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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________
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, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934.
For the transition period from _______ to _______
Commission File Number: 0-26330
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ASTEA INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
DELAWARE 23-2119058
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
455 BUSINESS CENTER DRIVE, 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
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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 ____
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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.
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 20, 1998 (based on the closing price of $3.25 as quoted
by Nasdaq National Market as of such date) was approximately $16,863,000.
As of March 20, 1998, 13,385,325 shares of the registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 14, 1998 are incorporated by reference into Part
III of this Annual Report on Form 10-K.
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TABLE OF CONTENTS
Page
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PART I
Item 1. Business 3
Item 2. Properties 17
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 18
PART II
Item 5. Market for Registrant's Common Equity and Related 18
Stockholder Matters
Item 6. Selected Financial Data 20
Item 7. Management's Discussion and Analysis of Financial 22
Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 28
Item 8. Financial Statements and Supplementary Data 29
Item 9. Changes in and Disagreements with Accountants on 53
Accounting and Financial Disclosure
PART III
Item 10. Directors and Officers of the Registrant 53
Item 11. Executive Compensation 53
Item 12. Security Ownership of Certain Beneficial Owners and 53
Management
Item 13. Certain Relationships and Related Transactions 53
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports 54
on Form 8-K
Signature Page 58
2
PART I
Item 1. Business.
GENERAL
Astea International Inc. ("Astea" or the "Company") develops, markets and
supports a suite of client/server and host-based applications for the Technology
Enabled Relationship Management ("TERM") software market. Companies worldwide
are automating the ways they interact with their customers, and Astea believes
that companies in almost every industry can find competitive advantages through
the use of customer management software. Astea is currently one of a few
application vendors offering software solutions and professional services for
automating critical aspects of field service, customer support and sales and
marketing operations. Astea's products automate customer interaction functions,
improve access to customer information and facilitate the proactive satisfaction
of customer needs. Thus, the Company believes that its principal product
offerings--DISPATCH-1(TM), HEAT(TM), Abalon(TM), ServiceAlliance and V-
Service(TM)--enable organizations with field service, customer support, and
sales and marketing requirements to increase their revenue opportunities and
decrease costs, while improving customer satisfaction and building customer
loyalty. Astea's software is used by approximately 4,000 companies and
approximately 90,000 end users worldwide today.
The Company's original product, DISPATCH-1, helps organizations with
complex and geographically dispersed field service operations automate and
manage call center operations among customers, headquarters, branch offices and
the field. The new Version 8.0 of DISPATCH-1 is Year 2000 compliant and supports
both Internet and graphical desktop interfaces as well as support for
complementary third-party products. During 1997, Astea introduced two new
service automation product offerings positioned for the mid-market and smaller
enterprises. The Company believes that its new ServiceAlliance and V-Service
products formed will reduce implementation complexity of the Company's solutions
by taking advantage of client/server and web technologies. With these new
offerings, the Company has broadened the potential market for its service
automation products beyond its traditional enterprise customers. Through its
Bendata, Inc. subsidiary, the Company also offers the HEAT family of software
applications, which provides a number of products for the help desk automation
market. The Abalon Customer Management Solution(TM) ("Abalon") is a
client/server, object-oriented software package for sales and marketing
automation. Acquired with the Company's purchase of Swedish-based Astea
International AB (formerly Abalon AB) in 1996, this customer management solution
provides a suite of modular applications built around a central customer
database. To implement its products, Astea also provides its clients with an
array of professional consulting services and a wide range of training and
customer support services.
Astea's products are flexible to meet clients' changing computing and
business needs; generally scalable to address the needs of both small, rapidly
growing and large, multinational organizations; and modular to accommodate
growth within the enterprise so that a solution can be implemented in phases and
expanded as required. The Company's products are platform independent, using
popular client/server environments, multiple hardware platforms and operating
systems such as DOS, Windows, Windows NT, UNIX, VMS, Open VMS and OSF, depending
on the product. Astea's products operate across a number of relational database
management systems including, depending on the Astea software, those from
Oracle, Progress, Sybase, Informix, Microsoft Sequel Server and WATCOM, and they
are deployed on local and wide-area networks with the ability to utilize
multiple communications protocols. The Company markets its products both
domestically and internationally through offices in the United States and
overseas, as well as through value added resellers and system integrators.
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Products
The Company's products include ServiceAlliance, DISPATCH-1, the Heat
family of products, Abalon, PowerHelp, and V-Service, which provided 2%, 49%,
34%, 13%, 2%, and 0%, respectively, of the Company's software license,
maintenance and service revenues in 1997.
ServiceAlliance
In August 1997, Astea announced the release of ServiceAlliance, a new
client/server-based field service management software solution targeted toward
smaller companies, which draws on the best practices and functionality of
Astea's DISPATCH-1, the industry's leading customer service application. The
Company is encouraged by the initial market acceptance of ServiceAlliance, which
is being implemented in businesses worldwide. See "Certain Factors that May
Affect Future ResultsUncertain Market Acceptance of ServiceAlliance and Abalon;
Continued Dependence on DISPATCH-1 as Principal Product." ServiceAlliance is a
quickly implemented software solution that can easily be configured to reflect
the way service organizations actually run their businesses. ServiceAlliance
provides a universal view of customer information, which facilitates the
tracking and management of customers anywhere in the customer life cycle. Key
elements in the customer life cycle that the product supports include: customer
and helpdesk order requests, service orders, customer support for third-party
databases, a price book, contracts, sales orders, repair orders and logistics
from the time of request through allocation and shipment.
ServiceAlliance is a centralized request management system that enables
users to receive, manage and close complex requests from within a single
module. Multiple orders can be tracked under a single customer request number.
Support for mixed request types under a single customer request allows the
inclusion of items for different action groups (service, help desk, repair,
sales order, or tickler) under a single call. This improves the quality of
customer interaction with a single access point for all their service needs.
The integration of the logistics module with the customer request module
provides the ability to update the status of customer requests as services are
performed. This maintains the customer status automatically, eliminating
confusion regarding call status. ServiceAlliance can be deployed rapidly. The
system allows changes in the presentation of information, the business rules, or
the underlying processes of a business. Screen graphics for every service
function have a consistent look to accelerate user familiarity. Integration
lets users move from one step to another with maximum efficiency and minimum
chance of error. Source code modifications are generally unnecessary.
ServiceAlliance was designed to interface with the "best of breed"
products for paging, search engines, case-based reasoning, computer telephony
integration, electronic mail and Internet tools. ActiveX automation makes it
easy to connect to other applications that conform to that standard. Supported
environments include: ClientsWindows 95 and Windows NTNetworksTCP/IP, Windows
NT, NetBUEI, and Novell (SPX/IPX). ServiceAlliance operates with Oracle,
Sybase, MS SQL Server and SQL Anywhere databases.
DISPATCH-1
Introduced in 1986 as the Company's original standard product,
DISPATCH-1 incorporates years of industry experience and is targeted toward
larger companies such as the Fortune 1,000. It automates critical field service
operations and distributes customer, product and technical information ranging
from field service, depot repair and logistics to finance and contract
administration. DISPATCH-1 automates a broad range of field service operations,
allowing a client to track information relevant to customer accounts. DISPATCH-1
has been licensed by more than 400 clients worldwide since its introduction. In
1997, approximately 49% of the Company's total revenues derived from license,
maintenance and professional service fees related to
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DISPATCH-1. See "Certain Factors that May Affect Future Results--Uncertain
Market Acceptance of ServiceAlliance and Abalon; Continued Dependence on
DISPATCH-1 as Principal Product."
DISPATCH-1 has more than 30 core operational modules, which allow call
center operations to open and track service requests, identify contractual
obligations, generate new sales opportunities, diagnose problems and analyze the
appropriate field resources required to address the problem. Spare parts
inventory needed for on-site, in-house or third-party repairs is managed from
requisition through purchasing, receiving and shipping. Repairs made to parts
and components returned from the field are tracked through the product's depot
operations capabilities. Integrated financial modules capture cost and revenue
information throughout the life of the customer interaction. Product performance
and failure information also can be captured and shared with engineering,
quality and manufacturing departments to deliver improvements in quality
control, design and production. With Version 8.0, released in December 1997, the
functionality of DISPATCH-1 became even more comprehensive. The new release
provides users with easy-to-use interface choices, Year 2000 compliance,
enhanced contracts administration and service order management functionality.
Users can now use the system from virtually any type of interface over the
Internet, with a personal computer or with traditional terminals. Users can
interface with their data with one or all of these interfaces simultaneously.
Each of the interfaces provides similar screens and may be used separately or in
any combination. A new desktop interface provides a Microsoft Windows interface
to DISPATCH-1. With this familiar point-and-click interface, links and icons can
be added to automate access to key DISPATCH-1 functions. The event-driven, thin
display client is optimized to perform well in both LAN and WAN environments.
Remote users, again, can access all features of DISPATCH-1 through the Internet,
a corporate LAN/WAN and through direct modem connections.
