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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934. For The Fiscal Year Ended: December 31, 2004
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934. For the transition period from to
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Commission File Number: 0-26330
ASTEA INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Delaware 23-2119058
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
240 Gibraltar Road, Horsham, Pennsylvania 19044
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 682-2500
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.01 par value
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ _ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes___ No X
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of June 30, 2004 (based on the closing price of $8.92 as quoted
by Nasdaq National Market as of such date) was approximately $14,614,082.
As of March 15, 2005, 3,002,398 shares of the registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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TABLE OF CONTENTS
Page
PART I ----
Item 1. Business 3
Item 2. Properties 14
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II
Item 5. Market for Registrant's Common Equity and Related 16
Stockholder Matters
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial 18
Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 35
Item 8. Financial Statements and Supplementary Data 36
Item 9. Changes in and Disagreements with Accountants on 55
Accounting and Financial Disclosure
Item 9A. Controls and Procedures 55
Item 9B. Other Information 55
PART III
Item 10. Directors and Officers of the Registrant 56
Item 10A. Departure of Directors or Principal Officers; Election of Directors;
Appointment of Principal Officers 58
Item 11. Executive Compensation 59
Item 12. Security Ownership of Certain Beneficial Owners and 62
Management
Item 13. Certain Relationships and Related Transactions 63
Item 14. Principal Accountant Fees and Services 63
PART IV
Item 15. Exhibits and Financial Statement Schedules. 64
Signature Page 67
Consent of Independent Certified Public Accountant 68
Certificates 69
2
PART I
Item 1. Business.
General
Astea International Inc. and subsidiaries (collectively "Astea" or the
"Company") develops, markets and supports service management software solutions,
which are licensed to companies that sell and service equipment, and/or sell and
deliver professional services. Companies invest in Astea's software and services
to automate enterprise business processes for purposes of revenue enhancement,
cost containment, operational efficiency and improving management's awareness of
operational performance through analytical reporting. Customers' return on
investment from Astea solutions is achieved through improved management of
information, people and cash flows, thereby increasing competitive advantages
and customer satisfaction, top-line revenue and profitability.
Astea solutions are used in industries such as information technology,
medical devices and diagnostic systems, industrial controls and instrumentation,
retail systems, office automation, imaging systems, facilities management,
telecommunications and other industries with equipment sales and service
requirements. Astea's strong focus on enterprise solutions for organizations
that sell and deliver services is a unique industry differentiator that draws
upon the Company's industry experience and core expertise.
Founded in 1979, Astea is known throughout the industry, largely from
its history as a dominant provider of software solutions for field service
management and depot repair. Astea has since expanded its product portfolio to
also include integrated management applications for sales and marketing,
multi-channel customer contact centers, and professional services automation.
In 2002, Astea began commercial release of its latest Astea Alliance
service management suite version 6 products ("Astea Alliance 6") that adapt the
Company's domain expertise and integrated business process functionality to the
Microsoft.NET Web Services framework. Astea solutions include a variety of Web
portal and wireless remote-access capabilities integrating mobile employees,
contractors, business partners and customers into an enterprise's consolidated,
real-time management of workforce, assets and business relationships.
Astea's software has been licensed to approximately 600 companies
worldwide. Customers range from mid-size organizations to large, multinational
corporations with geographically dispersed locations around the globe. The
Company markets and supports its products through a worldwide network of direct
and indirect sales and services offices with corporate headquarters in the
United States and regional headquarters in the United Kingdom and Australia.
Sales partners include distributors (value-added resellers, system integrators
and sales agents) and OEM partners.
In addition to its own product development that is conducted at Company
facilities in the United States and Israel, Astea participates in partnerships
with complementary technology companies in order to reduce time-to-market with
new product capabilities and continually increase its value proposition to
customers. The Company's product strategies are developed from the collective
feedback from customers, industry consultants, technology partners and sales
partners, in addition to its internal product management and development. Astea
also works with its active user community who closely advises and participates
in ongoing product development efforts.
Astea provides customers with an array of professional consulting,
training and customer support services to implement its products and integrate
them with other corporate systems such as back-office financial and ERP
applications. Astea also maintains and supports its software over its installed
life cycle. The
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Company's experience and domain expertise in service and sales management,
distribution, logistics, finance, mobile technologies, internet applications and
enterprise systems integration are made available to customers during their
assessments of where and how their business processes can be improved.
The Company's sales and marketing efforts are almost exclusively
focused on new software licensing and support services for its latest generation
of Astea Alliance products. Marketing and sales of licenses and services related
to the Company's legacy system DISPATCH-1(R) products are limited to existing
DISPATCH-1 customers.
Current Product Offerings
Astea Alliance
[GRAPHIC OMITTED]
Astea Alliance is a service management offering consisting of software
applications and services. The software product consists of a series of
applications. The offering has been developed as a global solution from the
ground up with multi-lingual and multi-currency capabilities.
Astea Alliance has been designed to address the complete service
lifecycle, from lead generation and project quotation to service and billing
through asset retirement. It integrates and optimizes critical business
processes for Campaigns, Call Center, Depot Repair, Field Service, Logistics,
Projects and Sales and Order Processing. Astea extends its application suite
with mobile, portals, analytics, tools and services solutions. In order to
ensure customer satisfaction and quick return on investment, Astea also offers
infrastructure tools and services.
Astea Alliance is licensed to companies that sell and/or service
capital equipment or mission critical assets. Companies invest in Astea's
software and services to automate service processes for cost containment,
operational efficiency, and management visibility. Customers' return on
investment is achieved through improved management of customer information,
people and cash flows, thereby increasing competitive advantage and customer
satisfaction, top-line revenues and profitability. Astea solutions are used in
industries such as information technology, medical devices and diagnostics
systems, industrial controls and instrumentation, retail systems, office
automation, imaging systems, facilities management, telecommunications and
related industries with equipments sales and service requirements.
The latest version software, Astea Alliance 6.8, is designed and built
with a new system architecture for Web-based deployment using the Microsoft.NET
development architecture. Prior to this, products were engineered for Windows
client/server technology and marketed as AllianceEnterprise. AllianceEnterprise
products included re-engineered and enhanced versions of service modules that
were initially introduced as
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ServiceAlliance(R) in 1997, and a re-engineered and enhanced version of the
Company's sales force automation product that was initially introduced as
SalesAlliance in 1999.
ServiceAlliance and SalesAlliance, the earliest versions of Astea
Alliance solutions, were the Company's initial new technology offerings
following a long and highly successful history with its DISPATCH-1 legacy system
solutions. Astea Alliance solutions have been licensed to over 225 customers
worldwide. Market acceptance of Astea Alliance by global and regional companies
has continually increased since 2002 and the Company has aggressively pursued
opportunities for larger system implementations with mid-size to large
enterprises on a worldwide basis.
The current Astea Alliance offering consists of:
o 8 Core Applications
o Mobile Applications
o Extended Portals
o Reporting and Analytical Tools
o Services
o Tools
Astea Alliance Core Applications:
Alliance Contact Center
Alliance Depot Repair
Alliance Field Service
Alliance Logistics
Alliance Marketing Campaigns
Alliance Order Processing
Alliance Professional Services
Alliance Sales
Astea Alliance Mobile Applications:
Alliance Notebook for Service
Alliance Notebook for Sales
Alliance PocketPC for Service
Alliance 2-way Paging
Astea Alliance Extended Portals:
Customer Self-Service
Remote Technician
Astea Alliance Reporting and Analytical Tools:
Analytics Framework
Analytical Reports - Field ServiceCore Applications Standard Reports
Mobile Applications Standard Reports
Astea Alliance Services:
Alliance Consulting
Alliance Customer Support
Alliance Education & Training
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Astea Alliance Tools:
Alliance BizTalk Connector
Alliance Financial Link
Alliance Global Database
Alliance Knowledge Base
Alliance Links
Alliance Studio
Astea Alliance Core Applications
Alliance Contact Center
The Alliance Contact Center application supports call centers,
information desks, service hotlines, inside sales and telemarketing activities.
Integrated, multi-channel, inbound/outbound capabilities enable customer service
representatives to serve prospects and customers in their media of choice,
including phone, fax, e-mail or Internet. Integrated customer self-service
portals with automated email response, automated call escalation, and interface
to Computer Telephony Integration (CTI) systems help streamline customer
interaction processes. Work scheduling and demand balancing optimize staff
utilization. Employee personal portals with access to comprehensive real-time
customer data and decision support tools including intelligent knowledge
management and scripting for problem resolution and inside sales drive higher
staff productivity. Aside from more efficient customer service and higher levels
of customer satisfaction, the objectives of Astea's Alliance Contact Center
software are to reduce overhead through improved first-call resolution rates and
shorter service-call handling times. A powerful, third-party knowledge base is
integrated into this application to further enhance and extend the diagnostic
tools available to contact center agents. This optional module is also available
for Depot Repair and Field Service applications.
Alliance Depot Repair
Alliance Depot Repair automates tracking of assets through equipment
calibration and repair chains, including merchandise ownership, location, repair
status and warranty coverage. Objectives are to gain real-time visibility of all
repair chain activities, ensure compliance with warranty and contractual
agreements, respond to customer inquiries with up-to-the-minute repair status,
collect and analyse repair statistics for product design improvement, and reduce
overhead such as inventory carrying costs. Applications support in-house,
subcontractor and vendor calibration and repair; customer and vendor exchanges
and advance exchanges; equipment on loan; change of ownership; merchandise
shipments, cross shipments and pickups; consolidated repair orders; and, storage
and refurbishment programs. Integration with other Astea Alliance modules allows
repair orders and repair status queries to be initiated from customer contact
centers, field service, field sales and warehouses as well as the repair depot.
