 43,000 and 44,000
shares (210,000) (212,000)
-------------- --------------
Total stockholders' equity 6,071,000 3,734,000
-------------- --------------
Total liabilities and stockholders' equity $13,754,000 $10,096,000
============== ==============
See accompanying notes to the consolidated financial statements.
38
ASTEA INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2004 2003 2002
- -----------------------------------------------------------------------------------------------------------
Revenues:
Software license fees $ 7,992,000 $ 1,935,000 $ 6,504,000
Services and maintenance 11,325,000 10,906,000 10,294,000
---------------------------------------------
Total revenues 19,317,000 12,841,000 16,798,000
---------------------------------------------
Costs and expenses:
Cost of software license fees 1,838,000 766,000 1,262,000
Cost of services and maintenance 6,356,000 7,095,000 6,345,000
Product development 1,431,000 2,490,000 1,781,000
Sales and marketing 5,565,000 5,875,000 6,218,000
General and administrative 2,051,000 2,198,000 2,426,000
---------------------------------------------
Total costs and expenses 17,241,000 18,424,000 18,032,000
---------------------------------------------
Income (loss) from operations 2,076,000 (5,583,000) (1,234,000)
Interest income 58,000 58,000 112,000
Interest expense -- (4,000) (6,000)
---------------------------------------------
Income (loss) before income taxes 2,134,000 (5,529,000) (1,128,000)
Income tax expense -- -- 200,000
---------------------------------------------
Net income (loss) $ 2,134,000 $ (5,529,000) $ (1,328,000)
=============================================
Basic net income (loss) per share $ .72 $ (1.89) $ (0.45)
=============================================
Diluted net income (loss) per share $ .71 $ (1.89 $ (0.45)
=============================================
Weighted average shares used in computing basic net income
(loss) per share 2,960,000 2,922,000 2,921,000
---------------------------------------------
Weighted average shares used in computing diluted net
income
(loss)per share 3,001,000 2,922,000 2,921,000
=============================================
See accompanying notes to the consolidated financial statements.
39
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 Income(Loss)
--------------------------------------------------------------------------------------------
Balance, January 1, 2002 148,000 22,674,000 (1,256,000) (11,239,000) (222,000) 10,105,000
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)
============
Issuance of common stock under -- -- -- (1,000) 2,000 1,000
employee stock purchase plan
Exercise of stock options -- 131,000 -- -- -- 131,000
Options for satisfaction of liability -- 74,000 -- -- -- 74,000
Comprehensive income -- -- (3,000) -- -- (3,000) $ (3,000)
Net income -- -- -- 2,134,000 -- 2,134,000 2,134,000
--------------------------------------------------------------------------------------------
Balance 12/31/04 $ 30,000 $ 22,997,000 $(779,000) $(15,967,000) $(210,000) $ 6,071,000 $ 2,131,000
============
See accompanying notes to the consolidated financial statements.
40
ASTEA INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2004 2003 2002
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss ) $ 2,134,000 $(5,529,000) $(1,328,000)
Adjustments to reconcile net income(loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,375,000 910,000 1,295,000
Increase (decrease) in allowance for doubtful 84,000 (477,000) (255,000)
accounts
Officer's life insurance valuation -- -- 59,000
Deferred income taxes -- -- 200,000
Changes in operating assets and liabilities:
Receivables (2,272,000) 4,952,000 (39,000)
Prepaid expenses and other (61,000) 67,000 125,000
Accounts payable and accrued expenses 121,000 (382,000) 186,000
Accrued restructuring -- -- (385,000)
Deferred revenues 1,297,000 (688,000) (203,000)
Other -- (53,000) (110,000)
-------------------------------------------
Net cash provided by (used in) operating activities 2,678,000 (1,200,000) (455,000)
-------------------------------------------
Cash flows from investing activities:
Proceeds from sales of investments -- -- 2,987,000
Purchases of property and equipment (389,000) (216,000) (404,000)
Capitalized software development costs (1,380,000) (480,000) (807,000)
Increase in restricted cash -- -- (300,000)
Proceeds from the termination of life insurance policy -- 632,000 --
-------------------------------------------
Net cash (used in) provided by investing activities (1,769,000) (64,000) 1,476,000
-------------------------------------------
Cash flows from financing activities:
Proceeds from exercise of stock options and
employee stock purchase plan 131,000 2,000 4,000
Net repayments of long-term debt -- -- (34,000)
-------------------------------------------
Net cash provided by (used in) financing activities 131,000 2,000 (30,000)
-------------------------------------------
Effect of exchange rate changes on cash and cash
equivalents (37,000) (225,000) (95,000)
-------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,003,000 (1,487,000) 896,000
Cash and cash equivalents balance, beginning of year 3,480,000 4,967,000 4,071,000
-------------------------------------------
Cash and cash equivalents balance, end of year $ 4,483,000 $ 3,480,000 $ 4,967,000
===========================================
Supplemental disclosure of cash flow information:
Satisfaction of liability with options 74,000 -- --
Cash paid for interest expense $ 1,000 $ 4,000 $ 6,000
===========================================
See accompanying notes to the consolidated financial statements.