DISPATCH-1's remote access modules, REMOTE-1, Manager's Window and Customer
Access, address the specific processing needs of field technicians, their
managers and the client's customers. Using Astea's REMOTE-1 module, mobile field
technicians have direct access to critical customer service information via
wireline networks, ensuring that required equipment and parts are obtained
before traveling to the customer site. Manager's Window enables field managers
to gain access to and assess a technician's progress, help troubleshoot problems
and reassign resources to address workload requirements as new customer
priorities arise. Customer Access allows an organization's customers to connect
directly to DISPATCH-1 to initiate service requests, place parts orders and
track the service provider's progress on service calls, streamlining the call
center administration process and further strengthening the client's
relationship with the customer. Astea has also developed decision support
modules to further automate and decentralize the decision-making capabilities
offered by DISPATCH-1. In April 1997, Astea introduced DISPATCH-1 WebView,
which provides access to all DISPATCH-1 functionality, using Web browsers such
as Netscape Navigator 3.0 and above or Microsoft Internet Explorer 3.0 and above
on PC or Macintosh computers. This is of particular benefit to companies moving
to a "thin-client" Internet approach to enterprise-wide applications. Remote
users can access all features of DISPATCH-1's 30 modules through the Internet, a
corporate LAN/WAN and through direct modem connections.
DISPATCH-1 is available on UNIX, VMS and Open VMS operating systems and
operates with Oracle and Progress database management systems.
HEAT Products
Originally introduced by the Company's Bendata subsidiary in December 1990,
HEAT is a fully customizable software solution for automating an organization's
help desk system without the need for extensive programming. The HEAT solution
employs client/server databases to assist end-users and help desk agents to
resolve problems and answer questions, log and manage calls to the help desk,
automate alert conditions, manage workflow, improve tracking and comprehension
of trends in help desk activity and coordinate the overall problem resolution
process. The HEAT products are designed to be customizable and
5
easy to use, without the need for programming. Non-technical users can modify
field descriptions, add and define new fields, adjust layout design, and create
new tables.
HEAT customers can distribute and access knowledge bases of problem
resolutions via an expert problem solving tool, First Level Support. Customers
of HEAT can also use the HEAT add-on products, which provide help desk
integration with popular third-party applications. Such applications include
HEAT Workgroup Asset Manager (which offers true asset management functionality
to the workgroup market allowing customers to measure the total cost of
ownership of their equipment) and HEAT Telephony Manager (which provides an
integration between HEAT and the PBX phone system to allow HEAT screen pops when
a call is received).
HEATWeb is a flexible and secure application for extending help desk
support services to the Internet and Intranet. Customers and help desk agents
can use HEATWeb to more quickly resolve issues using a standard Web browser.
With HEATWeb, remote help desk technicians can acknowledge, resolve, and assign
critical call information. The Internet user can also search knowledge solutions
exported from the First Level Support module in HEAT.
Bendata's Support Management Signature Series product is a set of
integrated software tools that focuses specifically on support center management
and planning activities. It combines an extensive, built-in knowledge base of
proven management practices with structured, customizable design templates.
This tool simplifies the development of process flows, service level agreements,
job descriptions, workforce forecasting, budgeting, and many other essential
elements of support center management.
Bendata's family of HEAT products are scalable, enabling customers to
operate under a number of environments. These products are written in C++ and
adhere to open standards employing native ODBC (open database compliant)
implementation to provide compatibility with a broad range of databases. HEAT is
available on 16 bit and 32 bit Windows operating systems and operates with
Microsoft Access, Microsoft SQL Server, Sybase SQL Anywhere, Oracle, Informix
and other leading relational database management.
Abalon
Abalon is a scalable, modular, object oriented, client/server-based,
integrated software product that enables companies to coordinate activities
ranging from marketing programs to telemarketing and telesales, field sales
activities, customer training and customer support. Originating in Sweden,
Abalon was introduced in North America in 1997. Abalon provides a suite of
integrated, modular applications built around a central database. These
applications can be used as stand-alone departmental systems or integrated into
an enterprise-wide solution. Abalon Base is a central repository for
information gathered about prospects, customers, business partners, competitors
and suppliers. Abalon Marketing provides a set of advanced tools that identify
and target specific market segments for the purpose of planning, promotions, or
telemarketing. Abalon Sales is a tool for both the individual salesperson and
the sales manager designed to reduce time spent on administrative chores. Abalon
Project keeps track of actual time and resources expended during the sales
implementation process. Abalon Tele is a system for telemarketing and telesales
that is integrated with other Abalon modules to better coordinate and execute
call-center oriented projects with scripting and call management functionality
ranging from market research to sales proposals to support calls. Abalon Mobile
offers a portable sales system for the traveling professional. Abalon Intranet
and Internet Integration uses Abalon as a World Wide Web server. And Abalon
Course Booking tracks and manages training and seminar programs and Customer
Agreements for referencing and tracking customer contracts online.
Abalon is written in C++ and adheres to open standards. Abalon is available
on major operating systems such as Windows, Windows NT and UNIX, and operates
with Oracle, Informix and Sybase relational database management systems.
Microsoft SQL Server and other database products are supported via ODBC.
6
The Virtual Service Corporation
In October 1997, Astea announced the formation of Virtual Service
Corporation ("VSC"). VSC is currently a wholly-owned subsidiary of the Company;
pursuant to a joint development agreement, Mitsubishi Electronics America, Inc.
has agreed to provide technology and other support to VSC and, in exchange, is
represented on VSC's board of directors and has the option to acquire an
ownership interest in VSC not greater than 50%, depending on certain
circumstances.
VSC's product, V-Service, is a "virtual" service bureau that provides for
the full deployment of DISPATCH-1 through the Internet, on a highly secure,
time-share basis. V-Service provides access to the software and to each
customer's database for a monthly service fee, which includes customer support.
Both the hardware and software are maintained at VSC's facility in Horsham,
Pennsylvania. The Company believes V-Service greatly reduces the customers' need
to invest in hardware, software and networking, and that it is unique in the
field service management software market. V-Service also permits quicker
implementation and more flexible deployment, with fewer infrastructure
limitations, than traditional software offerings.
PowerHelp
In conjunction with the Company's restructuring during the first quarter of
1997, the Company is no longer directly marketing the PowerHelp product. In
July 1997, the Company granted all of its North American distribution rights in
its PowerHelp product to Vertical Solutions, Inc. ("VSI"), a system integrator
and reseller based in Cincinnati, Ohio, for a period of two years. VSI also
assumed responsibility for the technical support of the Company's existing
PowerHelp customers in North America, and VSI is authorized to make
modifications and enhancements to the PowerHelp product.
PROFESSIONAL SERVICES AND CUSTOMER SUPPORT SERVICES
Astea offers a range of specialized professional and customer support
services to assist its clients in using its products effectively. These services
include business process consulting, implementation planning, project
management, customization, education and training, technical support and ongoing
software maintenance. Astea believes that its professional services capabilities
allow its clients to deploy the Company's products quickly and efficiently.
Together, professional services and customer support comprised 59% of the
Company's total revenues in 1997, compared to 54% in 1996.
Professional Services
As of December 31, 1997, the professional services group consisted of 252
professional services personnel headquartered in three offices in the United
States and seven offices internationally: in the United Kingdom, the
Netherlands, Sweden, Israel, Australia and New Zealand. Of the Company's 252
professional services personnel, 141 representatives are based in domestic
offices while the remaining 111 representatives are based overseas. The initial
professional services engagement usually lasts between six and 18 months for
DISPATCH-1 and less for the other application. For some of Astea's largest
clients, dedicated, global project teams are created to work exclusively with
these clients. In the case of smaller clients or more discrete projects,
appropriate teams are assembled from the Company's worldwide offices to perform
the required services. Due to the more complex nature of Astea's DISPATCH-1 and
Abalon offerings, customers that license these programs purchase a higher volume
of professional services than customers of HEAT products, ServiceAlliance and V-
Service.
Astea's typical professional services engagement includes planning,
prototyping and implementation of Astea's products within the client's
organization. During the initial planning phase of the engagement, Astea's
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professional services personnel work closely with representatives of the client
to prepare a detailed project plan that includes a timetable, resource
requirements, milestones, in-house training programs, onsite business process
training and demonstrations of Astea's product capabilities within the client's
organization. The next, most critical phase of the Astea professional services
personnel engagement is the prototyping phase, in which Astea works closely with
representatives of the client to configure Astea's software functionality to the
client's specific business process requirements. During the prototyping phase,
Astea's professional services personnel design the technology infrastructure,
define and document business processes and establish the order of product
deployment. The critical element of the prototyping phase is a detailed analysis
of the client's business processes and needs. The final phase in the
professional services engagement is the implementation phase, in which Astea's
professional services personnel work with the client to develop detailed data
mapping, conversions, interfaces, product customizations and other technical and
business processes necessary to integrate Astea's software into the client's
computing environment. Ultimately, education plans are developed and executed to
provide the client with the process and system knowledge necessary to
effectively utilize the software and fully implement the Astea solution.
Professional services are charged on an hourly or per diem basis and are billed,
pursuant to customer work orders, usually on a monthly basis.
Customer Support
The Company's customer support group provides Astea's clients with
telephone and on-line technical support, as well as product enhancements,
updates, new releases and corrections. Astea's customer support group is
deployed to provide support for Astea's clients in all regions of Astea's
worldwide operations, providing local client representatives with real-time
support usually spoken in their native languages by Astea and distributor
personnel familiar with local business customs and practices. Typically,
customer support fees are established as a fixed percentage of license fees and
are invoiced to clients on an annual basis after the conclusion of the warranty
period, which is normally 90 days. Astea's customer support representatives are
located in three offices in the United States and five offices in Europe and
Australia. As of December 31, 1997, the Company's worldwide customer support
group consisted of 90 representatives, 42 located in the United States and 48
based internationally.
