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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934. For The Fiscal Year Ended: December 31, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934. For the transition period from -------- to
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Commission File Number: 0-26330
ASTEA INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Delaware 23-2119058
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
240 Gibraltar Road, Horsham, Pennsylvania 19044
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 682-2500
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Securities registered pursuant to Section 12(b)
of the Act: None
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Securities registered pursuant to Section 12(g)
of the Act: Common Stock, $.01 par value
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ _ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes___ No X
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The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of June 28, 2002 (based on the closing price of $0.93 as quoted by
Nasdaq National Market as of such date) was approximately $7,263,793
As of March 19, 2003, 14,606,530 shares of the registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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TABLE OF CONTENTS
Page
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PART I
Item 1. Business 3
Item 2. Properties 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for Registrant's Common Equity and Related 14
Stockholder Matters
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial 16
Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 34
Item 8. Financial Statements and Supplementary Data 35
Item 9. Changes in and Disagreements with Accountants on 57
Accounting and Financial Disclosure
PART III
Item 10. Directors and Officers of the Registrant 57
Item 11. Executive Compensation 60
Item 12. Security Ownership of Certain Beneficial Owners and 63
Management
Item 13. Certain Relationships and Related Transactions 64
PART IV
Item 14. Controls and Procedures 64
Item 15. Exhibits, Financial Statement Schedules, and Reports 64
on Form 8-K
Signature Page 68
Certifications 69, 70
2
PART I
Item 1. Business.
General
Astea International Inc. and subsidiaries (collectively "Astea" or the
"Company") develops, markets and supports Customer Relationship Management
("CRM") software solutions which are licensed to companies that sell and service
equipment, or sell and deliver professional services. Companies invest in
Astea's software and services to automate enterprise business processes for
purposes of cost containment, operational efficiency and management visibility.
Customers' return on investment from Astea solutions is achieved through
improved management of information, people and cash flows, thereby increasing
competitive advantages, top-line revenue and profitability.
Astea solutions are used in industries such as information technology,
medical devices and diagnostic systems, industrial controls and instrumentation,
retail systems, office automation, imaging systems, facilities management,
telecommunications and other industries with equipment sales and service
requirements. Astea's focus on enterprise solutions for organizations that sell
and deliver services is a unique CRM industry differentiator that draws upon the
Company's industry experience and core expertise.
Founded in 1979, Astea is known throughout the CRM 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
CRM suite version 6 products ("Astea Alliance 6") that adapt the Company's
domain expertise and integrated business process functionality to the
Microsoft.NET Web Services framework. Astea solutions include a variety of Web
portal and wireless remote-access capabilities to integrate mobile employees,
contractors, business partners and customers into an enterprise's consolidated,
real-time management of workforce, assets and business relationships.
Astea's software has been licensed to approximately 575 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,
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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.
The Company continues to support approximately 45 DISPATCH-1 customers
on maintenance contracts. Further, the Company offers a migration path to Astea
Alliance with the Company's integrated DISPATCH-1 to Alliance Conversion (iDAC)
program. The iDAC program enables long-time Astea users to leverage their
previous investments in DISPATCH-1 and economically deploy the latest, more
comprehensive and far superior Alliance functionality.
Current Product Offerings
Astea Alliance
Astea Alliance applications are designed to increase business
efficiencies by collapsing multiple, interdependent business processes into a
consolidated shared enterprise system. Astea Alliance automates front-office
sales and service processes, integrates with back-office financial and ERP
applications, and enables real-time information sharing among local, remote and
mobile employees, customers and business partners. Companies' return on
investment from Astea Alliance is obtained from higher operational efficiencies,
such as more-efficient utilization of employees and material resources, improved
sales execution and revenue generation, improved service delivery and revenue
recovery, and stronger relationships with customers and partners.
Astea Alliance is an international product with multi-lingual and
multi-currency capabilities. The latest version software, Astea Alliance 6, is
engineered with a new system architecture for Web-based deployment using
existing and emerging Microsoft.NET technologies. Prior to Astea Alliance 6,
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. Astea Alliance 6 delivers all enhanced AllianceEnterprise
functionality on a Web-based platform and new module applications for
multi-channel contact centers, marketing campaign management, Professional
Services Automation (PSA), enterprise systems integration and remote access via
untethered and real-time wireless connectivity using a variety of mobile
devices.
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. All references to Astea Alliance herein refer to the Alliance family
of products available since 1997. As of December 31, 2002, Astea Alliance
solutions have been licensed to over 200 customers worldwide. Market acceptance
of Astea Alliance by global and regional companies increased in 2002 and the
Company is aggressively pursuing opportunities for larger system implementations
with mid-size to large enterprises on a worldwide basis. See "Certain Factors
that May Affect Future Results-- Uncertain Market Acceptance of Astea Alliance;
Decreased revenues from DISPATCH-1."
4
Astea Alliance 6 consists of nine applications suites:
o Astea Contact Center 6
o Astea Depot Repair 6
o Astea Field Service 6
o Astea Marketing 6
o Astea Mobile 6
o Astea Portals 6
o Astea Professional Services 6
o Astea Sales 6
o Astea Analytics 6 (available 2003)
Each suite includes two or more application modules. For example, the
Astea Field Service 6 suite includes Alliance Field Service, Alliance Contracts
and Alliance Logistics modules. All suites and modules are fully integrative,
enabling Astea Alliance configurations to meet exact customer needs.
The Astea software facilitates one-time data entry and data sharing to
maximize operational efficiencies. Anyone within a user organization who has
contact with a customer has the ability to update the status of customer records
in real-time, which ensures "one view of a customer" and eliminates any
disparity or confusion in business data among marketing, sales, customer service
and field service personnel. This includes information entered remotely by
mobile employees and by customers over the Internet. Astea Alliance synchronizes
all customer-facing activities to operate as a cohesive unit.
In addition to selected application suites and modules, Astea Alliance
configurations are delivered with system infrastructure consisting of Alliance
Global Database, Alliance Studio and Alliance Links.
Alliance Global Database is the system's enterprise database capable of
data translation for multi-national organizations to collaborate across country
lines, including support for double-byte character data sets such as for Asian
languages. Each user can interact with the system in their preferred language
and currency. Alliance Global Database also provides translation between time
zones, taxation methods, and other unit-of-measure implications of a global
enterprise.
Alliance Studio 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.
Alliance Links are a family of enterprise application integration
products that interface Astea Alliance to other enterprise systems, such as
back-office financial and ERP applications, remote equipment monitoring and
diagnostic software, and wireless data transmission services. Alliance Links
extend Astea Alliance's return on investment for customers by making all
Alliance modules accessible to external software through open, well defined,
synchronous and asynchronous application programming interfaces (APIs) that are
XML based.
Astea Contact Center 6
Astea Contact Center 6 applications support 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,
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and interface to Computer Telephony Integration (CTI) systems help streamline
customer interaction processes. Work scheduling and demand balancing optimize
staff utilization. Employee personal portals with access to comprehensive
real-time customer data and decision support tools including intelligent
knowledge management and scripting for problem resolution and inside sales drive
higher staff productivity. Aside from more efficient customer service and higher
levels of customer satisfaction, the objectives of Astea Contact Center software
are to reduce overhead through improved first-call resolution rates and shorter
service-call handling times.