41
ASTEA INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Company Background
Astea International Inc. and Subsidiaries (collectively the
"Company" or "Astea") is a global provider of service management software
that addresses the unique needs of companies who manage capital equipment,
mission critical assets and human capital. Clients include Fortune 500 to
mid-size companies, which Astea services through company facilities in the
United States, United Kingdom, Australia, The Netherlands and Israel. The
Company's principal product, Astea Alliance, supports the complete service
lifecycle, from lead generation and project quotation to service and
billing through asset retirement. It integrates and optimizes critical
business processes for Contact Center, Field Service, Depot Repair,
Logistics, Professional Services, and Sales and Marketing. Astea extends
its applications with portal, analytics and mobile solutions. Astea
Alliance provides service organizations with technology-enabled business
solutions that improve profitability, stabilize cash-flows and reduce
operational costs through automating and integrating key service, sales and
marketing processes. Since its inception in 1979, Astea has licensed
applications to companies in a wide range of sectors including information
technology, telecommunications, instruments and controls, business systems,
and medical devices.
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
Revenues are recognized in accordance with Statement of Position
(SOP) 97-2, which provides guidelines on the recognition of software
license fee revenue. Principally, revenue may be recognized when persuasive
evidence of an arrangement exists, delivery has occurred, the license fee
is fixed and determinable and the collection of the fee is probable. The
Company allocates a portion of its software revenue to post-contract
support activities or to other services or products provided to the
customer free of charge or at non-standard discounts when provided in
conjunction with the licensing arrangement. Amounts allocated are based
upon standard prices charged for those services or products. Software
license fees for resellers or other members of the indirect sales channel
are based on 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.
42
Revenue from post-contract support is recognized ratably over the
term of the contract on a straight-line basis. Consulting and training
service revenue is generally unbundled and recognized at the time the
service is performed. Fees from licenses sold together with consulting
services are generally recognized upon shipment, provided that the contract
has been executed, delivery of the software has occurred, fees are fixed
and determinable and collection is probable. In instances where the
aforementioned criteria have not been met, both the license and the
consulting fees are recognized under the percentage of completion method of
contract accounting.
In limited instances, the Company will enter into contracts for
which revenue is recognized under contract accounting. The accounting for
such arrangements requires judgment, which impacts the timing of revenue
recognition and provision for estimated losses, if applicable.
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 Emerging Issues Task Force
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 2004,
2003 and 2002, the Company billed $296,000, $326,000, and $273,000
respectively, of reimbursable expenses to customers.
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.
Allowance for Doubtful Accounts
The allowance for doubtful accounts reflects the Company's best
estimate on probable losses inherent in the accounts receivable balance.
Management determines the allowance based on known troubled accounts,
historical experience, and other currently available evidence. Activity in
the allowance for doubtful accounts is as follows
-----------------------------------------------------------------------------------------------------------------------
Year Ended Balance at
December 31 beginning of year Charged costs Write offs Balance at end of year
------------------------- --------------------- ---------------------- --------------------- --------------------------
2004 $ 810,000 $ 84,000 $483,000 $ 411,000
------------------------- --------------------- ---------------------- --------------------- --------------------------
2003 1,018,000 479,000 687,000 810,000
------------------------- --------------------- ---------------------- --------------------- --------------------------
2002 955,000 533,000 470,000 1,018,000
------------------------- --------------------- ---------------------- --------------------- --------------------------
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.
43
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, 2004, 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
(usually two years), beginning with the initial release to customers.
During the first quarter of 2004, the Company revised the estimated life
for it capital software products from three years to two years based on
current sales trends and the rate of product release. The impact of
reducing the estimated life resulted in $443,000 of additional amortization
in 2004. 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, 2004, management
believes that no revisions to the remaining useful lives or write-downs of
capitalized software development costs are required.
Major Customers
In 2004, the Company had one customer, Carrier Corporation, which
accounted for 15% of revenues. In 2003 and 2002 no single customers
represented 10% or more of total revenues.
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, the Company places investments with financial
institutions evaluated as being creditworthy, or investing in short-term
money market 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 customers 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. If all attempts to
collect a receivable have failed, the receivable will then be written off
against the allowance. Based on all information available, the Company
believes its allowance for doubtful accounts as of December 31, 2004 is
adequate. However, actual write-offs might exceed the recorded allowance.
44
Fair Value of Financial Instruments
Due to the short term nature of these accounts, the carrying
values of cash, cash equivalents, 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 income (loss). There are
no material transaction gains or losses in the accompanying consolidated
financial statements for the periods presented.