CUSTOMERS
The Company estimates that it has approximately 4,000 customers,
representing more than 90,000 end-users. Astea's customers range from small,
rapidly growing companies to large, multinational corporations with
geographically dispersed operations and remote offices. 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
telecommunications, computers and electronics, office equipment, and third-party
service and support organizations.
In 1997 and 1996, no customer accounted for 10% or more of the Company's
revenues. In 1995, the Company had one customer that accounted for approximately
19% of revenues.
SALES AND MARKETING
Astea markets its products and services through a multi-tiered sales
structure comprised of direct sales and telesales operations, and through
relationships with value-added resellers ("VARs") and international
distributors. The Company's sales organization consisted of 63 personnel on
December 31, 1997 (which excludes sales management, administration and support
personnel), complemented by a coordinated marketing effort of the Company's
marketing group, which consisted of 31 personnel on December 31, 1997. See
"Certain Factors that May Affect Future ResultsNeed to Increase Sales Force and
Expand Indirect Sales."
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Astea's direct sales force of 63 personnel employs a telesales process for
HEAT products, a hybrid approach to selling ServiceAlliance and Abalon, and a
consultative sales process for other products, working closely with prospective
clients to understand and define their customers' 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 TERM software market. A prospect
development organization comprised of telemarketing representatives develops and
qualifies sales leads prior to referral to the direct sales staff. See "Certain
Factors that May Affect Future Results--Continued Dependence on Large Contracts
May Result in Lengthy Sales and Implementation Cycles." 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.
The Company's telesales channel targets low- to mid-market opportunities
and is the principal channel of distribution for the HEAT products. For domestic
sales, Astea's telesales operation employs several account management teams
consisting of one account representative and one account executive. The account
representatives qualify leads generated by marketing activities. The account
executives provide telephone demonstrations, present the Company's support and
help desk products at local seminars, conduct site visits and close qualified
leads generated by the account representatives.
The Abalon product is currently sold and marketed in United States, Central
Europe and Scandinavia through a direct sales channel. In Scandinavia, where
Abalon is a dominant vendor, the organization is vertically focused on market
segments such as telecommunications, financial services, manufacturing, and
construction management. In other regions, the organization is still more
geographically focused. During 1997 a number of partners have signed partnership
agreements and trained their employees to resell the Abalon product.
Astea's marketing department is responsible for lead generation and product
and professional services marketing, and the department provides input into the
Company's ongoing product development efforts based on client feedback and
market data. Leads developed from marketing are routed through Abalon, the
Company's sales automation system. The Company also participates in an annual
conference organized and sponsored by ADONUS, an independent user group
comprised of Astea's DISPATCH-1 and PowerHelp clients. Conference participants
attend training sessions, workshops and presentations, and interact with other
Astea product users and Astea management and staff, providing important input
for future product direction.
Astea's international sales continued to increase in 1997, accounting for
37% of the Company's revenues in 1997, 32% in 1996 and 21% in 1995. 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 are easy
to use and implement. Its 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 also is designed to be both platform and hardware
independent, using popular client/server environments, multiple hardware
platforms and operating systems. To accomplish these goals, the Company uses
widely accepted, commercially available application development tools from
Progress Software Corporation, Sybase, Inc. and Microsoft Corporation. These
software tools provide the Company's clients with the flexibility to deploy
Astea's products across a variety of hardware platforms, operating systems,
client/server configurations and relational database management systems.
As of December 31, 1997, the Company's product development staff consisted
of 117 employees. The Company's total expenses for product development for the
years ended December 31, 1997, 1996 and 1995 were $10,273,000, $7,989,000 and
$4,178,000, respectively. These expenses represented 17%, 13% and 8% of
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total revenues for 1997, 1996 and 1995, respectively. In addition, the Company
capitalized software development costs of $950,000, $1,858,000 and $957,000 in
1997, 1996 and 1995, respectively. The Company anticipates that it will continue
to commit substantial resources to product development in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7 hereof and "Certain Factors that May Affect Future
Results--Need for Development of New Products."
MANUFACTURING
The Company's software products are distributed on standard magnetic disks,
tapes and CD ROMs. Included with the software products are security keys and
documentation available on CD ROM and in print. Historically, the Company has
purchased diskettes, tapes, and duplicating and printing services from outside
vendors. The Company has been able to obtain adequate supplies of all components
and materials in a timely manner from existing and alternate sources of supply.
COMPETITION
The TERM 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 expand its professional services capabilities. The
Company currently competes on the basis of the breadth of its product features
and functions, including the adaptability and scalability of its products and
their enablement with other client/server products; the ability to deploy
complex systems both locally and internationally; product quality, ease-of-use,
reliability and performance; breadth of professional services; integration of
Astea's offerings with other enterprise and client/server applications; price;
and the availability of Astea's products on popular operating systems,
relational databases, the 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 management information systems
departments of potential customers developing proprietary, custom software. The
Company's competitors include SAP AG ("SAP"), Clarify Inc. ("Clarify"), Siebel
Systems, Inc. ("Siebel"), Remedy Corp. ("Remedy"), Scopus Technology, Inc.
("Scopus"), The Vantive Corporation ("Vantive"), Metrix Corp. ("Metrix") and a
number of smaller privately-held companies which generally focus only on
discrete areas of the TERM software marketplace. In the field service
marketplace, the Company competes against publicly-held companies and numerous
smaller, privately-held companies. In the customer support and help desk
marketplace, the Company competes against a number of smaller, privately-held
and publicly-held companies as well as larger publicly-held companies with
greater resources. With the introduction of Abalon into the United States, this
product faces a variety of established competitors such as Siebel, The Baan
Company's Aurum division, Vantive and Scopus, as well as a number of smaller
companies. See "Certain Factors that May Affect Future Results--Competition in
the Technology Enabled Relationship Management Software Market Is Intense."
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LICENSES AND INTELLECTUAL PROPERTY
Astea considers its software proprietary and licenses its products to its
customers generally under written license agreements. The Company also employs
an encryption system that restricts a user's access to source code to further
protect the Company's intellectual property. Because the Company's products
allow customers to customize their applications without altering the source
code, the source code for the Company's products is typically neither licensed
nor provided to customers. The Company does, however, license source code from
time to time and maintains certain third-party source code escrow arrangements.
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 and consultants or 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, 1997, the Company, including its subsidiaries, had a
total of 568 full time employees worldwide, 316 in the United States, 87 in
Sweden, 59 in the United Kingdom, 31 in the Netherlands, 4 in France, 38 in
Israel, 30 in Australia and 3 in New Zealand. Of the total, 129 were employed in
sales and marketing, 117 in product development, 252 in professional services
and customer support and 70 in administration and finance. As of December 31,
1997, the Company's Bendata subsidiary had a total of 182 employees, 135 in the
United States and 47 in the United Kingdom. As of December 31, 1997, the
Company's Astea International AB subsidiary had a total of 87 employees, all
located in Sweden. 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. Competition for such personnel is
intense, and there can be no assurance that the Company can retain its key
managerial and technical employees or that it can attract, assimilate or retain
other highly qualified personnel in the future. 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., and 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.
11
In February 1996, the Company merged with Bendata, Inc. In June 1996, the
Company acquired Astea International AB (formerly Abalon AB).
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company does not provide forecasts of its future financial performance.
From time to time, however, information provided by the Company or statements
made by its employees may contain "forward looking" information that involves
risks and uncertainties. In particular, statements contained in this Annual
Report on Form 10-K that are not historical fact may constitute forward looking
statements and are made under the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. The Company's actual results of
operations and financial condition have varied and may in the future vary
significantly from those stated in any forward looking statements. Factors that
may cause such differences include, but are not limited to, the risks,
uncertainties and other information discussed within this Annual Report on Form
10-K, as well as the accuracy of the Company's internal estimates of revenue and
operating expense levels.
