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
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
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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
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
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.
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.
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
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
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.
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
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.
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
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.
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.
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.
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.
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.
PART II
Item 5.
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.
(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.
Item 7.
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.
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.
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
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.
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.
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
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
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.
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
Certain Factors That May Affect Future Results
The Company does not provide forecasts of its future financial performance. From time to time, however, information provided by the Company or statements made by its employees may contain "forward looking" information that involves risks and uncertainties. In particular, statements contained in this Annual Report on Form 10-K that are not historical fact may constitute forward looking statements and are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company's actual results of operations and financial condition have varied and may in the future vary significantly from those stated in any forward looking statements. Factors that may cause such differences include, but are not
limited to, the risks, uncertainties and other information discussed within this Annual Report on Form 10-K, as well as the accuracy of the Company's internal estimates of revenue and operating expense levels.
The following discussion of the Company's risk factors should be read in conjunction with the financial statements and related notes thereto set forth elsewhere in this report. The following factors, among others, could cause actual results to differ materially from those set forth in forward looking statements contained or incorporated by reference in this report and presented by management from time to time. Such factors, among others, may have a material adverse effect upon the Company's business, results of operations and financial conditions:
Recent History of Net Losses
The Company has a history of net losses. 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
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
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:
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
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
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
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
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
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.
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.
Item 8.
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
Philadelphia, PA February 25, 2005
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.
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
Property and Equipment
Property and equipment are recorded at cost. Property and equipment capitalized under capital leases are recorded at the present value of the minimum lease payments due over the lease term. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the related assets or the lease term, whichever is shorter. Gains and losses on disposal are recognized in the year of the disposition. Expenditures for repairs and maintenance are charged to expense as incurred and significant renewals and betterments are capitalized.
The Company reviews the carrying values of its long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable based on undiscounted estimated future operating cash flows. As of December 31, 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.
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.
Comprehensive Income (Loss)
The Company follows SFAS No. 130 "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and presentation of comprehensive income (loss) and its components
(revenues, expenses, gains and losses) in a full set of general-purpose financial statements. This statement also requires that all components of comprehensive income (loss) be displayed with the same prominence as other financial statements. Comprehensive income (loss) consists of net income (loss) and foreign currency translation adjustments. The effects of SFAS No. 130 are presented in the accompanying Consolidated Statements of Stockholders' Equity.
Stock Compensation
The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants using the intrinsic-value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations. Under the intrinsic-value method, because the exercise price of the Company's employee stock options is less than or equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
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:
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.
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.
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
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 ==============
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.
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
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:
The following table summarizes information about stock options outstanding at December 31, 2004:
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.
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.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
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.
Item 9B. Other Information
None.
PART III
Item 10.
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.
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.
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.
Item 11.
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").
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:
(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:
Employment Agreements and Severance Arrangements with Executive Officers
The Company has not entered into employment agreements with any of its current Executive Officers.
Board Interlocks and Insider Participation
No executive officer of the Company served as a member of the Board of Directors, compensation committee, or other committee performing equivalent functions, of another entity one of whose executive
officers served as a Director of the Company. Other than Mr. Bergreen, no person who served as a member of the Board was, during the fiscal year ended December 31, 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.
Item 12.
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.
* 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.
(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.
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.
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.
PART IV
Item 15.
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)).
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).
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.
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.