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. Under the treasury stock method it is
assumed that diluted stock options are exercised. Furthermore, it is
assumed that the proceeds are used to purchase common stock at the average
market price for the period. The difference between the number of the
shares assumed issued and the number of shares assumed purchased represents
the dilutive shares.
At December 31, 2004, there were 138,220 net additional dilutive
shares assumed to be converted at an average exercise price of $4.05 per
share, which brought the total outstanding dilutive shares to 3,001,000.
Additionally at December 31, 2004, the Company had 51,950
anti-dilutive shares that were excluded from diluted earnings per share
calculation due to their anti-dilutive nature.
The Company sustained a loss for fiscal years 2003 and 2002.
Options with an exercise price less than market at December 31, 2003 to
purchase 31,600 and 30,000 shares of common stock with average exercise
prices of $2.81 and $2.75 per share, respectively, were excluded from the
diluted (loss) per common share calculation as the inclusion of these
options would have been antidilutive.
----------------------------------------------------------- ------------- --------------- ---------------
Year Ending December 31, 2004 2003 2002
----------------------------------------------------------- ------------- --------------- ---------------
Net income (loss) $ 2,134 $(5,529) $(1,328)
----------------------------------------------------------- ------------- --------------- ---------------
Basic weighted average number of common shares
outstanding 2,960 2,922 2,921
----------------------------------------------------------- ------------- --------------- ---------------
Basic earnings (loss) per common share $ .72 $ (1.89) $ (.45)
----------------------------------------------------------- ------------- --------------- ---------------
Effect of dilutive stock options 41 - -
----------------------------------------------------------- ------------- --------------- ---------------
Diluted weighted average number of common shares
outstanding 3,001 2,922 2,921
----------------------------------------------------------- ------------- --------------- ---------------
Diluted earnings (loss) per common share $ .71 $ (1.89) $ (.45)
----------------------------------------------------------- ------------- --------------- ---------------
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
45
(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.
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
income(loss) and basic and diluted net income(loss) per share would have
been:
46
2004 2003 2002
------------------- --------------------- --------------------
Net income (loss) - as reported $ 2,134,000 $ (5,529,000) $(1,328,000)
Add: Stock based compensation
included in net income as reported -- -- --
Deduct stock based compensation
determined under fair value based
methods for all awards (252,000) (329,000) (303,000)
------------------- --------------------- --------------------
Net income (loss) - pro forma $ 1,882,000 $ (5,858,000) $(1,631,000)
=================== ===================== ====================
Basic income (loss) per share - as reported $ .72 $ (1.89) $ (0.45)
Diluted income (loss) per share - as reported $ .71 $ (1.89) $ (0.45)
Basic income (loss) per share - pro forma $ 64 $ (2.00) $ (0.56)
Diluted income (loss) per share - pro forma $ .63 $ (2.00) $ (0.56)
The weighted average fair value of those options granted during
the years ended December 31, 2004, 2003 and 2002 was estimated as $5.39,
$3.17 and $3.52, 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
4.18%, 3.97% and 4.30% for 2004, 2003 and 2002 grants, respectively; an
expected life of six years; volatility of 130%, 137% and 147%; and a
dividend yield of zero for 2004, 2003 and 2002 grants, respectively.
Reclassifications
Certain reclassifications of prior years' amounts have been made
to conform to the current year presentation.
Recent Accounting Standards or Accounting Pronouncements
In December 2004, the FASB issued FAS No. 123( R) , "Share-Based
Payment," an amendment of FASB Statements 123 and 95. FAS No, 123( R)
replaced FAS No. 123, "Accounting for Stock-Based Compensation," and
supercedes APB Opinion No. 25, "Accounting for Stock Issued to Employees."
This statement requires companies to recognize the fair value of stock
options and other stock-based compensation to employees prospectively
beginning with fiscal periods beginning after June 15, 2005. This means
that the Company will be required to implement FAS No, 123( R) no later
than the quarter beginning July 1, 2005. The Company currently measures
stock-based compensation in accordance with APB Opinion No. 25, as
discussed above. The Company anticipates adopting the modified prospective
method of FAS No. 123( R) on July 1, 2005. The impact on the company's
financial condition or results of operations will depend on the number and
terms of stock options outstanding on the date of change, as well as future
options that may be granted.
47
In January 2003, the FASB issued Interpretation No. 46 ("FIN
46"), "Consolidation of Variable Interest Entities" was issued. FIN 46
provides guidance on consolidating variable interest entities and applies
immediately to variable interests created after January 31, 2003. In
December 31, 2003, the FASB revised and superceded FIN 46 with the issuance
of FIN 46R in order to address certain implementation issues that were
adopted the first reporting period ending after March 15, 2004. The
interpretation requires variable interest entities to be consolidated if
the equity investment at risk is not sufficient to permit an entity to
finance its activities without support from other parties or the equity
investors lack certain specified characteristics. The adoption of FIN 46
did not have an impact on the Company's financial position or result of
operations.