The following discussion of the Company's risk factors should be read in
conjunction with the financial statements and related notes thereto set forth
elsewhere in this report The following factors, among others, could cause
actual results to differ materially from those set forth in forward looking
statements contained or incorporated by reference in this report and presented
by management from time to time. Such factors, among others, may have a material
adverse effect upon the Company's business, results of operations and financial
conditions:
UNCERTAIN MARKET ACCEPTANCE OF SERVICEALLIANCE AND ABALON; CONTINUED
DEPENDENCE ON DISPATCH-1 AS PRINCIPAL PRODUCT. In each of 1997, 1996 and 1995,
more than 49%, 61% and 76%, respectively, of the Company's total revenues
derived from the licensing of DISPATCH-1 and the provision 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 developed ServiceAlliance,
which it introduced in August 1997, in order to target potential customers for
which DISPATCH-1 was not cost-effective or attractive. While the Company
licensed ServiceAlliance to 10 companies with a total of 356 users worldwide in
1997, ServiceAlliance has not yet earned market acceptance. At the same time,
while the Company licensed Abalon to 50 companies with a total of more than
2,000 users worldwide in 1997, Abalon has not yet earned market acceptance in
the United States, and it has only begun to win market acceptance in Europe
outside of Scandinavia. The Company's future success will depend in part on its
ability to continue to reduce its reliance on revenues generated by DISPATCH-1,
by increasing licenses of ServiceAlliance, the HEAT products, the Abalon
products, V-Service and other offerings, and by developing new products and
product enhancements to complement its existing field service and customer
support offerings. The Company believes that a number of factors will determine
such acceptance, including product performance, ease of adoption, migration from
host-based to client/server computing environments, Internet connectivity and
interoperability with diverse hardware platforms, network servers, financial and
reporting applications and databases. Any failure of the Company's products to
achieve or sustain market acceptance, or of the Company to sustain its current
position in the field service, customer support and sales and marketing software
markets, 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 sustain demand for DISPATCH-1 and grow demand for ServiceAlliance, Abalon,
HEAT and V-Service, thereby avoiding future losses, or to successfully develop
any new products and product enhancements in order to increase sales of other
products and reduce its reliance on licenses of DISPATCH-1 and related
professional services revenue.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS MAY BE SIGNIFICANT. The
Company's quarterly operating results have in the past varied significantly and
are likely to vary significantly in the future, depending on factors such as the
size and timing of revenue from significant orders, the recognition of revenue
from such orders, the timing of new product releases and market acceptance of
these new releases, increases or
12
other changes in operating expenses, the level of product and price competition,
and the seasonality of its business. As a result of the application of the
revenue recognition rules applicable to the Company's licenses under generally
accepted accounting principles, the Company's license revenues may be recognized
in periods after those in which the respective licenses were signed. In
addition, the Company's quarterly operating results are dependent on factors
such as budgeting cycles of its customers, customer order deferrals in
anticipation of enhancements or new products, the impact of acquisitions of
competitors, the cancellation of licenses or maintenance agreements, product
life cycles, software bugs and other product quality problems, personnel
changes, changes in Company strategy, investments to develop sales distribution
channels, changes in the level of operating expenses and general domestic and
international economic and political conditions, among others.
In recent years, the Company has generally had stronger demand for its
products during the quarters ending in June and December and weaker demand in
the quarter ending in March. To the extent international operations constitute a
higher percentage of the Company's total revenues, the Company anticipates that
it may also experience relatively weaker demand in the quarter ending in
September. Moreover, the Company has generally recorded 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, the
Company's results of operations may vary seasonally in accordance with licensing
activity or otherwise, and will also depend upon its recognition of revenue from
such licenses from time to time. There can be no assurance that the Company will
be profitable or avoid losses in any future period, and the Company believes
that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as any indication of future
performance.
CONTINUED DEPENDENCE ON LARGE CONTRACTS MAY RESULT IN LENGTHY SALES AND
IMPLEMENTATION CYCLES. The sale and implementation of the Company's DISPATCH-1
product generally involve a significant commitment of resources by prospective
customers. While ServiceAlliance and Abalon require a less substantial
commitment than does DISPATCH-1, the purchase and implementation of
ServiceAlliance and Abalon also require a substantial commitment. 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. The sales cycle associated with the license of
DISPATCH-1 and Abalon varies substantially from customer to customer and
typically lasts between six and nine months, during which 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, and 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 incurrence
of costs and recognition 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.
In addition, following the initial sale, the implementation of DISPATCH-1 (and
to a lesser extent, Abalon) typically involves several months of customer
training and integration of the product with the customer's other existing
systems. A successful implementation requires a close working relationship
between the customer and members of the Company's professional service
organization. Occasionally, delays result from a customer's inattention to the
implementation project for reasons unrelated to the Company's performance. 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. Some of the Company's customers have adopted the Company's
software on an incremental basis. There can be no assurance that the Company's
customers will
13
expand usage of the Company's software on an enterprise-wide basis or implement
new software products introduced by the Company. The failure of the Company's
software to perform according to customer expectations or otherwise to be
deployed on an enterprise-wide basis could have a material adverse effect on the
ability of the Company to collect revenues or to increase revenues from new as
well as existing customers. The Company believes that period-to-period
comparisons of its results of operations should not be relied upon as any
indication of future performance.
COMPETITION IN THE TECHNOLOGY ENABLED RELATIONSHIP MANAGEMENT SOFTWARE MARKET
IS INTENSE. The TERM software market is intensely competitive. The Company's
competitors include SAP, Siebel, Clarify, Remedy, Scopus, Vantive, Metrix and a
number of smaller, privately-held companies that generally focus only on
discrete areas of the TERM software marketplace. Some of the Company's existing
and potential competitors have greater financial, technical, marketing and
distribution resources than the Company. Moreover, the TERM industry is
currently experiencing significant consolidation, as larger public companies
seek to enter the TERM market through acquisitions. The Company expects that
competition will increase as a result of software industry consolidations. As a
result, some of the Company's competitors may be able to respond more quickly to
new or emerging technologies and changes in customer requirements, or to devote
greater resources to the development and distribution of their products.
Because the barriers to entry in the TERM software market are relatively low,
new competitors may emerge with products that are superior to the Company's
products in performance, functionality or ease-of-use, or that achieve greater
market acceptance. Increased competition is likely to result in price
reductions, reduced gross margins and loss of market share. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors or that competitive pressures faced by the Company will
not adversely affect its business and results of operations.
NEED FOR DEVELOPMENT OF NEW PRODUCTS. The Company's future success will depend
upon its ability to enhance its current products and develop and introduce new
products on a timely basis that keep pace with technological developments,
industry standards and the increasingly sophisticated needs of its customers,
including developments within the client/server computing environment. 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 have sufficient resources to make the necessary investments. Also, 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. If the Company is unable to develop and introduce new
products or enhancements of existing products in a timely manner in response to
changing market conditions or customer requirements, the Company's business,
operating results and financial condition will be materially adversely effected.
POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Common Stock has
in the past been, and may continue to be, subject to significant fluctuations in
response to, and may be adversely affected by, variations in quarterly operating
results, changes in earnings estimates by analysts, developments in the software
industry, adverse earnings or other financial announcements of the Company's
customers and general stock market conditions as well as other factors. In
addition, the stock market can experience extreme price and volume fluctuations
from time to time which may bear no meaningful relationship to the Company's
performance.
14
RAPID TECHNOLOGICAL CHANGE. The client/server application software market is
subject to rapid technological change, frequent new product introductions and
evolving technologies and industry standards that can quickly render existing
products and services obsolete. While the Company is not aware of any emerging
products that are likely to render its existing products obsolete, there can be
no assurance that the Company's products could not suffer such obsolescence.
Because of the rapid pace of technological change in the application software
industry, the Company's current market position in field service, customer
support, sales and marketing automation or other markets that it may enter could
be eroded rapidly by product advancements. The Company's application environment
relies primarily on software development tools from Progress Software
Corporation and PowerSoft Corporation, a subsidiary of Sybase, Inc. If
alternative software development tools were to be designed and generally
accepted by the marketplace, the Company could be at a competitive disadvantage
relative to companies employing such alternative developmental tools, possibly
resulting in material harm to the Company's financial condition and results of
operation.
BURDENS OF CUSTOMIZATION. Certain of the Company's clients request
customization of the Company's software products to address unique
characteristics of their businesses or computing environments. The Company's
commitment to customization could place a burden on the Company's client support
resources or delay the delivery or installation of products which, in turn,
could materially adversely affect the Company's relationship with significant
clients or otherwise adversely affect its 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.
NEED TO INCREASE SALES FORCE AND EXPAND INDIRECT SALES. The Company has
historically sold its products through its direct sales force and a limited
number of distributors. The Company's ability to achieve significant revenue
growth in the future will depend in large part on its success in recruiting and
training more sales personnel and establishing relationships with distributors,
resellers and systems integrators. The Company is currently investing, and plans
to continue to invest, significant resources to expand its domestic and
international direct sales force and develop distribution relationships with
certain third party distributors, resellers and systems integrators. The
Company's distributors also sell or can potentially sell products offered by the
Company's competitors. There can be no assurance that the Company will be able
to retain or attract a sufficient number of its existing or future third party
distribution partners or that such partners will recommend, or continue to
recommend, the Company's products. The inability to establish or maintain
successful relationships with distributors, resellers or systems integrators
could have a material adverse effect on the Company's business, operating
results or financial condition. In addition, there can be no assurance that the
Company will be able to successfully expand its direct sales force or other
distribution channels. Any failure by the Company to expand its direct sales
force or other distribution channels would materially adversely affect the
Company's business, operating results and financial condition.
RISK OF PRODUCT DEFECTS; FAILURE TO MEET PERFORMANCE CRITERIA. The Company's
field service and sales and marketing software is intended for use in
enterprise-wide applications that may be critical to a customer's business. As a
result, the Company's customers and potential customers typically have demanding
requirements for installation and deployment. Software products as complex as
those offered by the Company may contain errors or failures, particularly when
software must be customized for a particular licensee, when new products are
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. There can be no assurance that, despite testing by
the Company and by current and potential customers, errors will not be found in
software, customizations or releases after commencement of commercial shipments,
resulting in loss or delay of revenue or delay in market acceptance, diversion
of development resources or increased service and warranty costs, any of which
could have a material adverse effect upon the Company's business, operating
results and financial condition.