Alliance Field Service
The Alliance Field Service core application delivers a robust set of
automated capabilities to streamline and improve management of field service
activities. By automating workflow field service representatives can more
efficiently complete and document assignments, manage vehicle assets, capture
expenses and generate revenue through add-on sales during a customer contact.
Applications alert dispatchers to contractual minimum response times and
expedite coordination of field force skills matching, scheduling, dispatch and
repair parts logistics. The Remote Technician portal allows site-based field
engineers and other off-site agents secure access to the core system. Mobile
tools deliver rich functionality on notebook and PDA platforms that enable field
forces to work electronically for receiving, documenting and reporting
assignments, eliminating manual procedures, service delays and paper reporting.
The software supports all field service categories including equipment
installations, break/fix, planned maintenance and meter reading.
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Applications can also be integrated with equipment diagnostic systems for fully
automated solutions that initiate and prioritize service requests and dispatch
assignments to field employees' PDAs without human intervention.
Alliance Logistics
The Alliance Logistics core application is divided into 3 functional
portals. These are Supply Chain, Inventory Management and Reverse Supply Chain,
reflecting the diversity of needs in this area. Seamlessly integrated with sales
and service applications, Alliance Logistics enables equipment service
organizations to control inventory costs, manage assets and implement proactive
service management strategies. Automated calculation of stock profiles based on
usage eliminates overstocking and dramatically reduces costs associated with
storing, depreciating, and insuring inventory. The application supports parts
and tools management for effective field service delivery and SLA compliance.
Improved cost management improves cash flow by streamlining and shortening the
cycles from inventory to usage to billing. Lower logistics costs open
opportunities to recognize higher margins on products and services. Key areas to
apply Alliance Logistics include asset management, field service parts/tools
management, demand fulfillment, and sales fulfilment.
Alliance Marketing Campaigns
This core application coordinates the planning, execution and analysis
of marketing campaigns. The software supports budgeting and tracking complete
multi-channel campaigns that integrate advertising, direct mail, email
marketing, telemarketing, etc. Electronic campaigns such as email and
telemarketing are further supported with list management, script development and
user interfaces for campaign execution. Marketing managers can define campaign
offerings such as products and services to be sold, pricing and discount
tolerances; assign campaign attributes; attach campaign documentation such as
descriptive text, images, slogans and lead conversion literature; and monitor
and measure response. The big picture view enables managers to assess synergies
each channel delivers to an overall campaign and adjust channel details such as
prospect lists, scripts, budgets or offering incentives to elicit best results.
Integration with other Astea Alliance modules enables equipment and service
organizations to leverage abundant customer information for identifying new
potential revenue sources and marketing to maximize customer loyalty and sales
opportunities.
Alliance Order Processing
The Alliance Order Processing module provides straightforward
functionality for the management of quotations and order fulfillment. Quotations
can be created for the sale of products and the provision of field services.
Integration with the Approvals process and the Logisitcs and Field Service
modules ensure good management control and sustainable promises for delivery.
This application is ideally suited to the sale of "consumable products" in
association with the provision of equipment-based services, but can be equally
applied to the supply of finished products resulting from up-sell and cross-sell
opportunities.
Alliance Professional Services
Alliance Professional Services supports management of knowledge
workers, such as deployed by professional services organizations and internal
service departments of large organizations. Functionality focuses on planning,
deploying and billing service engagements that can extend for days, weeks,
months and years. Applications improve resource planning and allocation,
workflow management, consultant time and expense reporting, subcontractor and
vendor invoice processing, customer billing, and visibility of service
engagements. Integration with other Astea Alliance modules delivers an
end-to-end solution to market, sell, manage and bill professional services.
Capabilities to share sales, service, project, and post-project field service
data across the enterprise enable professional services organizations to operate
with less overhead, improved cash flow, higher profitability, and more
competitive bidding.
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Alliance Sales
Sales consolidates and streamlines enterprise sales processes, from
quote generation through order processing, at all points of customer contact
including field sales, inside sales, contact center sales and field service
sales. Lead-to-close sales process capabilities include integration with Astea
Alliance marketing, customer support and field service applications, leveraging
all enterprise knowledge pools to increase sales opportunities, margins and
close rates. Consolidated views of sales and service data also provide a clearer
understanding of enterprise operations to drive strategic business decisions.
Sales force automation application automates business rules and practices such
as enterprise-defined sales methodologies, sales pipeline management, territory
management, contact and opportunity management, forecasting, collaborative team
selling and literature fulfillment. The same functionality is delivered to
mobile resources via the notebook application - with full two-way data
synchronization with the central database, via wired and wireless networks.
Other applications prompt customer support and service staff to up-sell and
cross-sell during contact with customers.
Astea Alliance Mobile Applications
Astea provides a family of mobility applications for use away from the
base office. These enable customers to match mobile access to field sales and
service needs. Untethered wireless applications with synchronized client
databases are provided for notebooks and Pocket PC handheld devices.
Direct-connect, real-time wireless text messaging is provided for two-way pagers
and capable mobile smart phones. The mobile connectivity integrates field sales
and service activity with automated front-office processes and eliminates the
time, costs, procedural delays and errors of paper reporting. Benefits include
reduced field administration costs; electronic data sharing among field and
in-house personnel; improved speed, accuracy content and compliance of field
reporting; faster sales order processing and customer service invoicing; and
other operational efficiencies.
Astea Alliance Extended Portals
The Alliance Customer Portal is a secure, multi-level entry point that
supports unattended e-business transactions for customer self-service and
self-sales. Alliance Customer Portal empowers customers and lessens dependence
on sales and service staff to conduct transactions that can be performed over
the Internet. It reduces routine voice and fax calls to customer contact
centers, freeing lines for customers whose critical needs do require assistance
from a service representative. The pre-defined Entry-Level, Standard and
Enterprise profiles in connection with a flexible and powerful security utility
ensure tight control on access to sensitive data and a range of features that
can be enabled. It also provides another channel to promote and sell more
products and services to an existing customer base. The customer portal can
delay or eliminate needs for contact center expansion and associated increases
in facility, equipment and staffing costs.
The Remote Technician Portal provides secure connectivity to the
enterprise system from customer sites, technician's homes or other non-corporate
locations. The available functionality covers the needs of a mobile service
resource in the areas of work and inventory management - equivalent to that
available with Alliance Notebook for Service.
Astea Alliance Reporting and Analytics
For proactive service management, Alliance Analytics provides highly
visual, real-time analysis of business performance, focusing on Key Performance
Indicators - a tool that facilitates businesses understanding customer behavior.
Alliance Analytics enables the viewing of information for the entire
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enterprise, increasing revenues and identifying new business opportunities.
Utilizing a DataMart built with Microsoft's SQL Server 2000 Analysis Services,
it helps 'drill down' and `drill across' to focus on the true value of the
captured customer information, with views of actionable data at both
departmental and enterprise-wide levels. The graphical representation of
individual data is available for Field Service, with additional deliveries of
Analytical Reports that cover Contact Center, Depot Repair, and Sales and
Marketing planned for 2005. This affords businesses the opportunity to focus on
critical information that is fundamental to the ongoing attainment of
outstanding customer service management. Alliance Analytics has been designed to
ensure that users of all kinds have immediate access to crucial information
whenever it's needed. In the boardroom, at agent level, or even for your
customers, this tool effortlessly allows the viewing of performance data such as
performance against service level agreements, contract profitability, product
failure rate, repair turn around times, customer satisfaction and engineer
efficiency. Reports allow businesses to see how many orders have met their
contractual service ETA and how many failed which helping organizations
understand customer satisfaction. Workloads show the available working hours at
a specific location in contrast with the demand for workforce planning and
optimization.
Astea Alliance Services
Alliance Consulting
Professional Services:
----------------------
Astea's typical professional services engagement does not include
customizations, but rather includes planning, prototyping and implementation of
Astea's products within the client's organization.
During the initial planning phase of the engagement, Astea's
professional services personnel work closely with representatives of the
customer to prepare a detailed project plan that includes a timetable, resource
requirements, milestones, in-house training programs, onsite business process
training and demonstrations of Astea's product capabilities within the
customer's organization.
The next most critical phase of the Astea professional services
engagement is the prototyping phase, in which Astea works closely with
representatives of the customer to configure Astea's software functionality to
the customer's specific business process requirements.
The next integral phase in the professional services engagement is the
implementation phase, in which Astea's professional services personnel work with
the client to develop detailed data mapping, conversions, interfaces and other
technical and business processes necessary to integrate Astea's software into
the customer's computing environment. Ultimately, education plans are developed
and executed to provide the customer with the process and system knowledge
necessary to effectively utilize the software and fully implement the Astea
solution. Professional services are charged on an hourly or per diem basis.
The last phase of the engagement utilizes Astea's professional services
personnel to assist in Go Live planning and the Go Live effort.
Astea will assist in the planning for installation, initialization,
data preparation, operational procedures, schedules and required resources. The
initialization and creation of the production database is planned and prepared
for the data history, open orders and all required data for go live processing.
During the cut-over to the Astea solution, Astea business resources are best
utilized to assist new users with functionality/processes while Astea technical
resources support customer IT staff.
Following the Go Live, Astea professional services engages the customer
in the Assessment Phase. During this effort, the delivered system is assessed to
validate benefits, analyze the process to measure key performance indicators,
document and understand lessons learned. To perform these assessments we collect
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and analyze the planned benefits, processes used to capture and report on the
key performance indicators, and document the lessons learned from all phases of
the implementation. An action plan is developed from the lessons learned and key
performance indicators for use in future phases and/or releases.
Technical Services:
-------------------
Astea's technical services teams provide services related to
installation, data verification, functional design, technical design, system
infrastructure setup or changes, customizations, QA activities, testing and
go-live support.
Initially, software and database installation resources are available
to prepare the environment for the prototyping phase.