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. The Company redeemed all
fractional shares that resulted from the reverse split. The number of
authorized shares was unchanged at 25,000,000.
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. Receivables
December 31, 2004 2003
---------------------------- ----------------- -----------------
Billed receivables $ 4,379,000 $ 3,013,000
Unbilled receivables 2,049,000 930,000
----------------- -----------------
$ 6,428,000 $ 3,943,000
================= =================
Billed receivables represent billings for the Company's products
and services to end users and value added resellers. Unbilled receivables
represent contractual amounts due within one year under software licenses
that have been delivered but have not been billed. Billed and unbilled
receivables are shown net of reserves for estimated uncollectible amounts.
For the years ended December 31, 2004, 2003 and 2002, the Company
recorded bad debt expense of $41,000, $479,000, and $533,000, and
write-offs of $483,000 $687,000, and $470,000. The decrease in bad debt
expense in 2004 is primarily due to improvement in customer payment
performance.
48
5. Property and Equipment
December 31,
Useful Life 2004 2003
----------- ---- ----
Computers and related
equipment 3 $ 2,246,000 $ 3,484,000
Furniture and fixtures 10 468,000 470,000
Leasehold improvements Lease term 111,000 111,000
Office equipment 3-7 993,000 843,000
---------------- -----------------
3,818,000 4,908,000
Less: Accumulated
depreciation and amortization (3,270,000) (4,399,000)
---------------- -----------------
$ 548,000 $ 509,000
================ =================
Depreciation and amortization expense for the years ended
December 31, 2004, 2003 and 2002 was $286,000, $310,000 and $425,000,
respectively.
In 2002 and 2003, the Company acquired title to the equipment
under capital leases, which had a gross asset value of $133,000. The
equipment is included in computers and related equipment.
6. Capitalized Software Development Costs
Remaining Weighted
December 31, Average Life 2004 2003
- ------------- ------------------ ---- ----
Capitalized software development costs 1.68 $ 5,209,000 $ 4,984,000
Less: Accumulated amortization 3,689,000 3,755,000
-------------- ---------------
$ 1,520,000 $ 1,229,000
============== ===============
The Company capitalized software development costs for the years
ended December 31, 2004, 2003 and 2002 of $1,380,000, 480,000 and $807,000,
respectively. Amortization of software development costs for the years
ended December 31, 2004, 2003 and 2002 was $1,088,000, $599,000 and
$870,000, respectively. Additionally, for the year ended December 31, 2004,
the Company wrote off $1,155,000 of fully amortized capitalized software
for old versions that had been deemed no longer useful or functional.
Estimated amortization for the next two years is as follows:
2005 $ 926,000
2006 594,000
--------------
$ 1,520,000
==============
49
7. Accounts Payable and Accrued Expenses
December 31, 2004 2003
------------------------------------------- ------------------- --------------------
Accounts payable $ 688,000 $ 656,000
Accrued compensation and related benefits 1,229,000 1,029,000
Accrued professional services 197,000 241,000
Sales and payroll taxes 410,000 298,000
Other accrued liabilities 670,000 779,000
------------------- --------------------
$ 3,194,000 $ 3,003,000
=================== ====================
8. Income Taxes
The provision (benefit) for income taxes is as follows:
Years ended December 31, 2004 2003 2002
- -------------------------------------------------------------
Current:
Federal $-- $-- $ --
State -- -- --
Foreign -- -- --
-----------------------------------
-- -- --
Deferred:
Federal -- -- 200,000
-----------------------------------
$-- $-- $ 200,000
===================================
The approximate income tax effect of each type of temporary
difference is as follows:
December 31, 2004 2003
----------------------------------------------------------------------------
Deferred income tax assets:
Revenue recognition $ -- $ 20,000
Accruals and reserves not
currently deductible for tax 126,000 313,000
Benefit of net operating loss carryforward 7,882,000 8,015,000
Depreciation 32,000 94,000
Alternative minimum tax 370,000 370,000
Capital loss carryforward 10,000 10,000
--------------------------
8,420,000 8,822,000
Deferred income tax liabilities:
Capitalized software development costs (547,000) (455,000)
--------------------------
7,873,000 8,367,000
Valuation reserve (7,873,000) (8,367,000)
--------------------------
Net deferred income tax asset $ -- $ --
==========================
For all years presented, 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.
50
In 2004, the Company utilized $494,000 of its reserved deferred
tax asset to offset its provision for income taxes, primarily from the
utilization of its net operating loss carryforward and turning of certain
accruals. In the years ended December 31, 2003 and 2002, 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 2010.