Astea Depot Repair 6
Astea Depot Repair 6 applications automate tracking of assets through
equipment calibration and repair chains, including merchandise ownership,
location, repair status and warranty coverage. Objectives are to gain real-time
visibility of all repair chain activities, ensure compliance with warranty and
contractual agreements, respond to customer inquiries with up-to-the-minute
repair status, collect and analyze repair statistics for product design
improvement, and reduce overhead such as inventory carrying costs. Applications
support in-house, subcontractor and vendor calibration and repair; customer and
vendor exchanges and advance exchanges; equipment on loan; change of ownership;
merchandise shipments, cross shipments and pickups; consolidated repair orders;
and, storage and refurbishment programs. Integration with other Astea Alliance
modules allows repair orders and repair status queries to be initiated from
customer contact centers, field service, field sales and warehouses as well as
the repair depot.
Astea Field Service 6
Astea Field Service 6 delivers a robust set of automated capabilities
to improve management of field service activities and for field service
representatives to more efficiently complete and document assignments, manage
vehicle assets, capture expenses and generate revenue through add-on sales
during a customer contact. Applications alert dispatchers to contractual minimum
response times and expedite coordination of field force skills matching,
scheduling, dispatch and repair parts logistics. Mobile tools enable field
forces to work electronically for receiving, documenting and reporting
assignments, eliminating manual procedures, service delays and paper reporting.
The software supports all field service categories including equipment
installations, break/fix, planned maintenance and meter reading. Applications
can also be integrated with equipment diagnostic systems for fully automated
solutions that initiate and prioritize service requests and dispatch assignments
to field employees' PDAs without human intervention.
Astea Marketing 6
Astea Marketing 6 coordinates the planning, execution and analysis of
marketing campaigns. The software supports budgeting and tracking complete
multi-channel campaigns that integrate advertising, direct mail, email
marketing, telemarketing, etc. Electronic campaigns such as email and
telemarketing are further supported with list management, script development and
user interfaces for campaign execution. Marketing managers can define campaign
offerings such as products and services to be sold, pricing and discount
tolerances; assign campaign attributes; attach campaign documentation such as
descriptive text, images, slogans and lead conversion literature; and monitor
response. The big picture view enables managers to assess synergies each channel
delivers to an overall campaign and adjust channel details such as prospect
lists, scripts, budgets or offering incentives to elicit best results.
Integration with other Astea Alliance modules enables equipment and service
organizations to leverage abundant customer information for identifying new
potential revenue sources and marketing to maximize customer loyalty and base
sales opportunities.
6
Astea Mobile 6
Astea Mobile 6 enables customers to match Astea Alliance mobile access
to field sales and service needs. Untethered wireless applications with
synchronized client databases are provided for laptops and Pocket PC handheld
devices. Direct-connect, real-time wireless text messaging is provided for
two-way pagers and capable mobile 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 inhouse personnel; improved speed, accuracy content and
compliance of field reporting; faster sales order processing and customer
service invoicing; and other operational efficiencies.
Astea Portals 6
Astea Portals 6 supports unattended e-business transactions for
customer self-service and self-sales ("Alliance Customer Portal") and Astea
Alliance remote system access for service agents and small satellite offices
("Alliance Employee Portal"). Alliance Customer Portal empowers customers and
lessens dependence on sales and service staff to conduct transactions that can
be performed over the Internet. It reduces routine voice and fax calls to
customer contact centers, freeing lines for customers whose critical needs do
require assistance from a service representative. It also provides another
channel to promote and sell more products and services to an existing customer
base. The customer portal can delay or eliminate needs for contact center
expansion and associated increases in facility, equipment and staffing costs.
Alliance Employee Portal enables real-time online access to the Astea Alliance
system for employees in remote locations. The Company plans to include Alliance
Partner Portals for indirect sales channel management and unattended supply
chain transactions.
Astea Professional Services 6
Astea Professional Services 6 supports management of knowledge workers,
such as deployed by professional services organizations and internal service
departments of large organizations. Suite 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.
Astea Sales 6
Astea Sales 6 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 fulfilment. Other
applications prompt customer support and service staff to up sell and cross sell
during contact with customers.
7
Astea Analytics 6
Astea Analytics 6, planned for introduction in 2003, will provide
pre-configured business intelligence applications for equipment and service
companies. Applications will enable Astea Alliance users to perform various
multi-dimensional analyses and trend reporting of key performance indicators.
Dashboards will graphically highlight key metrics to aid Astea Alliance users'
decision making for improving operational efficiencies, customer loyalty,
revenue and profit.
DISPATCH-1
The Company's original flagship product, DISPATCH-1, was introduced in
1986 and adopted by many Fortune 1000 companies. Astea currently supports
approximately 45 DISPATCH-1 customers on active maintenance. In 2002,
approximately 24% of the Company's total revenues were derived from license,
maintenance and professional service fees related to DISPATCH-1, compared to 35%
in 2001. See "Certain Factors that May Affect Future Results-- Uncertain Market
Acceptance of Astea Alliance; Decreased revenues from DISPATCH-1."
While Astea Alliance is the successor to DISPATCH-1 and offers a
broader CRM solution, DISPATCH-1 remains deployed in a variety of large
enterprise environments and supports thousands of users in multinational
locations. Support of these installations remains a component of the Company's
plans and DISPATCH-1 is expected to be a significant continuing source of
licensing, service and maintenance revenues to Astea for the foreseeable future
in the form of additional users on current licenses, addition of optional
modules, and ongoing maintenance fees.
DISPATCH-1, at one point one of the most widely installed field service
solutions in the world, helps organizations with complex and geographically
dispersed field service operations automate and manage call center operations
among customers, headquarters, branch offices and the field. Version 8.0 of
DISPATCH-1 supports both Internet and graphical desktop interfaces, and is
interfaced to a number of complementary third-party products designed to extend
its functionality. DISPATCH-1 has been deployed in a wide variety of large
enterprise environments. In select engagements, the Company has significantly
customized and enhanced DISPATCH-1 to specifically address the needs of a few
very large product deployments, generating an ongoing but decreasing level of
professional services and consulting revenues, as well as product maintenance
revenues.
integrated DISPATCH-1 to Alliance Conversion (iDAC)
Astea offers a cost-effective migration program (iDAC) for DISPATCH-1
customers to convert to Astea Alliance and thereby leverage their earlier
investments with the Company into the far superior and expanded Astea Alliance
applications. The iDAC program includes professional services, training and gap
analyses on Astea Alliance's expanded capabilities, project planning,
software-to-business process optimization, standardized file conversion
routines, and Astea Alliance life cycle support.