15
RISKS ASSOCIATED WITH INTERNATIONAL SALES. In 1997, international sales
represented approximately 34% of the Company's total revenues. In 1996,
international sales represented approximately 32% of the Company's total
revenues. In 1995, international sales represented approximately 21% of the
Company's total revenues. The Company expects that international sales will
continue to be a significant component of its business. International sales are
subject to a variety of significant risks, including difficulties in
establishing and managing international distribution channels and in translating
products into foreign languages. International operations also may encounter
difficulties in collecting accounts receivable, staffing and managing personnel
and enforcing intellectual property rights. Other factors that can also
adversely affect international operations include fluctuations in the value of
foreign currencies and currency exchange rates, changes in import/export duties
and quotas, introduction of tariff or non-tariff barriers, potentially adverse
tax consequences, possible recessionary environments in economies outside the
United States, changes in the market for business software as a result of
currency unification in Europe, and economic or political changes in
international markets. In addition, as the Company increases its international
sales, its total revenues may also be affected to a greater extent by seasonal
fluctuations resulting from lower sales that typically occur during the summer
months in Europe and other parts of the world.
YEAR 2000 RISKS. The Company is reviewing its existing product offerings to
ensure that these offerings are adequately able to address the issues expected
to arise in connection with the upcoming change in the century.
ServiceAlliance, Abalon, the HEAT family of products, and certain recent
releases of DISPATCH-1 are designed to accurately calculate, compare and
sequence date and time data between the twentieth and twenty-first centuries.
The Company has implemented plans and timetables for modifying or phasing out
the remainder of its products (older versions of DISPATCH-1) that are not
currently able to calculate, compare and sequence all date and time data between
the twentieth and twenty-first centuries. The Company regularly provides its
customers with current information on the status of these development efforts.
There can be no assurance, however, that the Company will successfully complete
this development in the published timeframes. In addition, the Company has not
fully determined the extent to which the Company's products may be impacted by
third parties' systems, which may not be "Year 2000" compliant. While the
Company has begun efforts to seek reassurance from its suppliers, there can be
no assurance that the systems of other companies which the Company deals with or
on which the Company's systems rely will be timely converted, or that any such
failure to convert by another company could not have an adverse effect on the
Company. Moreover, the law regarding liability for "Year 2000" problems is
evolving rapidly and could become more friendly to users of software with
alleged "Year 2000" deficiencies. The Company limits its contractual warrantees
on "Year 2000" compliance to objective performance standards that the Company
has tested, and the Company makes no warrantees for nonconformance if the
Company's software products are combined with other software or data that are
not conducive to accurately calculating, comparing or sequencing date and time
data between the twentieth and twenty-first centuries. Nonetheless, there can be
no assurance that some of the Company's customers will not assert legal claims
against the Company based on "Year 2000" theories of liability. While the
Company believes that such claims would be precluded by its contracts, if such a
claim were upheld in court, the resulting expense to the Company and diversion
of management and development time could have a material, adverse effect on the
Company's operations and financial condition.
DEPENDENCE ON KEY PERSONNEL; COMPETITION FOR EMPLOYEES. The future success of
the Company will depend in large part on its ability to attract and retain
talented and qualified employees, including skilled management personnel. The
Company's future success also depends on its continuing ability to attract and
retain highly qualified technical, sales and managerial personnel. Competition
for key personnel is intense, particularly so in recent years. From time to time
the Company has experienced difficulty in recruiting talented and qualified
employees. There can be no assurance that the Company can retain its key
technical, sales and managerial employees or that it can attract, assimilate or
retain other highly qualified technical, sales and managerial personnel in the
future. The inability of the Company to hire talented personnel or the loss of
key employees could have a material adverse effect on the Company's business and
results of operations.
16
CONCENTRATION OF OWNERSHIP. Zack B. Bergreen, the Company's Chairman and Chief
Executive Officer, as of December 31, 1997, beneficially owned more than 50% of
the outstanding Common Stock of the Company. As a result, Mr. Bergreen exercises
significant control over the Company through his ability to influence and, under
certain circumstances, control, the election of directors and all other matters
that require action by the Company's stockholders. Under certain circumstances,
Mr. Bergreen could prevent or delay a change of control of the Company which may
be favored by a significant portion of the Company's other stockholders, or
cause a change of control not favored by the majority of the Company's other
stockholders. Mr. Bergreen's ability under certain circumstances to influence,
cause or delay a change in control of the Company also may have an adverse
effect on the market price of the Company's Common Stock.
RISKS OF DEPENDENCE ON PROPRIETARY TECHNOLOGY. The Company's success is
heavily dependent upon proprietary technology. The Company's products are
licensed to customers under signed license agreements containing, among other
terms, provisions protecting against the unauthorized use, copying and transfer
of the licensed program. In addition, the Company relies on a combination of
trade secret, copyright and trademark laws and non-disclosure agreements to
protect its proprietary rights in its products and technology. Policing
unauthorized use of the Company's software is difficult and, while the Company
is unable to determine the extent to which piracy of its software products
exists, software piracy can be expected to be a persistent problem. In addition,
the laws of some foreign countries do not protect the Company's proprietary
rights to the same extent as do the laws of the United States. There can be no
assurance that measures taken by the Company will be adequate to protect the
Company's proprietary technology. In addition, there can be no assurance that
the Company's competitors will not independently develop technologies that are
substantially equivalent or superior to the Company's technologies. In addition,
although the Company believes that its products and technologies do not infringe
on any existing proprietary rights of others, and although there are no pending
lawsuits against the Company regarding infringement of any existing patents or
other intellectual property rights or any notices that the Company is infringing
the intellectual property rights of others, there can be no assurance that such
infringement claims will not be asserted by third parties in the future. Any
such situations can have a material adverse effect on the Company's business and
results of operations.
POSSIBLE PRODUCT LIABILITY. The Company's license agreements with its
customers typically contain provisions designed to limit the Company's exposure
to potential product liability claims. It is possible, however, that the
limitation of liability provisions contained in the Company's license agreements
may not be effective under the laws of certain jurisdictions. The sale and
support of products by the Company may entail the risk of such claims, and there
can be no assurance that the Company will not be subject to such claims in the
future. A successful product liability claim brought against the Company could
have a material adverse effect on the Company's business, operating results and
financial condition.
ITEM 2. PROPERTIES.
The Company's headquarters are located in a leased facility of approximately
51,500 square feet in Horsham, Pennsylvania. The Company also leases facilities
for operational activities in Bedford, Massachusetts; Colorado Springs,
Colorado; Houten, the Netherlands; Bromma, Sweden; and Tefen, Israel; and for
sales and customer support activities in Swindon, England; St. Leonards,
Australia; Auckland, New Zealand; and Gothenburg, Sweden. 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
17
services over several quarterly periods, the Company is from time to time
engaged in discussions and deliberations with customers regarding the adequacy
and timeliness of the installation or service, product functionality and
features desired by the customer and additional work and product requirements
that were not anticipated at the commencement of the project. These
deliberations sometimes result in changes in services required, upward or
downward price adjustments, or reworking of contract terms. The Company from
time to time will reserve funds for contingencies under contract deliberations.
The Company is not a party to any material legal proceedings, the adverse
outcome of which, in management's opinion, would have a material adverse effect
on the Company's business, financial condition or results of operations. See
Note 16 of the Notes to the Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report, through the solicitation of
proxies or otherwise.
PART II
ITEM 5. 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:
1996: High Low
----------- --------------
First quarter $29.50 $21.00
Second quarter 29.75 23.75
Third quarter 24.25 5.00
Fourth quarter 8.38 4.88
1997:
First quarter 6.38 3.89
Second quarter 3.75 1.94
Third quarter 3.19 2.38
Fourth quarter 2.94 1.75
As of March 20, 1998, there were approximately 93 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 3,000 on such date.) On March 20, 1998,
the last reported sale price of the Common Stock on the Nasdaq National Market
was $3.25 per share.
From its inception in 1979 to July 27, 1995, the Company elected to be treated
as an S corporation for Federal and state income tax purposes. In connection
with the initial public offering of its Common Stock, the Company terminated its
election to be treated as an S corporation on July 27, 1995. The Company paid
an aggregate of $1,979,000 and $8,296,000 of cash dividends and distributions in
1996 and 1995, respectively, to Zack B. Bergreen, the sole stockholder of the
Company prior to the initial public offering, principally representing the
remaining amount of the Company's previously taxed but undistributed S
corporation earnings. The Company does not presently intend to declare a cash
dividend on the Common Stock in the foreseeable future and expects to retain
future earnings to fund the development and growth of its business.
18
As of December 31, 1997, the Company has used $37,312,000 of the $42,057,000
net proceeds from its initial public offering of common stock. The use of
proceeds includes $9,952,000 for the acquisition of Astea International AB,
$3,416,000 for expenses incurred in connection with the merger with Bendata,
Inc., $7,779,000 of S corporation distributions paid to the majority
stockholder, $6,150,000 for purchases and installation of property and
equipment, $1,359,000 of temporary investments, $1,542,000 for repayment of
indebtedness and $7,114,000 of working capital for product development
activities and general operations.
19
ITEM 6. SELECTED FINANCIAL DATA.