Net income of the Israeli Subsidiary was $334,950 and $216,276 for the
years ending December 31, 2004 and 2003, respectively. The Israeli
subsidiary has net carryforward losses for Israeli tax purposes of
approximately 1.2 million.
As of December 31, 2004, the Company had a net operating loss
carryforward for United States federal income tax purposes of approximately
$23,200,000. 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
management, will continue to be reinvested indefinitely. At December 31,
2004, the Company had not provided federal income taxes on cumulative
earnings of individual international subsidiaries of $1,850,000. 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.
9. 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, 2004, 2003 and 2002 was $701,000, $867,000 and $970,000,
respectively.
Future minimum lease payments under the Company's leases as of
December 31, 2004 are as follows:
Operating Leases
2005 $ 873,000
2006 818,000
2007 765,000
2008 693,000
2009 426,000
----------------------
Total minimum lease payments $ 3,575,000
======================
On September 11, 2002, the Company invested $300,000 in a
certificate of deposit, which was pledged as collateral on an outstanding
letter of credit related to a lease obligation. It was classified as
51
restricted cash on the balance sheet. The certificate of deposit
automatically renews every six months. The letter of credit is due to
expire in February 2009.
From time to time, the Company may be 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.
10. Profit Sharing Plan/Savings Plan
The Company maintains a discretionary profit sharing plan,
including a voluntary 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 $50,000, $61,000 and $57,000 for the years ended December 31,
2004, 2003 and 2002, respectively.
11. 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, 2004, 2003 and 2002 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, 2002 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 $ 5.99 213,000 $7.91
Granted at market (110,000) 110,000 -- -- --
Cancelled 150,000 (151,000) -- -- --
Exercised -- (37,000) -- -- --
Expired (43,000) -- -- -- --
------------------------------------------------------------------------------
Balance, December 31, 2004 113,000 400,000 $ 5.73 190,000 $7.09
==============================================================================
52
The following table summarizes information about stock options outstanding
at December 31, 2004:
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 - $ 4.85 287,000 6.46 $ 3.94 124,000 $ 4.38
$ 5.31 - $ 8.45 88,000 7.49 $ 7.56 41,000 $ 7.48
$12.50 - $ 31.25 25,000 3.24 $19.81 25,000 $19.81
------ ------ ------ ------
$ 2.75 - $ 31.25 400,000 6.49 $ 5.73 190,000 $ 7.09
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 2004, 2003 and 2002, shares
purchased were 500, 1,100 and 1,200, respectively. At December 31, 2004,
there were 29,621 shares available for future purchases. The plan is set to
expire on June 30, 2005.
12. Related Party Transactions
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 $32,500, $22,500 and $37,500 in 2004, 2003 and 2002,
respectively.
During 2003, the Director terminated his relationship with the
Company and was engaged as a sales consultant. In this capacity, the
Company made payments totaling $17,000 in 2003. In January 2004, the sales
consultancy was terminated.
53
13. Geographic Segment Data
The Company and its subsidiaries are engaged in the design,
development, marketing and support of its service management software
solutions. Substantially all revenues result from the license of the
Company's software products and related professional services and customer
support services. The Company's chief executive officer reviews financial
information presented on a consolidated basis, accompanied by disaggregated
information about revenues by geographic region for purposes of making
operating decisions and assessing financial performance. Accordingly, the
Company considers itself to be in a single reporting segment, specifically
the license, implementation and support of its software.