Professional Services and Customer Support Services
Astea offers a range of specialized professional and customer support
services to assist its clients in using its products effectively. These services
include business process consulting, implementation planning, project
management, customization, education and training, technical support and ongoing
software maintenance. Astea believes that its professional services capabilities
allow its clients to deploy the
8
Company's products quickly and efficiently. Together, professional services and
customer support comprised approximately 61% of the Company's total revenues in
2002 and 63% of the Company's total revenues in 2001.
Professional Services
An initial professional services engagement for Astea Alliance
typically lasts between three and six months. Such engagements usually lasted
between six and eighteen months for DISPATCH-1. For most of Astea's customers,
teams are assembled from the Company's worldwide offices to perform the required
services. Due to the more complex nature of the DISPATCH-1 legacy system
implementations and upgrades, customers that licensed these programs typically
purchased a higher volume of professional services than customers need to
purchase for Astea Alliance, which is a superior and more sophisticated
technology.
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 client 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 client'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 client to configure Astea's software functionality to the
client's specific business process requirements.
The final 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 client's computing environment. Ultimately, education plans are developed
and executed to provide the client 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 and
are billed, pursuant to customer work orders, usually on a weekly basis
subsequent to the work being performed.
Customer Support
The Company's customer support organization provides customers with
telephone and online technical support, as well as product enhancements, updates
and new software releases. All regions of the Company's worldwide operations are
supported by local representatives. Support is provided in real-time and usually
spoken in native languages by the Company's personnel or a distributor's
personnel familiar with local business customs and practices. 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 one office in the United States, two offices in
Europe, one office in Israel and one office in Australia.
Customers
The Company estimates that it has sold approximately 575 licenses to
customers ranging from small, rapidly growing companies to large, multinational
corporations with geographically dispersed operations and remote offices. More
than 200 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
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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 2002, no single customer
accounted for more than 10% of the Company's revenues. In 2001, one customer
accounted for 11% of the Company's revenues. In 2000, no customer accounted for
more than 10% the Company's revenues.
Sales and Marketing
The Company markets its products through a worldwide network of direct
and indirect sales and services offices with corporate headquarters in the
United States and regional headquarters in the United Kingdom (European
Operations) and Australia (Asia Pacific Operations). Sales partners include
distributors (value-added resellers, system integrators and sales agents) and
OEM partners. The Company actively seeks to expand its reseller network and
establish an international indirect distribution channel targeted at the
mid-market tier. See "Certain Factors that May Affect Future Results-- Need to
Expand Indirect Sales."
Astea's direct sales force employs a consultative approach to selling,
working closely with prospective clients to understand and define their needs
and determine how such needs can be addressed by the Company's products. These
clients typically represent the mid- to high-end of the CRM software market. A
prospect development organization comprised of telemarketing representatives,
who are engaged in outbound telemarketing and inbound enquiry 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 CRM 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 31% of the Company's revenues
in 2002, 33% of the Company's revenues in 2001 and 41% in 2000. See "Certain
Factors that May Affect Future Results--Risks Associated with International
Sales."
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Product Development
Astea's product development strategy is to provide products that
perform with exceptional depth and breadth of functionality and are easy to
implement, use and maintain. Products are designed to be flexible, modular and
scalable, so that they can be implemented incrementally in phases and expanded
to satisfy the evolving information requirements of Astea's clients and their
customers. Each product is also designed to be as hardware-platform-independent
as possible for client/server, thin-client and Web environments that can be
powered by multiple hardware platforms and operating systems. To accomplish
these goals, the Company uses widely accepted, commercially available
application development tools from Microsoft Corporation and Sybase, Inc. for
Astea Alliance and Progress Software Corporation for DISPATCH-1. These software
tools provide the Company's customers with the flexibility to deploy Astea's
products across a variety of hardware platforms, operating systems and
relational database management systems. The latest Astea Alliance products are
currently being engineered for existing and emerging Microsoft technologies such
as COM+, Microsoft ComPlus Transactions, Microsoft Message Queuing (MSMQ),
Internet Information Server (IIS) and Microsoft.NET Enterprise Servers including
Windows 2000 Server, SQL Server and BizTalk Server.
In addition to product development that is conducted at Company
facilities in the United States and Israel, Astea participates in partnerships
with complementary technology companies to reduce time-to-market with new
product capabilities and continually increase its value proposition to
customers. The Company also works with OEM partners who can integrate
AllianceEnterprise modules to complement and expand the capabilities of their
product offerings.
The Company's total expenses for product development for the years
ended December 31, 2002, 2001 and 2000, were $1,781,000, $2,590,000 and
$2,744,000, respectively; and these expenses amounted to 10%, 15% and 14% of
total revenues for 2002, 2001, and 2000, respectively. In addition, the Company
incurred capitalized software development costs of $807,000, $600,000 and
$640,000 in 2002, 2001 and 2000, respectively. The Company anticipates that it
will continue to commit substantial resources to product development in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Certain Factors that May Affect Future Results--Need
for Development of New Products."
Manufacturing
The Company's software products are distributed on CD ROMs and by
e-mail. Included with the software products are security keys (a software piracy
protection) and documentation available on CD ROM and hard copy. Historically,
the Company has purchased media and duplicating and printing services for its
product packaging from outside vendors.
Competition
The CRM 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.
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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 CRM
marketplace, the Company competes against publicly held companies and numerous
smaller, privately held companies. The Company's competitors include Siebel
Systems, Inc. ("Siebel"), PeopleSoft Inc. ("PeopleSoft"), SAP AG ("SAP"), Oracle
Corporation ("Oracle"), Great Plains Software which was acquired by Microsoft
("Microsoft Great Plains"), Clarify which was acquired by Amdocs Limited
("Amdocs Clarify"), Viryanet Ltd. ("Viryanet") and a number of smaller privately
held companies. See "Certain Factors that May Affect Future Results--Competition
in the Customer Relationship Management Software Market is Intense."
Licenses and Intellectual Property
Astea considers its software proprietary and licenses its products to
its customers under written license agreements. The Company also employs an
encryption system that restricts a user's access to source code to further
protect the Company's intellectual property. Because the Company's products
allow customers to customize their applications without altering the source
code, the source code for the Company's products is typically neither licensed
nor provided to customers. The Company does, however, license source code from
time to time and maintains certain third-party source code escrow arrangements.
See "Customers" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
The Company seeks to protect its products through a combination of
copyright, trademark, trade secret and fair business practice laws. The Company
also requires employees, consultants and third parties to sign nondisclosure
agreements. Despite these precautions, it may be possible for unauthorized
parties to copy certain portions of the Company's products or reverse engineer
or obtain and use information that the Company regards as proprietary. The
Company presently has no patents or patent applications pending. See "Certain
Factors that May Affect Future Results--Risks of Dependence on Proprietary
Technology."