Data verification and feedback services can be provided for initial
data verification analysis. These efforts are conducted to determine present
state of information as far as type, conversions, data manipulation, location,
frequency, method of interface (initial load, ongoing load, data export or data
import,) and data integrity. Findings are documented and shared with the project
team.
During the implementation phase, Astea's technical services team is
often engaged to assist with the functional and/or technical design as related
to customer desired system personalization, customization and interfaces, often
referred to as `gaps'. Gap solutions are assessed and categorized into system,
studio, customization or interface. Utilizing the services of the customer
project team, Astea professional services and Astea technical services Business
Requirement Documents (BRDs) are created for all customizations and interfaces.
Astea technical services will provide specifications and a quote for the
customization. The Customer and Astea agree on the outcome of the customization
and all expected outputs prior to the actual development customization.
Following acceptance of the BRDs, code will be written as per design. QA of the
code with test data sets will complete these efforts.
Astea's technical services team will also provide testing and go-live
support, as required.
Alliance Customer Support
Astea's customer support organization provides customers with telephone
and online technical support, as well as product enhancements, updates and new
software releases. The company can provide 24X7 "follow-the-sun" support through
its global support network. Local representatives support all regions of Astea's
worldwide operations. Astea personnel or a distributor's personnel familiar with
local business customs and practices provide support in real-time and usually
spoken in native languages. Typically, customer support fees are established as
a fixed percentage of license fees and are invoiced to customers on an annual
basis. Astea's customer support representatives are located in the United
States, Europe, Israel and Australia. In addition, Astea provides customer
support 24X7 with its self-service portal. The maintenance offering provides
customers with support and help desk services, as well as software service packs
and release upgrades.
Alliance Education & Training
Application Training:
---------------------
Key business owners responsible for the implementation of the core
components will receive in-depth training designed to present the features,
functionality and terminology of the Astea solution. The objective of this
training is to provide the audience with a working knowledge of the Astea
solution. This exposure to the system will enable project communication and add
insight into specific business processes.
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End-user training plans and documents are created during the
implementation phase. These plans and documentation are utilized to conduct
end-user training sessions prior to go-live.
Technical Training:
-------------------
Software and database installation/creation training is provided, as
required and/or recommended.
System Administration training provides the customer IT staff
pre-requisite knowledge to manipulate and manage administrative tasks associated
with the Astea solution. Included within these tasks are: Security, Batch
Applications, Escalation, Import, etc.
Many customers are interested in performing their own personalization
and customization to the system. Training sessions are available to enhance
customer understanding of available options for personalization and how to
perform customizations.
Astea Alliance Tools
Alliance Links
Alliance Links are a family of enterprise application integration
products that interface Astea Alliance to other enterprise systems, such as
back-office financial and ERP applications, remote equipment monitoring and
diagnostic software, and wireless data transmission services. Alliance Links
extend Astea Alliance's return on investment for customers by making all
Alliance modules accessible to external software through web services and open,
well defined, synchronous and asynchronous application programming interfaces
(APIs) that are XML based.
Alliance Studio
Alliance Studio is a toolset for easily adapting system behavior and
user interfaces to specific business environments without expensive custom
programming. A customer can control how Astea Alliance automates workflows as
well as the system's intuitiveness and "look and feel" to employees, which
thereby maximizes the system's usability, effectiveness and benefits. Alliance
Studio reduces system implementation time and cost, and subsequently enables
customers to update system performance as their business needs change--all of
which contributes to the system's low cost of ownership.
Customers
The Company estimates that it has sold approximately 600 licenses to
customers ranging from small, rapidly growing companies to large, multinational
corporations with geographically dispersed operations and remote offices. More
than 225 licenses have been sold for Astea Alliance and the remainder for
DISPATCH-1. The broad applicability of the Company's products is demonstrated by
the wide range of companies across many markets and industries that use one or
more of Astea's products, including customers in information technology, medical
devices and diagnostic systems, industrial controls and instrumentation, retail
systems, office automation, imaging systems, facilities management,
telecommunications, and other industries with equipment sales and service
requirements. In 2004 there was one major customer that accounted for 15% of
total revenues. In 2003 and 2002, no single customer accounted for more than 10%
of the Company's revenues.
Sales and Marketing
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The Company markets its products through a worldwide network of direct
and indirect sales and services offices with corporate headquarters in the
United States and regional headquarters in the United Kingdom (Europe, Middle
East and Africa Operations) and Australia (Asia Pacific Operations). Sales
partners include distributors (value-added resellers, system integrators and
sales agents) and OEM partners. The Company actively seeks to expand its
reseller network and establish an international indirect distribution channel
targeted at the mid-market tier. See "Certain Factors that May Affect Future
Results-- Need to Expand Indirect Sales."
Astea's direct sales force employs a consultative approach to selling,
working closely with prospective clients to understand and define their needs
and determine how such needs can be addressed by the Company's products. These
clients typically represent the mid- to high-end of the market. A prospect
development organization comprised of telemarketing representatives, who are
engaged in outbound telemarketing and inbound inquiry response to a variety of
marketing vehicles, develops and qualifies sales leads prior to referral to the
direct sales staff. Additional prospects are identified and qualified through
the networking of direct sales staff and the Company's management as part of
daily business activities.
The modular structure of Astea's software and its ongoing product
development efforts provide opportunities for incremental sales of product
modules and consulting services to existing accounts. See "Certain Factors that
May Affect Future Results-- Continued Dependence on Large Contracts May Result
in Lengthy Sales and Implementation Cycles and Impact Revenue Recognition and
Cash Flow."
Astea's corporate marketing department is responsible for product
marketing, lead generation and marketing communications, including the Company's
corporate website, dialogue with high tech industry analysts, trade conferences,
advertising, e-marketing, on-line and traditional seminars, direct mail, product
collateral and public relations. Based on feedback from customers, analysts,
business partners and market data, the marketing department provides input and
direction for the Company's ongoing product development efforts and
opportunities for professional services. Leads developed from the variety of
marketing communications vehicles are routed through the Company's Astea
Alliance sales and marketing automation system. The Company also participates in
an annual conference for users of Astea's DISPATCH-1 and Astea Alliance
products. Conference participants attend training sessions, workshops and
presentations, and interact with other Astea product users, Astea management and
staff, and technology partners, providing important input for future product
direction.
Astea's international sales accounted for 39% of the Company's revenues
in 2004, 34% of the Company's revenues in 2003 and 31% in 2002. See "Certain
Factors that May Affect Future Results--Risks Associated with International
Sales."
Product Development
Astea's product development strategy is to provide products that
perform with exceptional depth and breadth of functionality and are easy to
implement, use and maintain. Products are designed to be flexible, modular and
scalable, so that they can be implemented incrementally in phases and expanded
to satisfy the evolving information requirements of Astea's clients and their
customers. Each product is also designed to utilize n-tier, distributed,
thin-client and Web environments that can be powered by multiple hardware
platforms and operating systems. To accomplish these goals, the Company uses
widely accepted, commercially available application development tools from
Microsoft Corporation for Astea Alliance and Progress Software Corporation for
DISPATCH-1. These software tools provide the Company's customers with the
flexibility to deploy Astea's products across a variety of hardware platforms,
operating systems and relational database management systems. The latest Astea
Alliance products are currently being engineered for existing and emerging
Microsoft technologies such as COM+, Microsoft ComPlus Transactions, Microsoft
Message Queuing (MSMQ), Internet Information Server (IIS) and Microsoft.NET
Enterprise Servers including Windows 2000 and 2003 Servers, SQL Server and
BizTalk Server.
12
In addition to product development that is conducted at Company
facilities in the United States and Israel, Astea participates in partnerships
with complementary technology companies to reduce time-to-market with new
product capabilities and continually increase its value proposition to
customers.
The Company's total expenses for product development for the years
ended December 31, 2004, 2003 and 2002, were $1,431,00, $2,490,000 and
$1,781,000 respectively; and these expenses amounted to 7%, 19% and 11% of total
revenues for 2004, 2003, and 2002, respectively. In addition, the Company
incurred capitalized software development costs of $1,380,000, $480,000 and
$807,000 in 2004, 2003 and 2002, respectively. During 2004 the Company wrote off
$1,155,000 of fully amortized capitalized software for versions that had been
deemed no longer useful or functional. Additionally, the Company anticipates
that it will continue its consistent and substantial resources on its
development effort towards the upgrade of the Astea Alliance suite of products.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Certain Factors that May Affect Future Results--Need for
Development of New Products."
Manufacturing
The Company's software products are distributed on CD ROMs and via FTP.
Included with the software products are security keys (a software piracy
protection) and documentation available on CD ROM and hard copy. Historically,
the Company has purchased media and duplicating and printing services for its
product packaging from outside vendors.
Competition
The service management software market is intensely competitive and
subject to rapid change. To maintain or increase its position in the industry,
the Company will need to continually enhance its current product offerings,
introduce new products and features and maintain its professional services
capabilities. The Company currently competes on the basis of the depth and
breadth of its integrated product features and functions, including the
adaptability and scalability of its products to specific customer environments;
the ability to deploy complex systems locally, regionally, nationally and
internationally; product quality; ease-of-use; reliability and performance;
breadth of professional services; integration of Astea's offerings with other
enterprise applications; price; and the availability of Astea's products on
popular operating systems, relational databases, Internet and communications
platforms.