Years ended December 31, 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------
(in thousands, except per share data)
STATEMENT OF OPERATIONS
DATA:(1)
Revenues:
Software license fees.................. $ 24,777 $ 28,857 $29,904 $15,532 $ 6,179
Services and maintenance............... 36,157 33,851 24,062 11,815 8,414
------------------------------------------------
Total revenues....................... 60,934 62,708 53,966 27,347 14,593
------------------------------------------------
Cost and expenses:
Cost of software license fees (2)...... 4,702 3,982 3,880 1,807 876
Cost of services and maintenance....... 23,949 23,477 16,198 7,603 5,219
Product development.................... 10,273 7,989 4,178 2,677 1,584
Sales and marketing.................... 21,196 22,390 14,902 8,277 3,004
General and administrative (3)......... 13,953 9,535 6,357 3,659 2,642
Restructuring charge (4)............... 5,328 - - - -
Expenses related to Bendata merger
transaction (5)...................... - 3,416 - - -
Charge for purchased research and
development (6)...................... - 13,810 - - -
------------------------------------------------
Total costs and expenses............. 79,401 84,599 45,515 24,023 13,325
Income (loss) from operations.............. (18,467) (21,891) 8,451 3,324 1,268
Net interest expense (income)............. 15 (571) (179) 408 231
------------------------------------------------
Income (loss) before income taxes.......... (18,482) (21,320) 8,630 2,916 1,037
Provision (benefit) for income taxes(7).... 12 (1,613) 1,883 49 16
------------------------------------------------
Net income (loss).......................... $(18,494) $(19,707) $ 6,747 $ 2,867 $ 1,021
================================================
Basic earnings (loss) per share............ $ (1.40) $ (1.53) $ 0.64 $ 0.32 $ 0.13
Diluted earnings (loss) per share.......... $ (1.40) $ (1.53) $ 0.59 $ 0.30 $ 0.13
Shares used in computing basic
earnings (loss) per share................. 13,252 12,844 10,514 9,100 7,600
Shares used in computing diluted
earnings (loss) per share................. 13,252 12,844 11,484 9,539 7,926
Pro Forma Data:
Historical income (loss) before
income taxes......................... $(21,320) $ 8,630 $ 2,916 $ 1,037
Pro forma income taxes (benefit)(2).... (2,082) 3,452 1,133 308
-------------------------------------
Pro forma net income (loss)............ $(19,238) $ 5,178 $ 1,783 $ 729
-------------------------------------
Pro forma basic earnings (loss)
per share............................ $ (1.50) $ 0.49 $ 0.20 $ 0.10
=====================================
Pro forma diluted earnings (loss)
per share............................ $ (1.50) $ 0.45 $ 0.19 $ 0.09
=====================================
BALANCE SHEET DATA:(1)
Working capital............................ $ 7,800 $ 20,760 $40,732 $ 2,745 $ 1,489
Total assets............................... 41,773 57,691 69,370 22,481 13,350
Long-term debt, less
current portion........................... 1,636 3,708 2,532 2,913 2,628
Retained earnings (deficit)................ (35,502) (17,008) 2,699 4,963 2,096
Total stockholders' equity................. 13,429 31,617 47,920 6,368 2,587
20
(1) In February 1996, the Company completed the merger of Bendata. This
transaction was accounted as a pooling of interests. Hence, the financial
position and results of operations of the Company and Bendata are combined
in 1996 and all prior periods are restated to give the effect to the
merger. See Note 4 of the Notes to the Consolidated Financial Statements.
In February 1995, the Company acquired Astea BV and in June 1996, the
Company acquired Astea International AB (formerly Abalon AB). These
acquisitions were accounted for as purchases. Hence, the results of
operations after the acquisition date are included in the statement of
operations data. See Note 5 of the Notes to the Consolidated Financial
Statements.
(2) Included in cost of software license fees in the first quarter of 1997 is a
write-off of $453,000 of capitalized software development costs related to
the Company's support automation product, PowerHelp, and to older versions
of certain service automation modules which are no longer marketed by the
Company. See Note 6 of the Notes to the Consolidated Financial Statements.
(3) As a result of the restructuring, during the first quarter of 1997, the
Company recorded a goodwill impairment charge of $2,058,000 which is
included in general and administrative expense. This charge related to the
1995 acquisition of Astea BV. See Note 6 of the Notes to the Consolidated
Financial Statements.
(4) Included in the first quarter of 1997 is a restructuring charge of
$5,328,000 which includes severance costs, office closing costs and other
consolidation costs. See Note 6 of the Notes to the Consolidated Financial
Statements.
(5) In connection with the Bendata merger, $3,416,000 of merger expenses
($2,609,000 after-tax) were incurred and charged to expense in the first
quarter of 1996. The Bendata merger expenses consisted of bonus payments
made to Bendata non-shareholder employees, as well as legal, accounting and
investment banking fees. See Note 4 of the Notes to the Consolidated
Financial Statements.
(6) In connection with the acquisition of Astea International AB, the Company
recorded a one-time charge of $13,810,000 related to the fair value of in
process research and development. See Note 5 of the Notes to the
Consolidated Financial Statements.
(7) Until July 1995, Astea had operated as a S corporation for income tax
purposes since its inception in 1979; and until February 1996, Bendata,
Inc. and Bendata UK had operated as a S corporation and a partnership,
respectively. Therefore, the historical financial statements before
conversion to C corporation do not include a provision for federal and
state income taxes for such years, except for certain state income taxes
imposed at the corporate level. Pro forma net income has been computed as
if the Company had been fully subject to federal and state income taxes
based on the tax laws in effect during the respective years. See Note 3
of the Notes to the Consolidated Financial Statements.
21
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, licenses, implements and supports a suite of
client/server and host-based applications for the Technology Enabled
Relationship Management ("TERM") Software Market that permit organizations of
various sizes across a wide range of industries to automate field service,
customer support and sales and marketing functions. The Company maintains
operations in the United States, Australia, New Zealand, the Netherlands,
France, the United Kingdom, Sweden and Israel.
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, customization, implementation, training and
maintenance related to those products.
Software license fees, which accounted for 41% of the Company's total revenues
in 1997, consist of license fees for the Company's products. Software license
fee revenues also include some fees from the sublicensing of third-party
software, primarily consisting of relational database licenses constituting an
integral part of the Company's products. Typically, customers pay a license fee
for the software based on the number of licensed users and modules licensed. The
Company's pricing is structured so that the licensing of a greater number of
users within a customer's organization results in a decreasing per-user cost to
that customer. Thus, pricing varies both with the number of users and type and
number of modules licensed. 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
delivery or if the product is subject to customer acceptance, revenue is
deferred until no significant obligations remain or acceptance has occurred.
The second 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, to a lesser extent,
maintenance fees for ongoing customer support, primarily external customer
technical support services and product enhancements. Professional services are
charged on an hourly or per diem basis and billed monthly pursuant to customer
work orders. Training services are 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. Annual maintenance fees are typically paid to the Company under
agreements entered into at the time of the initial software license. Maintenance
revenue, which is invoiced annually upon the expiration of the warranty period,
is recognized ratably over the term of the agreement, which is usually twelve
months.
The Company's 1997, 1996 and 1995 financial results include the results of
Bendata, Inc. ("Bendata") which Astea acquired by merger in February 1996 and
was accounted for as a pooling of interests. See Note 4 of the Notes to the
Consolidated Financial Statements. Astea's 1996 financial results include the
July to December results of Astea International AB (formerly Abalon AB), which
Astea acquired in June 1996 and accounted for as a purchase transaction. See
Note 5 of the Notes to the Consolidated Financial Statements.
22
RESULTS OF 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, 1997 1996 1995
- -------------------------------------------------------------------------------
Revenues:
Software license fees 40.7% 46.0% 55.4%
Services and maintenance 59.3 54.0 44.6
--------------------------------------
Total revenues 100.0 100.0 100.0
--------------------------------------
Costs and expenses:
Cost of software license fees 7.7% 6.4% 7.2%
Cost of services and maintenance 39.3 37.4 30.0
Product development 16.9 12.7 7.7
Sales and marketing 34.8 35.7 27.6
General and administrative 22.9 15.2 11.8
Restructuring charge 8.7 - -
Expenses related to Bendata
merger transaction - 5.5 -
Charges for purchased in process
research and development - 22.0 -
--------------------------------------
Total costs and expenses 130.3% 134.9% 84.3%
--------------------------------------
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996
Revenues. Total revenues decreased 3% to $60,934,000 in 1997 from
$62,708,000 in 1996. Revenues were generated from Astea's three product lines:
Service Automation (DISPATCH-1, ServiceAlliance and V-Service), Support
Automation (HEAT and PowerHelp) and Sales Automation (Abalon). Within these
product lines, Service Automation realized a decline in total revenues of 19%,
or $7,066,000, to $30,872,000 in 1997 from $37,938,000 in 1996. This decline
was offset by increased Support Automation and Sales Automation revenues.
Support automation revenues increased 8%, or $1,686,000, to $22,224,000 in 1997
from $20,538,000 in 1996, resulting from the HEAT product revenue increases
offset by decreases in PowerHelp product revenue. Sales Automation revenues
increased $3,606,000 to $7,838,000 in 1997 from $4,232,000 in the last six
months of 1996. The Sales Automation product line was acquired in June 1996.