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, 2002, the Company, including its subsidiaries, had a
total of 137 full time employees worldwide, 63 in the United States, 18 in the
United Kingdom, 6 in the Netherlands, 33 in Israel, 14 in Australia, and 3 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
12
services on a fee for service and on a project basis. In 1986, the Company
introduced its DISPATCH-1 product. In November 1991, the Company's sole
stockholder acquired the outstanding stock of The DATA Group Corporation ("Data
Group"), a provider of field service software and related professional services
for the mainframe computing environment. Data Group was merged into the Company
in January 1994. In February 1995, the Company and its sole stockholder acquired
the outstanding stock of Astea Service & Distribution Systems BV ("Astea BV"),
the Company's distributor of DISPATCH-1 and related services in Europe. In May
1995, the Company reincorporated in Delaware. In July 1995, the Company
completed its initial public offering of Common Stock. In February 1996, the
Company merged with Bendata, Inc. In June 1996, the Company acquired Abalon AB.
In September 1998 (effective July 1, 1998), the Company sold Bendata, Inc. In
December 1998, the Company sold Abalon AB. In December 1997, the Company
introduced ServiceAlliance and in October 1999, SalesAlliance, which were
subsequently re-engineered into components of the AllianceEnterprise Suite
introduced in 2001. Through 2001 and into 2002, the Company rebuilt is product
functionality for Web-based applications and in August 2002 introduced Astea
Alliance 6.
Item 2. Properties.
The Company's headquarters are located in a leased facility of
approximately 22,000 square feet in Horsham, Pennsylvania. The Company also
leases facilities for operational activities in Houten, Netherlands, and Tefen,
Israel, and for sales and customer support activities in Cranfield, England and
St. Leonards, Australia. The Company believes that suitable additional or
alternative office space will be available in the future on commercially
reasonable terms as needed.
Item 3. Legal Proceedings.
From time to time, the Company is involved in litigation relating to
claims arising out of its operations in the normal course of business. In
addition, since the Company enters into a number of large contracts requiring
the complex installation of software products and the implementation of
considerable professional services over several quarterly periods, the Company
is from time to time engaged in discussions and deliberations with customers
regarding the adequacy and timeliness of the installation or service, product
functionality and features desired by the customer and additional work and
product requirements that were not anticipated at the commencement of the
project. These deliberations sometimes result in changes in services required,
upward or downward price adjustments, or reworking of contract terms. The
Company from time to time will reserve funds for contingencies under contract
deliberations. The Company is not a party to any material legal proceedings, the
adverse outcome of which, in management's opinion, would have a material adverse
effect on the Company's business, financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report, through the
solicitation of proxies or otherwise.
13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Common Stock is traded on the Nasdaq National Market
under the symbol "ATEA." The following table sets forth the high and low closing
sale prices for the Common Stock as reported by the Nasdaq National Market for
the past two fiscal years:
2002 High Low
--------------------------------------------------------------------
First quarter $1.00 $0.72
Second quarter 1.00 0.76
Third quarter 0.97 0.51
Fourth quarter 0.75 0.45
2001 High Low
--------------------------------------------------------------------
First quarter $1.19 $0.53
Second quarter 1.37 0.53
Third quarter 1.24 0.72
Fourth quarter 1.00 0.70
As of March 19, 2003, there were approximately 90 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
19, 2003, the last reported sale price of the Common Stock on the Nasdaq
SmallCap Market was $0.55 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.
14
Item 6. Selected Financial Data.
Years ended December 31, 2002 2001 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Statement of Income Data: (1)
Revenues:
Software license fees $ 6,504 $ 6,384 $ 6,554 $ 11,312 $ 5,822
Services and maintenance 10,294 10,973 13,763 22,509 24,061
-------------------------------------------------------------------
Total revenues 16,798 17,357 20,317 33,821 29,883
-------------------------------------------------------------------
Cost and Expenses:
Cost of software license fees 1,262 1,224 1,199 2,240 1,957
Cost of services and maintenance 6,345 6,808 10,928 17,849 18,525
Product development 1,781 2,590 2,744 4,900 5,718
Sales and marketing 6,218 5,396 6,857 8,463 7,976
General and administrative (2) 2,426 2,837 4,066 4,478 5,297
Restructuring charge (3) - 333 1,101 1,630 (800)
-------------------------------------------------------------------
Total costs and expenses 18,032 19,188 26,895 39,560 38,673
-------------------------------------------------------------------
Loss from continuing operations
before interest and taxes (1,234) (1,831) (6,578) (5,739) (8,790)
Net interest income 106 309 1,496 2,163 496
-------------------------------------------------------------------
Loss from continuing
operations before income taxes (1,128) (1,522) (3,576) (8,294)
Income tax expense (benefit) 200 - - - (803)
-------------------------------------------------------------------
Loss from continuing operations (1,328) (1,522) (5,082) (3,576) (7,491)
Gain on sale of discontinued operations,
net of taxes (1) - - 293 - 43,339
Loss from discontinued operations,
net of taxes (1) - - - - (1,697)
-------------------------------------------------------------------
Net loss $ (1,328) $ (1,522) $ (4,789) $ (3,576) $ 34,151
==================================================================
Basic and diluted (loss) earnings per share:
Continuing operations $ (0.09) $ (0.10) $ (0.35) $ (0.26) $ (0.56)
Gain on sale of discontinued operations - - 0.02 - 3.22
Discontinued operations - - - - (0.13)
-------------------------------------------------------------------
$ (0.09) $ (0.10) $ (0.33) $ (0.26) $ 2.53
==================================================================
Shares used in computing basic (loss) earnings
per share 14,603 14,631 14,570 13,899 13,478
Shares used in computing diluted (loss) earnings
per share 14,620 14,631 14,570 13,899 13,478
Balance Sheet Data: (1)
Working capital $ 6,449 $ 7,313 $ 9,668 $ 44,170 $ 45,542
Total assets 16,443 18,015 21,653 58,634 63,613
Long-term debt, less current portion - - 23 49 468
Accumulated deficit (12,568) (11,239) (9,716) (4,927) (1,351)
Total stockholders' equity 8,998 10,105 11,955 46,617 49,017
(1) The Company sold Bendata in September 1998 (effective July 1, 1998) and
sold Abalon in December 1998. The results of Bendata and Abalon have been
treated as discontinued for all periods presented. See Note 3 of the Notes
to the Consolidated Financial Statements.
(2) A one-time accrual for consulting fees of $304,000 is included in the
fourth quarter of 1999 general and administrative expense.
(3) 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, there was an office
closing, and other actions aimed at reducing operating expenses. The fourth
quarter of 1999 contains a restructuring charge of $1,630,000 due to
reduced DISPATCH-1 development and billable service activity and includes
severance payments, the write-off of capitalized software for certain
DISPATCH-1 modules which will no longer be sold and reserves to settle
DISPATCH-1 contractual obligations. In the second quarter of 1998, $800,000
was reversed due to lower than expected restructuring costs. See Note 4 of
the Notes to the Consolidated Financial Statements.
(4) Certain reclassifications have been made in prior years due to the
implementation of EITF 01-14. See Note 2
15
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
This document contains various forward-looking statements and
information that are based on management's beliefs as well as assumptions made
by and information currently available to management. Such statements are
subject to various risks and uncertainties which could cause actual results to
vary materially from those contained in such forward looking statements. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated, expected or projected. Certain of these as well as other
risks and uncertainties are described in more detail in this Annual Report on
Form 10-K.