Year ended December 31, 2004 2003 2002
-------------------------------------------------------------------------------------------------------------------
Revenues:
Software license fees
United States
Domestic $ 4,285,000 $ 1,151,000 $ 4,296,000
Export - - 72,000
--------------------------------------------------------------
Total United States
software license fees 4,285,000 1,151,000 4,368,000
Europe 2,457,000 337,000 1,151,000
Other foreign 1,250,000 447,000 985,000
--------------------------------------------------------------
Total foreign software
license fees 3,707,000 784,000 2,136,000
--------------------------------------------------------------
Total software license 7,992,000 1,935,000 6,504,000
fees
Services and maintenance
United States
Domestic 6,719,000 6,239,000 7,037,000
Export 749,000 1,140,000 252,000
--------------------------------------------------------------
Total United States
service and
maintenance revenue 7,468,000 7,379,000 7,289,000
--------------------------------------------------------------
Europe 2,584,000 2,300,000 2,126,000
Other foreign 1,273,000 1,227,000 879,000
--------------------------------------------------------------
Total foreign service
and
maintenance revenue 3,857,000, 3,527,000 3,005,000
--------------------------------------------------------------
Total service and
maintenance revenue 11,325,000 10,906,000 10,294,000
--------------------------------------------------------------
Total revenue $ 19,317,000 $ 12,841,000 $ 16,798,000
==============================================================
Profit(loss) from continuing operations
United States $ 913,000 $ (3,757,000) $ (1,332,000)
Europe 60,000 (454,000)
(1,361,000
Other foreign 1,161,000 (411,000) 458,000
--------------------------------------------------------------
Total income(loss)
from continuing operations $ 2,134,000 $ (5,529,000) $ (1,328,000)
==============================================================
Identifiable assets
United States $ 8,550,000 $ 6,493,000 $ 11,786,000
Europe 4,041,000 2,404,000 2,753,000
Other foreign 1,163,000 1,199,000 1,904,000
--------------------------------------------------------------
Total assets $ 13,754,000 $ 10,096,000 $ 16,443,000
==============================================================
54
14. Selected Consolidated Quarterly Financial Data (Unaudited)
2004 Quarter Ended Dec 31, Sep 30, Jun 30, Mar 31,
--------------------------------------------------------------------------------------------------------------------
Revenues $5,012,000 $4,004,000 $ 4,416,000 $ 5,884,000
Gross profit 2,619,000 2,086,000 2,493,000 3,927,000
Net income 186,000 155,000 309,000 1,483,000
Basic net income per share .06 .05 .10 .51
Diluted net income per share .06 .05 .10 .51
Shares used in computing basic
net income per share (in
thousands) 2,960 2,954 2,954 2,921
Shares used in computing diluted
net income per share (in
thousands) 3,013 2,992 2,972 2,923
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 2,115,000
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
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, 2004, 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 effective to
ensure 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, 2004 that have materially affected, or are reasonable
likely to materially affect, our internal controls over financial
reporting.
Item 9B. Other Information
None.
55
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, 59, 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. From August 1999 to
May 2000, his sole title was Chairman of the Board. Since June 2000, in addition
to Chairman of the Board, Mr. Bergreen resumed the positions of President and
Chief Executive Officer. Mr. Bergreen holds a Bachelor of Science and a Master
of Science degree in Electrical Engineering from the University of Maryland.
Adrian Peters, 55, 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 as strategic
advisors to high-tech firms, starting in 1995. From 1986 through 1995, he held
positions as President and CEO of various companies, within Siemens AG, a large
maker of telecommunications and industrial and other equipment. Prior to that,
he held senior positions at Federale, an investment firm, 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., 65 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, 48, joined Astea's Board in September 2002 and is a member
of the Audit Committee. In 1983, he founded Siegel Management Company, a
strategy consulting and investment banking advisory firm with a diverse client
base; principally middle market firms. His expertise and experience had been
utilized by growth companies, public market and acquisition candidates, industry
consolidators and turnarounds. He also serves on the Board of NCO Group (NASDAQ:
NCOG), a provider of outsourced accounts receivable management and collection
services, and PSCInfoGroup, a privately backed information management company.
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.
George S. Rapp, 52, joined Astea in April 2004 as Chief Financial
Officer and Treasurer. Mr. Rapp is a certified public accountant and has over
twenty-five years of experience in financial management and reporting. He is
responsible for the company's financial planning, investor relations, and
executive guidance to help drive corporate performance. Prior to Astea, from
June 2002 to January 2004, Mr. Rapp served as Senior Vice President and Chief
Financial Officer of Advanta Bank Corp, a commercial credit card issuer based in
Spring House, PA, which is a subsidiary of Advanta Corporation. From August 2000
to June 2002, Mr. Rapp served as Senior Vice President and Chief Accounting
Officer of Sovereign Bancorp in Philadelphia, PA. Immediately prior to that,
from 1995 to 2000, Mr. Rapp served as Chief Financial Officer of Republic First
Bancorp, a commercial bank holding company based in Philadelphia, Pennsylvania.
Mr. Rapp received his Bachelor of Science degree from St. Joseph's University.
Mr. Rapp resigned on January 4, 2005.
56
Rick Etskovitz, 50, joined Astea International in June 2000, when he
was elected chief financial officer and treasurer. Responsible for the firm's
financial planning, investor relations, and executive guidance to help drive
corporate performance, Rick brings to his position 25 years of experience in
financial management and reporting. A certified public accountant, he previously
served Astea for seven years as the engagement partner from an independent
accounting firm. Before beginning his career in private practice, Rick was part
of the financial management team at Dupont where he held responsibilities for
Mergers and Acquisitions, Financial Planning, Corporate Accounting and Benefits.
Rick received his Bachelor of Science from the Pennsylvania State University and
his Masters of Business Administration from the Wharton Graduate School at the
University of Pennsylvania. Mr. Etskovitz resigned from the firm in April 2004
and returned as CFO on January 4, 2005.