Software license fee revenues decreased 14%, or $4,080,000, to $24,777,000
in 1997 from $28,857,000 in 1996. The decrease primarily relates to decreases in
license revenues from DISPATCH-1 within the Service Automation product line and
from PowerHelp within the Support Automation product line, resulting from a
decreasing demand for these products. Service Automation software license
revenues decreased 32%, or $4,035,000, to $8,480,000 in 1997 from $12,515,000 in
1996. In August 1997, the Company added ServiceAlliance to its Service
Automation product line. In 1997, the Company recorded ServiceAlliance license
revenue of $928,000. PowerHelp license revenues decreased $2,637,000, to
$733,000 in 1997 from $3,370,000 in 1996. Offsetting these decreases was an
increase in HEAT license revenue in the Support Automation product line and
license revenue in the Sales Automation product line. HEAT software license
revenues increased 10%, or $1,068,000, to $12,105,000 in 1997 from $11,037,000
in 1996. This increase reflects the expansion of the customer help desk market
and the increased acceptance of the Company's HEAT product. Sales Automation
software license revenues were $3,459,000 in 1997 compared to $1,935,000 in the
second half of 1996.
23
Services and maintenance revenues increased 7%, or $2,306,000, to
$36,157,000 in 1997 from $33,851,000 in 1996. Increases were realized in Support
Automation and Sales Automation amounting to $3,178,000 and $2,081,000,
respectively. These increases are offset by a $2,953,000 decrease in service and
maintenance revenues from Service Automation. The increase in service and
maintenance revenues is attributable to the expansion of the Company's installed
base and a full year of marketing the Sales Automation product, which was
acquired in June 1996.
In 1997 and 1996, none of the Company's customers accounted for more than
10% of total revenues.
Costs of Revenues. Costs of software license fee revenues increased 18%, or
$720,000, to $4,702,000 in 1997 from $3,982,000 in 1996. The software license
gross margin decreased by 5% to 81% in 1997 from 86% in 1996. This decrease in
gross margin was primarily due to higher capitalized software amortization and
the $453,000 write-off of capitalized software development costs in the first
quarter of 1997. The write-off related to products and versions that will no
longer be marketed in conjunction with the Company's restructuring of its
product lines. Amortization of capitalized software increased 30%, or $224,000,
to $963,000 in 1997 from $739,000 in 1996.
The costs of services and maintenance revenues increased 2%, or $472,000,
to $23,949,000 in 1997 from $23,477,000 in 1996. This increase was attributable
to a full year of costs of services and maintenance for Sales Automation, which
was acquired in June 1996, offset by cost reductions in the Service Automation
product line as a result of the first quarter 1997 restructuring. The service
and maintenance gross margin percentage increased 3% , to 34% in 1997 from 31%
in 1996.
Product Development. Product development expenses increased 29%, or
$2,284,000, to $10,273,000 in 1997 from $7,989,000 in 1996. Product development
as a percentage of total revenue increased 4% to 17% in 1997 compared to 13% in
1996. This increase is a result of the Company's commitment to bring new
product offerings and enhancements of existing products to the market, including
the Company's August 1997 introduction of ServiceAlliance. The increase is also
the result of a full year of Sales Automation product line development expenses
in 1997 of $731,000 compared to $302,000 in the second half of 1996. The
Company's total product development costs, including capitalized software
development costs, were $11,223,000, or 18% of total revenues in 1997 compared
to $9,847,000, or 16% of total revenues in 1996, an increase of 14% or
$1,376,000. The capitalized portions of total product development costs were
$950,000, or 8%, compared to $1,858,000 or 19% in 1996. The Company
anticipates that it will continue to commit substantial resources to product
development in the future.
Sales and Marketing. Sales and marketing expenses decreased 5%, or
$1,194,000, to $21,196,000 in 1997 from $22,390,000 in 1996. The decrease
primarily relates to lower commissions as a result of lower license revenue in
1997 compared to 1996, primarily in the Service Automation product line. The
decrease was offset by a full year of Sales Automation expenses of $3,500,000 in
1997, an increase of $2,204,000 from $1,296,000 of expenses in the second half
of 1996. Sales and marketing expense as a percentage of total revenues
decreased 1% to 35% in 1997 from 36% in 1996.
General and Administrative. General and administrative expenses increased
46%, or $4,418,000, to $13,953,000 in 1997 from $9,535,000 in 1996. As a
percentage of total revenues, general and administrative expenses increased 8%
to 23% in 1997 compared to 15% in 1996. This increase primarily relates to non-
recurring charges of $5,131,000 in 1997. These charges include $2,058,000 for
the write-off of Astea BV goodwill and $3,073,000 of contingency reserve for the
possible failure to deliver a commercial release of software product under a
beta development agreement, payment of cash and stock options related to the
settlement of claims by a shareholder and other contingencies. The increase in
general and administrative expenses is also the result of a full year of Astea
International AB in 1997 of $853,000 compared to $410,000
24
in the second half of 1996. These increases are offset by a charge in 1996 of
$1,400,000 to address a customer satisfaction issue. See Notes 5 and 16 to the
Notes to the Consolidated Financial Statements.
Restructuring Charge. During the first quarter of 1997, the Company
recorded a restructuring charge of $5,328,000 for actions aimed at reducing
costs and consolidating its development activities primarily in its service
automation product line. These costs included accruals for severance costs of
$1,713,000, office closing costs and unutilized lease expense of $3,136,000,
including $1,597,000 of non-cash writedowns of property and equipment, and other
consolidation costs of $479,000.
Net Interest Expense/Income. Net interest expense/income decreased 103%,
or $586,000, to $15,000 of net interest expense in 1997 from $571,000 of net
interest income in 1996. This decrease was primarily attributable to the cash
used in the 1996 acquisitions of Bendata and Astea International AB and the
operating cash requirements of the Company which reduced its investments.
International Operations. Total revenue from the Company's international
operations grew by $2,178,000, to $22,395,000 in 1997 from $20,217,000 in 1996.
The increase in revenue from international operations was primarily attributable
to the Astea International AB acquisition which accounted for $7,338,000 in 1997
compared to $4,232,000 during the second half of 1996. This increase was
offset by declining international revenues in the Service Automation product
line. International operations resulted in a $10,962,000 loss for 1997. The
loss includes $5,042,000 of non-recurring charges. These charges include
$2,058,000 for the write-off of Astea BV goodwill and $2,984,000 charge for
restructuring the Company's international operations. The loss also includes a
$3,659,000 operating loss for the Company's Israeli operation, which is
primarily a research and development cost center. The current economic
difficulties of several Asian countries could have an adverse impact on the
Company's international operations in future periods.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995
Revenues. Total revenues increased 16% to $62,708,000 in 1996 from
$53,966,000 in 1995. Within Astea's three product lines, the Service Automation
product line realized a slight decline in total revenues. This decline was
offset by increased Support Automation product line revenues and the addition of
the Company's Sales Automation product line which was acquired in 1996. Service
Automation revenues decreased 8% or $3,284,000 to $37,938,000 in 1996 from
$41,222,000 in 1995. In 1996, Support Automation revenues increased 61%, or
$7,794,000, to $20,538,000 from $12,744,000 in 1995 primarily resulting from
HEAT product. Sales Automation revenues amounted to $4,232,000 in 1996,
resulting from the acquisition of Astea International AB in June 1996.
Software license fee revenues decreased 4%, or $1,047,000, to $28,857,000
in 1996 from $29,904,000 in 1995. Within Astea's three product lines, Service
Automation software license revenues decreased 41%, or $8,567,000, to
$12,515,000 in 1996 from $21,082,000 in 1995. This decrease was due primarily
to increased competition which prolonged sales cycles in the Service Automation
software marketplace, which reduced the number of large volume software license
agreements in 1996. In 1995, three large volume software license agreements
accounted for $13,000,000, or 43% of 1995 license revenues. Offsetting the
decrease in Service Automation license revenues was a significant increase in
Support Automation license agreements. Support Automation software license
revenues increased 63%, or $5,585,000, to $14,407,000 in 1996 from $8,822,000 in
1995. This increase was due primarily to new customers and reflects the
expansion of the customer help desk market and increased acceptance of the
Company's HEAT and PowerHelp products. Bendata's software license fee revenues
increased significantly in 1996 as a result of increased demand for the HEAT
line of products in the United States and abroad. Sales Automation software
license revenues were $1,935,000 in the second half of 1996, subsequent to the
Astea International AB acquisition.
25
Services and maintenance revenues increased 41%, or $9,789,000, to
$33,851,000 in 1996 from $24,062,000 in 1995. Increases were realized in
Service, Support and Sales Automation amounting to $5,283,000, $2,209,000 and
$2,297,000, respectively. This increase in service and maintenance revenues is
attributable to the expansion of the Company's installed base and new sales of
DISPATCH-1 licenses, and the increased need for professional services associated
with the ongoing implementation and deployment of more complex software
offerings, including the three large software license agreements from 1995
mentioned above, which continued implementation throughout 1996.
In 1996, none of the Company's customers accounted for more than 10% of
total revenues. In 1995, the Company had one customer which accounted for 19%
of total revenues.
Costs of Revenues. Costs of software license fee revenues increased 3%,
or $102,000, to $3,982,000 in 1996 from $3,880,000 in 1995. As a percentage of
software license fee revenues, the costs of software license fees increased by
1% to 14% in 1996 from 13% in 1995. The increase was due to the increase in the
aggregate cost of third-party software licenses sold in conjunction with the
Company's products. Amortization of capitalized software decreased 7%, or
$57,000, to $739,000 in 1996 from $796,000 in 1995.