The Company develops, markets and supports Customer Relationship
Management ("CRM") 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 CRM 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, healthcare, 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 39% of the Company's total revenues
in 2002. Sales of Astea Alliance accounted for 37% of total revenues and add-on
sales to existing DISPATCH-1 users accounted for 2% of total revenues. 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
16
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 upon the expiration of the warranty period,
is recognized ratably over the term of the agreement, which is usually twelve
months.
Critical Accounting Policies and Estimates
The Company's significant accounting policies are more fully described
in its Summary of Accounting Policies, Note 2, to the Company's consolidated
financial statements. The preparation of financial statements in conformity with
accounting principles generally accepted within the United States requires
management to make estimates and assumptions in certain circumstances that
affect amounts reported in the accompanying financial statements and related
notes. In preparing these financial statements, management has made its best
estimates and judgments of certain amounts included in the financial statements,
giving due consideration to materiality. The Company does not believe there is a
great likelihood that materially different amounts would be reported related to
the accounting policies described below; however, application of these
accounting policies involves the exercise of judgments and the use of
assumptions as to future uncertainties and, as a result, actual results could
differ from these estimates.
Revenue Recognition
Revenues are recognized in accordance with Statement of Operations
Procedures (SOP) 97-2, which provides guidelines on the recognition of software
license fee revenue. Principally, revenue may be recognized when persuasive
evidence of an arrangement exists, delivery has occurred, the license fee is
fixed and determinable and the collection of the fee is probable. The Company
allocates a portion of its software revenue to post-contract support activities
or to other services or products provided to the customer free of charge or at
non-standard discounts when provided in conjunction with the licensing
arrangement. Amounts allocated are based upon standard prices charged for those
services or products. Software license fees for resellers or other members of
the indirect sales channel are based on a fixed percentage of the Company's
standard prices. The Company recognizes software license revenue for such
contracts based upon the terms and conditions provided by the reseller to its
customer.
Revenue from post-contract support is recognized ratably over the term
of the contract on a straight-line basis. Consulting and training service
revenue is generally recognized at the time the service is performed. Fees from
licenses sold together with consulting services are generally recognized upon
shipment, provided that the contract has been executed, delivery of the software
has occurred, fees are fixed and determinable and collection is probable. In
instances where the aforementioned criteria have not been met, both the license
and the consulting fees are recognized under the percentage of completion method
of contract accounting.
In limited instances, the Company will enter into contracts for which
revenue is recognized under contract accounting. The accounting for such
arrangements requires judgement, which impacts the timing of revenue recognition
and provision for estimated losses, if applicable.
Accounts Receivable
The Company evaluates the adequacy of its allowance for doubtful
accounts at the end of each quarter. In performing this evaluation, the Company
analyzes the payment history of its significant past due accounts, subsequent
cash collections on these accounts and comparative accounts receivable aging
statistics. Based on this information, along with consideration of the general
strength of the economy, the Company develops what it considers to be a
reasonable estimate of the uncollectible amounts included in accounts
17
receivable. This estimate involves significant judgement 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." Accordingly, all costs incurred subsequent to attaining technological
feasibility are capitalized and amortized over a period not to exceed three
years. Technological feasibility is attained when software products reach Beta
release. Costs incurred prior to the establishment of technological feasibility
are charged to product development expense. The establishment of technological
feasibility and the ongoing assessment of recoverability of capitalized software
development costs require considerable judgment by management with respect to
certain external factors, including, but not limited to, anticipated future
revenues, estimated economic life and changes in software and hardware
technologies. Upon the general release of the software product to customers,
capitalization ceases and such costs are amortized, using the straight-line
method, on a product-by-product basis over the estimated life, which is
generally three years. All research and development expenditures are charged to
research and development expense in the period incurred.
Recent Accounting Pronouncements
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others" ("Interpretation No. 45"). This
Interpretation elaborates on the existing disclosure requirements for most
guarantees, including loan guarantees such as standby letters of credit. It also
clarifies that at the time a company issues a guarantee, the company must
recognize an initial liability for the fair market value of the obligations it
assumes under that guarantee and must disclose that information in its interim
and annual financial statements. The initial recognition and measurement
provisions of Interpretation No. 45 apply on a prospective basis to guarantees
issued or modified after December 31, 2002. The adoption of Interpretation No.
45 is not expected to have a material impact on our consolidated results of
operations, financial position or cash flows.
FIN 46, Consolidation of Variable Interest Entities, clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is applicable
immediately for variable interest entities created after January 31, 2003. For
variable interest entities created prior to January 31, 2003, the provisions of
FIN 46 are applicable no later than July 1, 2003. We do not expect this
Interpretation to have an effect on the consolidated financial statements.
In August 2001, the FASB issued Statement No. 143, "Accounting for
Asset Retirement Obligations" ("SFAS 143"), which provides the accounting
requirements for retirement obligations associated with tangible long-lived
assets. SFAS 143 requires entities to record the fair value of the liability for
an asset retirement obligation in the period in which it is incurred and is
effective for our 2003 fiscal year. The adoption of SFAS 143 is not expected to
have a material impact on our consolidated results of operations, financial
position or cash flows.
In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. This statement supersedes SFAS Statement No. 121,
18
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and the accounting and reporting provisions of APB Opinion No.
30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." This new pronouncement also amends Accounting Research
Bulletin (ARB) No. 51 "Consolidated Financial Statements," to eliminate the
exception to consolidation for a subsidiary for which control is likely to be
temporary. SFAS 144 requires that one accounting model be used for long-lived
assets to be disposed of by sale, whether previously held and used or newly
acquired and also broadens the presentation of discontinued operations to
include more disposal transactions. SFAS 144 is effective for fiscal years
beginning after December 15, 2001 and interim periods within those fiscal years.
Adoption of SFAS 144 on January 1, 2002, did not have any impact on our
financial position, cash flows or results of operations for the year ended
December 31, 2002.
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS 145"). The rescission of FASB No. 4, "Reporting Gains and
Losses from Extinguishment of Debt" applies to us. FASB No. 4 required that
gains and losses from extinguishment of debt that were included in the
determination of net income be aggregated and, if material, classified as an
extraordinary item, net of the related income tax effect. SFAS 145 is effective
for our fiscal year beginning January 1, 2003. Effective January 1, 2003,
pursuant to SFAS 145, the losses on early extinguishment of debt, if any, will
be included in "Other expenses" in our consolidated Statements of Income.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities: ("SFAS 146"), which addresses
financial accounting and reporting for costs associated with exit or disposal
activities, and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)" which
previously governed the accounting treatment for restructuring activities. SFAS
146 applies to costs associated with an exit activity that does not involve an
entity newly acquired in a business combination or with a disposal activity
covered by SFAS 144. Those costs include, but are not limited to, the following:
(1) termination benefits provided to current employees that are involuntarily
terminated under the terms of a benefit arrangement that, in substance, is not
an ongoing benefit arrangement or individual deferred-compensation contract, (2)
costs to terminate a contract that is not a capital lease, and (3) costs to
consolidate facilities or relocate employees. SFAS 146 does not apply to costs
associated with the retirement of long-lived assets covered by SFAS 143. SFAS
146 will be applied prospectively and is effective for exit or disposal
activities initiated after December 31, 2002. We do not expect adoption of SFAS
146 to materially impact its financial position, results of financial position,
results of operations, or cash flows.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure, an amendment of FASB
Statement No. 123 ("SFAS 148"). SFAS 148 amends FASB Statement No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based employee compensation. It also amends the
disclosure provisions of that Statement to require prominent disclosure about
the effects on reported net income of an entity's accounting policy decisions
with respect to stock-based employee compensation. Finally, this Statement
amends Accounting Principles Board ("APB") Opinion No. 28, Interim Financial
Reporting, to require disclosure about those effects in interim financial
information. SFAS 148 is effective for financial statements for fiscal years
ending after December 15, 2002. The Company expects to continue to utilize the
intrinsic valuation method for recording employee stock based compensation.