Competitors vary in size, scope and breadth of the products and
services offered. The Company encounters competition generally from a number of
sources, including other software companies, third-party professional services
organizations that develop custom software, and information systems departments
of potential customers developing proprietary, custom software. In the service
management marketplace, the Company competes against publicly held companies and
numerous smaller, privately held companies. The Company's competitors include
Siebel Systems, Inc. ("Siebel"), PeopleSoft Inc., ("PeopleSoft"), acquired by
Oracle, SAP AG ("SAP"), Oracle Corporation ("Oracle"), Great Plains Software
which was acquired by Microsoft ("Microsoft Great Plains"), Clarify which was
acquired by Amdocs Limited ("Amdocs Clarify"), Viryanet Ltd. ("Viryanet") and a
number of smaller privately held companies. See "Certain Factors that May Affect
Future Results--Competition in the Customer Relationship Management Software
Market is Intense."
Licenses and Intellectual Property
Astea considers its software proprietary and licenses its products to
its customers under written license agreements. The Company also employs an
encryption system that restricts a user's access to source code to further
protect the Company's intellectual property. Because the Company's products
allow customers to customize their applications without altering the framework
source code, the framework source code for the
13
Company's products is typically neither licensed nor provided to customers. The
Company does, however, license source code from time to time and maintains
certain third-party source code escrow arrangements. See "Customers" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company seeks to protect its products through a combination of
copyright, trademark, trade secret and fair business practice laws. The Company
also requires employees, consultants and third parties to sign nondisclosure
agreements. Despite these precautions, it may be possible for unauthorized
parties to copy certain portions of the Company's products or reverse engineer
or obtain and use information that the Company regards as proprietary. The
Company presently has no patents or patent applications pending. See "Certain
Factors that May Affect Future Results--Risks of Dependence on Proprietary
Technology."
Because the software development industry is characterized by rapid
technological change, Astea believes that factors such as the technological and
creative skills of its personnel, new product developments, frequent product
enhancements, and reliable product maintenance are more important to
establishing and maintaining a technology leadership position than current legal
protections.
Employees
As of December 31, 2004, the Company, including its subsidiaries, had a
total of 139 full time employees worldwide, 57 in the United States, 21 in the
United Kingdom, 5 in the Netherlands, 44 in Israel, 11 in Australia, and 1 in
Japan. The Company's future performance depends, in significant part, upon the
continued service of its key technical and management personnel and its
continuing ability to attract and retain highly qualified and motivated
personnel in all areas of its operations. See "Certain Factors that May Affect
Future Results--Dependence on Key Personnel; Competition for Employees." None of
the Company's employees is represented by a labor union. The Company has not
experienced any work stoppages and considers its relations with its employees to
be good.
Corporate History
The Company was incorporated in Pennsylvania in 1979 under the name
Applied System Technologies, Inc. In 1992, the Company changed its name to Astea
International Inc. Until 1986, the Company operated principally as a
software-consulting firm, providing professional software consulting services on
a fee for service and on a project basis. In 1986, the Company introduced its
DISPATCH-1 product. In November 1991, the Company's sole stockholder acquired
the outstanding stock of The DATA Group Corporation ("Data Group"), a provider
of field service software and related professional services for the
mainframe-computing environment. Data Group was merged into the Company in
January 1994. In February 1995, the Company and its sole stockholder acquired
the outstanding stock of Astea Service & Distribution Systems BV ("Astea BV"),
the Company's distributor of DISPATCH-1 and related services in Europe. In May
1995, the Company reincorporated in Delaware. In July 1995, the Company
completed its initial public offering of Common Stock. In February 1996, the
Company merged with Bendata, Inc. In June 1996, the Company acquired Abalon AB.
In September 1998 (effective July 1, 1998), the Company sold Bendata, Inc. In
December 1998, the Company sold Abalon AB. In December 1997, the Company
introduced ServiceAlliance and in October 1999, SalesAlliance, which were
subsequently re-engineered into components of the AllianceEnterprise suite
introduced in 2001. Through 2001 and into 2002, the Company rebuilt its product
functionality for Web-based applications and in August 2003 introduced Astea
Alliance 6. The Company released a new system architecture based on
Microsoft.NET during the third quarter of 2004.
Item 2. Properties.
The Company's headquarters are located in a leased facility of
approximately 22,000 square feet in Horsham, Pennsylvania. The Company also
leases facilities for operational activities in Culemborg, Netherlands, and
Tefen, Israel, and for sales and customer support activities in Cranfield,
England and St.
14
Leonards, Australia. The Company believes that suitable additional or
alternative office space will be available in the future on commercially
reasonable terms as needed.
Item 3. Legal Proceedings.
From time to time, the Company is involved in litigation relating to
claims arising out of its operations in the normal course of business. In
addition, since the Company enters into a number of large contracts requiring
the complex installation of software products and the implementation of
considerable professional services over several quarterly periods, the Company
is from time to time engaged in discussions and deliberations with customers
regarding the adequacy and timeliness of the installation or service, product
functionality and features desired by the customer and additional work and
service requirement that were not anticipated at the commencement of the
project. The Company from time to time will reserve funds for contingencies
under contract deliberations. The Company is currently not a party to any
material legal proceedings, the adverse outcome of which, in management's
opinion, would have a material adverse effect on the Company's business,
financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report, through the
solicitation of proxies or otherwise.
15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Common Stock is traded on the Nasdaq National Market
under the symbol "ATEA." The following table sets forth the high and low closing
sale prices for the Common Stock as reported by the Nasdaq National Market for
the past two fiscal years:
2004 High Low
---------------------------------------------------------------
First quarter $4.31 $2.41
Second quarter 13.75 3.15
Third quarter 9.62 5.13
Fourth quarter 8.74 6.31
2003 High Low
---------------------------------------------------------------
First quarter $3.10 $2.55
Second quarter 4.35 2.65
Third quarter 4.40 2.81
Fourth quarter 3.50 2.10
In September 2003, the Company affected a 1:5 reverse stock split. All
prices reported for periods prior to the reverse stock split have been adjusted
for the reverse stock split.
As of March 15, 2005, there were approximately 35 holders of record of
the Company's Common Stock. (Because "holders of record" include only
stockholders listed with the Company's transfer agent and exclude stockholders
listed separately with financial nominees, this number does not accurately
reflect the actual number of beneficial owners of the Company's Common Stock, of
which the Company estimates there were more than 2,700 on such date.) On March
15, 2005, the last reported sale price of the Common Stock on the Nasdaq
SmallCap Market was $6.91 per share.
The Board of Directors from time to time reviews the Company's
forecasted operations and financial condition to determine whether and when
payment of a dividend or dividends is appropriate. On June 30, 2000, the Company
paid its only dividend since its initial public offering. The dividend was $2.05
per share.
16
Item 6. Selected Financial Data.
Years ended December 31, 2004 2003 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Statement of Income Data: (3)
Revenues:
Software license fees $ 7,992 $ 1,935 $ 6,504 $ 6,384 $ 6,554
Services and maintenance 11,325 10,906 10,294 10,973 13,763
----------------------------------------------------------
Total revenues 19,317 12,841 16,798 17,357 20,317
----------------------------------------------------------
Cost and Expenses:
Cost of software license fees 1,838 898 1,262 1,224 1,199
Cost of services and maintenance 6,356 6,963 6,345 6,808 10,928
Product development 1,431 2,490 1,781 2,590 2,744
Sales and marketing 5,565 5,875 6,218 5,396 6,857
General and administrative (1) 2,051 2,198 2,426 2,837 4,066
Restructuring charge (2) -- -- -- 333 1,101
----------------------------------------------------------
Total costs and expenses 17,241 18,424 18,032 19,188 26,895
----------------------------------------------------------
Income(loss) from continuing operations
before interest and taxes 2,076 (5,583) (1,234) (1,831) (6,578)
Net interest income 58 54 106 309 1,496
----------------------------------------------------------
Income(loss) from continuing
operations before income taxes 2,134 (5,529) (1,128) (1,522)
Income tax expense -- -- 200 -- --
----------------------------------------------------------
Profit/(Loss) from continuing operations 2,134 (5,529) (1,328) (1,522) (5,082)
Gain on sale of discontinued operations,
Net of taxes (4) -- -- -- -- 293
----------------------------------------------------------
Net Profit/(Loss) $ 2,134 $ (5,529) $ (1,328) $ (1,522) $ (4,789)
----------------------------------------------------------
Basic income (loss) per share:
Continuing operations $ .72 $ (1.89) $ (0.09) $ (0.10) $ (0.35)
Gain on sale of discontinued operations -- -- -- -- 0.02
----------------------------------------------------------
$ .72 $ (1.89) $ (0.09) $ (0.10) $ (0.33)
==========================================================
Diluted income (loss) per share $ .71 $ (1.89) $ (0.09) $ (0.10) $ (0.33)
==========================================================
Shares used in computing basic income (loss)
per share 2,960 2,922 2,921 2,926 2,914
Shares used in computing diluted income (loss)
per share 3,001 2,922 2,921 2,926 2,914
Balance Sheet Data:
Working capital $ 3,969 $ 1,820 $ 6,449 $ 7,313 $ 9,668
Total assets 13,754 10,096 16,443 18,015 21,653
Long-term debt, less current portion -- -- -- -- 23
Accumulated deficit (15,967) (18,100) (12,568) (11,239) (9,716)
Total stockholders' equity 6,071 3,734 8,998 10,105 11,955
(1) Included in the fourth quarter of 2001 is a restructuring charge of
$409,000, which includes cost of consolidating office space and severance
of certain personnel. The second quarter of 2000 contains a restructuring
charge of $1,101,000, which includes severance costs, an office closing,
and other actions aimed at reducing operating expenses. See Note 4 of the
Notes to the Consolidated Financial Statements.
(2) Certain reclassifications have been made in prior years due to the
implementation of EITF 01-14 (See Note 2 of the Notes to the Consolidated
Financial Statements) and the 1:5 reverse stock split which occurred in
September 2003 (See Note 3 of the Notes to the Consolidated Financial
Statements).