John Tobin, 39, joined the Company in June 2000 and serves as Vice
President, General Counsel, and Secretary. 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 law firms Pepper Hamilton LLP and Wolf, Block, Schorr and Solis
Cohen LLP, 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 received his Bachelor of Science degree 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, 45, Vice President of Sales, is chartered with leading the
Company's sales operations to drive revenue and market share. Mr. Roy joined
Astea in December 2003. Immediately prior to Astea, he worked at PTC, Inc., a
provider of Product Lifecycle Management software based in Needham,
Massachusetts, where he was a Global Account Manager. From July 2001 to
September 2002 he worked as Director of Sales for the Northeast at SynQuest,
Inc., a Norcross, Georgia based supply chain event planning software provider.
Prior to that, from December 1999 to July 2001, he was a Regional Vice President
at VerticalNet Solutions in Horsham, Pennsylvania, selling enterprise software.
Mr. Roy received a Bachelor of Science degree in Organizational Management from
Eastern College and a veteran of the U.S. Marine Corps.
Marikit Klein-Smith, 37, Vice President, Marketing, joined Astea in
April 2003 and brings over 15 years of experience in high-tech marketing, with
progressive management experience at leading enterprise software and service
companies. She is responsible for the Company's branding initiatives and
oversees product marketing, lead generation, public relations and analyst
relation efforts. Prior to joining Astea, from April 2001 until April 2003,
Klein-Smith was a strategic marketing consultant for Full Circle Communications.
Previously, she spent 12 years in the SAP enterprise software market, where she
held the position of Vice President of Marketing at eOnline, an application
service provider for SAP software (2000-2001); Director of Corporate
Communications at SAP America, one of the largest enterprise software developers
(1998 to 2000), Global Marketing Manager at Deloitte Consulting's SAP practice
(1995 to 1998), and Field Marketing/Public Relations Specialist at SAP America
(1989 to 1995). Klein-Smith holds a Bachelor of Science in Economics from
Ursinus College.
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,
2004 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, 2004.
57
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.
Item 10A. Departure of Directors or Principal Officers; Election of Directors;
Appointment of Principal Officers
Effective January 5, 2005, Rick Etskovitz has been appointed as interim
Chief Financial Officer and Treasurer, replacing George Rapp, who has resigned
those positions.
58
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, 2004, 2003, and 2002, of the following persons (i) each person who
served as Chief Executive Officer during the year ended December 31, 2004, and
(ii) four other executive officers of the Company in office at December 31, 2004
who earned more than $100,000 in salary and bonus in fiscal 2004 (collectively,
the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term
Compensation
------------------------------------------- ------------
Securities
Underlying
Options All Other
Name and Principal Position Year Salary ($) Bonus ($) (# of shares) Compensation ($)
--------------------------- ----- ----------- ---------- ------------- ----------------
Zack B. Bergreen 2004 $ 210,000 -- -- --
Chairman of the Board and Chief 2003 210,000 -- -- --
Executive Officer 2002 130,000 -- -- 69,600 (1)
George S. Rapp(7) 2004 $ 100,000 30,000 --
Chief Financial Officer
Rick Etskovitz (8) 2004 54,338 -- --
Chief Financial Officer 2003 129,525 -- 10,000 (2) --
2002 127,050 -- 10,000 (2) --
John Tobin (4) 2004 139,681 -- --
Vice President and General Counsel 2003 150,306 -- 10,000 (2) --
2002 151,033 (3) -- 10,000 (2) --
Ken Roy (5) 2004 150,000 $ 44,470 --
Vice President, North American Sales 2003 15,865 -- 35,000 (5) --
Marikit Klein-Smith (6) 2004 $ 104,327 --
Vice President, Marketing 2003 90,192 $ 9,700 10,000 (6)
(1) Includes premiums for term, split-dollar life insurance paid by the Company
on behalf of the Named Executive Officer.
(2) Represents options to purchase shares of Common Stock, which was awarded
based on merit.
(3) Compensation paid to Coleman Legal, a third party legal services provider.
(4) Hired as employee effective January 1, 2003.
(5) Ken Roy joined Astea in November 2003.
(6) Marikit Klein-Smith joined Astea in March 2003, resigned in November 2004.
(7) George Rapp joined Astea in April 2004, resigned in January 2005. No shares
have vested.
(8) Rick Etskovitz terminated as CFO at April 2004 and rejoined in January 2005.
59
Option Grants in Last Fiscal Year
The following table sets forth each grant of stock options made during the
year ended December 31, 2004 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%($)
---- ----------- ------ ------------ ---- ----- ------
George Rapp 30,000 (3) 28% $3.41 5/11/2014 $166,636 $265,340
(1) The exercise price per share of each option was fixed by the Board of
Directors.
(2) Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to the expiration of their
term assuming the specified compounded rates of appreciation (5% and 10%)
on the market value of the Company's Common Stock on the date of option
grant over the term of the options. These numbers are calculated based on
rules promulgated by the Commission and do not reflect the Company's
estimate of future stock price growth. Actual gains, if any, on stock
option exercises and Common Stock holdings are dependent on the timing of
such exercise and the future performance of the Company's Common Stock.