19
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, 2002 2001 2000
- ------------------------------------------------------------------------------------------
Revenues:
Software license fees 38.7 % 36.8 % 32.3 %
Services and maintenance 61.3 63.2 67.7
-----------------------------------------
Total revenues 100.0 % 100.0 % 100.0 %
-----------------------------------------
Costs and expenses:
Cost of software license fees 7.5 % 7.1 % 5.9 %
Cost of services and maintenance 37.8 39.2 53.8
Product development 10.6 14.9 13.5
Sales and marketing 37.0 31.1 33.8
General and administrative 14.4 16.3 20.0
Restructuring charge - 1.9 5.4
-----------------------------------------
Total costs and expenses 107.3 % 110.5 % 132.4 %
-----------------------------------------
Comparison of Years Ended December 31, 2002 and 2001
Revenues. Total revenues decreased $559,000, or 3%, to $16,798,000 for
the year ended December 31, 2002 from $17,357,000 for the year ended December
31, 2001. Software license revenues increased by 2% in 2002, compared to 2001.
Services and maintenance fees for 2002 amounted to $10,294,000, a 6% decrease
from 2001.
Software license fee revenues increased $120,000 or 2% to $6,504,000 in
2002 from $6,384,000 in 2001. Astea Alliance license fee revenues increased to
$6,220,000 in 2002 from $5,888,000 in 2001, an increase of 6% which reflects the
growing acceptance of the Astea Alliance CRM suite of software products. License
fee revenues for DISPATCH-1 decreased $213,000 or 43% from $496,000 in 2001 to
$283,000 in 2002 primarily due to the Company's planned movement from its legacy
software to the Astea Alliance CRM suite.
Total services and maintenance revenues decreased $679,000 or 6% to
$10,294,000 in 2002 from $10,973,000 in 2001. The decrease in service and
maintenance revenues is attributable to a decrease of $1,760,000 in DISPATCH-1
revenues partially offset by an increase in Astea Alliance revenues of
$1,081,000. Astea Alliance service and maintenance revenues increased to
$6,540,000 in 2002 from $5,459,000 in 2001 due to the growing Astea Alliance
customer base. DISPATCH-1 service and maintenance revenues decreased 32% to
$3,754,000 in 2002 from $5,514,000 in 2001 due to an ongoing decrease in the
number of customers under service and maintenance contracts. As a result of the
DISPATCH-1 source code sales, which enables the users to customize the software,
and decreasing demand for DISPATCH-1, the decrease in service and maintenance
revenue is expected to continue in 2003.
In 2002 and 2000, no customer accounted for more than 10% of its
revenues. In 2001, the Company had one significant customer that accounted for
11% of its revenues.
Costs of Revenues. Costs of software license fee revenues increased 3%,
or $38,000, to $1,262,000 in 2002 from $1,224,000 in 2001. Included in the cost
of software license fees is the fixed cost of capitalized software amortization.
Capitalized software amortization increased to $870,000 in 2002 from $800,000 in
2001. The increase in amortization of capitalized software is due to the
increase in software capitalized. The software licenses gross margin percentage
remained unchanged in 2002 at 81%, as compared to 2001.
20
The costs of services and maintenance revenues decreased 7%, or
$463,000, to $6,345,000 in 2002 from $6,808,000 in 2001. The service and
maintenance gross margin percentage remained unchanged at 38% in 2002, as
compared to 2001.
Product Development. Product development expenses decreased 31%, or
$809,000, to $1,781,000 in 2002 from $2,590,000 in 2001. Product development as
a percentage of total revenue decreased to 11% in 2002 compared to 15% in 2001.
The Company's total product development costs, including capitalized software
development costs were $2,588,000 or 15% of revenues in 2002 compared to
$3,190,000, which was 19% of revenues in 2001, a decrease of $602,000 or 19%.
The decrease in product development expenses is primarily attributable to the
strengthening of the US dollar against the Israel shekel, which is where the
Company performs most of its development. Despite this decrease, development
employee headcount remained unchanged. The Company has focused its development
effort exclusively on the upgrade of the Astea Alliance suite of products. In
2003, the Company expects to slightly increase its development costs relative to
the amount spent in 2002.
Sales and Marketing. Sales and marketing expenses increased 15%, or
$822,000, to $6,218,000 in 2002 from $5,396,000 in 2001. The increase supports
newly released versions of its Astea Alliance suite of software products. The
Company's focused on improving its market presence through intensified marketing
efforts to increase awareness of the Company's products. This occurred through
the use of Webinars focused in the vertical industries in which the Company
operates, attendance at selected trade shows and increased investment in lead
generation for its sales force. Sales and marketing expense as a percentage of
total revenues increased to 37% in 2002 from 31% in 2001.
General and Administrative. General and administrative expenses
decreased 14%, or $411,000, to $2,426,000 in 2002 from $2,837,000 in 2001. As a
percentage of total revenues, general and administrative expenses decreased to
14% in 2002 compared to 16% in 2001. This decrease primarily results from the
restructuring that occurred in 2001, as well as ongoing efforts to control all
operating costs.
Restructuring Charge. At the end of December, 2001, the Company
recorded a restructuring charge of $409,000 in connection with severance costs
to downsize the Company's employment roles and eliminate excess office space.
Additionally, the Company reversed $76,000 of restructuring costs relating to
the 2000 restructuring plan determined to be no longer needed (See Note 4 in the
Notes to the Consolidated Financial Statements). In the fourth quarter of 2002,
the Company determined that it had over accrued $24,000 from is 2001
restructuring charge. This was reversed in the last quarter of 2002 and included
in general and administrative expenses.
Net Interest Income. Net interest income decreased $203,000, to
$106,000 in 2002 from $309,000 in 2001. This decrease was primarily attributable
to significantly lower interest rates paid in 2002 on invested cash and the
reduction in cash balances which are used to fund operations.