(3) During 2000, the Company reversed $149,000 of excess reserves and received
a distribution of unused escrow balance totaling $144,000 related to the
1998 sales of two of its subsidiaries, Bendata Inc. and Abalon AB.
17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Overview
This document contains various forward-looking statements and
information that are based on management's beliefs as well as assumptions made
by and information currently available to management. Such statements are
subject to various risks and uncertainties, which could cause actual results to
vary materially from those contained in such forward, looking statements. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated, expected or projected. Certain of these as well as other
risks and uncertainties are described in more detail in this Annual Report on
Form 10-K.
The Company develops, markets and supports service management software
solutions, which are licensed to companies that sell and service equipment, or
sell and deliver professional services. The Company's principal product
offering, the Astea Alliance suite, integrates and automates sales and service
business processes and thereby increases competitive advantages, top-line
revenue growth and profitability through better management of information,
people, assets and cash flows. Astea Alliance offers substantially broader and
far superior capabilities over the Company's predecessor product, DISPATCH-1,
which was designed for only field service and customer support management
applications.
The Company's products and services are primarily used in industries
such as information technology, medical devices and diagnostic systems,
industrial controls and instrumentation, retail systems, office automation,
imaging systems, facilities management and telecommunications. An eclectic group
of other industries, all with equipment sales and service requirements, are also
represented in Astea's customer base. The Company maintains offices in the
United States, United Kingdom, Australia, Israel and The Netherlands.
The Company generates revenues from two sources: software license fees
for its software products, and services and maintenance revenues from
professional services, which includes consulting, implementation, training and
maintenance related to those products.
Software license fees accounted for 41% of the Company's total revenues
in 2004, which was mostly comprised of sales of Astea Alliance. Software license
fee revenues also include some fees from the sublicensing of third-party
software, primarily relational database licenses. Typically, customers pay a
license fee for the software based on the number of licensed users. Depending on
the contract terms and conditions, software license fees are recognized as
revenue upon delivery of the product if no significant vendor obligations remain
and collection of the resulting receivable is deemed probable. If significant
vendor obligations exist at the time of delivery or if the product is subject to
uncertain customer acceptance, revenue is deferred until no significant
obligations remain or acceptance has occurred.
The remaining component of the Company's revenues consists principally
of fees derived from professional services associated with the implementation
and deployment of the Company's software products and maintenance fees for
ongoing customer support, primarily external customer technical support services
and product enhancements. Professional services (including training) are charged
on an hourly or daily basis and billed on a regular basis pursuant to customer
work orders. Training services may also be charged on a per-attendee basis with
a minimum daily charge. Out-of-pocket expenses incurred by company personnel
performing professional services are typically reimbursed by the customer. The
Company recognizes revenue from professional services as the services are
performed. Maintenance fees are typically paid to the Company under agreements
entered into at the time of the initial software license. Maintenance revenue,
which is invoiced annually, is recognized ratably over the term of the
agreement, which is usually twelve months.
18
Critical Accounting Policies and Estimates
The Company's significant accounting policies are more fully described
in its Summary of Accounting Policies, Note 2, to the Company's consolidated
financial statements. The preparation of financial statements in conformity with
accounting principles generally accepted within the United States requires
management to make estimates and assumptions in certain circumstances that
affect amounts reported in the accompanying financial statements and related
notes. In preparing these financial statements, management has made its best
estimates and judgments of certain amounts included in the financial statements,
giving due consideration to materiality. The Company does not believe there is a
great likelihood that materially different amounts would be reported related to
the accounting policies described below; however, application of these
accounting policies involves the exercise of judgments and the use of
assumptions as to future uncertainties and, as a result, actual results could
differ from these estimates.
Revenue Recognition
Revenues are recognized in accordance with Statement of Operations
Procedures (SOP) 97-2, which provides guidelines on the recognition of software
license fee revenue. Principally, license revenue may be recognized when
persuasive evidence of an arrangement exists, delivery has occurred, the license
fee is fixed and determinable and the collection of the fee is probable. The
Company allocates a portion of its software revenue to post-contract support
activities or to other services or products provided to the customer free of
charge or at non-standard discounts when provided in conjunction with the
licensing arrangement. Amounts allocated are based upon standard prices charged
for those services or products. Software license fees for resellers or other
members of the indirect sales channel are based on a fixed percentage of the
Company's standard prices. The Company recognizes software license revenue for
such contracts based upon the terms and conditions provided by the reseller to
its customer.
Revenue from post-contract support is recognized ratably over the term
of the contract on a straight-line basis. Consulting and training service
revenue is generally recognized at the time the service is performed. Fees from
licenses sold together with consulting services are generally recognized upon
shipment, provided that the contract has been executed, delivery of the software
has occurred, fees are fixed and determinable and collection is probable. Fees
from the service component in these types of contracts are recognized as the
services are performed. In instances where the aforementioned criteria have not
been met, both the license and the consulting fees are recognized under the
percentage of completion method of contract accounting.
In limited instances, the Company will enter into contracts for which
revenue is recognized under contract accounting. The accounting for such
arrangements requires judgment, which impacts the timing of revenue recognition
and provision for estimated losses, if applicable.
Accounts Receivable
The Company evaluates the adequacy of its allowance for doubtful
accounts at the end of each quarter. In performing this evaluation, the Company
analyzes the payment history of its significant past due accounts, subsequent
cash collections on these accounts and comparative accounts receivable aging
statistics. Based on this information, along with consideration of the general
strength of the economy, the Company develops what it considers to be a
reasonable estimate of the uncollectible amounts included in accounts
receivable. This estimate involves significant judgment by the management of the
Company. Actual uncollectible amounts may differ from the Company's estimate.
19
Capitalized Software Research and Development Costs
The Company accounts for its internal software development costs in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed." The Company capitalizes software development costs subsequent to the
establishment of technological feasibility through the product's availability
for general release. Costs incurred prior to the establishment of technological
feasibility are charged to product development expense. Development costs
associated with product enhancements that extend the original product's life or
significantly improve the original product's marketability are also capitalized
once technological feasibility has been established. Software development costs
are amortized on a product-by-product basis over the greater of the ratio of
current revenues to total anticipated revenues or on a straight-line basis over
the estimated useful lives of the products (usually two years), beginning with
the initial release to customers. During the first quarter of 2004, the Company
revised the estimated life for its capitalized software products from three
years to two years based on current sales trends and the rate of product
release. The Company continually evaluates whether events or circumstances have
occurred that indicate that the remaining useful life of the capitalized
software development costs should be revised or that the remaining balance of
such assets may not be recoverable. The Company evaluates the recoverability of
capitalized software based on the estimated future revenues of each product. As
of December 31, 2004, management believes that no revisions to the remaining
useful lives or write-downs of capitalized software development costs are
required.
Recent Accounting Pronouncements
In December 2004, the FASB issued FAS No. 123( R) , "Share-Based
Payment," an amendment of FASB Statements 123 and 95. FAS No, 123( R) replaced
FAS No. 123, "Accounting for Stock-Based Compensation," and supercedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees." This statement
requires companies to recognize the fair value of stock options and other
stock-based compensation to employees prospectively beginning with fiscal
periods beginning after June 15, 2005. This means that the Company will be
required to implement FAS No, 123( R) no later than the quarter beginning July
1, 2005. The Company currently measures stock-based compensation in accordance
with APB Opinion No. 25, as discussed above. The Company anticipates adopting
the modified prospective method of FAS No. 123( R) on July 1, 2005. The impact
on the company's financial condition or results of operations will depend on the
number and terms of stock options outstanding on the date of change, as well as
future options that may be granted.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities" was issued. FIN 46 provides
guidance on consolidating variable interest entities and applies immediately to
variable interests created after January 31, 2003. In December 31, 2003, the
FASB revised and superceded FIN 46 with the issuance of FIN 46R in order to
address certain implementation issues that were adopted the first reporting
period ending after March 15, 2004. The interpretation requires variable
interest entities to be consolidated if the equity investment at risk is not
sufficient to permit an entity to finance its activities without support from
other parties or the equity investors lack certain specified characteristics.
The adoption of FIN 46 did not have an impact on the Company's financial
position or result of operation.
In May 2003, the FASB issued Statement no. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS 150"). SFAS 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. SFAS 150 is
20
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS 150 did not have an impact
on the Company's financial position or results of operation.
Results of Continuing Operations
The following table sets forth, for the periods indicated, selected financial
data and the percentages of the Company's total revenues represented by each
line item presented for the periods presented:
Years ended December 31, 2004 2003 2002
- --------------------------------------------------------------------------------
Revenues:
Software license fees 41.4 % 15.1 % 38.7 %
Services and maintenance 58.6 84.9 61.3
---------------------------------------
Total revenues 100.0 % 100.0 % 100.0 %
---------------------------------------
Costs and expenses:
Cost of software license fees 9.6 % 6.0 % 7.5 %
Cost of services and maintenance 32.9 55.2 37.8
Product development 7.6 19.4 10.6
Sales and marketing 28.8 45.8 37.0
General and administrative 10.6 17.1 14.4
---------------------------------------
Total costs and expenses 89.5 % 143.5 % 107.3 %
---------------------------------------
Comparison of Years Ended December 31, 2004 and 2003
Revenues. Total revenues increased $6,476,000, or 50%, to $19,317,000
for the year ended December 31, 2004 from $12,841,000 for the year ended
December 31, 2003. Software license revenues increased by 313% in 2004, compared
to 2003. Services and maintenance fees for 2004 amounted to $11,325,000, a 4%
increase from 2003.
Software license fee revenues increased $6,057,000 or 313% to
$7,992,000 in 2004 from $1,935,000 in 2003. Astea Alliance license fee revenues
increased to $7,187,000 in 2004 from $1,935,000 in 2003, an increase of 271%.