The costs of services and maintenance revenues increased 45%, or
$7,279,000, to $23,477,000 from $16,198,000 in 1995. This increase was
attributable to increased services and maintenance obligations due to the
growing customer bases within all three product lines. Increased obligations and
related personnel costs contributed to the increase in services and maintenance
costs both on an absolute basis and as a percentage of service and maintenance
revenues. Costs of services and maintenance related to the Astea International
AB acquisition during the last six months of 1996 amounted to $1,430,000. Costs
of services and maintenance as a percentage of services and maintenance revenues
increased 2% to 69% in 1996 from 67% in 1995.
Product Development. Product development expenses increased 91%, or
$3,811,000, to $7,989,000 in 1996 from $4,178,000 in 1995. This increase is a
result of the Company's commitment to bring new product offerings to the market
along with the enhancement of existing products. Product development expenses
also include the addition of Astea International AB in the second half of the
year which totaled $302,000. As a percentage of revenues, product development
expenses increased 5% to 13% in 1996 from 8% in 1995. The Company's total
product development costs, including capitalized software development costs,
were $9,847,000, or 16% of revenues in 1996 compared to $5,135,000, or 10% of
revenues in 1995, an increase of 92% or $4,712,000. The capitalized portions of
total product development costs were $1,858,000, or 19%, in 1996 compared to
$957,000, or 19%, in 1995.
Sales and Marketing. Sales and marketing expenses increased 50%, or
$7,488,000, to $22,390,000 in 1996 from $14,902,000 in 1995. This increase
resulted from the various selling models attendant to the Company's acquired
products and increased emphasis on sales processes within the sales and
marketing organizations. Sales and marketing expenses during the second half of
1996 include $1,296,000 related to Astea International AB. Sales and marketing
expense as a percentage of revenues increased 8% to 36% in 1996 from 28% in
1995.
General and Administrative. General and administrative expenses increased
50%, or $3,178,000, to $9,535,000 in 1996 from $6,357,000 in 1995. As a
percentage of revenues, general and administrative expenses increased 3% to 15%
in 1996 compared to 12% in 1995. This increase relates to the continued effort
by the Company to support the growth of the Company by establishing the proper
infrastructure to meet the current and future needs of the Company. The Company
increased its payroll significantly, including through the Astea International
AB acquisition, from 327 employees in 1995 to 594 employees as of December 31,
1996. General and administrative expenses also includes a significant charge of
$1,400,000 made by the Company to address a customer satisfaction issue. See
Note 16 to the Notes to the Consolidated Financial Statements.
26
Net Interest Income. Net interest income increased 219%, or $392,000, to
$571,000 in 1996 from $179,000 in 1995. This increase was primarily due to a
full year's interest earned on the proceeds from the Company's initial public
offering in July 1995.
International Operations. Total revenue from the Company's international
operations grew by 82%, or $9,113,000, to $20,217,000 in 1996 from $11,103,000
in 1995. Growth was experienced in all segments of the Company's international
operations including the Astea International AB acquisition which accounted for
$4,232,000 during the second half of 1996. During 1996, the Company made several
important strides to expand and fortify its international presence. The Astea
International AB acquisition and Bendata merger (including a UK branch) were
completed, the Company signed a distributor agreement with Nissho Iwai in Japan,
and the Company expanded existing international operations. International
operations resulted in a $3,095,000 loss for 1996; this loss was primarily
attributable to the Company's Israeli operation, which had an operating loss of
$1,727,000. Israel is primarily a research and development cost center.
Income Tax Expense (Benefit). The Company's and Bendata's status as
subchapter S corporations under the Internal Revenue Code, were terminated in
July 1995 for Astea and in February 1996 for Bendata. As a result of these
terminations, the Company became subject to federal and additional state income
taxes commencing in 1995. See Notes 2 and 15 of the Notes to the Consolidated
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used in) operating activities was $1,191,000 for
the year ended December 31, 1997 compared to $(6,352,000) for the year ended
December 31, 1996. This increase was primarily attributable to the Company's
non-cash goodwill write-down, expense related to the issuance of stock and stock
options in various dispute settlements, increased collection of receivables,
timing of income tax refunds, as well as increases in accounts payable and
accrued expenses and deferred revenues. The increases were offset by the non-
cash charge of $13,810,000 recorded in 1996 and by the Company's net loss
resulting from the factors described above under "Results of Operations--
Comparison of Years Ended December 31, 1997 and 1996."
The Company generated $5,431,000 of cash from investing activities in
1997 compared to $7,430,000 in 1996. The decrease was primarily attributable to
a decrease in the sale of investments available for sale offset by the 1996
payment for acquired businesses of $9,710,000.
The Company used $1,267,000 in financing activities for the year ended
December 31, 1997 compared to cash used of $1,785,000 for the year ended
December 31, 1996. In 1997, funds were used to pay down the line of credit and
to make debt repayments, partially offset by the proceeds from the exercises of
stock options and employee stock purchase rights. For the year ended December
31, 1995, the Company received net proceeds totaling $42,057,000 for the
issuance of common stock in its initial public offering, offset by an S
corporation distribution, repayment of debt and repayment of notes receivable
from the sole stockholder and his wife. For the years ended December 31, 1996
and 1995, the Company utilized $1,979,000 and $8,641,000, respectively, S
corporation distributions and dividends paid to stockholders.
The Company maintains a line of credit with a maximum borrowing
availability of $2,000,000. The line of credit bears interest at the lending
bank's prime rate (8.5% at December 31, 1997). Borrowings under the line of
credit are secured by $2,000,000 of the Company's investments. As of
December 31, 1997, the Company has not been in compliance with certain loan
covenants. The Company has obtained a waiver from the bank relating to such non-
compliance. The line expires on June 1, 1998.
Astea International AB has a revolving line of credit for borrowings up
to 8,000,000 SEK or $1,007,000. As of December 31, 1997, Astea International
AB's outstanding balance on the line of credit was
27
$914,000. The revolving line of credit bears interest at the bank's prime rate
plus 2.4% (6.9% at December 31, 1997). Borrowings under the revolving line of
credit are secured by a first security interest in substantially all of Astea
International AB's assets. The line expires on December 31, 1998.
At December 31, 1997, the Company had a working capital ratio of
approximately 1.3:1, with cash and investments available for sale of
$10,104,000. The Company may need to access additional funding during 1998 to
fund operations as products are rolled out and other strategies progress toward
realization. The Company believes sufficient cash resources exist to support
its long-term growth strategies either through currently available cash, cash
generated from future operations, or the ability of the Company to obtain
additional financing through private and/or public debt placement. The Company
does not anticipate that its operations or financial condition will be affected
materially by inflation.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Not Applicable
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Astea International Inc.:
We have audited the accompanying consolidated balance sheets of Astea
International Inc. (a Delaware corporation) and subsidiaries as of December 31,
1997 and 1996, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Astea International Inc. and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II, Valuation and Qualifying
Accounts, is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Philadelphia, Pa.
February 20, 1998
29
ASTEA INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 1996
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ASSETS
Current assets:
Cash and cash equivalents $ 8,745,000 $ 3,334,000
Investments available for sale 1,359,000 8,994,000
Receivables, net of reserves of $2,286,000 and $1,681,000 18,069,000 24,187,000
Prepaid expenses and other 2,709,000 2,279,000
Income tax refund receivable - 1,516,000
Deferred income taxes 2,274,000 1,869,000
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Total current assets 33,156,000 42,179,000
Property and equipment, net 3,958,000 8,117,000
Capitalized software development costs, net 3,556,000 4,022,000
Goodwill, net 1,103,000 3,373,000
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Total assets $ 41,773,000 $ 57,691,000
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 914,000 $ 1,678,000
Current portion of long-term debt (including $0 and $78,000
due to majority stockholder and his wife) 1,085,000 525,000
Accounts payable and accrued expenses 13,749,000 11,076,000
Deferred revenues 9,608,000 8,140,000
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Total current liabilities 25,356,000 21,419,000
Deferred income taxes 1,352,000 947,000
Long-term debt (including $0 and $2,410,000
due to majority stockholder and his wife) 1,636,000 3,708,000
Commitments and contingencies (Note 16)
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued - -
Common stock, $.01 par value, 25,000,000 shares
authorized, 13,361,000 and 13,106,000 shares issued and
outstanding 134,000 131,000
Additional paid-in capital 49,585,000 49,097,000
Deferred compensation (43,000) (160,000)
Cumulative currency translation adjustment (745,000) (443,000)
Accumulated deficit (35,502,000) (17,008,000)
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Total stockholders' equity 13,429,000 31,617,000
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Total liabilities and stockholders' equity $ 41,773,000 $ 57,691,000
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
30
ASTEA INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997 1996 1995
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Revenues:
Software license fees $ 34,777,000 $ 28,857,000 $29,904,000
Services and maintenance 36,157,000 33,851,000 24,062,000
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Total revenues 60,934,000 62,708,000 53,966,000
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Costs and expenses:
Cost of software license fees 4,702,000 3,982,000 3,880,000
Cost of services and maintenance 23,949,000 23,477,000 16,198,000
Product development 10,273,000 7,989,000 4,178,000
Sales and marketing 21,196,000 22,390,000 14,902,000
General and administrative 13,953,000 9,535,000 6,357,000
Restructuring charge 5,328,000 - -
Expenses related to Bendata
merger transaction - 3,416,000 -
Charge for purchased research and
development