Income Tax Expense. The Company accounts for income taxes in accordance
with SFAS No. 109 "Accounting for Income Taxes" which requires that deferred tax
assets and liabilities be recognized using enacted tax rates for the effect of
temporary differences between the book and tax basis of recorded assets and
liabilities. SFAS No. 109 also requires that deferred tax assets be reduced by a
valuation allowance if it is more likely than not that some portion or all of
the deferred tax asset will not be realized.
The realizability of the deferred tax assets is evaluated quarterly by
assessing the valuation allowance and by adjusting the amount of the allowance,
if necessary. The factors used to assess the likelihood of realization are the
forecast of future taxable income and available tax planning strategies that
could be implemented to realize the net deferred tax asset. During the year
ended December 31, 2002, the Company
21
recorded a tax expense of $200,000 to increase its valuation allowance related
to its net deferred tax asset based on an assessment of what portion of the
asset is more likely than not to be realized, in accordance with FSAS No. 109.
The Company will review this provision periodically in the future as
circumstances change.
International Operations. Total revenue from the Company's
international operations declined by $486,000, or 8.6% to $5,141,000 in 2002
from $5,627,000 in 2001. The decrease in revenue from international operations
was primarily attributable to the reductions in license revenues from the Astea
Alliance suite. The economic slowdown in both Europe and the Pacific Rim
severely impacted the operating results of the Company. International revenues
from professional services and maintenance were similar to those in 2001.
International operations resulted in net income of $4,000 for 2002 compared to a
net income of $226,000 in 2001. The decrease in income resulted primarily from
the decline in license sales resulting from depressed world wide operating
conditions in both Europe and the Pacific Rim.
Comparison of Years Ended December 31, 2001 and 2000
Revenues. Total revenues decreased $2,960,000, or 15%, to $17,357,000
for the year ended December 31, 2001 from $20,317,000 for the year ended
December 31, 2000. Software license revenues decreased by 3% in 2001, compared
to 2000. Services and maintenance fees for 2001 amounted to $10,973,000, a 20%
decrease from 2000.
Software license fee revenues decreased $170,000 or 3% to $6,384,000 in
2001 from $6,554,000 in 2000. Astea Alliance license fee revenues increased to
$5,888,000 in 2001 from $3,414,000 in 2000, an increase of 72% which reflects
the growing acceptance of the Astea Alliance CRM suite of software products.
License fee revenues for DISPATCH-1 decreased $2,644,000 or 84% from $3,140,000
in 2000 to $496,000 in 2001 primarily due to the Company's planned movement from
its legacy software to the Astea Alliance CRM suite.
Total services and maintenance revenues decreased $2,790,000 or 20% to
$10,973,000 in 2001 from $13,763,000 in 2000. The decrease in service and
maintenance revenues is attributable to a decrease in DISPATCH-1 revenues
partially offset by an increase in Astea Alliance revenues. Astea Alliance
service and maintenance revenues increased to $5,459,000 in 2001 from $4,991,000
in 2000 due to the growing Astea Alliance customer base. DISPATCH-1 service and
maintenance revenues decreased 34% or $2,876,000 to $5,514,000 in 2001 from
$8,390,000 in 2000 due to an ongoing decrease in the number of customers under
service and maintenance contracts and the completion of two significant
long-term projects in the first quarter of 2000. As a result of the DISPATCH-1
source code sales in 2000, which enables the users to customize the software,
and decreasing demand for DISPATCH-1, the decrease in service and maintenance
revenue is expected to continue in 2002.
In 2001, the Company had one significant customer that accounted for
11% of its revenues. In 2000, no customer accounted for more than 10% of its
revenues.
Costs of Revenues. Costs of software license fee revenues increased 2%,
or $25,000, to $1,224,000 in 2001 from $1,199,000 in 2000. Included in the cost
of software license fees is the fixed cost of capitalized software amortization.
Capitalized software amortization was $800,000 in both 2001 and 2000. The small
increase in cost of software license fees was due to costs of miscellaneous
hardware included in a license sale. The software licenses gross margin
percentage was 81% in 2001 compared to 82% in 2000. The decrease in gross margin
percentage was attributable to the cost of items resold to customers,
principally third party software and hardware.
22
The costs of services and maintenance revenues decreased 38%, or
$4,120,000, to $6,808,000 in 2001 from $10,928,000 in 2000. The service and
maintenance gross margin percentage increased to 38% in 2001 from 21% in 2000.
The improvement in gross margin is attributable to improved personnel
utilization and the elimination of certain redundant positions in 2000. The
gross margin improvement is also a result of the decrease in third party
maintenance costs associated with the decline in DISPATCH-1 maintenance
revenues.
Product Development. Product development expenses decreased 6%, or
$154,000, to $2,590,000 in 2001 from $2,744,000 in 2000. Product development as
a percentage of total revenue increased to 15% in 2001 compared to 14% in 2000.
The Company's total product development costs, including capitalized software
development costs were $3,190,000 or 19% of revenues in 2001 compared to
$3,384,000, which was 17% of revenues in 2000, a decrease of $194,000 or 6%. The
decrease in product development expenses is primarily attributable to reduced
third party consultant costs. The Company has focused its development effort
exclusively on the upgrade of the Astea Alliance suite of products. In 2002, the
Company expects to pay similar development costs as incurred in 2001.
Sales and Marketing. Sales and marketing expenses decreased 21%, or
$1,461,000, to $5,396,000 in 2001 from $6,857,000 in 2000. The decrease resulted
primarily from the Company's cost restructuring efforts that occurred in the
middle of 2000 as well as lower commissions as a result of lower total revenues
in 2001. However, the Company continues to make a concentrated effort to
increase market share and expand its presence through both direct and indirect
channels. Sales and marketing expense as a percentage of total revenues
decreased to 31% in 2001 from 34% in 2000.
General and Administrative. General and administrative expenses
decreased 30%, or $1,229,000, to $2,837,000 in 2001 from $4,066,000 in 2000. As
a percentage of total revenues, general and administrative expenses decreased to
16% in 2001 compared to 20% in 2000. This decrease primarily results from the
restructuring that occurred in 2000, minimal legal activity in 2001 as compared
to 2000 which resulted in lower legal costs, as well as a favorable outcome on
an arbitration case which resulted in the reversal of a $250,000 accrual.
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). During the second quarter of
2000, the Company also recorded a restructuring charge of $1,101,000 in
connection with the closing of one of its offices, relocation of other offices
to smaller facilities, termination fees related to operating leases and
severance costs related to downsizing the Company's employment roles.
Net Interest Income. Net interest income decreased $1,187,000, to
$309,000 in 2001 from $1,496,000 in 2000. This decrease was primarily
attributable to significantly lower interest rates paid in 2001 on invested cash
and the reduction in cash balances resulting from the special dividend of $2.05
per share, totaling $30,376,000, paid June 30, 2000.