The Company also sold $805,000 of additional DISPATCH-1 licenses to existing
customers. There were 6 different license sales of DISPATCH-1 in 2004 as
compared to no license sales in 2003. The overall increase in license revenue is
primarily the result of greater acceptance of our vision, which resulted in the
release of version 6.7. This new version is based completely on .Net, a new
Microsoft operating system platform. In addition, there was an overall
improvement in our economy over the past year.
Total services and maintenance revenues increased $419,000 or 4% to
$11,325,000 in 2004 from $10,906,000 in 2003. The increase in service and
maintenance revenues is attributable to an increase of $1,131,000 in Astea
Alliance revenues partially offset by a decrease in DISPATCH-1 revenues of
$712,000. Astea Alliance service and maintenance revenues increased to
$9,375,000 in 2004 from $8,244,000 in 2003 due to the growing Astea Alliance
customer base. DISPATCH-1 service and maintenance revenues decreased 27% to
$1,949,000 in 2004 from $2,661,000 in 2003 due to an ongoing decrease in the
number of customers under service and maintenance contracts. As a result of the
decreasing demand for DISPATCH-1 and the lack of any related product development
by the Company, the decrease in service and maintenance revenue is expected to
continue in 2005 for DISPATCH-1.
In 2004 there was one major customer, Carrier Corporation, which
accounted for 15% of total revenues compared to 2003 when no customer accounted
for more than 10% of the Company's revenues.
21
Costs of Revenues. Costs of software license fee revenues increased
140%, or $1,072,000, to $1,838,000 in 2004 from $766,000 in 2003. The increase
in cost of sales results from increased amortization of capitalized software and
license costs of third party software embedded in the Company's products
resulting from the higher volume of license sales. Included in the cost of
software license fees is the amortization of capitalized software. Capitalized
software amortization increased to $1,088,000 in 2004 from $599,000 in 2003.
During the first quarter of 2004, the Company revised the estimated useful life
of its software products from three years to two years. The shorter amortization
period increased amortization for the year by $489,000 or 81% compared to 2003.
In addition, the Company capitalized $1,338,000 of development costs due to its
concentrated effort to convert its newest version of service Alliance to the
..Net platform. Accordingly, the increase in amortization of capitalized software
is due to both the decrease in amortization period and the increase in
development costs capitalized. The gross margin percentage on software license
sales increased to 77% in 2004 from 60% in 2003.
The costs of services and maintenance revenues decreased 10%, or
$739,000, to $6,356,000 in 2004 from $7,095,000 in 2003. The decrease in cost of
services and maintenance is primarily attributed to a reduction in headcount
from last year to this year. The service and maintenance gross margin percentage
increased to 44% in 2004 from 35% in 2003. The increased margin is primarily
attributable to the decrease in costs and improved utilization of professional
services personnel, which contributed to increased revenues.
Product Development. Product development expenses decreased 41%, or
$1,059,000, to $1,431,000 in 2004 from $2,490,000 in 2003. Product development
as a percentage of total revenue decreased to 7% in 2004 compared to 19% in
2003. This decline is due to both the increase in revenues as well as the
increase in software costs capitalized compared to last year. Gross development
expense before the capitalization of software costs were $2,811,000 in 2004
compared to $2,970,000 in 2003. Additionally in 2004, the Company wrote off
$1,155,000 of fully amortized software for old versions that had been deemed no
longer useful or functional. The Company capitalizes software costs out of
product development. Capitalized software totaled $1,380,000 in 2004 compared to
$480,000 in 2003. The increase in software capitalization is a result of product
development initiatives to convert the Company's product to .NET, a new
Microsoft operating system platform through the release of Astea Alliance
version 6.7 during the third quarter of 2004, as well as development costs
associated with a new version anticipated to be released in the first quarter of
2005.
Sales and Marketing. Sales and marketing expenses decreased 5%, or
$310,000, to $5,565,000 in 2004 from $5,875,000 in 2003. The decrease is
primarily the result of a reduction in marketing costs due to the consolidation
of worldwide marketing programs into the United States from the Company's
foreign operations, reduction of redundant sales personnel throughout the world,
partially offset by higher sales commissions on increased software license
revenues. The Company continues to focus on improving its market presence
through intensified marketing efforts to increase awareness of the Company's
products. This occurred through the use of Webinars focused in the vertical
industries in which the Company operates, attendance at selected trade shows and
increased investment in lead generation for its sales force. Sales and marketing
expense as a percentage of total revenues decreased to 28% in 2004 from 46% in
2003.
General and Administrative. General and administrative expenses consist
of salaries, benefits and related costs for the Company's finance,
administrative and executive management personnel, legal costs, accounting
costs, bad debt write-offs and various costs associated with the Company's
status as a public company. The Company's general and administrative expenses
were $2,051,000 in 2004 and $2,198,000 in 2003 representing a 7% decrease. This
decrease is primarily due to a decrease in bad debt expense, which is
attributable to improvement in customer payment performance and recovery of
legal fees in connection with legal action in Europe. As a percentage of total
revenues, general and administrative expenses decreased to 11% in 2004 compared
to 17% in 2003. The decrease in expenses relative to revenues primarily results
from the increase in total revenues generated during 2004.
22
Net Interest Income. Net interest income increased $4,000, to $58,000
in 2004 from $54,000 in 2003. This increase was primarily attributable to slight
growth in both interest rates and investable funds.
Income Tax Expense. The Company accounts for income taxes in accordance
with SFAS No. 109 "Accounting for Income Taxes" which requires that deferred tax
assets and liabilities be recognized using enacted tax rates for the effect of
temporary differences between the book and tax basis of recorded assets and
liabilities. SFAS No. 109 also requires that deferred tax assets be reduced by a
valuation allowance if it is more likely than not that some portion or all of
the deferred tax asset will not be realized.
The realizability of the deferred tax assets is evaluated quarterly by
assessing the valuation allowance and by adjusting the amount of the allowance,
if necessary. The factors used to assess the likelihood of realization are the
forecast of future taxable income and available tax planning strategies that
could be implemented to realize the net deferred tax asset. During the year
ended December 31, 2004, the Company recorded no tax expense or income tax
benefit met and maintained to increase its valuation allowance related to its
net deferred tax asset based on an assessment of what portion of the asset is
more likely than not to be realized, in accordance with FSAS No. 109. The
Company will review this provision periodically in the future as circumstances
change.
International Operations. Total revenue from the Company's
international operations increased by $3,254,000, or 75% to $7,565,000 in 2004
from $4,311,000 in 2003. The increase in revenue from international operations
was primarily attributable to the increases in license revenues from the Astea
Alliance suite. Most of the increase occurred in Europe, where the Company has
focused attention on expanding awareness of the Company's products.
International revenues from professional services and maintenance increased 9%
to $3,857,000 in 2004 from $3,527,000 in 2003. Overall, international operations
resulted in net profit of $1,221,000 for 2004 compared to net loss of $1,772,000
in 2003. Operating costs increased slightly due to higher cost of sales on
licenses and higher sales commissions, both resulting from the increased level
of revenues in 2004 compared to 2003. Accordingly, the increase in international
net income of $2,993,000 is approximately the same as the year-to-year increase
in revenue. Additionally, the weakening of the U.S. dollar against the foreign
currencies in Europe, the Pacific Rim and Israel, contributed to increased
revenues upon translation into U.S. currency.
Comparison of Years Ended December 31, 2003 and 2002
Revenues. Total revenues decreased $3,957,000, or 24%, to $12,841,000
for the year ended December 31, 2003 from $16,798,000 for the year ended
December 31, 2002. Software license revenues decreased by 70% in 2003, compared
to 2002. Services and maintenance fees for 2003 amounted to $10,906,000, a 6%
increase from 2002.
Software license fee revenues decreased $4,569,000 or 70% to $1,935,000
in 2003 from $6,504,000 in 2002. Astea Alliance license fee revenues decreased
to $1,935,000 in 2003 from $6,221,000 in 2002, a decrease of 69%. There were no
license sales DISPATCH-1 in 2003 as compared to sales totaling $283,000 in 2002
primarily due to the Company's planned movement from its legacy software to the
Astea Alliance suite. The decrease in license revenue is primarily the result of
delayed investment in information technology on the part of our target customers
due to the slowly improving economy.
Total services and maintenance revenues increased $612,000 or 6% to
$10,906,000 in 2003 from $10,294,000 in 2002. The increase in service and
maintenance revenues is attributable to an increase of $1,705,000 in Astea
Alliance revenues partially offset by a decrease in DISPATCH-1 revenues of
$1,093,000. Astea Alliance service and maintenance revenues increased to
$8,244,000 in 2003 from $6,540,000 in 2002 due to the growing Astea Alliance
customer base. DISPATCH-1 service and maintenance revenues decreased 29% to
$2,661,000 in 2003 from $3,754,000 in 2002 due to an ongoing decrease in the
number of customers
23
under service and maintenance contracts. As a result of the decreasing demand
for DISPATCH-1, the decrease in service and maintenance revenue is expected to
continue in 2004.
In 2003 and 2002, no customer accounted for more than 10% of the
Company's revenues.
Costs of Revenues. Costs of software license fee revenues decreased
39%, or $496,000, to $766,000 in 2003 from $1,262,000 in 2002. Included in the
cost of software license fees is the amortization of capitalized software.
Capitalized software amortization decreased to $600,000 in 2003 from $870,000 in
2002. The decrease in amortization of capitalized software is due to the
decrease in the amount of unamortized capitalized software. The gross margin
percentage on software license sales decreased to 60% in 2003 from 81% in 2002.
This decrease is primarily attributable to the significant fixed cost of
software amortization.
The costs of services and maintenance revenues increased 12%, or
$750,000, to $7,095,000 in 2003 from $6,345,000 in 2002. The service and
maintenance gross margin percentage decreased to 35% in 2003 from 38% in 2002.