There can be no assurance that the rates of appreciation assumed in this
table can be achieved or that the amounts reflected will be received by the
individual.
(3) Options to purchase shares will vest in equal installments on each of the
first four anniversaries of the grant date.
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
The following table sets forth, for each of the Named Executive
Officers, information with respect to the exercise of stock options during the
year ended December 31, 2004 and the year-end value of unexercised options:
Value of Unexercised
Shares Numbers of Unexercised In-the-Money Options
Acquired on Value Options at Year End at Year End
Name Exercise(#) Realized($) Exercisable/Unexercisable Exercisable/Unexercisable
---- ------------ ----------- -------------------------- --------------------------
Zack B. Bergreen -- -- 60,000/20,000 --
Rick Etskovitz -- -- 16,250/13,750 --
John Tobin -- -- 16,250/13,750 --
Ken Roy -- -- 8,750/26,250 --
Marikit Klein-Smith -- -- -- --
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
60
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, 2004, 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. Directors who are employees are not compensated for their service
on the Board of Directors or any committee thereof.
61
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth as of March 5, 2005: (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, 2005 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.
Amount of Percent of
Name and Address Of Beneficial Owner Ownership(1) Class(2)
- ------------------------------------- ------------ ----------
Zack B. Bergreen(3) 1,418,000 47%
c/o Astea International
240 Gibraltar Road
Horsham, Pennsylvania 19044
Adrian Peters (4) 14,200 *
Eric Siegel (5) 9,400 *
Thomas J. Reilly, Jr. (6) 3,000 *
Rick Etskovitz (7) 20,250 *
George Rapp 0 *
John Tobin (8) 16,250 *
Ken Roy 8,750 *
Marikit Klein-Smith 0 *
Leviticus Partners, L.P. 250,000 7.8%
Daniel Zeff 234,883 7.9%
All current directors, nominees and executive officers 1,974,733 48.9%
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
2,959,727 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 60,000 options, all of which are currently
exercisable.
(4) Board Of Director. Represents options to purchase 14,200 shares, all of
which are currently exercisable.
(5) Board Of Director. Represents options to purchase 9,400 shares, all of
which are currently exercisable.
62
(6) Board Of Director. Represents 1,000 shares of common stock and also options
to purchase 2,000 all of which are exercisable.
(7) Chief Financial Officer. Represents 4,000 shares of common stock and also
options to purchase 16,250 shares all of which are currently exercisable.
(8) Vice President and General Counsel. Represents options to purchase 16,250
shares, all of which are currently exercisable.
Item 13. Certain Relationships and Related Transactions.
Over the years, the Company paid premiums on behalf of the majority
stockholder and his wife under split dollar life insurance policies. At the end
of 2002, the Company stopped paying premiums on these policies. In 2003, the
policies were surrendered and the Company received $632,000 refund of all the
premiums it had paid over the life of the policy.
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, 2004 and 2003, and fees
billed for other services rendered by BDO Seidman, LLP during those periods:
2004 2003
----------------- ----------------
Audit Fees (1) $ 160,071 $ 145,500
Audit-related Fees (2) 9,000 9,000
Tax Fees (3) 73,219 62,200
16,000 --
----------------- ----------------
Total (4) $ 242,290 $ 216,700
================= ================
(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) The Audit Committee pre-approved 100% of the fees for 2004.
63
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a)(1)(A) Consolidated Financial Statements.
i) Consolidated Balance Sheets at December 31, 2004 and 2003
ii) Consolidated Statements of Operations for the years ended
December 31, 2004, 2003, and 2002
iii) Consolidated Statements of Stockholders' Equity for the
years ended December 31,
2004, 2003, and 2002
iv) Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003, and 2002
v) Notes to the Consolidated Financial Statements
(a)(1)(B) Report of Independent Registered Public Accounting Firm.
(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
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)).
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)).
64
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).
10.28 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).
65
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
(b) 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.
66
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 28th day of March
2005.
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 28, 2005
--------------------------- Officer (Principal Executive Officer)
Zack Bergreen
/s/Rick Etskovitz. Chief Financial March 28, 2005
--------------------------- (Principal Financial
Rick Etskovitz and Accounting Officer)
/s/Eileen Smith Controller March 28, 2005
---------------------------
Eileen Smith
/s/Thomas J. Reilly, Jr. Director March 28, 2005
---------------------------
Thomas J. Reilly, Jr.
/s/Zack Bergreen Director March 28, 2005
---------------------------
Zack Bergreen
/s/Adrian Peters Director March 28, 2005
---------------------------
Adrian Peters
/s/Eric Siegel Director March 28, 2005
---------------------------
Eric Siegel
67