International Operations. Total revenue from the Company's
international operations declined by $2,536,000, or 31% to $5,627,000 in 2001
from $8,163,000 in 2000. The decrease in revenue from international operations
was primarily attributable to the reductions in license revenues from DISPATCH-1
due to sales of source code in 2000. The source code sales also contributed to a
reduction in international maintenance revenues on DISPATCH-1. Revenues from
sales of Astea Alliance licenses, services and maintenance were similar to those
in 2000. International operations resulted in net income of $226,000 for 2001
compared to a loss of $819,000 in 2000. The increase in income resulted
primarily from the
23
restructuring charge, which took place during the second quarter of 2000, the
elimination of certain redundant costs and increase sales activity in Japan
during 2001.
Liquidity and Capital Resources
Net cash used in operating activities was $455,000 for the year ended
December 31, 2002 compared to $439,000 for the year ended December 31, 2001. The
$16,000 increase in the use of cash was primarily attributable to a $294,000
increase in accounts receivable in 2002 compared to a $460,000 decrease in 2001,
a $385,000 decrease in accrued restructuring offset by a $186,000 increase in
accounts payable in 2002, compared to a decrease of $1,522,000 in accounts
payable in 2001, and a $203,000 decrease in deferred revenues in 2002 compared
to a $268,000 decrease in 2001.
The Company generated $1,477,000 of cash for investing activities in
2002 compared to using $325,000 in 2001. The change from last year was primarily
attributable to the sale of $2,998,000 of investments in 2002 compared to
selling $519,000 of investments in 2001. Capital expenditures were $404,000 in
2002 compared to $244,000 in 2001. Capitalized software costs were $807,000 in
2002 compared to $600,000 in 2001. The Company also purchased a certificate of
deposit, which is security for a letter of credit, for $300,000.
The Company used $31,000 in financing activities for the year ended
December 31, 2002 compared to using $343,000 for the year ended December 31,
2001. The decrease in cash used for financing activities was principally
attributable to the purchase of 223,000 shares of treasury stock for $223,000 in
2001. During 2002, the Company did not purchase any treasury stock. In addition,
the Company paid $35,000 to repay its outstanding debt in 2002, compared to
paying $126,000 in 2001.
At December 31, 2002, the Company had a working capital ratio of
approximately 1.8:1, with cash of $5,267,000. The Company believes that it has
adequate cash resources to make the investments necessary to maintain or improve
its current position and to sustain its continuing operations for the
foreseeable future. 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 2003. In addition, it does not
anticipate that its operations or financial condition will be affected
materially by inflation.
Contractual Obligations and Commercial Commitments
The following tables summarize our contractual and commercial obligation as of
December 31, 2002:
Payment Due By Period
2003 2004 2005 2006 2007 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
Contractual Obligations:
Long-term Debt $ - $ - $ - $ - $ - $ - $ -
Capital Leases - - - - - - -
Operating Leases 782,000 770,000 555,000 465,000 469,000 972,000 4,013,000
24
Amounts of Commitment Expiration Per Period
2003 2004 2005 2006 2007 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
Other Commercial
Commitments:
Letters of Credit $ 300,000 $ - $ - $ - $ - $ - $300,000
Certain Factors That May Affect Future Results
The Company does not provide forecasts of its future financial
performance. From time to time, however, information provided by the Company or
statements made by its employees may contain "forward looking" information that
involves risks and uncertainties. In particular, statements contained in this
Annual Report on Form 10-K that are not historical fact may constitute forward
looking statements and are made under the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. The Company's actual results of
operations and financial condition have varied and may in the future vary
significantly from those stated in any forward looking statements. Factors that
may cause such differences include, but are not limited to, the risks,
uncertainties and other information discussed within this Annual Report on Form
10-K, as well as the accuracy of the Company's internal estimates of revenue and
operating expense levels.
The following discussion of the Company's risk factors should be read
in conjunction with the financial statements and related notes thereto set forth
elsewhere in this report. The following factors, among others, could cause
actual results to differ materially from those set forth in forward looking
statements contained or incorporated by reference in this report and presented
by management from time to time. Such factors, among others, may have a material
adverse effect upon the Company's business, results of operations and financial
conditions:
Recent History of Net Losses.
The Company has a history of net losses. In particular, the Company
incurred net losses of approximately $1.3 million in fiscal 2002, $1.5 million
in fiscal 2001 and $4.8 million in fiscal 2000. As of December 31, 2002, we had
stockholders' equity of approximately $9.0 million which is net of an
accumulated deficit of approximately $12.6 million. Moreover, we expect to
continue to incur additional operating expenses resulting primarily from
research and development. As a result, we will need to generate significant
revenues to achieve and maintain profitability. We may not be able to achieve
the necessary revenue growth or profitability on an annual basis in the future.
If we do not attain or sustain profitability in the future, we may be unable to
continue our operations.
Uncertain Market Acceptance of Astea Alliance; Decreased revenues from
DISPATCH-1.
In each of 2002, 2001, and 2000, 24%, 35% and 58%, 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 sales planned or anticipated for DISPATCH-1 to new customers. Sales to
existing customers comprised 100% of DISPATCH-1 license revenue in 2002 and
2001. DISPATCH-1 revenues have declined in each of the last three fiscal years
and that trend is expected to continue and accelerate.
25
While the Company has licensed Astea Alliance to over 210 companies
worldwide in 1998 through 2002, 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 and PowerSoft Corporation, a
subsidiary of Sybase, Inc., in the case of Astea Alliance, and Progress Software
Corporation, in the case of DISPATCH-1. If alternative software development
tools were to be designed and generally accepted by the marketplace, we could be
at a competitive disadvantage relative to companies employing such alternative
developmental tools.
26
Burdens of Customization.
Certain of the Company's clients request customization of DISPATCH-1 or
Astea Alliance products to address unique characteristics of their businesses or
computing environments. In these situations, the Company applies contract
accounting to determine the recognition of license revenues. The Company's
commitment to customization could place a burden on its client support resources
or delay the delivery or installation of products which, in turn, could
materially adversely affect its relationship with significant clients or
otherwise adversely affect business and results of operations. In addition, the
Company could incur penalties or reductions in revenues for failures to develop
or timely deliver new products or product enhancements under development
agreements and other arrangements with customers. If customers are not able to
customize or deploy the Company's products successfully, the customer may not
complete expected product deployment, which would prevent recognition of
revenues and collection of amounts due, and could result in claims against the
Company.
Risk of Product Defects; Failure to Meet Performance Criteria.
The Company's software is intended for use in enterprise-wide
applications that may be critical to its customer's business. As a result,
customers and potential customer 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
27
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 will continue to experience relatively lower sales in the
first fiscal quarter due to patterns in capital budgeting and purchasing cycles
of current and prospective customers. The Company also expects that sales may
decline during the summer months of its third quarter, particularly in the
European markets. Moreover, the Company generally records most of its total
quarterly license revenues in the third month of the quarter, with a
concentration of these revenues in the last half of that third month. This
concentration of license revenues is influenced by customer tendencies to make
significant capital expenditures at the end of a fiscal quarter. The Company
expects these revenue patterns to continue for the foreseeable future. Thus, its
results of operations may vary seasonally in accordance with licensing activity,
and will also depend upon recognition of revenue from such licenses from time to
time. The Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as an
indication of future performance.
28
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
29
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
managem