The decreased margin is primarily attributable to the increase in third party
costs as a result of upgrades.
Product Development. Product development expenses increased 40%, or
$709,000, to $2,490,000 in 2003 from $1,781,000 in 2002. Product development as
a percentage of total revenue increased to 19% in 2003 compared to 11% in 2002.
The Company's total product development costs, including capitalized software
development costs were $2,970,000 or 23% of revenues in 2003 compared to
$2,588,000, which was 15% of revenues in 2002, an increase of $382,000 or 15%.
The increase in product development expenses is primarily attributable to the
increased effort to convert the Company's product to .NET, a new Microsoft
operating system platform. In doing so, the Company increased its development
staff headcount to 40 employees in 2003 from 33 in 2002. Additionally, during
2003 the U.S. dollar weakened against the Israel shekel, which is where the
Company performs most of its development, thereby resulting in increased
expenses upon translation into U.S. currency. The Company has focused its
development effort exclusively on the upgrade of the Astea Alliance suite of
products.
Sales and Marketing. Sales and marketing expenses decreased 6%, or
$343,000, to $5,875,000 in 2003 from $6,218,000 in 2002. The decrease is
primarily the result of lower commissions due to lower sales. Despite actual
performance, the Company continued to focus on improving its market presence
through intensified marketing efforts to increase awareness of the Company's
products. This occurred through the use of Webinars focused in the vertical
industries in which the Company operates, attendance at selected trade shows and
increased investment in lead generation for its sales force. Sales and marketing
expense as a percentage of total revenues increased to 46% in 2003 from 37% in
2002.
General and Administrative. General and administrative expenses consist
of salaries, benefits and related costs for the Company's finance,
administrative and executive management personnel, legal costs, accounting
costs, bad debt write-offs and various costs associated with the Company's
status as a public company. The Company's general and administrative expenses
were $2,198,000 in 2003 and $2,426,000 in 2002 representing a 9% decrease. This
decrease is primarily due to lower costs related to legal and investor
relations' activity and other taxes. Partially offsetting this decrease, the
Company experienced an increase in bad debt expense of $277,000, which is
attributable to the reserve of license and service revenues related to a
customer. As a percentage of total revenues, general and administrative expenses
increased to 18% in 2003 compared to 14% in 2002. The increase in expenses
relative to revenues primarily results from the decrease in total revenues
generated during 2003.
Restructuring Charge. At the end of December 2001, the Company recorded
a restructuring charge of $409,000 in connection with severance costs to
downsize the Company's employment roles and eliminate excess office space.
Additionally, the Company reversed $76,000 of restructuring costs relating to
the 2000 restructuring plan determined to be no longer needed (See Note 4 in the
Notes to the Consolidated Financial
24
Statements). In the fourth quarter of 2002, the Company determined that it had
over-accrued $24,000 from its 2001 restructuring charge and, therefore, reversed
it. The expense reversal is included in general and administrative expenses.
Net Interest Income. Net interest income decreased $52,000, to $54,000
in 2003 from $106,000 in 2002. This decrease was primarily attributable to
significantly lower interest rates paid in 2003 on invested cash and the
reduction in cash balances, which were used to fund operations.
Income Tax Expense. The Company accounts for income taxes in accordance
with SFAS No. 109 "Accounting for Income Taxes" which requires that deferred tax
assets and liabilities be recognized using enacted tax rates for the effect of
temporary differences between the book and tax basis of recorded assets and
liabilities. SFAS No. 109 also requires that deferred tax assets be reduced by a
valuation allowance if it is more likely than not that some portion or all of
the deferred tax asset will not be realized.
The realizability of the deferred tax assets is evaluated quarterly by
assessing the valuation allowance and by adjusting the amount of the allowance,
if necessary. The factors used to assess the likelihood of realization are the
forecast of future taxable income and available tax planning strategies that
could be implemented to realize the net deferred tax asset. During the year
ended December 31, 2002, the Company recorded a tax expense of $200,000 to
increase its valuation allowance related to its net deferred tax asset based on
an assessment of what portion of the asset is more likely than not to be
realized, in accordance with FSAS No. 109. The Company will review this
provision periodically in the future as circumstances change.
International Operations. Total revenue from the Company's
international operations declined by $830,000, or 16% to $4,311,000 in 2003 from
$5,141,000 in 2002. The decrease in revenue from international operations was
primarily attributable to the reductions in license revenues from the Astea
Alliance suite. The economic slowdown in both Europe and the Pacific Rim
severely impacted the operating results of the Company. International revenues
from professional services and maintenance increased 17% to $3,527,000 in 2003
from $3,005,000 in 2002. Overall, international operations resulted in net loss
of $1,772,000 for 2003 compared to net income of $4,000 in 2002. Combined with
the decrease in revenues, the decrease in income resulted in part from an
increase in reserves against doubtful accounts. Additionally, the weakening of
the U.S. dollar against the foreign currencies in Europe, the Pacific Rim and
Israel, contributed to increased expenses upon translation into U.S. currency.
Liquidity and Capital Resources
Net cash provided by operating activities was $2,678,000 for the year
ended December 31, 2004 compared to net cash used in operations of $1,200,000
for the year ended December 31, 2003. The increase in cash provided by
operations of $3,878,000 was primarily attributable to the swing in net income
of $7,663,000 which resulted from a net loss of $5,529,000 in 2003 to net income
of $2,134,000 in 2004 and an increase in depreciation and amortization of
$465,000, primarily the result of reducing the amortization period of
capitalized software from 3 to 2 years. Also contributing to the increase in
cash flow was an increase in accounts payable and accrued expenses of $121,000
compared to a decrease of $382,000 in 2003. This change resulted from an
increase in overall volume of license sales that included royalties payable to
vendors for third party software embedded in the Company's products. In
addition, deferred revenues increase by $1,339,000 in 2004 compared to a
decrease of $688,000 in 2003. This change was also the result of increased
license revenues, which generated new maintenance contracts. Partially
offsetting the net increase in cash flows was the use of cash of $7,224,000,
which resulted from an increase in accounts receivable in 2004 of $2,272,000
compared to a decrease in accounts receivable of $4,952,000 in 2003. This swing
resulted from the increased level of revenues in 2004 compared to 2003.
25
The Company used $1,769,000 of cash for investing activities in 2004
compared to using $64,000 in 2003. Most of the increased use of cash resulted
from an increase in capitalized software of $1,380,000 compared to $480,000 in
2003. The increase in capitalized software results from the concentrated effort
of the Company to convert its software products to the .Net platform as well as
expand the functionality of its product suite. In addition, the Company
purchased $389,000 of property and equipment compared to $216,000 in 2003. In
2003, the Company terminated a life insurance policy it held on behalf of its
Chief Executive Officer and received payment of $632,000 from the cash surrender
value of the policy.
The Company generated $131,000 in financing activities for the year
ended December 31, 2004 compared to generating $2,000 for the year ended
December 31, 2003. The increase in cash generated by financing activities was
principally attributable to the exercise of company stock options in 2004.
At December 31, 2004, the Company had a working capital ratio of
approximately 1.5:1, with total cash of $4,483,000. The Company has projected
revenues for 2005 that will generate enough funds to sustain its continuing
operations. However, if current projections trail expectations, the Company has
plans in place to reduce operating expenditures appropriately in order to
continue to fund all required expenditures. The Board of Directors from time to
time reviews the Company's forecasted operations and financial condition to
determine whether and when payment of a dividend or dividends is appropriate.
The Company does not plan any significant capital expenditures in 2005. In
addition, it does not anticipate that its operations or financial condition will
be affected materially by inflation.
Contractual Obligations and Commercial Commitments
The following tables summarize our contractual and commercial
obligation as of December 31, 2005:
Payment Due By Period
2005 2006-2007 2008-2009 2010 and after Total
---------- ---------- ---------- -------------- ----------
Contractual Cash
Obligations:
Long-term Debt $ -- $ -- $ -- $ --
Capital Leases -- -- -- --
Operating Leases $873,000 $1,583,000 $ 1,119,000 $3,575,000
Amounts of Commitment Expiration Per Period
2005 2006-2007 2008-2009 2010 and after Total
---------- ---------- ---------- -------------- ----------
Other Commercial
Commitments:
Letters of Credit $300,000 $ -- $ -- $ -- $ 300,000
Certain Factors That May Affect Future Results
The Company does not provide forecasts of its future financial
performance. From time to time, however, information provided by the Company or
statements made by its employees may contain "forward looking" information that
involves risks and uncertainties. In particular, statements contained in this
Annual Report on Form 10-K that are not historical fact may constitute forward
looking statements and are made under the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. The Company's actual results of
operations and financial condition have varied and may in the future vary
significantly from those stated in any forward looking statements. Factors that
may cause such differences include, but are not
26
limited to, the risks, uncertainties and other information discussed within this
Annual Report on Form 10-K, as well as the accuracy of the Company's internal
estimates of revenue and operating expense levels.
The following discussion of the Company's risk factors should be read
in conjunction with the financial statements and related notes thereto set forth
elsewhere in this report. The following factors, among others, could cause
actual results to differ materially from those set forth in forward looking
statements contained or incorporated by reference in this report and presented
by management from time to time. Such factors, among others, may have a material
adverse effect upon the Company's business, results of operations and financial
conditions:
Recent History of Net Losses
The Company has a history of net losses. Although the Company generated
net income of $2.1 million in 2004, it incurred net losses of approximately $5.5
million in fiscal 2003, $1.3 million in fiscal 2002 and $1.5 million in fiscal
2001. As of December 31, 2004, stockholders' equity is approximately $6.0
million, which is net of an accumulated deficit of approximately $16.0 million.
Moreover, the Company expects to continue to incur additional operating expenses
for research and development. As a result, the Company will need to generate
significant revenues to achieve and maintain profitability. The Company may not
be able to achieve the necessary revenue growth or profitability in the future.
If the Company does not attain or sustain profitability or raise additional
equity or debt in the future, the Company may be unable to continue its
operations.
Uncertain Market Acceptance of Astea Alliance; Decreased Revenues from
DISPATCH-1
In each of 2004, 2003, and 2002 14%, 21%, and 24% respectively, of the
Company's total revenues was derived from the licensing of DISPATCH-1 and the
providing of professional services in connection with the implementation,
deployment and maintenance of DISPATCH-1 installations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
Company originally introduced Astea Alliance in August 1997 in order to target a
market segment in which DISPATCH-1 was not cost-effective or attractive.
Subsequent, rapid changes in technology have now positioned the Astea Alliance
suite, introduced in 2001 and which includes the Astea Alliance functionality,
to supercede DISPATCH-1 as the company's flagship product. As a result, there
are no license sales planned or anticipated for DISPATCH-1 to new customers.
Total license revenues from DISPATCH-1 was $805,000 in 2004. There were no
license revenues of DISPATCH-1 in 2003. Total DISPATCH-1 revenues have declined
in each of the last three fiscal years and that trend is expected to continue
and accelerate.
While the Company has licensed Astea Alliance to over 225 companies
worldwide in 1998 through 2004, revenues from sales of Astea Alliance alone are
not yet sufficient to support the expenses of the Company. The Company's future
success will depend mainly on its ability to increase licenses of the Astea
Alliance suite offerings, on developing new products and product enhancements to
complement its existing product offerings, on its ability to continue support
and maintenance revenues from DISPATCH-1, and on its ability to control its
operating expenses. Any failure of the Company's products to achieve or sustain
market acceptance, or of the Company to sustain its current position in the
Customer Relationship Management software market, would have a material adverse
effect on the Company's business and results of operations. There can be no
assurance that the Company will be able to increase demand for Astea Alliance,
obtain an acceptable level of support and maintenance revenues from DISPATCH-1,
or to lower its expenses, thereby avoiding future losses.
Need for Development of New Products
27
The Company's future success will depend upon its ability to enhance
its current products and develop and introduce new products on a timely basis
that keep pace with technological developments, industry standards and the
increasingly sophisticated needs of its customers, including developments within
the client/server, thin-client and object-oriented computing environments. Such
developments may require, from time to time, substantial capital investments by
the Company in product development and testing. The Company intends to continue
its commitment to research and development and its efforts to develop new
products and product enhancements. There can be no assurance that the Company
will not experience difficulties that could delay or prevent the successful
development, introduction and marketing of new products and product
enhancements; that new products and product enhancements will meet the
requirements of the marketplace and achieve market acceptance; or that the
Company's current or future products will conform to industry requirements.
Furthermore, reallocation of resources by the Company, such as the diversion of
research and development personnel to development of a particular feature for a
potential or existing customer, can delay new products and certain product
enhancements. Some of our customers adopted our software on an incremental
basis. These customers may not expand usage of our software on an
enterprise-wide basis or implement new software products introduced by the
Company. The failure of the software to perform to customer expectations or
otherwise to be deployed on an enterprise-wide basis could have a material
adverse effect on the Company's ability to collect revenues or to increase
revenues from new as well as existing customers. If the Company is unable to
develop and market new products or enhancements of existing products
successfully, the Company's ability to remain competitive in the industry will
be materially adversely effected.
Rapid Technological Change
In this industry there is a continual emergence of new technologies and
continual change in customer requirements. Because of the rapid pace of
technological change in the application software industry, the Company's current
market position could be eroded rapidly by product advancements. In order to
remain competitive, the Company must introduce new products or product
enhancements that meet customers' requirements in a timely manner. If the
Company is unable to do this, it may lose current and prospective customers to
competitors.
The Company's application environment relies primarily on software
development tools from Microsoft Corporation in the case of Astea Alliance, and
Progress Software Corporation, in the case of DISPATCH-1. If alternative
software development tools were to be designed and generally accepted by the
marketplace, we could be at a competitive disadvantage relative to companies
employing such alternative developmental tools.
Burdens of Customization
Certain of the Company's clients request customization of Astea
Alliance products to address unique characteristics of their businesses or
computing environments. In these situations, the Company applies contract
accounting to determine the recognition of license revenues. The Company's
commitment to customization could place a burden on its client support resources
or delay the delivery or installation of products, which, in turn, could
materially adversely affect its relationship with significant clients or
otherwise adversely affect business and results of operations. In addition, the
Company could incur penalties or reductions in revenues for failures to develop
or timely deliver new products or product enhancements under development
agreements and other arrangements with customers. If customers are not able to
customize or deploy the Company's products successfully, the customer may not
complete expected product deployment, which would prevent recognition of
revenues and collection of amounts due, and could result in claims against the
Company.
Risk of Product Defects; Failure to Meet Performance Criteria
28
The Company's software is intended for use in enterprise-wide
applications that may be critical to its customer's business. As a result,
customers and potential customers typically demand strict requirements for
installation and deployment. The Company's software products are complex and may
contain undetected errors or failures, particularly when software must be
customized for a particular customer, when first introduced or when new versions
are released. Although the Company conducts extensive product testing during
product development, the Company has at times delayed commercial release of
software until problems were corrected and, in some cases, has provided
enhancements to correct errors in released software. The Company could, in the
future, lose revenues as a result of software errors or defects. Despite testing
by the Company and by current and potential customers, errors in the software,
customizations or releases might not be detected until after initiating
commercial shipments, which could result in additional costs, delays, possible
damage to the Company's reputation and could cause diminished demand for the
Company's products. This could lead to customer dissatisfaction and reduce the
opportunity to renew maintenance contracts or sell new licenses.
Continued Dependence on Large Contracts May Result in Lengthy Sales and
Implementation Cycles and Impact Revenue Recognition and Cash Flow
The sale and implementation of the Company's products generally involve
a significant commitment of resources by prospective customers. As a result, the
Company's sales process often is subject to delays associated with lengthy
approval processes attendant to significant capital expenditures, definition of
special customer implementation requirements, and extensive contract
negotiations with the customer. Therefore, the sales cycle varies substantially
from customer to customer and typically lasts between four and nine months.
During this time the Company may devote significant time and resources to a
prospective customer, including costs associated with multiple site visits,
product demonstrations and feasibility studies. The Company may experience a
number of significant delays over which the Company has no control. Because the
costs associated with the sale of the product are fixed in current periods,
timing differences between incurring costs and recognizing of revenue associated
with a particular project may result. Moreover, in the event of any downturn in
any existing or potential customer's business or the economy in general,
purchases of the Company's products may be deferred or canceled.
Furthermore, the implementation of the Company's products typically
takes several months of integration of the product with the customer's other
existing systems and customer training. A successful implementation requires a
close working relationship between the customer and members of the Company's
professional service organization. These issues make it difficult to predict the
quarter in which expected orders will occur. Delays in implementation of
products could cause some or all of the revenues from those licenses to be
shifted from the expected quarter to a subsequent quarter or quarters. In these
situations, the Company applies contract accounting to determine the recognition
of license revenue.
When the Company has provided consulting services to implement certain
larger projects, some customers have in the past delayed payment of a portion of
license fees until implementation was complete and in some cases have disputed
the consulting fees charged for implementation. There can be no assurance the
Company will not experience additional delays or disputes regarding payment in
the future, particularly if the Company receives orders for large, complex
installations. Additionally, as a result of the application of the revenue
recognition rules applicable to the Company's licenses under generally accepted
accounting principles, license revenues may be recognized in periods after those
in which the respective licenses were signed. The Company believes that
period-to-period comparisons of its results of operations should not be relied
upon as any indication of future performance.
Fluctuations in Quarterly Operating Results May Be Significant
The Company's quarterly operating results have in the past and may in
the future vary or decrease significantly depending on factors such as:
29
o Revenue from software sales;
o the timing of new product releases;
o market acceptance of new and enhanced versions of the Company's
products;
o customer order deferrals in anticipation of enhancements or new
products;
o the size and timing of significant orders, the recognition of
revenue from such orders;
o changes in pricing policies by the Company and its competitors;
o the introduction of alternative technologies;
o changes in operating expenses;
o changes in the Company's strategy;
o personnel changes;
o the effect of potential acquisitions by the Company and its
competitors; and general domestic and international economic and
political factors.
The Company has limited or no control over many of these factors. Due
to all these factors, it is possible that in some future quarter the Company's
operating results will be materially adversely affected.
Fluctuations in Quarterly Operating Results Due to Seasonal Factors
The Company expects to experience fluctuations in the sale of licenses
for its products due to seasonal factors. The Company has experienced and
anticipates that it may experience relatively lower sales in the first fiscal
quarter due to patterns in capital budgeting and purchasing cycles of current
and prospective customers. The Company also expects that sales may decline
during the summer months of its third quarter, particularly in the European
markets. Moreover, the Company generally records most of its total quarterly
license revenues in the third month of the quarter, with a concentration of
these revenues in the last half of that third month. This concentration of
license revenues is influenced by customer tendencies to make significant
capital expenditures at the end of a fiscal quarter. The Company expects these
revenue patterns to continue for the foreseeable future. Thus, its results of
operations may vary seasonally in accordance with licensing activity, and will
also depend upon recognition of revenue from such licenses from time to time.
The Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as an
indication of future performance.
General Economic Conditions May Affect Operations
As business has grown, the Company has become increasingly subject to
the risks arising from adverse changes in domestic and global economic
conditions. Because of the recent economic slowdown in the United States and in
other parts of the world, many companies are delaying or reducing technology
purchases and investments.